Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders

SECURITIES AND EXCHANGE
COMMISSION
17 CFR Part 242
[Release No. 34–96494; File No. S7–30–22] RIN 3235–AN23 Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders AGENCY: Securities and Exchange Commission. ACTION: Proposed rule. SUMMARY: The Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) is proposing to amend certain rules of Regulation National Market System (‘‘Regulation NMS’’) under the Securities Exchange Act of 1934, as amended (‘‘Exchange Act’’) to adopt variable minimum pricing increments for the quoting and trading of NMS stocks, reduce the access fee caps, and enhance the transparency of better priced orders. 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.html; or
• Send an email to rule-comments@
  sec.gov. Please include File Number S7– 30–22 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 S7–30–22. 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 of submission. The Commission will post all comments on the Commission’s website (https:// 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 we do 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 our 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:
  Kelly Riley, Senior Special Counsel, Johnna Dumler, Special Counsel, Steve Kuan, Special Counsel, Marc McKayle, Special Counsel, and Ted Uliassi, 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 amendments to the following rules under Regulation NMS:
  Commission reference CFR citation (17 CFR) Rule 600(b)(59) ................... § 242.600(b)(59) Rule 600(b)(78) ................... § 242.600(b)(78) Rule 603 .............................. § 242.603 Rule 610 .............................. § 242.610 Rule 612 .............................. § 242.612
  I. Introduction
  A. Rule 612—Minimum Pricing Increments B. Rule 610—Access to Quotations
  C. Transparency of Better Priced Orders
  II. Amendment to Rule 612 of Regulation
  NMS—Minimum Pricing Increment A. Background B. Rule 612

1. Exchange Retail Liquidity Programs
   (‘‘RLPs’’)
   C. Tick Size Considerations Since
   Regulation NMS
   D. Issues Raised in the Current Market Structure E. Proposals by Market Participants
2. Reduce the Tick Size to $0.005 for Tick￾Constrained Stocks
3. Variable Tick Sizes
   F. Proposal to Amend Rule 612
4. Minimum Pricing Increments
5. Quotations and Orders in NMS Stocks
   Priced at $1.00 or More
6. Quotations and Orders in NMS Stocks
   Priced Less Than $1.00
7. Minimum Pricing Increment for Trading
   G. Proposed Implementation Period H. Request for Comment
   III. Amendments to Rule 610 of Regulation
   NMS—Fees for Access to Quotations A. Background
8. Regulation NMS
9. Exchange Fee Models
   B. Current Rule 610(c)
   C. Proposal To Reduce Fees for Access to
   Protected Quotations and Increase Fee Transparency
10. Reduce Fees for Access to Protected
    Quotations
11. Require That All Exchange Fees and
    Rebates Be Determinable at the Time of an Execution D. Request for Comment
    IV. Transparency of Better Priced Orders
    A. Background
12. Infrastructure Implementation: Phased
    Transition Plan and Current Status B. Accelerate Implementation of Round Lots and Odd-Lot Information
13. Odd-Lot Information
14. Round Lots
15. Display of Round Lots and Odd-Lot
    Information
16. Proposed Compliance Date
    C. Request for Comment
    D. Proposed Definition of Best Odd-Lot Orders E. Request for Comment
    V. Economic Analysis
    A. Introduction
    B. Market Failure
    C. Baseline
17. Tick Sizes
18. Access Fees
19. Round Lots and Market Data
    Infrastructure
20. Affected Entities and Markets
    D. Economic Effects
21. Modification of Rule 612 To Create a
    Tiered Tick Structure
22. Minimum Pricing Increment for Trading
23. Lower Access Fee Cap
24. Exchange Fees and Rebates
    Determinable at the Time of Execution
25. Acceleration of the MDI Rules and
    Addition of Information About Best Odd￾Lot Orders
26. Compliance Costs
    E. Effect on Efficiency, Competition, and Capital Formation
27. Efficiency
28. Competition
29. Capital Formation
    F. Reasonable Alternatives
30. Alternative Trading Increment
31. Alternative Tick Sizes
32. Alternative Access Fee
33. Do Not Accelerate Odd-Lot Information
    or Create BOLO
    G. Request for Comment
    VI. Paperwork Reduction Act
    A. Summary of Collection of Information B. Proposed Use of Information
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
34. Initial Burden Hours and Costs
35. Ongoing Burden Hours and Costs
    E. Collection of Information is Mandatory F. Confidentiality G. Revisions to Current MDI Rules Burden Estimates H. Request for Comments
    VII. Consideration of Impact on the Economy
    VIII. Regulatory Flexibility Act Certification
    and Initial Regulatory Flexibility Act Analysis A. Proposed Amendments to Rule 612— Initial Regulatory Flexibility Analysis
36. Reasons for the Proposed Action
37. Legal Basis
38. Small Entities Subject to the Rule
39. Reporting, Recordkeeping, and Other
    Compliance Requirements

1 15 U.S.C. 78k–1.
2 15 U.S.C. 78k–1(a).
3 15 U.S.C. 78k–1(a)(1)(B).
4See Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (‘‘Disclosure of Order Handling Information’’ in which the Commission adopted new order handling disclosure requirements). The Commission has continually reviewed the national market system and issues related to equity market structure since Regulation NMS was adopted. In 2010, the Commission issued a Concept Release on Equity Market Structure seeking public comments on high frequency trading, order routing, market data linkages, and undisplayed liquidity. See Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) (‘‘Concept Release on Equity Market Structure’’). In 2015, the SEC formed the Equity Market Structure Advisory Committee (‘‘EMSAC’’), which considered issues related to Regulation NMS and equity market structure. The archives of these meetings are available at https:// www.sec.gov/spotlight/emsac/emsac-archives.htm. 5Securities Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (‘‘MDI Adopting Release’’). 6 Id. at 18601. 7See 17 CFR 242.610 and 17 CFR 242.612. 8See infra section III for further discussion of the relationship between access fees and minimum pricing increments. 9 15 U.S.C. 78k–1(a)(1)(B). 10 15 U.S.C. 78k–1(a)(1)(c)(i), (ii), and (iv). 11See MDI Adopting Release, supra note 5. 12 Id. 13See id. at 18699. As discussed below, the transition to the new MDI Rules has been delayed. See infra note 357 and accompanying text. 14See infra sections IV, V.D.5, and V.D.6 (discussing the costs and benefits of accelerating the round lot and odd-lot information definitions).
5. Duplicative, Overlapping, or Conflicting
Federal Rules
6. Significant Alternatives
7. Request for Comments
B. Proposed Amendments to Rule 610
C. Proposed Amendments to Rule 603 and
Definitions Odd-Lot Information and Regulatory Data Under Rule 600 Statutory Authority and Text of the Proposed Rule Amendments
I. Introduction
Section 11A of the Exchange Act 1
directs the Commission to facilitate the establishment of a national market system in accordance with specified Congressional findings. In furtherance of this direction, the Commission adopted Regulation NMS in 2005, which includes several provisions that updated and modernized the national market system to take advantage of the data processing and communications technology that were available at that time and to address the then recent changes that had occurred in the markets. Regulation NMS was designed to achieve the objectives of section 11A of efficient, competitive, fair and orderly markets.2 In Section 11A of the Exchange Act, Congress recognized that new technology could ‘‘create the opportunity for more efficient and effective market operations.’’ 3 The market structure and technology available today is vastly different from what was available when Regulation NMS was adopted. Today, electronic trading has all but supplanted manual trading and electronic trading systems can handle and process data at speeds that would have been unheard of when Regulation NMS was adopted. As the national market system has evolved, the Commission has amended several aspects of Regulation NMS to address and reflect changes in the markets.4 Most recently, in 2020, the Commission adopted rules to update and modernize the equity market infrastructure responsible for the collection, consolidation, and dissemination of equity market data in the national market system by expanding the content of NMS market data and establishing a decentralized consolidation model for NMS market data (‘‘MDI Rules’’).5 While the MDI Rules, in part, updated the NMS market data to enable investors to see, and more readily access, better￾priced quotations,6 the Commission believes that other aspects of Regulation NMS need to be updated in light of the current trading environment. Investors should have access to the best priced quotations available in the national market system and such prices generally should be determined by competitive market forces. Among the rules adopted under Regulation NMS, rule 610 sets forth standards governing access to quotations in NMS stocks and rule 612 establishes minimum pricing increments for NMS stocks.7 In the current trading environment, rule 612 should be updated by reducing the minimum pricing increment for certain NMS stocks to allow market participants, including investors, to better determine the prices at which they would bid or offer. Further, rule 610 contains maximum access fee caps that were based on the trading environment in 2005. These access fee caps should be reduced in conjunction with the reduction of the minimum pricing increments under rule 612 to help to ensure that the access fee caps do not become too large in relation to the minimum pricing increments.8 The Commission has not revised rule 610 or rule 612 since they were adopted and the Commission believes that these rules should be revised to reflect the current trading
environment and so that they can continue to fulfill the goals of
section 11A of the Exchange Act. The
amendments proposed herein—varying and lowering the minimum pricing increments for the quoting and trading of certain NMS stocks, reducing the access fee caps, and accelerating the dissemination of information about quotations in smaller sizes—would enhance trading opportunities for all investors. They would also serve to help ensure that orders placed in the national market system reflect the best prices available for all investors. Congress’ findings promulgated in 1975 as set forth in section 11A of the Exchange Act continue to guide the Commission as it considers the issues that exist within the national market system in 2022. Among the findings that guide the Commission in overseeing the national market system, the Commission must consider the availability of ‘‘[n]ew data processing and communications techniques [that] create the opportunity for more efficient and effective market operations’’ 9 and that it is in the public interest, appropriate for investor protection and the maintenance of fair and orderly markets to assure ‘‘economically efficient execution of securities transactions,’’ ‘‘fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets,’’ and ‘‘the practicality of brokers executing investors’ orders in the best market.’’ 10 These findings support our decision to propose amendments to rules 610 and 612 of Regulation NMS in light of the tremendous changes that have occurred in the markets since 2005. Further, the MDI Rules are in the process of being implemented.11 While the content of market data that will be made available within the national market system will provide many benefits to investors,12 the Commission scheduled the implementation of the MDI Rules over a period of time to minimize disruption to the markets and to facilitate an orderly transition.13 As discussed in section IV.B below, in part due to implementation delays after the adoption of the MDI Rules, the Commission believes that the transition period set forth in the MDI Adopting Release should be partially modified so that investors and market participants would be provided with some of the benefits of the MDI Rules, including greater transparency regarding the best priced orders available in the market, sooner than the originally adopted implementation schedule.14 Section 11A of the Exchange Act provides that ‘‘[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . the availability to brokers, dealers, and investors of information with respect to

15 15 U.S.C. 78k–1(a)(1)(C)(iii). 16See Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). See also Exchange Act Release No. 49325 (Feb. 26, 2004), 69 FR 11126 (Mar. 9, 2004) (‘‘Regulation NMS Proposing Release’’). The Commission issued a supplemental request for comment on proposed Regulation NMS in May 2004. See Securities Exchange Act Release No. 49749 (May 20, 2004), 69 FR 30142 (May 26,
2004) (‘‘Supplemental Release’’). On Dec. 16, 2004,
the Commission re-proposed Regulation NMS in its entirety for public comment. See Securities Exchange Act Release No. 50870 (Dec. 16, 2004), 69 FR 77424 (Dec. 27, 2004) (‘‘Re-proposing Release’’). 17 In this release, tick-constrained stocks are defined as those that have a time weighted quoted spread of $0.011 or less calculated during regular trading hours. See infra note 102 and accompanying text, infra note 448 and accompanying text and
Table 4.
18See infra section II.D.
19Exchanges and ATSs execute orders in sub￾penny increments if the price of the execution is the midpoint of the national best bid and national best offer (‘‘NBBO’’), if the orders are benchmark trades such as volume-weighted average price (‘‘VWAP’’) and time-weighted average price (‘‘TWAP’’), or if an exchange has a retail liquidity program (‘‘RLP’’) that operates pursuant to exemptions granted by the Commission that allow such programs to provide executions in tenths of a cent. See Regulation NMS Adopting Release, supra note 16, at 37556. See also infra section II. 20See, e.g., Staff Report on Equity and Options Market Structure Conditions in Early 2021 (‘‘Staff Report on Equity and Options Market Structure’’) at
section 2.4 for a discussion of Order Execution and
Segmentation of Individual Investor Flow. Staff reports, Investor Bulletins, and other staff documents (including those cited herein) represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these staff documents and, like all staff statements, they have no legal force or effect, do not alter or amend applicable law, and create no new or additional obligations for any person. See also Edwin Hu and Dermot Murphy, ‘‘Competition for Retail Order Flow and Market Quality’’ (June 8, 2022), available at https://ssrn.com/ abstract=4070056 (retrieved from SSRN Elsevier database) (noting that approximately 27% of trading volume is routed from retail brokerages to seven internalizing broker-dealers and estimating that two of those firms handle 70% of the volume from 2017 to 2021; and concluding that promoting more competitive markets for retail order flow could save investors billions of dollars in transaction costs). 21 15 U.S.C. 78k–1(a)(1)(C). 22The proposed rule would not change the minimum pricing increment of rule 612(b), which permits sub-penny increments for quotations and orders in NMS stocks that are priced less than $1.00 per share. See infra section II.F.3. 23See infra section II.F. quotations for and transactions in securities.’’ 15 Acceleration of some of the MDI Rules would help to fulfill this statutory goal. A. Rule 612—Minimum Pricing Increments The Commission adopted rule 612 of Regulation NMS to implement minimum pricing increments (also known as minimum price variations or tick sizes) for NMS stocks. Currently, quotations for NMS stocks priced at, or greater than, $1.00 per share the minimum pricing increment is $0.01, while quotations for NMS stocks priced less than $1.00 per share the minimum pricing increment is $0.0001. Specifically, rule 612(a) states that ‘‘[n]o national securities exchange, national securities association, alternative trading system, 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.’’ Rule 612(b) applies to bids, offers, orders, and indications of interest in any NMS stock priced less than $1.00 per share and specifies that the increment cannot be smaller than $0.0001. The Commission adopted rule 612 to address concerns about sub-penny quoting by protecting displayed limit orders and promoting transparent and consistent pricing. The Commission stated that the rule ‘‘was designed to limit the ability of a market participant to gain execution priority over competing limit orders by stepping ahead by an economically insignificant amount.’’ 16 There are various issues related to market developments which suggest that the Commission should update the minimum
pricing increments for the U.S. equity markets. Specifically, many NMS stocks today are constrained by the minimum pricing increment of $0.01 that is required under rule 612 and thus are not able to be priced by market forces. That is, based on liquidity and price competition, these stocks could be priced more aggressively within the spread than is possible with the current minimum pricing increment of $0.01. ‘‘Tick￾constrained’’ stocks, i.e., stocks that have a time weighted average quoted spread of 1.1 cents or less make up the majority of the current trading volume, and their presence suggests that the rule 612 minimum pricing increment of $0.01 may now be too large for certain stocks, which, in turn, results in the pricing of such stocks being artificially constrained.17 Trading in tick￾constrained stocks would be improved if competitive market forces could establish prices in sub-penny increments, which could reduce quoted spreads. In addition, the competitive dynamic between trading in the certain parts of the over-the-counter (‘‘OTC’’) market and trading on national securities exchanges and alternative trading systems (‘‘ATSs’’) caused by, among other things, rule 612 has continued to shift over time.18 Specifically, while rule 612 prohibits exchanges, ATSs and broker-dealers from displaying, ranking or accepting quotes and orders in NMS stocks that are priced at, or greater than, $1.00 per share in sub-penny increments, the rule does not prohibit trading in sub-penny increments. In application, however, certain OTC market participants are able to trade more freely in sub-penny increments than others. Specifically, while rule 612 requires an OTC market maker to only accept priced orders in a penny increment, it does not prevent OTC market makers from executing an order in a sub-penny amount. Trading on national securities exchanges and ATSs, however, largely occurs in penny increments because national securities exchanges and ATSs generally execute trades at the prices that orders and quotes must be displayed, accepted or ranked under rule 612.19 Among other things, the ability of OTC market makers to trade more readily in finer increments (i.e., offering sub-penny price improvement over the displayed quote) compared to the trading on exchanges and ATS has contributed to the increased percentage of executions that occur off-exchange.20 Finally, since the adoption of rule 612, there have been technological advancements that enable trading and order routing systems of market participants to handle the increased message traffic that could occur if smaller or varied minimum pricing increments were implemented for NMS stocks. Under section 11A(a)(1) of the Exchange Act, Congress found that ‘‘[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure—(i) economically efficient execution of securities transactions; [and] (ii) fair competition among brokers and dealers,
among exchange markets, and between exchange markets and markets other than exchange markets. . . .’’ 21 The Commission, consistent with the Congressional mandate and direction of section 11A(a)(2) of the Exchange Act to carry out these objectives, proposes to amend rule 612 to establish variable minimum pricing increments for quotations and orders in NMS stocks that are priced at, or greater than, $1.00 per share based on objective and measurable criteria and make such minimum pricing increments applicable to the trading of all NMS stocks regardless of price, subject to certain specified exceptions.22 As discussed in section II.F 23 the Commission is proposing to amend rule 612 in a manner that would extend

24See infra sections V.D.2 and V.E.2.a. 25Currently, no NMS stock would qualify for this minimum pricing increment. See infra note 211. 26See Regulation NMS Adopting Release, supra note 16, at 37497, 37538. 27 Id. at 37538. See also 15 U.S.C. 78k– 1(a)(1)(C)(iv). 28See Regulation NMS Adopting Release, supra note 16, at 37538. See also 15 U.S.C. 78k– 1(a)(1)(C)(i). 29A protected quotation is defined in rule 600(b)(71) as ‘‘a protected bid or protected offer.’’ 17 CFR 242.600(b)(71). A protected bid or protected offer is defined as ‘‘a quotation in an NMS stock that: (i) Is displayed by an automated trading center; (ii) Is disseminated pursuant to an effective national market system plan; and (iii) Is an automated quotation that is the best bid or best offer of a national securities exchange, the best bid or best offer of the Nasdaq Stock Market, Inc., or the best bid or best offer of a national securities association.’’ 17 CFR 242.600(b)(70). 30A trading center is defined in rule 600(b)(95) as ‘‘a national securities exchange or national securities association that operates an 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.’’ 17 CFR 242.600(b)(95). 31See Regulation NMS Adopting Release, supra note 16, at 37544. 32See id. at 37545. 33See infra section III.A.2. 34See infra section III.A.2. beyond tick-constrained stocks. The Commission believes that it is timely, and consistent with section 11A of Exchange Act, to replace and modernize the current ‘‘one-size-fits-all’’ tick approach with an objectively calculated and varied approach that would determine the minimum pricing increments for particular NMS stocks in a manner that would reflect differences in their trading characteristics. The Commission believes that the proposed variable minimum pricing increments would address the issues related to tick￾constrained stocks, help to prevent other stocks from becoming tick￾constrained, and reduce transaction costs for many stocks without harming the displayed liquidity in, and execution quality of, NMS stocks that may be higher priced and/or trade with wider spreads. In addition, the Commission is proposing to apply the amended rule 612 minimum pricing increments to the quoting and trading of NMS stocks in order to promote fair competition and equal regulation between trading in the OTC market and trading on exchanges and ATSs, particularly as it relates to retail order flow. The Commission believes that requiring orders to be executed in the minimum pricing increment would enhance competition among trading centers by ensuring that all trading centers would be able to compete in the same price increment. The Commission believes applying the proposed minimum pricing increments to the trading of NMS stocks regardless of trading venue would also preserve most meaningful price improvement
opportunities and potentially benefit the market as increased competition for orders, and between market participants, could promote innovation.24 As further discussed in section II.F, the Commission is proposing to amend rule 612 such that the minimum pricing increment for quotations and orders in NMS stocks that are priced at $1.00 or more per share would be variable and no smaller than (1) $0.001, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was equal to, or less than, $0.008; 25 (2) $0.002, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than $0.008 but less than, or equal to, $0.016; (3) $0.005, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than $0.016 but less than, or equal to, $0.04; and (4) $0.01, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than $0.04. Under this proposal, the primary listing exchanges would measure and calculate the Time Weighted Average Quoted Spread of each NMS stock in order to determine the applicable minimum pricing increment for such NMS stock during the months of March, June, September, and December of a particular calendar year (i.e., ‘‘Evaluation Period’’) for the three months to follow. Finally, the Commission is proposing that the minimum pricing increments set forth by rule 612, subject to specified exceptions, be applicable to the trading of all NMS stocks. B. Rule 610—Access to Quotations The Commission adopted rule 610 to help to fulfill the statutory objectives of fair and efficient access to the individual markets that participate in the national market system.26 The Commission described rule 610 as supporting the national market system objectives of assuring ‘‘the practicability of brokers executing investors’ orders in the best market’’ 27 and ‘‘the efficient execution of securities transactions.’’ 28 Rule 610 addresses three issues related to access to quotations: (1) the means of access to quotations; (2) the fees for access to protected quotations and any other quotations that are the best bid or best offer of an exchange; and (3) locking and crossing quotations. Rule 610 imposes a limit on the fees that can be charged for access to protected quotations.29 For NMS stocks priced at, or greater than, $1.00 per share, a trading center 30 shall not impose, nor permit to be imposed, any fee for the execution of an order against a protected quotation that exceeds $0.0030 per share, and for NMS stocks that are priced at less than $1.00 per share, a trading center shall not impose, nor permit to be imposed, any fee for the execution of an order against a protected quotation that exceeds 0.3% of the quotation price per share. The Commission adopted the access fee caps to preserve the benefits of strengthened price protection and more efficient linkages among trading centers that could be disrupted
if substantial fees for accessing quotations were charged.31 The access fee caps were calculated based upon the then current fees that were charged by certain trading venues and reflect the minimum pricing increment of $0.01 per share.32 The access fee caps have not changed since their adoption in 2005. In the time since the adoption of rule 610, the national securities exchanges have adopted complex fee schedules, with fees charged and rebates paid, in
part, to encourage the submission of
liquidity.33 The fee schedules of the national securities exchanges also include various volume-based tiers that seek to reward market participants for submitting a minimum level of liquidity.34 The fees included in these schedules are largely calculated based on volume in a given month and are therefore calculated at month’s end. This timing impedes the ability of market participants, including investors, to evaluate the total price of a trade at the time of execution and impedes a market participant’s ability to evaluate best execution and order routing. The Commission proposes to amend rule 610 in two ways. First, to reflect the lower variable minimum pricing increments proposed under rule 612, the Commission proposes to reduce the access fee caps for protected quotations in NMS stocks priced $1.00 or more to $0.0005 per share for NMS stocks that have a minimum pricing increment of $0.001; and $0.001 per share for NMS stocks that have a minimum pricing increment greater than $0.001 per share; and for protected quotations in NMS stocks priced less than $1.00 per share to 0.05% of the quotation price. The proposed level of the access fee caps seeks to balance the need to reduce the access fee caps to accommodate the reduction in the minimum pricing increments and preserve the ability of

35Agency market trading centers are those that bring together buyers and sellers and typically charge a fee for their execution services. The Commission has previously recognized that ‘‘agency trading centers perform valuable agency services in bringing buyers and sellers together, and that their business model historically has relied, at least in part, on charging fees for execution of orders against their displayed quotations.’’ See Regulation NMS Adopting Release, supra note 16, at 37545. 36See infra section III.C.1. 37See infra note 297 and accompanying text. 38MDI Adopting Release, supra note 5. Several exchanges filed petitions for review in the U.S. Court of Appeals for the District of Columbia Circuit, which were denied on May 24, 2022. The Nasdaq Stock Market LLC, et al v. SEC, No. 21–1100 (D.C. Cir. May 24, 2022). 39See Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 16726, 16730–31 (Mar. 24,
2020) (‘‘MDI Proposing Release’’). See infra note
327 for a description of the data currently provided within the national market system. 40For example, if the national best bid for XYZ, Inc. is 100 shares at $25.00, and there are three orders of five shares and two orders of ten shares at $25.01 on Exchange A, this would be represented as ‘‘35 shares at $25.01 on Exchange A’’ pursuant to the definition of odd-lot information adopted under the MDI Rules. MDI Adopting Release, supra note 5, at 18613. 41MDI Adopting Release, supra note 5, at 18612– 13. 42See id. at 18698. 43See id. at 18612. 44 Id. See also infra note 359. 45 15 U.S.C. 78k–1(a)(1)(C)(iii). 46 15 U.S.C. 78k–1(c)(1)(B). 47A tick is the minimum pricing increment that can be used to trade securities. Decimalization set the tick size to penny increments from fractional increments, such as 1⁄8 or 1⁄16 of a dollar. For a discussion of the implementation of decimal pricing, see Order Directing the Exchanges and the Financial Industry Regulatory Authority to Submit a Tick Size Pilot Plan, Exchange Act Release No. 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014). 48See Exchange Act Release No. 46280 (July 29, 2002), 67 FR 50739 (Aug. 5, 2002) (order approving proposed rule changes and amendments related to decimal pricing). In this order, the Commission approved the proposals of the then-existing exchanges and the National Association of Securities Dealers, Inc. (the predecessor to the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’)) to establish a minimum pricing increment of $0.01 for equity issues, $0.05 for option issues quoted under $3.00 a contract, and $0.10 for option issues quoted at $3.00 a contract or greater. 49See Regulation NMS Proposing Release, supra note 16, at 11163. See also Report to Congress on Decimalization, Commission (July 2012) (‘‘Decimalization Report’’) available at https:// www.sec.gov/files/decimalization-072012.pdf. the agency market business models to charge fees for access.35 Consistent with the Commission’s proposal to adopt lower variable minimum pricing increments, the Commission is proposing reduced variable access fee caps based on the minimum pricing increment and the price of the protected quotation.36 The Commission believes the proposed fee caps are consistent with current market practices and would lead to pricing that is better aligned with today’s transaction costs.37 Second, to facilitate the ability of market participants to understand and calculate the total price of transactions at the time of execution, the Commission proposes to amend rule 610 to require exchanges to make the amounts of all fees and rebates determinable at the time of execution.
C. Transparency of Better Priced Orders
The Commission adopted the MDI Rules, which expanded the content of data that will be made available for dissemination within the national market system and adopted a decentralized consolidation model for the collection, consolidation, and dissemination of consolidated market data.38 One goal in expanding the data made available within the national market system was to increase transparency about better prices available in the market.39 To accomplish this, the Commission, in the MDI Rules, adopted a new definition of round lot, which will increase transparency about smaller sized orders in higher priced stocks by assigning NMS stocks priced over $250 to round lot sizes that are less than the 100 share round lot size that is predominant today. In addition, the MDI Rules included odd-lot information in the data that will be made available within the national market system. ‘‘Odd-lot information’’ is defined as (1) odd-lot transactions, and (2) odd-lots at a price greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association.40 Therefore, once implemented, information regarding the prices and sizes of odd-lot orders priced better than the national best bid and national best offer (‘‘NBBO’’) will be made available within the national market system and is expected to be made widely available to investors.41 These new definitions will significantly enhance transparency about better priced orders available in the market. For the reasons explained in the MDI Adopting Release, the Commission adopted a phased transition plan for the MDI Rules that sequenced the implementation of these data elements in the later stages of the transition.42 The Commission proposes to accelerate implementation of the round lot and odd-lot information definitions adopted under the MDI Rules so that this information is made available to investors within the national market system sooner. Information about better priced orders available in the market is important for investors to be able to understand the current prices and liquidity in the market when entering their orders.43 This information is also important for market participants who have best execution obligations.44 Furthermore, while the odd-lot information definition includes all prices better than the NBBO for which there is liquidity available in an odd-lot size, it does not identify a consolidated best odd-lot order. Establishing a defined best odd-lot order would provide further relevant information to investors and market participants. A consolidated best odd-lot order would be useful to investors in deciding the terms of an order by providing information about the price, size, and market of the best priced buy and sell orders available in the market against which their own orders could execute. Further, a best odd-lot order would be useful to investors to measure the amount of
price improvement they receive for the execution of their orders. The Commission believes that amending the definition of odd-lot information to include a best odd-lot order would be consistent with section 11A of the Exchange Act, which provides, among other things, that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability of information with respect to quotations in securities.45 Further, a best odd-lot order would be consistent with section 11A(c)(1)(B) of the Exchange Act as it would assure the usefulness of quotation information.46 Together with accelerating the implementation of the definitions of round lot and odd-lot information, these proposed amendments would provide investors with enhanced transparency about better priced orders available in the market.
II. Amendment to Rule 612 of
Regulation NMS—Minimum Pricing Increment A. Background Prior to implementing decimal pricing in April 2001, fractions of a dollar were utilized to represent the minimum pricing increments for the United States equity markets (e.g., 1⁄8, 1⁄16, and 1⁄32 of a dollar).47 The conversion to decimal pricing reduced the allowable minimum pricing increment to $0.01 and the exchanges adopted rules that established minimum pricing increments of $0.01 for equities trading.48 However, after the conversion to decimal pricing, the display and execution of sub-penny quotes increased off-exchange.49 The increase

50See Regulation NMS Proposing Release, supra note 16 at 11164. 51See id. at 11165. 52 Id. at 37553. 53 Id. at 37551. Further, the Commission stated that ‘‘[w]hen market participants can gain execution priority for an infinitesimally small amount, important customer protection rules such as exchange priority rules and [FINRA’s] Manning rule could be rendered meaningless’’ and that without such protections, ‘‘professional traders would have more opportunity to take advantage of non￾professionals,’’ which could lead to lost executions or executions occurring at inferior prices. Id. 54 Id. at 37552. The Commission stated that a decrease in market depth could ‘‘lead to higher transaction costs, particularly for institutional investors (such as pension funds and mutual funds) that are more likely to place large orders,’’ which ‘‘would likely be passed on to retail investors whose assets are managed by the institutions.’’ Id. 55 Id. at 37552. The Commission described ‘‘flickering quotations’’ as occurring when the price of a trading center’s best displayed quotations changes multiple times in a single second and stated that flickering quotations ‘‘could make it more difficult for broker-dealers to satisfy their best execution obligations and other regulatory responsibilities.’’ Id. 56 Id. at 37553 (‘‘Even assuming that quoting in sub-penny increments would reduce spreads, the Commission continues to believe, on balance, that the costs of sub-penny quoting are not justified by the benefits.’’) 57 Id. (‘‘Nevertheless, the Commission acknowledges the possibility that the balance of costs and benefits could shift in a limited number of cases or as the markets continue to evolve.’’) 58See Regulation NMS Adopting Release, supra note 16, at 37556. 59See id. 60See id. See also, e.g., NYSE Rule 7.6 (Trading Differentials) (‘‘The minimum price variation (MPV) for quoting and entry of orders in securities traded on the Exchange is $0.01, with the exception of securities that are priced less than $1.00 for which the MPV for quoting and entry of orders is $0.0001.’’); see also Nasdaq Rule Equity 1 Equity Definitions (a)(13) (‘‘The term minimum price increment means $0.01 in the case of a System Security priced at $1 or more per share, and $0.0001 in the case of a System Security priced at less than $1 per share.’’). 61See Regulation NMS Adopting Release, supra note 12, at 37556. 62NYSE Rule 107C; Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR 40673 (July 10, 2012) (approving retail liquidity programs on a pilot basis for NYSE and NYSE Amex and granting rule 612 exemption) (NYSE Retail Liquidity Program Approval Order); CBOE BYX Rule 11.24; Securities Exchange Act Release No. 68303 (Nov. 27, 2012), 77 FR 71652 (Dec. 3, 2012) (CBOE BYX Retail Pilot Program Approval Order); Nasdaq BX Rule 4780; Securities Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4, 2014) (NASDAQ BX Retail Pilot Program Approval Order). 63See NYSE Retail
Liquidity Program Approval Order, supra note 62 at 40679. 64 Id. at 40862. of sub-penny quoting and trading in the OTC market raised concerns because these quotes were not readily transparent, or accessible, to many average investors.50 In 2004, as part of Regulation NMS, the Commission proposed rule 612 to implement minimum pricing increments for quoting in NMS stocks. The Commission stated that while the benefits of decimalization justified the costs, there was a potential for costs to investors and the markets to surpass the benefits if the minimum pricing increment decreased beyond a certain level.51 Rule 612 was designed to ‘‘deter the practice of stepping ahead of exposed trading interest by an economically insignificant amount,’’ 52 which could discourage investors from submitting limit orders. The Commission reasoned that ‘‘if orders lose execution priority because competing orders step ahead for an economically insignificant amount, liquidity could diminish.’’ 53 Further, the Commission was concerned that sub-penny quotes could decrease market depth (i.e., the number of shares of a security that is available at any given price), which in turn could increase transaction costs and cause institutions ‘‘to rely more on execution alternatives away from the exchanges’’ and ‘‘[s]uch a trend could increase fragmentation of the securities markets.’’ 54 In addition, the Commission stated that sub-penny quoting could inhibit the ability of broker-dealers to meet certain regulatory obligations by increasing the incidences of so-called ‘‘flickering’’ quotes.55 At the time, the Commission did not believe that the potential benefits of marginally better prices offered by sub-penny increments for quotes and orders in securities priced at, or greater than, $1.00 per share were likely to justify the costs of permitting sub-penny quotes to be displayed, accepted and ranked.56 However, the Commission acknowledged the possibility that the markets could evolve over time and cause the balance of the costs and benefits to shift.57 When rule 612 was adopted, the Commission considered the impact of sub-penny trading but did not believe that such trading raised the same concerns as sub-penny quoting. Specifically, the Commission stated that, unlike sub-penny quoting, sub￾penny executions do not cause quote flickering, decrease depth at the inside of the market or raise systems capacity issues.58 In addition, the Commission stated that sub-penny executions were generally beneficial to retail investors.59 B. Rule 612 In 2005, the Commission adopted rule 612 of Regulation NMS to establish uniform minimum pricing increments for NMS stocks. Rule 612 prohibits national securities exchanges, national securities associations, ATSs, vendors and broker-dealers from displaying, ranking, or accepting quotations, orders, or indications of interest in any NMS stock priced in an increment smaller than $0.01 if the quotation, order, or indication of interest is priced equal to,
or greater than, $1.00 per share. Rule 612 also prohibits national securities exchanges, national securities associations, ATSs, vendors, and broker￾dealers from displaying, ranking or accepting quotations, orders and indications of interest in an NMS stock in an increment smaller than $0.0001 if the quotation, order or indication of interest in an NMS stock is priced less than $1.00 per share. Under rule 612, an exchange, association, ATS, vendor or broker-dealer must reject a quote or order for an NMS stock that is explicitly priced in an impermissible increment.60 Rule 612 does not prohibit quotes and orders from being executed in sub￾penny increments. In the Regulation NMS Adopting Release, the Commission stated that the rule does not prohibit a sub-penny execution resulting from a midpoint, volume-weighted algorithm, or from price improvement so long as the execution does not result from an impermissibly priced sub-penny order or quote.61

1. Exchange Retail Liquidity Programs
   (‘‘RLPs’’)
   After its adoption, the Commission granted exemptions from rule 612 to various national securities exchanges to establish ‘‘retail liquidity programs’’ that allow them to accept and rank certain quotes and orders from certain participants in sub-penny increments as small as $0.001.62 RLPs were designed to attract retail orders to exchanges by providing such orders potential price improvement at sub-penny levels because ‘‘most marketable retail order flow is executed in the OTC markets, pursuant to bilateral agreements, without ever reaching a public exchange’’ and that OTC market makers typically paid retail brokers for their order flow.63 The Commission stated that ‘‘[i]nternalizing broker-dealer[s] can offer sub-penny executions, provided that such executions do not result from impermissible sub-penny orders or quotations’’ by ‘‘typically select[ing] a sub-penny price for a trade without quoting at that exact amount or accepting orders from retail customers seeking that exact price.’’ 64 The Commission stated that, in contrast, exchange members, when submitting orders and quotations to exchanges, ‘‘cannot compete for marketable retail order flow on the same basis because it would be impractical for exchange

65 Id.
66 Id. at 40679.
67 Id. at 40682. See also CBOE BYX Retail Pilot Program Approval Order, supra note 62 at 71658; and NASDAQ BX Retail Pilot Program Approval Order, supra note 62 at 72053. 68NYSE Retail Liquidity Program Approval Order at 40682. There are three effective national market system plans that govern the collection, consolidation, processing, and dissemination of certain NMS information. They are: (1) the Consolidated Tape Association Plan (‘‘CTA Plan’’); (2) the Consolidated Quotation Plan (‘‘CQ Plan’’); and (3) the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis (‘‘UTP Plan’’) (together, the ‘‘Equity Data Plans’’). See also MDI Adopting Release, supra note 5. 69 Id. at 40680. 70See, e.g., How Can The Buy Side Interact With Retail Flow, Rosenblatt Securities, Feb. 14, 2022, available at https://www.rblt.com/market-reports/ how-can-the-buy-side-interact-with-retail-flow (‘‘The various exchange retail programs consistently account for less than 0.2% of consolidated volume.’’). According to NYSE, most order handling processes ignore retail interest that is available in the RLPs because resting interest in RLPs does not display price or size. See NYSE, Price improvement, tick harmonization & investor benefit (Aug. 22, 2022) (‘‘NYSE Tick Harmonization Paper’’), available at https://www.nyse.com/ publicdocs/nyse/NYSE_Price_Improvement_ 202208.pdf. See also https://www.nyse.com/data￾insights/what-exchanges-can-and-cannot-offer￾retail-traders. See also NYSE Retail Liquidity Program Approval Order at 40682. 71See Concept Release on Equity Market Structure, supra note 4. 72 Id. 73 Id. 74 Id. 75See, e.g., Letters from Karrie McMillan, General Counsel, Investment Company Institute, dated Apr. 21, 2010; Ann Vlcek, Managing Director and Associate General Counsel, Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated Apr. 29, 2010; James J. Angel, Associate Professor, McDonough School of Business, Georgetown University; Lawrence E. Harris, Fred V. Keenan Chair in Finance, Professor of Finance and Business Economics, Marshall School of Business, University of Southern California; Chester S. Spatt, Pamela R. and Kenneth B. Dunn Professor of Finance, Director, Center for Financial Markets, Tepper School of Business, Carnegie Mellon University, dated Feb. 23, 2010. 76See, e.g., Letters from Eric Swanson, General Counsel, BATS Exchange, Inc., dated Apr. 21, 2010 and Eric W. Hess, General Counsel, Direct Edge, dated Apr. 28, 2010. 77See, e.g., Letters from Janet M. Kissane, SVP— Legal and Corporate Secretary, Office of the General Counsel, NYSE Euronext, dated Apr. 23, 2010; and John A. McCarthy, General Counsel, GETCO LLC, Christopher R. Concannon, Partner, Virtu Financial LLC, and Leonard J. Amoruso, General Counsel, Knight Capital Group, Inc., dated July 9, 2010. 78See
Letter from Chris Isaacson, Chief Operating Officer, BATS Exchange, Inc., Eric Noll, Executive Vice President, NASDAQ OMX Group, Inc., and Larry Leibowitz, Chief Operating Officer, NYSE Euronext, Inc. to Elizabeth M. Murphy, Secretary, Commission, dated on Apr. 30, 2010 (‘‘Joint Petition’’) available at https://www.sec.gov/ spotlight/regnms/jointnmsexemption request043010.pdf. The petitioners stated that the pilot would allow the Commission to collect data to study the impact of the reduction of the minimum increment without making a long term policy commitment. The petitioners did not propose to reduce the access fee caps under rule 610 because the $0.005 increment would have continued to be higher than the access fee cap, which would prevent the public display of a protected quote that is not accurate when the access fee is factored in. Id. at 7. 79 Id. at 6. 80 Id. at 2. 81 Id. at 1. 82See Decimalization Report, supra note 49. penny executions’’ without firms ‘‘having first submitted sub-penny orders or quotations, which the Sub￾Penny Rule expressly prohibits.’’ 65 The Commission found that the first RLP, which was approved on a pilot basis, was reasonably designed to benefit retail investors by providing price improvement to retail order flow and ‘‘could promote competition for retail order flow among execution venues.’’ 66 The Commission also found that the proposed RLPs were reasonably designed to minimize the concerns raised by sub-penny quoting.67 Specifically, using the same analytical framework as the Regulation NMS Adopting Release, the Commission reasoned that the proposed RLPs did not raise concerns related to quote flickering or reduced depth at the inside quotation because the sub-penny prices would not be disseminated through the Equity Data Plans.68 In addition, the Commission did not believe the proposed RLPs would reduce incentives to post limit orders because market participants that display limit orders were unable to interact with marketable retail order flow that was almost entirely executed in the OTC market.69 Exchanges proposed RLPs, in part, to address the differences in market structure that divert retail liquidity off-exchange. However, to date, the RLPs have not attracted a significant volume of retail order flow.70
C. Tick Size Considerations Since
Regulation NMS
Minimum pricing increments have been considered several times since the Commission adopted rule 612. In 2010, the Commission issued the Concept Release on Equity Market Structure, which examined the then current equity market structure and invited public comment on various market structure issues, including high frequency trading, order routing, market data linkages, and undisplayed liquidity.71 Among other things, the Commission discussed internalization by broker￾dealers and stated that ‘‘[t]here may be greater incentives for broker-dealer internalization in low-priced stocks than in higher priced stocks.’’ 72 The Commission stated that in low-priced stocks, the one cent per share minimum pricing increment is much larger on a percentage basis than it is in higher￾priced stocks.73 In the discussion on undisplayed liquidity, the Commission sought comment on whether public price discovery and execution quality may have suffered and specifically questioned whether the minimum pricing increment should be reduced for lower priced stocks.74 In response, the Commission received several letters opposing 75 and supporting 76 a pilot program to test sub-penny tick increments. The Commission also received letters recommending a pilot program to test a wider variety of tick sizes.77 In 2010, three exchange operators jointly petitioned the Commission to use its exemptive authority under rule 612(c) to allow the exchanges to implement a 6-month pilot program that would reduce the minimum pricing increment to $0.005 for a limited set of 30 NMS stocks priced from $1.00 to $20.00 (including one exchange-traded fund (‘‘ETF’’) that was trading at greater than $20.00).78 The Joint Petition stated that at that time a significant percentage of the volume in these securities (4%) was transacting at a $0.005 increment and that a large percentage of share volume in securities priced below $20 occurred in securities that were routinely quoted at the minimum pricing increment, indicating a likelihood that price discovery was being constrained.79 The Joint Petition also stated that ‘‘a disproportionately high percentage of transactions in securities priced between $1 and $20 dollars are occurring away from lit markets, which [they] believe indicates a lack of quote competition.’’ 80 The petitioners stated that the $0.01 minimum pricing increment resulted in artificially wide publicly-displayed quotes for certain lower-priced, liquid securities, which, in turn, negatively impacted the public price discovery process and resulted in inferior execution prices for investors.81 In 2012, Congress passed the Jumpstart Our Business Startups Act (‘‘JOBS Act’’), which contained provisions relating to the impact of decimalization on small and middle capitalization companies. Section 106(b) of the JOBS Act directed Commission to conduct a study on how decimalization affected the number of initial public offerings (‘‘IPOs’’) and the liquidity and trading of smaller capitalization
company securities. The Commission submitted a staff study to Congress in July 2012.82 While the Decimalization Report did not reach any firm conclusions about the impact of

83For a complete discussion about the Feb. 6, 2013 roundtable and the discussions that led to the implementation of the tick size pilot, see Securities Exchange Act Release No. 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014) (Order Directing the Exchange and FINRA to submit a Tick Size Pilot Plan). 84See Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27513 (May 13, 2015) (Order Approving the National Market System Plan to Implement a Tick Size Pilot Program, available at https://www.govinfo.gov/content/pkg/FR-2015-05- 13/pdf/2015-11425.pdf). 85 DERA Tick Size Pilot and Market Quality (Jan. 31, 2018), available at https://www.sec.gov/dera/ staff-papers/white-papers/dera_wp_tick_size￾market_quality. See also Who Provides Liquidity, And When?, Sida Li, Xin Wang, and Mao Ye, Journal of Financial Economics 141, no. 3 (2021) (finding that wider tick sizes reduce liquidity, encourage the speed race among high-frequency traders, and allocate resources to latency reduction) and Yashar Barardehi, Peter Dixon, Qiyu Liu, and Ariel Lohr, Tick Sizes and Market Quality:
Revisiting the Tick Size Pilot (working paper, Dec. 14, 2022) available at https://www.sec.gov/files/ dera_wp_ticksize-pilot-revisit.pdf (observing that market quality improved at the end of the pilot for stocks that were tick constrained under the TSP). Dixon, Liu, and Lohr are financial economists in the Division of Economic and Risk Analysis at the SEC. Barardehi is at the Argyros School of Business & Economics, Chapman University, and is a part-time consultant with the SEC. 86See Concept Release on Equity Market Structure, supra note 4. 87See MDI Adopting Release, supra note 5. 88The Concept Release on Equity Market Structure describes the transition of the modern equity trading markets away from the largely centralized, manual structure to the dispersed automated structure that exists today. See Concept Release on Equity market Structure, supra note 4. See also Staff Report on Algorithmic Trading in the U.S. Capital Markets (Aug. 5, 2020) (‘‘Staff Report on Algorithmic Trading’’) (this staff report updated some of the Concept Release’s details and described certain developments that have occurred since 2010). 89See Staff Report on Algorithmic Trading (describing the broad use of algorithms in contemporary securities markets). 90See https://www.sec.gov/divisions/marketreg/ form-ats-n-filings.htm. 91See Staff Report on Equity and Options Market Structure, supra note 20. 92Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ. 93Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ. 94See supra section II.B.1. 95OTC market makers internalize orders by trading principally on the other side of the orders that they accept. See Staff Report on Equity and Options Market Structure, supra note 20. 96 ‘‘Payment for order flow’’ is defined in Rule 10b–10 under the Exchange Act. 17 CFR 240.10b– 10(d)(8). Rule 10b–10 further prescribes information that a broker or dealer must disclose to its customer on the customer’s confirmation. The rule requires that the broker-dealer disclose to the customer, among other things, ‘‘[t]he amount of any remuneration received or to be received by the broker from such customer in connection with the transaction . . .’’ and ‘‘the source and amount of any other remuneration received or to be received by the broker in connection with the transaction. . . .’’ 17 CFR 240.10b–10(a)(2)(B) and (D). 97See infra section V.C.1.b and accompanying text. 98See infra section V.C.1.b and Table 8. decimalization on the number of IPOs or the liquidity and trading of small capitalization companies, it did recommend that the Commission conduct a roundtable where recommendations could be presented on a pilot program that would generate data to allow the Commission to further assess decimalization’s impact. Commission staff held a roundtable on February 5, 2013, during which there was broad support among panelists for the Commission to conduct a pilot program to
gather information, particularly with respect to the impact of wider minimum pricing increments on liquidity in smaller capitalization companies.83 In 2016, the Commission initiated a Tick Size Pilot for small- and mid-size capitalized stocks to test larger quoting and trading increments (‘‘TSP’’).84 After the expiration of the 2- year pilot program, the Commission staff observed that, on average, increasing the tick size resulted in deteriorating market quality for stocks that became tick-constrained under the pilot.85 D. Issues Raised in the Current Market Structure In 2005, when rule 612 was adopted, the markets were still largely typified by manual trading on exchange floors.86 Since then, the markets have overwhelmingly transitioned to electronic trading with orders being accepted, routed, displayed, and executed via low latency trading systems.87 Equity market structure and competitive dynamics have also changed,88 and trading and order routing systems can handle and process an amount of data that would have been unprecedented and unfathomable in
2005.89 NMS stocks are traded on￾exchange (i.e., on one or more of the 16
currently registered national securities exchanges) or off-exchange (e.g., on one or more of the 33 currently registered NMS Stock ATSs 90 or by OTC market makers).91 As of September 2022, on￾exchange volume is approximately 58% while off-exchange/OTC volume is approximately 42%,92 while in 2007, on-exchange share volume was 71% and off-exchange/OTC volume was approximately 29%.93 The market structure of the OTC market that permits the execution of orders more readily in sub-penny amounts has been a factor that contributes to this result. While rule 612 does not prohibit executions from occurring in sub-penny increments, there are various factors that lead to sub-penny trading occurring more frequently off-exchange compared to on-exchanges or ATSs. Specifically, exchanges and ATSs typically match quotes and orders in the penny increment in which explicitly priced quotes and orders must be submitted under rule 612. Sub-penny trading occurs on exchanges and ATSs pursuant to either: (1) exchange rules and order types that permit executions at midpoint of the NBBO or volume￾weighted executions or (2) exemptions that have been granted by the Commission under rule 612(c) (i.e., RLPs).94 Accordingly exchange rules, and the requirement that such rules comply with rule 612, limit sub-penny trading on exchanges. OTC market makers execute in sub￾penny increments with more regularity as a result of their ability to offer price improvement in between the NBBO after such orders have been accepted by the OTC market maker in the permissible penny increment.95 OTC market makers, unlike market participants on an exchange or ATS, are not limited by their market structure to generally execute orders in the minimum pricing increment that the order was accepted. Instead, OTC market makers are able to trade as principal with orders that they receive and in the increment that they determine. As a result, OTC market makers may trade more readily in sub￾penny increments which helps to provide an advantage over their exchange and ATS counterparts in attracting order flow. Today, most marketable retail order flow is executed off-exchange by OTC market makers who, in addition to not being limited by exchange rules, offer, in many cases, payment for order flow (‘‘PFOF’’) for retail orders.96 Further, 37% of executions off-exchange are reported in sub-penny amounts that are not associated with midpoint trades.97 As further discussed in the Economic Analysis, data suggests that of the total dollar value of sub-penny trades that are not midpoint trades, 11% occurred on￾exchange while 89% occurred off￾exchange.98 While this dynamic provides retail orders that execute OTC with a measure of price improvement, the Commission is concerned that these retail orders are not exposed to competitive forces on the public market (since these retail orders are typically directed from one broker-dealer to another wholesale broker-dealer by contractual arrangement). As a result, these retail
orders are not publicly displayed and do not contribute to the

99See Staff Report on Equity and Options Market Structure at 11. See also Kwan, Amy, Ronald Masulis, and Thomas H. McInish, ‘‘Trading rules, competition for order flow and market fragmentation,’’ Journal of Financial Economics 115, no. 2 (2015): 330–348. 100See, e.g., Enhancing Competition, Transparency and Resiliency in U.S. Financial Markets, Citadel Securities (May 2021) available at https://fe7a500fc6adae9c30fb.b-cdn.net/wp￾content/uploads/2021/05/EnhancingCompetition TransparencyandResiliencyinUS FinancialMarkets.pdf (‘‘Citadel Report’’) (‘‘This regulatorily mandated tick size impedes the ability of exchanges to compete for order flow in symbols that are highly liquid and commonly trade inside a bid-offer spread of a penny. We believe this ‘constrained’ tick size directly leads to complexities and inefficiencies—such as driving order flow into alternative venues, complex exchange pricing structures, and increased overall market fragmentation.’’). See also Enhancing U.S. Equity Market Structure for Retail Investors, Committee on Capital Markets Regulation (Sept. 2021) (‘‘CCMR Report’’) available at https://www.capmktsreg.org/ wp-content/uploads/2021/09/CCMR-Enhancing￾Retail-Equity-Market-Structure-09.01.2021-2.pdf. 101See infra note 448. 102See infra note 448 and accompanying text and infra Table 4. 103 Id. 104See, e.g., The Tick-Constrained Stock Problem by Phil Mackintosh (Jan. 20, 2022), available at https://www.nasdaq.com/articles/the-tick￾constrained-stock-problem) (‘‘Nasdaq Paper’’). See also Petition for Rulemaking to Amend Rule 612 of Regulation NMS to Adopt Intelligent Tick-Size Regime, dated Dec. 16, 2019, submitted by John A. Zecca, Executive Vice President, Chief Legal Officer & Chief Regulatory Officer, Nasdaq Inc. available at https://www.sec.gov/rules/petitions/2019/petn4- 756.pdf (‘‘Nasdaq Intelligent Tick Proposal’’); The Impact of Tick Constrained Securities on the U.S. Equity Market (available at https://www.nyse.com/ publicdocs/Tick_Constrained_Stocks.pdf) (‘‘NYSE White Paper’’) (no date available); and Cboe Proposes Tick-Reduction Framework to Ensure Market Structure Benefits All Investors (available at https://www.cboe.com/insights/posts/cboe￾proposes-tick-reduction-framework-to-ensure￾market-structure-benefits-all-investors/) (‘‘Cboe Proposal’’). 105See MEMX Tick Constrained Securities (Aug.
2021) (‘‘MEMX Report’’) available at https://
memx.com/wp-content/uploads/MEMX-Market￾Structure-Report-Tick-Constrained-Securities.pdf. MEMX reviewed data from the first and second quarter of 2021. MEMX data suggested that on average 998 stocks during the period were tick￾constrained, which MEMX defined as those NMS stocks that had an average quoted spread of 1.1 cents or less. In addition, on Aug. 30, 2021, MEMX filed a Request for Exemptive Relief Pursuant to Rule 612(c) of Regulation NMS to Permit a Minimum Increment of $0.005 in ‘‘Tick Constrained’’ NMS Stocks. See Letter from Adrian Griffiths, Head of Market Structure, MEMX to Vanessa Countryman, Secretary, Commission dated Aug. 30, 2021 (‘‘MEMX Exemption Request’’). 106MEMX Report, supra note 105, at 9. 107 Id. at 9. 108 Id. at 10. 109 Id. 110 Id. 111 Id. at 11. 112 Id. at 15–17. 113 Id. at 13. 114 Id. 115See NYSE White Paper, supra note 104. price competition and discovery mechanism of the lit markets. The Commission is seeking to address concerns about the competitive dynamic between exchanges/ATSs and OTC market makers because the ability of OTC market makers to more readily trade in finer sub-penny increments than exchanges and ATSs factors into the increasing percentage of equity volume that is executed off-exchange.99 The fact that rule 612 does not prohibit sub-penny trading and the underlying regulatory framework that results in greater opportunities to trade OTC in sub-penny increments makes it more difficult for exchanges and ATSs to compete with OTC market makers for retail order flow. The Commission believes that the contrast between on and off-exchange sub-penny trading and the competitive responses by market participants results in market complexity and inefficiencies (e.g., inverted taker-maker fee structures, tiered fee structures, segmentation via RLPs, excessive fragmentation and intermediation).100 The proposed amendments to rule 612 would level the competitive playing field in this regard by requiring market participants, regardless of trading venue, to offer price improvement to investor orders in the same minimum pricing increments, unlike today where OTC market makers are able to offer investor orders price improvement in smaller pricing increments compared to their exchange and ATS counterparts. In addition, some NMS stocks are considered to be tick-constrained, meaning that they regularly experience a time-weighted average quoted spread of 1.1 cents or less, which indicates that these stocks are frequently quoted in the smallest increment permitted under the rule.101 The Commission identified 1,337 NMS stocks that would be considered tick-constrained under this metric.102 These tick-constrained NMS stocks account for 56.1% of estimated share volume and 23.2% of estimated dollar volume.103 NMS stocks become tick-constrained because rule 612’s minimum pricing increment prohibits quoting these stocks in increments smaller than provided under the rule. These stocks would experience smaller quoted spreads but for
the requirement under rule 612. Certain market participants have conducted data analysis on the effects of rule 612 and concluded that a $0.01 increment may not be appropriate for all stocks.104 For instance, MEMX LLC (‘‘MEMX’’) issued a report in August 2021, which provided data that suggests that ‘‘[a] significant portion of the U.S. equity market trades with a consistent penny spread throughout most of the trading day.’’ 105 MEMX provided data from the first half of 2021 indicating that many tick-constrained stocks, based on MEMX’s definition, are actively traded securities that ‘‘as a group [account] for 47% of volume, 28% of trades, and 25% of notional value executed.’’ 106 According to MEMX, the ‘‘[q]uoted spreads in these securities are limited not by supply and demand, but rather by outdated regulatory constraints that apply the same tick regime to securities with different trading characteristics.’’ 107 MEMX analyzed tick-constrained stocks across different price buckets and found that tick-constraint occurs more frequently in lower-priced securities, ‘‘where the one cent minimum increment is more ‘‘economically significant’’ relative to the price of a share of stock.’’ 108 According to MEMX’s analysis, ‘‘two-thirds (66%) of all tick-constrained securities trade in the two lowest price buckets,’’ which included stocks priced between $1.00 and $20.00 per share.109 MEMX’s analysis concluded that low-priced stocks are ‘‘more likely to be tick constrained, and the impact of that tick constraint in terms of basis point spread, which is relevant when measuring the cost of entering into a transaction, is also largest in these securities.’’ 110 However, MEMX stated that tick-constraint issues can occur across different price buckets, including in high-priced, actively-traded stocks.111 MEMX’s analysis also found that tick￾constrained stocks typically have more liquidity at the NBBO than stocks that are not tick-constrained. The findings were similar for stocks and exchange traded products (‘‘ETPs’’) with varying notional values traded.112 MEMX analyzed securities that trade at least $100 million notional value each day and concluded that more than one half of equity ETPs are tick￾constrained.113 MEMX stated that tick￾constrained actively-traded ETPs have spreads that are artificially wide ‘‘despite the fact that ETPs can be priced more efficiently due to the ability to accurately derive ETP prices and an effective arbitrage mechanism that keeps ETP prices in line with those of its underlying securities.’’ 114 The New York Stock Exchange (‘‘NYSE’’) published a white paper that stated the current $0.01 minimum pricing increment is a wider tick than market forces would otherwise produce for tick-constrained stocks.115 NYSE stated that tick-constrained stocks tend to trade with high volume, relatively low prices, and quoted spreads near $0.01, and exhibit higher levels of inaccessible liquidity (i.e., order flow

116NYSE stated that retail order flow is an example of inaccessible liquidity because it is largely sent to OTC market making firms that can execute such orders on a principal basis at prices inside the best displayed prices. Id. at 1. NYSE stated that retail order flow has increased as a percentage of the market. Id. 117 Id. at 1. 118 Id. at 2. 119 Id. 120 Id. 121 Id. 122 Id. at 12. 123 Id. at 4. 124 Id. at 6–7. 125 Id. at 8. 126See NYSE Tick Harmonization Paper, supra note 70 at 2. 127 Id. at 3. 128 Id. at 4. 129 Id. 130 Id. at 2. NYSE described ‘‘trade increment harmonization’’ as ‘‘equal trade pricing rules for all on and off exchange trading, with exchanges able to display quotes at twice the trade pricing increment.’’ NYSE analyzed the possible impact of a half cent quoting increment coupled with a harmonized quarter cent trading increment. Id. at 5. 131 Id. at 2. 132 Id. 133 Id. at 8. 134NYSE defined a ‘‘calm’’ market for purposes of its analysis as ‘‘when there is a stable quoted market price for a restrictive 100 milliseconds before and after the trade.’’ Id. at 9. 135 Id. 136 Id. 137 Id. at 10–11. 138 Id. at 10. 139 Id. at 11. 140See Nasdaq Paper and Nasdaq Intelligent Tick at 4, supra note 104. that is only available to select market participants) 116 which hampers transparency and price discovery.117 NYSE stated that the uniform rule 612 minimum pricing increment of $0.01 for all NMS stocks that are priced at, or above, $1.00 per share increases inaccessible liquidity, which results in ‘‘different market experiences for different participants.’’ 118 NYSE explained that some high￾volume, lower-priced securities ‘‘trade consistently with a spread of exactly $0.01 and maintain very deep order books at the national best price.’’ 119 NYSE said that this dynamic makes ‘‘it difficult for liquidity providers to receive a fill, except at undesirable times such as when the price is about to change’’ and that ‘‘queue competition contributes to high-cost infrastructure deployments’’ as market participants need to develop low latency technology to be the fastest to a new price and has also led to the development of inverted fee venues, ‘‘which allow, for a cost, liquidity providers to pay for better queue position.’’ 120 According to NYSE, these dynamics show that rule 612 has influenced an ‘‘arms race’’ in market technology and venue fragmentation. NYSE also stated that ‘‘artificially wide tick sizes raise transaction costs and harm execution quality.’’ 121 NYSE estimated that ‘‘trading in tick constrained securities typically increase[s] transaction costs by about one billion dollars per year . . .’’ 122 NYSE developed a ‘‘Tick Constrained Index’’ based on consolidated quoted spread and NBBO coverage to identify stocks that it considered tick￾constrained using data from 2019. NYSE’s tick-constrained stocks represented 538 symbols in the second half of 2020, which had an average intraday volume of 4,254,664 shares per symbol, and 25.9% of
intraday volume. NYSE estimated that the minimum $0.01 spread ‘‘cost investors over $1.7 billion in the first half of 2020 . . . [and] $499 million’’ in the second half of 2020.123 NYSE also analyzed the impact of volatility in 2020 on tick￾constrained stocks and concluded that tick-constrained stocks responded differently than non-tick-constrained stocks to extreme volatility. Specifically, tick-constrained stocks spreads did not widen (52.72%) as much as non-tick￾constrained (163.33%), but the depth at the inside decreased significantly more in tick-constrained stocks (¥73.24%) compared to non-tick-constrained stocks (¥39.75%).124 According to NYSE, market makers managed their risk in tick-constrained stocks by reducing liquidity because they could not reduce prices. NYSE also noted that exchange market makers are unable to compete with off-exchange providers in providing price improvement.125 More recently, NYSE published a study on price improvement and minimum pricing increments.126 NYSE analyzed consolidated exclusive securities information processor (‘‘SIP’’) data from January 1, 2022, to June 30,
2022.127 NYSE estimates that in the first
half of 2022 approximately $72 million per day aggregated price improvement was provided and that of this amount 48% was delivered on exchange and 52% was delivered off-exchange.128 Further, NYSE estimates that 12.4% of the total price improvement came from non-midpoint trades in either tenths or hundredths of a cent, which are increments that exchanges have limited ability to trade.129 According to NYSE’s analysis, harmonizing the trading increment across exchange and non￾exchange trading ‘‘could yield $6.3MM per day ($1.8B per year) in investor cost savings based on projected incremental savings if exchanges could offer sub￾penny price improvement in a competitive manner.’’ 130 NYSE stated that exchanges currently provide: (1) 1.17× the amount of off￾exchange price improvement when combining the midpoint and round penny trade prices; and (2) 77% as much price improvement as off￾exchange trades when spreads are wider than $0.01.131 NYSE applied these ratios to current off-exchange sub-penny price improvement estimates to calculate an additional $7.3 million in daily price improvement.132 NYSE also examined data related to stocks that frequently trade with a $0.01 spread and found that trades did not frequently execute in increments as small as $0.0001, which is the increment that off-exchange market makers can use in executing trades.133 In addition, according to NYSE, most price improvement is delivered to trades where the bid-offer spread is larger than $0.10. NYSE also examined price improvement trends during ‘‘calm’’ 134 and volatile markets.135 According to NYSE, exchanges tend to provide a larger share of the total price improvement during volatile markets, while off-exchange venues increase their share of total price improvement when volatility drops.136 Finally, NYSE considered the impact of allowing sub-penny quoting on market infrastructure.137 NYSE stated that the industry is capable of accommodating an increase in message traffic that may accompany lower minimum pricing increments.138 NYSE calculated several estimates of potential increased message traffic that resulted in increases in messages of the exchanges’ best quotations between 25% and 152% and stated that these increases would ‘‘lead to small changes in messaging levels relative to historical fluctuations and overall messaging rates that remain quite modest compared to data volumes prevalent in current-day options trading.’’ 139 The Nasdaq Stock Market (‘‘Nasdaq’’) has also conducted studies on minimum pricing increments. According to Nasdaq, trading in tick-constrained stocks is more complicated and more expensive, with artificially wider spreads and longer order queues, which slows order fulfillment and leads to the increased routing to exchanges that have inverted taker/maker fee structures.140 Nasdaq stated that as the price of the securities falls, the one penny minimum pricing increment becomes large as a percentage of value. For example, Nasdaq stated that for a stock
priced above $1,000 per share, one penny is less than 0.10 basis point (one basis point is equal to 0.01% or 0.0001), while for a stock priced $1.00, one penny represents 100 basis points.

141See Cboe Proposal at 1, supra note 104. 142 Id. 143 Id. 144 Id. 145 Id. 146See Joint Petition, supra note 78. See also MEMX Exemption Request, supra note 105. 147See Nasdaq Intelligent Tick Proposal, supra note 104. 148See TSP, supra note 85. 149See Citadel Report, supra note 91 at 4 and CCMR Report, supra note 91 at 10. See MEMX Exemption Request, supra note 105. 150MEMX did not explain how MEMX arrived at the $0.005 increment. However, MEMX also requested that orders be permitted to execute at the midpoint of the NBBO. 151MEMX, in conjunction with its request for relief pursuant to rule 612(c) to reduce the minimum increment for tick-constrained stocks to $0.005, also requested relief pursuant rule 610(c) to limit access fees for tick-constrained stocks for any national securities exchange, national securities association, or other trading center. MEMX stated that the rule 610 access fee and the rule 612 minimum increment are ‘‘intimately tied’’ to each other. See MEMX Exemption Request, supra note 105 at 8. 152MEMX suggested using a calendar month calculation to be similar to the round lot calculation adopted under the MDI Rules. MEMX stated that using a similar schedule could reduce complexity. See id. at 3. 153 Id. at 2. 154 Id. at 1. 155 Id. at 6. 156 Id. Nasdaq stated that this is harmful for smaller less liquid stocks because the minimum pricing increment represents a higher percentage of value which ends up costing investors money. Nasdaq stated that when faced with a spread constraint, market participants trade more on inverted venues to narrow the spread due to the inverted pricing structures. According to Nasdaq, substantial queue lengths result in inverted usage and stocks priced lower than $5 tend to have longer queues. For higher priced stocks, Nasdaq stated that a tick size that is too small can result in increased volatility and less price competition which impairs price discovery. According to Nasdaq, higher stock prices from less frequent stock splits can eventually lead to wider spreads and more odd-lot trading. Nasdaq found that fill rates are generally higher for low-priced stocks, and fill rates begin to decline once a stock is priced greater than $100. Further, Nasdaq stated that a tick size that is too small can reduce the significance of time priority because traders can outbid resting orders by an economically insignificant amount. Nasdaq stated that this discourages traders from improving displayed prices and reduces incentives to post displayed liquidity. Nasdaq stated that certain high priced stocks with spreads closer to $1.00 have odd￾lots inside the NBBO much more frequently than high priced stocks with spreads below $0.02. Nasdaq further stated that if high priced stocks traded at a wider tick, there would be more displayed depth at each tick increment. Nasdaq concluded that if the minimum pricing increment is too wide (tick-constrained) or too small (stocks trading in multiple increments), the mismatch
creates inefficiency that increases the issuer’s cost of capital, hurting issuers and investor returns, potentially harming economic growth and retirement stability. Recently, the Cboe Exchange, Inc. (‘‘Cboe’’) examined the NBBO of all NMS securities above $1.00 from January 3, 2022, to August 23, 2022, during regular trading hours, excluding opening and closing auctions and locked and crossed markets.141 Cboe stated that most securities are not tick￾constrained and that a one-size-fits-all finer minimum pricing increment ‘‘risks creating a structure that attempts to solve a problem that does not exist for most securities and introduces roadblocks to the liquidity aggregation and price discovery process.’’ 142 Cboe stated that out of 10,125 securities, only 9% (877) should be considered preliminarily tick￾constrained, which Cboe defined as stocks with an average quoted spread of
1.1 cents or less.143 Cboe found that
these 877 securities represent 49% of average daily volume and 22% of average daily notional value traded.144 Cboe found that 88% of NMS stocks are quoted at spreads above $0.015 and 37% of securities representing 25% average daily notional value are being quoted at spreads above $0.10.145 E. Proposals by Market Participants Various market participants have suggested that rule 612 be amended. Throughout the years, market participants have advocated that the minimum pricing increment: (1) only be reduced for NMS stocks that are tick￾constrained; 146 (2) be varied based on certain objective and measurable trading characteristics of a particular NMS stock; 147 or (3) be increased for higher￾priced stocks.148 The Commission has studied and considered the alternative approaches that are described in this
section, and at this time has determined
to propose rule 612 amendments that would implement variable minimum pricing increments for the quoting and trading of NMS stocks priced at, or above, $1.00 per share based on the Time-Weighted Average Quoted Spread during an Evaluation Period. As discussed more fully in section II.F., the Commission believes that the proposed amendments to rule 612 addresses the concerns that have arisen since its adoption in a manner that is consistent with the Congressional directives, set forth by section 11A of the Exchange Act, to facilitate the establishment of the national market system. Specifically, the Commission has designed the proposed rule 612 amendments to achieve the section 11A objectives of fair competition, economically efficient executions, and equal regulation by addressing concerns related to: (1) tick-constrained stocks; and (2) fair competition for retail order flow across trading venues.

1. Reduce the Tick Size to $0.005 for
   Tick-Constrained Stocks
   Some market participants have recommended that rule 612 be amended to lower the minimum pricing increment to $0.005 only for NMS stocks that are tick-constrained.149 Specifically, MEMX submitted a request that the Commission exercise its exemptive authority under rule 612(c) of Regulation NMS to permit market participants, including exchanges, associations, ATSs, vendors and broker￾dealers, to display, rank, and accept bids or offers, orders, and indications of interest in $0.005 150 increments for those NMS stocks that are ‘‘tick￾constrained,’’ which MEMX would define as those stocks that trade with an average quoted spread of 1.1 cents or less.151 MEMX requested that average daily spreads be calculated on a monthly basis and that a stock would have its minimum pricing increment reduced based upon a prior calendar month.152 MEMX stated that the current increment ‘‘is demonstrably too wide’’ for certain stocks and ‘‘imposes unnecessary costs on investors.’’ 153 MEMX also stated that quoting in tick￾constrained stocks is based on ‘‘outdated regulatory constraints’’ as opposed to ‘‘supply and demand’’ which in turn ‘‘harm[s] public price discovery and increas[es] transaction costs.’’ 154 Further, MEMX stated that reducing the minimum pricing increment for tick-constrained stocks would minimize implicit trading costs for investors, e.g., spread costs.155 MEMX stated that reducing the minimum increment ‘‘would reduce transaction costs and facilitate more robust price discovery by enabling liquidity providers to post more aggressive quotations within the current penny spread. . .’’ 156 In addition, MEMX stated that reducing the minimum pricing increment for tick￾constrained stocks would be in the

157 Id.
158See Regulation NMS Adopting Release, supra note 16, at 37554. MEMX did not analyze whether there is large volume of sub-penny executions due to price improvement. MEMX stated that executions in sub-penny increments ‘‘are likely to be indicative of retail internalization as opposed to market participants seeking to trade within a tick￾constrained spread.’’ See MEMX Exemption Request, supra note 105, at 4. 159See Regulation NMS Adopting Release, supra note 16, at 37554 (quoting a commenter). 160MEMX Exemption Request, supra note 105, at 6 (footnotes omitted). 161See id. at 7. 162Citadel Report, supra note 100 at 4. 163 Id. 164 Id. 165See id. 166 Id. 167See CCMR Report, supra note 100 at 10. 168 Id. 169 Id. 170See Cboe Proposal, supra note 104, at 9. 171See id. 172 Id. at 4. 173 Id. Cboe further stated that thinly-traded securities, which would have a low notional turnover, should not be the focus of reducing minimum pricing increments. 174See id. at 6. 175See id. at 7. 176See id. 177See id. 178See id. (Cboe also proposed to accelerate the addition of odd-lot orders to the exclusive SIPs and to modernize rule 604 to increase the threshold to display block orders from 10,000 shares and $200,000 to 50,000 shares and $500,000). public interest and consistent with the protection of investors because ‘‘the potential savings are likely to be substantial’’ due to the amount of trading that occurs in tick-constrained stocks.157 MEMX addressed the factors that the Commission identified in the Regulation NMS Adopting Release for consideration of exemptions under rule 612(c). In the Regulation NMS Adopting Release,158 the Commission stated that the factors it would consider and evaluate in the context of an exemption request under rule 612(c), amongst other things, would include: (1) if the security always trades with a penny spread and there is tremendous liquidity available on both sides of the market; 159 (2) whether the NMS stock was an ETF or other derivative that could be readily converted into its underlying securities or vice versa, in which case the true value of the security is derived from its underlying components and might be a sub-penny increment; (3) if there is a large volume of sub-penny executions in that security due to price improvement; and (4) if the security was low priced. Specifically, MEMX stated that ‘‘(1) almost one thousand NMS stocks accounting for nearly half of all volume and about a quarter of all trades and notional value traded on a daily basis are tick constrained, meaning that they consistently trade with a penny increment; (2) such tick constrained NMS stocks trade with ‘tremendous’ liquidity at the NBBO as quoting activity is forced to cluster at the minimum increment instead of more aggressive prices that would offer improved economics to investors; (3) tick constraints occur frequently and are most impactful in (A) low-priced NMS stocks where a one cent spread is more economically significant in relation [to] the
price of the security; and (B) ETPs whose prices can be appropriately derived from their underlying constituents.’’ 160 Further, MEMX stated that the objectives underlying rule 612 would not be jeopardized if the exemption was granted and the minimum pricing increment was reduced. Specifically, MEMX stated that because market participants are unable to improve displayed prices for tick-constrained stocks, the previously articulated policy concern of stepping ahead of displayed orders by ‘‘economically insignificant amounts’’ was not relevant. MEMX stated that reducing the tick size would promote price competition for those stocks that are currently hindered by regulation.161 Citadel also recommended that ‘‘[t]he Commission should reduce the minimum tick size to a half-penny for symbols trading above $1.00 per share that are tick constrained (i.e., have a penny spread the overwhelming majority of the time).’’ 162 Citadel stated that the rule 612 minimum pricing increment ‘‘impedes the ability of exchanges to compete for order flow in symbols that are highly liquid and commonly trade inside the bid-offer spread of a penny.’’ 163 Citadel continued that tick constraints lead to ‘‘complexities and inefficiencies,’’ including ‘‘driving order flow into alternative venues, complex exchange pricing structures, and increased overall market fragmentation.’’ 164 Citadel stated that a reduced tick size for tick￾constrained stocks would allow exchanges to display more aggressive prices and improve on-exchange execution quality and exchange competitiveness.165 Citadel also suggested, without elaborating, that allowing sub-penny quoting more broadly ‘‘could raise other concerns.’’ 166 Finally, the CCMR recommended that the Commission revise rule 612 to allow $0.005 increments in stocks that always trade with a penny spread.167 CCMR cited the analysis conducted by MEMX to support its recommendation. CCMR, however, stated that it did not recommend a $0.001 tick size. CCMR stated that a tick size that is too narrow can harm market quality. CCMR stated that a smaller tick size that is too narrow ‘‘can cause ‘‘flickering quotations,’’ in which a stock quote rapidly switches back and forth between prices complicating broker-dealer routing decisions and hindering their ability to get the best prices for investors.’’ 168 In addition, CCMR stated that smaller tick sizes could ‘‘enable ‘‘stepping ahead’’ whereby a trader uses an economically insignificant quote to ‘‘step ahead’’ of an existing order, reducing the likelihood that orders posted by fundamental investors will be executed,’’ which would create a disincentive for the public display of orders.169 More recently, Cboe proposed a framework to reduce the minimum tick size to $0.005 for tick-constrained stocks that demonstrate other objective criteria.170 Specifically, Cboe would designate a security as tick-constrained and thus eligible for a $0.005 minimum pricing increment if a stock exhibits: (1) a high
quote-size-to-trade-size ratio; and (2) a high average daily notional turnover.171 According to Cboe, a high quote-size-to-trade-size ratio demonstrates that ‘‘even though there is an abundance of liquidity, the current $0.01 tick constraint disincentivizes investors to cross the spread due to high costs, resulting in a lack of trade executions.’’ 172 Further, a high average daily notional turnover would be an objective criterion ‘‘because it focuses the tick-reduction effort on high turnover securities that would benefit from the ability to trade in finer increments.’’ 173 For each criterion, Cboe would include stocks that fall within the top 75 percentile in the lower minimum pricing increment.174 Using its criteria and parameters, Cboe identified 67 stocks that would be eligible for a reduction in the minimum pricing increment.175 Cboe’s proposal would include a reevaluation every quarter or bi￾annually for the criteria and parameters.176 Cboe would also decouple the quoting increments from trading increments.177 Cboe stated that decoupling the quoting and trading increments would allow retail auctions to increase trading competition in finer increments without impacting the broader market.178 Finally, Cboe proposed a consideration of wider ticks to facilitate enhanced liquidity

179 Id. at 9.
180See Nasdaq Intelligent Ticks, A Blueprint for a Better Tomorrow (‘‘Nasdaq Intelligent Tick’’), available at https://www.nasdaq.com/docs/2019/ 12/16/Intelligent-Ticks.pdf. 181 Id. at 4. 182 Id. at 4. 183 Id. at 4. 184 Id. at 15. 185 Id. at 6. 186 Id. at 6–7. 187 Id. at 4. 188 Id. at 4. 189 Id. at 4. See also Cboe Proposal, supra note 104. 190 15 U.S.C. 78k–1(c)(1)(F). 191See Regulation NMS Proposing Release, supra note 49. 192See infra section V.C.1. 193See infra section V.D.1, Table 8. 194See also MEMX Exemption Request, supra note 105 at 7. aggregation of securities that trade with wider spreads.179
2. Variable Tick Sizes
In December 2019, Nasdaq submitted a petition for rulemaking to request that the Commission amend rule 612 to replace the current ‘‘one-size-fits all’’ tick regime with an ‘‘intelligent tick regime’’ that would utilize multiple tick sizes based on certain measurable criteria of NMS stocks.180 Under the Nasdaq proposal: (1) stocks would trade in one of six increments ($0.005; $0.01; $0.02; $0.05; $0.10; and $0.25); (2) stocks would be categorized based upon their duration weighted average quoted spread over the measurement period; (3) stocks would be assigned the next smallest increment by quoted spread (e.g., a stock with average spread of $0.12 would be in the $0.10 increment category); and (4) listing exchanges would calculate and calibrate quoted spreads, determine applicable increments, and publish stock lists. Nasdaq stated that an intelligent tick regime ‘‘would improve markets and benefit all key stakeholders—investors, public companies, and exchange members alike.’’ 181 Nasdaq stated that it is sub-optimal to apply the $0.01 increment equally ‘‘regardless of market capitalization, volume, or share price.’’ 182 Nasdaq stated that currently, under rule 612, ‘‘a $2 stock’’ quotes with the same minimum pricing increment ‘‘as a $2,000 stock.’’ 183 According to Nasdaq, its proposal would address tick-related issues for: (1) low-priced tick-constrained securities; and (2) high-priced securities that trade with significantly wider spreads. Nasdaq stated that ‘‘if the tick is too wide (tick constrained) or too small (stocks trading in multiple tick increments), the mismatch creates inefficiency that increases the companies’ cost of capital . . . and hurts listed companies and investor returns. . . .’’ 184 Specifically, Nasdaq stated that tick-constrained stocks tend to have lower prices and that ‘‘tick￾constraints create long quotation queues, [slow] fulfillment . . . [create inefficiencies] and . . . [diminish] price discovery. . . .’’,185 which drives trading ‘‘to inverted taker-maker markets . . . where larger, lower priced, more liquid stocks tend to trade heavily.’’ 186 Nasdaq stated that reducing the minimum pricing increment for tick-constrained stocks ‘‘would reduce bid-ask spreads, [save] investors money, and make trading more efficient.’’ 187 Conversely, Nasdaq stated that high￾priced stocks that trade with wider spreads ‘‘increase[ ] investor costs, usage of odd-lots, flickering quotations, non￾displayed trading that doesn’t support price discovery, and price instability.’’ 188 For such high-priced stocks, Nasdaq also states that ‘‘outbidding becomes so inexpensive that time priority becomes essentially non-existent’’ and ‘‘[destroys] the reward and incentive to post passive liquidity and diminishing price discovery.’’ 189 F. Proposal To Amend Rule 612 The Commission believes that based on current market conditions it is appropriate to update and modernize the rule 612 minimum pricing increment for quotes and orders in NMS stocks priced
equal to, or greater than, $1.00 per share. The proposed amendments to rule 612 would also help to ensure, among other things, the ‘‘equal regulation of all markets for qualified securities and all exchange members, brokers, and dealers effecting transactions in such securities.’’ 190 Moreover, the proposed amendments to rule 612 also would facilitate fair competition and equal regulation that would help market forces to determine the prices of NMS stocks.191 In the Regulation NMS Adopting Release, the Commission acknowledged the possibility that the balance of costs and benefits of sub-penny quoting and trading could shift as the markets evolved. The Commission believes such a shift has occurred and the benefits of quoting and trading in sub-pennies more broadly and consistently across the national market system would be consistent with the goals of section 11A of the Exchange Act and appropriate in today’s market structure. Specifically, when rule 612 was adopted the Commission expressed concerns related to ‘‘stepping ahead’’ and quote flickering. The Commission believes that in today’s market the concerns related to these issues have diminished or have been mitigated. For instance, in 2005 there was concern that quoting in sub-penny increments would allow orders to step ahead of displayed orders by economically insignificant amounts. However, data demonstrates that in today’s market a significant percentage of executions occur in sub-penny increments as a result of midpoint executions and sub-penny price improvement provided by OTC market makers who internalize retail orders or RLPs on exchanges.192 For many stocks, including those that are tick￾constrained, a sub-penny execution is no longer economically insignificant. A majority of the trading volume for NMS stocks is tick-constrained, which indicates that the one cent minimum pricing increment is too large for such stocks, that a smaller sub-penny increment would be an economically meaningful increment for such stocks to be able to quote and trade, and that the current minimum pricing increment is constraining the ability of market participants to trade consistent with the principles of supply and demand. Further, the increased speed of quoting and trading has alleviated many of the concerns from 2005, as many market participants are now able to react to quote changes in microseconds. As discussed in section V.D.1, the Commission estimates that the proposal to amend rule 612 would reduce the minimum pricing increment to $0.005 or less for 81.9% of the share volume, which represents approximately 60.2% of dollar volume that trades with a spread of approximately $0.04 or less.193 These stocks generally have lower prices and consistent liquidity at the top of the book for both bids and offers. As a result of these characteristics, sub-penny increments, particularly in relation to the stock price, will generally be economically significant.194 The Commission believes that because liquidity is
consistently on both sides of the market for most tick and near tick-constrained securities, a smaller minimum pricing increment should be economically significant and allow market forces to better determine the appropriate price increment and depth for such stocks. When rule 612 was adopted, the Commission was concerned about the potential for quotes to flicker if the quoting increment was too small. The Commission believes that for tick￾constrained and near tick-constrained stocks, the proposed minimum pricing increments are not ‘‘too small,’’ rather,

195 In the Regulation NMS Re-Proposing Release, the Commission described ‘‘flickering’’ quotes as quotes that flashed for a short period of time solely to earn market data revenues, but were not truly accessible and therefore did not add any value to the consolidated quote stream. See Regulation NMS Re-Proposing Release, supra, note 16. Since 2004, market quotation and trading systems have improved along with technological advances. Today, low latency systems and ultrafast communication protocols allow market participants to access quotes and execute trades in microseconds. Therefore, the ‘‘flickering’’ issue discussed in 2004 is largely no longer relevant today. 196For example, in the second quarter of 2011, the average peak message per second for Tapes A and B as reported by the CTA/CQ Plan was 339,855 and for Tape C as reported by the UTP Plan was 97,370. In the second quarter of 2022, the average peak message per second for Tapes A and B was 1,015,000 and for Tape C was 408,300. In the second quarter of 2011, the average latency reported was less than one millisecond for Tapes A and B and 5.1 milliseconds for Tape C. In the second quarter of 2022, the average latency reported for Tape A and B was 18 microseconds and for Tape C it was 13.6 microseconds. See https:// www.ctaplan.com/publicdocs/CTA_Operating_ Metrics_Q22011.pdf; https://www.ctaplan.com/ publicdocs/ctaplan/CTAPLAN_Processor_Metrics_ 2Q2022.pdf and https://www.utpplan.com/DOC/ UTP_website_Statistics_Q2-2022-June.pdf. See also MDI Adopting Release, supra note 5, at 18638. 197For example, market participants that collect options market data from the Options Price Reporting Authority (‘‘OPRA’’) can readily handle message traffic that exceeds the messages disseminated in the national market system for NMS stocks. In the second quarter of 2022, OPRA reported 36.4 million messages per second. See OPRA Key Operating Metrics of U.S. Options Securities Information Processor, available at https://www.opraplan.com/document-library. See also NYSE Tick Harmonization Paper, supra note 126 at 11 (stating that OPRA handles many times more messages than the equities market). 198See Regulation NMS Adopting Release, supra note 16, at 37554. 199See id. 200Rule 612 applies to NMS stocks, including ETFs. In the Regulation NMS Adopting Release, the Commission considered whether sub-penny quoting of ETFs, which are derivatively priced, raised the same concerns as other NMS stocks. The Commission stated that a basis may exist to exempt actively traded ETFs from the rule. See Regulation NMS Adopting Release, supra note 16, at 37554. MEMX stated that its data shows that ‘‘more than half of equity ETPs and the vast majority of fixed income, commodity, and other ETPs trading at least 100 million notional each day are tick￾constrained.’’ MEMX Exemption Request, supra note 105 at 6. Further, in the Joint Petition, the petitioners requested an exemption from rule 612 to allow sub-penny quoting for one ETF, the
QQQQ. See Joint Petition, supra note 78 at 1. 201See MEMX stated that, according to its research, liquidity at the quote for tick-constrained stocks is five to eight times higher for corporate securities and nine to 59 times higher for ETPs than securities trading with a spread between $0.02 and $0.03. See MEMX Report, supra note 105, at 3. See also MEMX Exemption Request, supra note 105 at
4. See also NYSE White Paper, supra note 119 at
10.
202MEMX provided data that approximately 80% of tick-constrained stocks traded at $30 per share or less. See MEMX Report, supra note 105 at 10. 203See supra note 192 and accompanying text. 204See infra sections V.C.1 and V.D.1. the current quoting and trading of these stocks suggest that the current minimum pricing increment is too large. Advancements in technology since 2005 should reduce flickering quotes concerns.195 Specifically, the systems currently used in the market by exchanges and other market participants can accommodate many levels of data with extreme low latency 196 and should be able to readily adjust to any potential increase of system traffic that could result from price movements at a smaller minimum pricing increment.197 In the Regulation NMS Adopting Release, the Commission identified several factors that it would consider in the context of a request for an exemption from the minimum pricing increments required under the rule.198 Specifically, the Commission said it would evaluate the following factors: (i) if an NMS stock was consistently trading with a penny spread with significant liquidity available on both sides of the market; 199 (ii) if the NMS stock is an ETF or other derivative that can be readily converted into its underlying securities or vice versa, in which case the true value of the security as derived from its underlying components might be at a sub-penny increment; 200 (iii) if a large volume of sub-penny executions in an NMS stock occurs due to price improvement; and (iv) if the NMS stocks are low-priced. Currently, there is evidence that: (1) a significant percentage of the total volume of NMS stocks is consistently tick-constrained with liquidity on both sides of the market,201 (2) the majority of tick-constrained stocks trade at $30 or less,202 and (3) a large volume of sub￾penny executions occur in the market.203 The Commission believes that rule 612 should be updated based on current market conditions. The Commission proposes amendments to rule 612 to: (1) introduce a variable minimum pricing increment structure for quotes and orders in NMS stocks priced at, or greater than, $1.00 per share; and (2) require executions to occur in the minimum pricing increment, both on￾exchange and OTC, subject to certain exceptions. The Commission preliminarily believes the proposed amendments to rule 612 would promote: (1) fair and orderly markets and economically efficient executions, particularly for tick-constrained NMS stocks and retail order flow; and (2) fair competition and equal regulation between OTC market makers, exchanges, and ATSs that compete for retail liquidity by requiring that NMS stocks trade with the same minimum pricing increment regardless of venue (i.e., on or off-exchange). The Commission also believes that amended rule 612 would promote price discovery and price competition, particularly for tick-constrained stocks and retail order flow, by permitting the quoting and trading of certain NMS stocks
in finer increments that would vary based on objective criteria but must be uniform across trading venues. The Commission believes this proposal would result in pricing that is more in accordance with the principles of supply and demand.204

1. Minimum Pricing Increments
   Currently, rules 612(a) and (b) are structured in a parallel manner in that they both contain requirements for national securities exchanges, national securities associations, ATSs, vendors, brokers and dealers when displaying, ranking and accepting quotations, orders and indications of interest. Each paragraph establishes the minimum pricing increment based on the price of the quote, order, or indication of interest. Proposed rule 612(b), similar to current rules 612(a) and (b), would set forth when and how the minimum pricing increment requirements would be applicable to specific market participants. However, unlike current rules 612(a) and (b), proposed rule 612(b) would make the minimum pricing increment applicable to the quoting and trading of all NMS stocks. Specifically, proposed rule 612(b) would state that ‘‘[n]o national securities exchange, national securities association, alternative trading system, vendor, or broker or dealer shall display, rank, accept from any person, or execute a bid or offer, an order, or an indication of interest in any NMS stock priced in an increment smaller than the applicable increment required by paragraph (c) or (d).’’ As discussed further below, proposed rule 612(c) would add the proposed variable minimum pricing increments for quotations, orders and indications of interest in NMS stocks priced equal to, or greater than, $1.00 per share and proposed rule 612(d) would contain the minimum pricing increment for quotations, orders and indications of interest in NMS stocks priced less than $1.00 per share.
2. Quotations and Orders in NMS Stocks
   Priced at $1.00 or More
   The Commission proposes to amend rule 612 to introduce a variable minimum pricing increment model for quotations and orders in NMS stocks that are priced equal to, or greater than, $1.00 per share. The Commission preliminarily believes that a variable

205See supra section II.D.
206Proposed rule 612(a)(i) would define ‘‘Time Weighted Average Quoted Spread’’ as ‘‘the average dollar value difference between the NBB and NBO during regular trading hours where each instance of a unique NBB and NBO is weighted by the length of time that the quote prevailed as the NBB or NBO.’’ See infra section II.F.2.a.i. 207Proposed rule 612(a)(ii) would define ‘‘Evaluation Period’’ as the last month of a calendar quarter (Mar. in the first quarter, June in the second quarter, Sept. in the third quarter and Dec. in the fourth quarter) of a calendar year during which the primary listing exchange shall measure the Time Weighted Average Quoted Spread of an NMS stock that is priced equal to or greater than $1.00 per share to determine the minimum pricing increment to be in effect for an NMS stock for the next calendar quarter, as set forth by paragraph (c).’’ See infra section II.F.2.a.ii. 208MEMX suggested in its proposal that NMS stocks be evaluated on a monthly basis to determine a stock’s average quoted spread. MEMX stated that a monthly evaluation would minimize complexity as it would be similar to the schedule to determine an NMS stock’s round lot. See MEMX Exemption Request, supra note 105, at 3. The Commission believes that a quarterly evaluation and assignment is appropriate to reflect the current trading characteristics of an NMS stock. Further, the Commission believes that a monthly shift in the pricing of an NMS stock would be more complex and disruptive to the markets than a monthly shift in the size of a round lot. The Commission requests comment on whether a quarterly basis is the appropriate timeframe. See infra section II.G. 209See infra section V.C.1. 210See infra sections V.C.1 and V.D.1. 211 Initially, no NMS stock would qualify for the $0.001 minimum pricing increment due to the current rule 612 one cent minimum pricing increment restricting the minimum possible tick size. Further, as discussed below, the Commission proposes a staggered implementation of the new minimum pricing increments. See infra section II.G. 212See infra section V.C.1. 213See Table 8 infra section V.D.1. 214See id. 215See infra section V.D.1. minimum pricing increment model would allow minimum pricing increments to be better suited to the trading characteristics of the particular stocks. Since rule 612 was adopted, several commenters have suggested that the single minimum pricing increment may not be appropriate for all stocks.205 The Commission proposes to vary the minimum pricing increment for quotations, orders and indications of interest in NMS stocks priced equal to, or greater than, $1.00 per share based on a Time Weighted Average Quoted Spread,206 which would be calculated by the primary listing exchange for the particular NMS stock on a quarterly basis during a month long Evaluation Period.207 Under this proposal, the four potential minimum pricing increments for a particular NMS stock would be:
(1) $0.001, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was equal to, or less than, $0.008; (2) $0.002, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than $0.008 but less than, or equal to, $0.016; (3) $0.005, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than $0.016 but less than, or equal to, $0.04; and (4) $0.01, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than $0.04. Under this proposal, because the applicable minimum pricing increment for an NMS stock for a calendar quarter would be established based on the stock’s Time Weighted Average Quoted Spread during the Evaluation Period, an NMS stock could have a different minimum pricing increment every quarter of the calendar year. The Commission believes that the proposal that the applicable minimum pricing increment for a particular NMS stock be effective for a three month period is appropriate in order to balance the need to update the minimum pricing increment at regular intervals such that the increment can reflect market conditions without updating too frequently as to introduce undue complexity to the market system.208 Preliminarily, the Commission believes that the proposed variable minimum pricing increments would address the issues related to tick￾constrained stocks and help to prevent other stocks that trade with relatively small spreads from becoming tick￾constrained. The Commission also believes that the proposal would reduce transaction costs for many NMS stocks without harming the execution quality or dispersing the liquidity of stocks that are not tick-constrained and trade with wider spreads. As discussed below, assigning a small minimum pricing increment to a stock that has a wider spread can be harmful to displayed liquidity as liquidity would be spread across more price increments.209 Minimum pricing increments that are too small can also add to complexity in trading and increase the risk of stepping ahead. The Commission believes that proposing to vary the minimum pricing increments based on the Time Weighted Average Quoted Spread represents a balancing of pricing, liquidity, complexity, and price improvement opportunities.210 This proposal to amend rule 612 to implement variable minimum pricing increments would reduce the minimum pricing increment to $0.001 for all NMS stocks that are priced equal to, or greater than, $1.00 per share if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was equal to, or less than, $0.008.211 Further, proposed rule 612 would reduce the minimum pricing increment to $0.002 for all NMS stocks that are priced equal to, or greater than, $1.00 per share if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was equal to, or less than, $0.016. Proposed rule 612 is
designed to directly address the concerns that the current minimum pricing increment of $0.01 creates an artificial price constraint on certain NMS stocks and prevents such stocks from reaching a natural price that would be within a penny spread. The Commission estimates that tick￾constrained stocks make up over half (approximately 56.1%) of the market’s share volume, which is estimated to be the equivalent of 23.2% of dollar volume.212 While the Commission cannot estimate the number of these stocks that would have a Time Weighted Average Quoted Spread of $0.008 or less due to the $0.01 minimum pricing increment, the Commission estimates that 1,707 stocks, which make up an estimated 64% of share volume, and represent 37.9% of estimated dollar volume, have average spreads that are less than $0.016.213 The Commission believes that reducing the minimum pricing increment to $0.001 or $0.002 for such stocks would allow a more natural price discovery process to occur and preserve meaningful price discovery opportunities between the spread. In addition, the Commission believes that investor trading costs due to spreads would be reduced as a result of the smaller increments and spreads that would be permitted for stocks that are currently tick-constrained. Currently, approximately 2,648 stocks, which is an estimated 17.9% of share volume, and an estimated 22.3% of dollar volume, trade with a spread that is greater than $0.016 and less than or equal to $0.04.214 This proposal would also reduce the minimum pricing increment to $.005 for NMS stocks that trade with a Time Weighted Average Quoted Spread that is greater than $0.016 and less than or equal to $0.04.215 The Commission believes that the proposal would provide pricing flexibility for these stocks that trade with smaller spreads and prevent such stocks from becoming tick-constrained in the future. The Commission also believes that, by reducing the minimum pricing increments for these stocks that trade with smaller spreads, investor trading costs would be reduced as a result of smaller spreads while price

216See infra section V.D.1 217For example, if the bid for a stock is $10.00, and the stock has an average quoted spread of $0.010, it would be assigned a $0.002 minimum pricing increment and would have four price levels within the average quoted spread (i.e., 10.002, 10.004, 10.006, and 10.008). See also infra section V.D.1. However, if that same stock trades with a spread that is wider than the average quoted spread used to determine the minimum pricing increment there would be more than four price levels. For instance, if the bid for the stock was $10.00 and the ask was $10.02 then there would be nine price levels with the quoted spread (i.e., 10.002, 10.004, 10.006, 10.008, 10.01, 10.012, 10.014, 10.016. 10.018). 218See infra section V.D.1, Table 8. 219See infra section V.D.1. 220See supra section II.E.1. 221 Id. improvement opportunities would be preserved. The Commission believes that the execution quality for stocks with a Time Weighted Average Quoted Spread of equal to, or less than, $0.04 would not be harmed under the proposal (i.e., NMS stocks that would quote and trade with a minimum pricing increment of $0.001, $0.002 or $0.005).216 Further, the Commission believes that the liquidity at or near the NBBO for such stocks would not disperse or thin out across price levels because, as discussed below, the proposal is designed such that stocks priced equal to, or greater than, $1.00 per share with a Time Weighted Average Quoted Spread of less than $0.04 would generally have at least 3 to 4 price points but not have more than eight price points inside the quoted spread.217 As further discussed in section V.D.1 below, the Commission believes that a certain minimum number of ticks intra￾spread would be beneficial to market quality in the trading of NMS stocks. The proposal would increase the number of increments between the spread for those NMS stocks that are tick-constrained. Initially, these stocks would transition from having, on average, one increment between the spread to either having 1 to 8 increments or 4 to 5 increments between the spread, depending on whether the stock would be assigned to a $0.001 or $0.002 minimum pricing increment. Thereafter, if, for instance, the Time Weighted Average Quoted Spread for one of these NMS stocks widens during an Evaluation Period, such stock would be assigned to a larger minimum pricing increment for the next quarter. Conversely, if the Time Weighted Average Quoted Spread for one of these NMS stock narrows during an Evaluation Period, such stock would be assigned to a smaller minimum pricing increment for the next quarter, if available. The proposal is designed to maintain a certain number of increments between the spread for efficient trading, without creating too many increments between the spread which could impact execution priority for an infinitesimally amount or reduce market depth. Accordingly, NMS stocks would be moved between the proposed minimum pricing increments based on their quoting
characteristics. In sum, the Commission believes that the proposal will allow NMS stocks that have relatively small average quoted spreads to be priced with minimum pricing increments that are more reflective of the principles of supply and demand and mitigate the dispersion of liquidity across price points. Under the proposal, NMS stocks that are priced equal to, or greater than, $1.00 per share that have a Time Weighted Average Quoted Spread greater than $0.04 would continue to have a minimum pricing increment of $0.01. Based on current market conditions, the Commission estimates that approximately 7,792 stocks, which is estimated to be 18.1% of share volume, and estimated to be 39.8% of dollar volume, trade with a spread that is greater than $0.04.218 The Commission believes that the proposal would have little or no impact on these NMS stocks that would continue to quote at the $0.01 minimum pricing increment.219 The Commission proposes to retain the current minimum pricing increment for stocks that fall into this category because these stocks are neither tick-constrained nor near constrained stocks. Stated another way, stocks that have a Time Weighted Average Quoted Spread of greater than $0.04 are able to be competitively priced based on market forces and the principles of supply and demand so would continue to have a $0.01 minimum pricing increment. Further, as described above, if these stocks were to become tick-constrained, or experience a reduction in its average quoted spread, the minimum pricing increment would be adjusted downward following the next Evaluation Period. Although certain market participants recommend that the minimum pricing increment be reduced to $0.005 only for tick-constrained stocks,220 the Commission believes that many stocks that currently trade with an average quoted spread of $0.011 could continue to be tick-constrained if the minimum pricing increment for such stocks were only reduced to $0.005. Accordingly, the Commission is proposing to reduce the minimum pricing increment for tick￾constrained stocks as well as stocks that are near tick-constrained or otherwise have average quoted spreads less than $0.04 to either $0.001, $0.002 or $0.005, which would likely reduce the minimum quoting increment for more than 81.9% of the trading volume for NMS stocks. Overall, the Commission expects that the impact on liquidity and trade execution would be positive because tick constraints prevent market participants from quoting the prices that reflect supply and demand, and the reduction in the minimum pricing increments would lead to narrower spreads and better market quality. The Commission determined to propose the reduced minimum pricing increments of $0.001, $0.002, and $0.005, in part, because many investors will have familiarity with, or an awareness of, trades that occur in these specific increments because of how trading is conducted today. The Commission believes this because today, two of the most common
increments for the price improvement of stocks that trade OTC are $0.001 and $0.002, and price improvement on exchanges and ATSs often occurs through midpoint executions in an increment of $0.005. The Commission also selected these particular pricing increments because, as described above, the proposed amendments to rule 612 are designed to:
(1) correlate the Time Weighted Average Quoted Spread to the minimum pricing increments, which limits the number of potential price points within the spread, which, in turn, should mitigate the loss of liquidity that can occur when the minimum tick size is reduced and the number of pricing increments increases; 221 and (2) preserve meaningful price improvement for the majority of NMS stocks that would trade at minimum pricing increments that are $0.005 or less. For stocks priced equal to, or greater than, $1.00 per share with Time Weighted Average Quoted Spreads equal to or less than $0.04, the Commission believes the reduction in the minimum pricing increment would be largely beneficial to the trading environment. Specifically, the Commission believes that reducing the minimum pricing increment would remove tick-constraints for a large percentage of the total trading volume, and allow market participants to quote at the prices that equate supply and demand, which in turn would lead to narrower spreads and better market quality. The Commission also believes the proposal would increase price discovery for stocks that are tick-constrained, or near-tick-constrained, and reduce transaction costs for investors without

222See Nasdaq Intelligent Tick Proposal, supra note 180 at 8. 223See also infra note 548 and accompanying text. Further, minimum pricing increments that are too large or static could frustrate the natural pricing mechanism of quotes and orders. See also supra note 85. The Commission requests comment on whether larger tick sizes should be imposed on certain NMS stocks. See infra section II.H. 224 Id. 225See supra note 223. See also supra note 85 and accompanying text. 226The Commission proposes to use quotations only during regular trading hours because after hours trading is generally less liquid and more volatile. 227Market participants have suggested similar measurements for determining minimum pricing increments. For example, MEMX suggested looking at the average quoted spread of an NMS stock to determine if such stock should be permitted to have a smaller minimum pricing increment. See MEMX Exemption Request, supra note 105 at 3. Nasdaq suggested categorizing stocks to a minimum pricing increment based a duration weighted average quoted spread over a measurement period. See Nasdaq Intelligent Tick, supra note 180 at 8. The Commission preliminarily believes that the proposed Time Weighted Average Quoted Spread would be more precise than the suggestions from MEMX and Nasdaq, and the proposed definition would be sufficiently specific to determine a stock’s average quoted spread. 228As proposed, minimum pricing increments would be implemented on the first business day after an Evaluation Period. The Commission requests comment on whether this would be a sufficient amount of time for the market and market participants to implement new minimum pricing increments for any NMS stock that may experience a change in its Time Weighted Average Quoted Spread. See section II.H. 229See MEMX Exemption Request, supra note
105. See also supra section II.E.1.
negatively impacting execution quality for stocks that are not tick-constrained. The Commission’s proposal differs from the tiered approach for minimum pricing increments suggested by market participants as described in section II.E.2. The Commission’s proposed variable minimum pricing increments are designed to offset the potential dilution of liquidity and depth at the top of the book while providing market participants with a range of price points (generally four to eight) between the quoted spread to provide price improvement opportunities to investor orders. With regard to changing the minimum pricing increment, the Commission proposes to target tick-constrained stocks, and those stocks that trade with relatively smaller spreads that could become tick-constrained by reducing and varying the minimum tick size. While some market participants have suggested that the Commission impose larger minimum pricing increments for certain NMS stocks,222 the proposed rule would not change or increase the minimum pricing increment for any NMS Stocks that trade with a Time Weighted Average Quoted Spread greater than $0.04, or separately for higher-priced stocks. The Commission believes that the current $0.01 increment for NMS stocks that trade with a Time Weighted Average Quoted Spread greater than $0.04, regardless of price, remains sufficient based on their trading characteristics.223 Commission review of academic literature suggests that there are not consistent results as to how a larger tick size would affect market quality for stocks with wider spreads.224 Further, the Commission believes that increasing the tick size, for example for higher priced securities, which tend to trade with wider spreads, could result in the inadvertent and unintended constraining of the pricing of such stocks.225 The Commission does not expect the trading environment for stocks with prices lower than $1.00 per share, or Time Weighted Average Quoted Spreads greater than $0.04, to be significantly impacted because under the proposal the minimum pricing increment would not change for such stocks. a. Proposed Definitions Proposed rule 612(a) would define the terms ‘‘Time Weighted Average Quoted Spread’’ and ‘‘Evaluation Period.’’
i. Time Weighted Average Quoted
Spread
Proposed rule 612(a)(i) would define the term ‘‘Time Weighted Average Quoted Spread’’ as ‘‘the average dollar value difference between the NBB and NBO during regular trading hours 226 where each instance of a unique NBB and NBO is weighted by the length of time that the quote prevailed as the NBB or NBO.’’ The Commission proposes to use Time Weighted Average Quoted Spread as the measure for determining the minimum pricing increment because it would directly address the issue of tick-constrained stocks.227 The Commission believes that this metric represents what the quoted spread typically would be at any point in time during the trading day for an NMS Stock. It also represents the expected costs of trading that market participants would have experienced throughout the day. In addition, the Commission believes that the primary listing exchanges should have experience using time weighted average quoted spread as a metric, and that calculating the minimum pricing increments for NMS stocks on a quarterly basis balances the need for regular updates of the tick size for NMS Stock based on the Time Weighted Average Quoted Spread with the need to avoid undue complexity related to more frequent updates.
ii. Evaluation Period
Proposed rule 612(a)(ii) would define the term Evaluation Period as ‘‘the last month of a calendar quarter (March in the first quarter, June in the second quarter, September in the third quarter and December in the fourth quarter) of a calendar year during which the primary listing exchange shall measure the Time Weighted Average Quoted Spread of an NMS stock that is priced equal to, or greater than, $1.00 per share to determine the minimum pricing increment to be in effect for an NMS stock for the next calendar quarter, as set forth by paragraph (c).’’ The Commission proposes that the Evaluation Period be one month in order to balance the need to select a period that is: (1) long enough such that a few extreme or aberrant days of trading activity during the Evaluation Period would not unduly effect the Time Weighted Average Quoted Spread calculation; and (2) short enough such that the calculation of the Time Weighted Average Quoted Spread would likely be representative of current market conditions. As proposed, the applicable minimum pricing increment for the quoting and trading of the particular NMS stock, based on the Time Weighted Average Quoted Spread as prescribed by amended rule 612(c), would then be established for the following quarter on the first business day following the completion of the Evaluation Period.228 Further, the Commission proposes that the calculation to determine the particular tick for an NMS stock be done on a quarterly basis in order to balance the need for regular updates of the tick size while not introducing undue complexity to the market system by updating the tick size too frequently. MEMX suggested that the minimum pricing increment be evaluated on a monthly basis.229 The MEMX Exemption Request, however, would only develop one additional pricing increment for NMS stocks that would become tick-constrained. The Commission’s proposal would be more complex and would require the potential reclassification to four minimum pricing increments.
iii. Regulatory Data
The Commission proposes to amend the definition of regulatory data in Rule 600(b)(78) of Regulation NMS to require the primary listing exchange for each NMS stock to calculate and provide to competing consolidators, self￾aggregators, and the exclusive SIPs an

230See MDI Proposing Release, supra note 39, at 16762; MDI Adopting Release, supra note 5, at 18634–35. 231 17 CFR 242.600(b)(78); see MDI Proposing Release, supra note 39, at 16759–63; MDI Adopting Release, supra note 5, at 18633–35. 232See MDI Adopting Release, supra note 5, at 18633–35 See also infra section IV.B (discussing proposed amendments to the definition of ‘‘regulatory data’’ that would require the primary listing exchange to provide an indicator of the applicable round lot size to the exclusive SIPs). 233See infra note 324. 234See Regulation NMS Adopting Release, supra note 16, at 37555. 235See infra section V.C.1.b. 236See 17 CFR 242.600(b)(70) for a definition of PBBO. 237See supra note 19. 238See supra section II.D. See also infra section V.C.1.b and Table 3. 239See infra section V.D.2. 240 In the European Union, minimum pricing increments are applied to quoting and trading. See Art. 49 of the Directive 2014/65/EU of the European Parliament and of the Council Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU and Art. 17a of the Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014. 241See infra section V.D.2. 242See infra section V.D.2. 243See supra note 217. See also section V.D.2. indicator of the applicable minimum pricing increment required under the proposed amendments to rule 612. The Commission believes that it is appropriate and important that the primary listing exchanges play a central role in the administration of the proposed amendments to rule 612 by calculating the Time Weighted Average Quoted Spread for each NMS stock and to provide this information to the exclusive SIPs and competing consolidators for dissemination. The primary listing exchanges are well￾situated to perform these functions as they have direct and immediate access to pricing information about their own listed securities, and already perform similar calculations—and provide the results to the exclusive SIPs—today.230 In addition, under the MDI rules, the primary listing exchanges would be required to calculate and provide several regulatory data elements to competing consolidators and self￾aggregators.231 For example, the primary listing exchange will calculate the average monthly closing price of each of its NMS stocks, assign each stock to a round lot size corresponding to that average monthly closing price, and include an indicator of the applicable round lot size in the data it makes available to competing consolidators and self-aggregators.232 The proposed indicator would thus be included in NMS data 233 disseminated by the exclusive SIPs and competing consolidators, which should help to ensure the wide availability of information
about the applicable minimum pricing increment for each NMS stock, which in turn will enable market participants to trade in a more informed manner. Further, the Commission believes that information about the relevant minimum pricing increment should be provided to the exclusive SIPs, competing consolidators, and self-aggregators because the minimum pricing increment might change from quarter to quarter.
3. Quotations and Orders in NMS Stocks
Priced Less Than $1.00
Currently, the minimum pricing increment for quotations and orders in NMS stocks that are priced less than $1.00 per share is $0.0001. When it adopted this increment, the Commission stated that the sub-penny increment would largely represent genuine trading interest for low-price stocks rather than attempts to unfairly step ahead of displayed orders and that the sub-penny increment represents a significant amount of the price of the quotation or order.234 The Commission believes that this increment remains appropriate for these NMS stocks. Due to the other proposed amendments to rule 612, the minimum pricing increment for quotations and orders in NMS stocks that are priced less than $1.00 per share would be set forth in proposed rule 612(d). Rule 612(d) as proposed to be amended would state that ‘‘[e]xcept as provided in paragraph (e), the minimum increment for any bid or offer, order, or indication of interest for an NMS stock priced less than $1.00 per share shall be no smaller than $0.0001.’’ Proposed rule 612(b) would make the minimum pricing increment set forth in proposed rule 612(d) applicable to the quoting and trading of NMS stocks priced less than $1.00 per share. The Commission believes, for the reasons discussed below, that the minimum pricing increment should be applied to trading as well as quoting.235
4. Minimum Pricing Increment for
Trading
The Commission proposes that the variable minimum pricing increments of rule 612 as proposed to be amended would apply to all trading—on exchanges, ATSs, and OTC. This means that all quotes and orders, regardless of price, would be required to execute in the applicable minimum pricing increments set forth by proposed rule 612(c) or (d), subject to the specified exceptions set forth in proposed rule 612(e). Proposed amendments to rule 612(e) would provide exceptions for: (1) orders that execute, but are not explicitly priced at, the midpoint of the NBBO or the protected bid and protected offer (‘‘PBBO’’); 236 and (2) orders that execute at a price that was not based, directly or indirectly, on the quoted price of an NMS stock at the time of execution and for which the material terms were not reasonably determinable at the time the commitment to execute the order was made (e.g., VWAP or TWAP trades).237 The Commission is concerned about the increase of orders that are executed OTC in price increments that exchanges and ATSs cannot practically provide,238 and believes that harmonization of the minimum pricing increment for the quoting and trading across venues would promote competition and innovation, while preserving most meaningful price improvement opportunities.239 The Commission believes that amending rule 612 to require executions to occur at the relevant minimum pricing increment, subject to the specified exceptions, would help to address the competitive disparity that occurs, in part, because certain OTC executions may occur more freely in sub-penny increments, while the opportunity for sub-penny executions on exchanges and ATSs are much more limited.240 Currently, much of the sub-penny trading that occurs OTC is a result of price improvement (i.e., executions that occur between the spread). The most commonly offered sub-penny increments for price improvement are $0.0001, $0.001 and $0.002.241 Under this proposal, price improvement of $0.0001 would no longer be available for NMS stocks that are priced equal to, or greater than, $1.00 per share, but trades would be able to occur in $0.001 and $0.002 for those stocks that are assigned to such increments.242 Further, executions at even finer increments would still be permitted to occur at the midpoint. The variable minimum pricing increments have also been designed to facilitate trading between the spread to accommodate price improvement opportunities.243 The Commission believes that applying the minimum pricing increment to trading across all venues should promote equal regulation and fair competition among market participants such as exchanges, OTC

244See 15 U.S.C. 78k–1 (a)(1)(C)(ii) and (c)(1)(F). 245See 15 U.S.C. 78k–1 (a)(1)(C)(i). 246See supra note 61. 247 Id. 248The initial proposed Evaluation Period (Mar., June, Sept., or Dec., as applicable) would be the first full calendar month after the effectiveness of rule
612. For example, if the effectiveness would be on
Feb. 14, then the initial proposed Evaluation Period would be Mar. If the effectiveness would be on Mar. 15, then the initial proposed Evaluation Period would be June. 249The proposed changes to rule 610 would become effective during the first stage of implementing proposed rule 612. However, the $0.0005 access fee cap would not be become relevant until the final stage of implementing proposed rule 612 when the $0.001 minimum pricing increment becomes effective. While proposed rule 610 has proposed variable access fee caps, the proposed access fee caps are based on the relevant minimum pricing increment. market makers, and ATSs for retail order flow.244 Finally, the Commission believes that the proposed exceptions to the requirement that orders in NMS stocks be executed in the applicable minimum pricing increment would promote fair and orderly markets and economically efficient executions.245 These proposed exceptions would codify current trading activity that is common and widespread under rule 612. Today, orders that are not explicitly priced in an impermissible sub-penny increment may execute at the midpoint of the NBBO/PBBO, even if the midpoint price would be an otherwise impermissible sub-penny quoting increment.246 Similarly, orders that are not explicitly priced in an impermissible sub-penny increment, such as benchmark trades (e.g., VWAP or TWAP trades) may execute in an otherwise impermissible quoting increment under amended rule
612.247 Mid-point and benchmark
orders are widely used and viewed by liquidity providers as important options for handling orders and implementing trading strategies that can reduce the market impact of their trades. In addition, mid-point liquidity provides price improvement opportunities for market participants on the other side of these trades. G. Proposed Implementation Period The Commission proposes to stagger the implementation of the variable minimum pricing increments for NMS Stocks that are priced equal to, or greater than $1.00 in order to facilitate an orderly transition for NMS stocks that would have minimum pricing increments that are less than $0.01. The implementation period would also provide for longer periods than the proposed quarterly time period between Evaluation Periods to allow the market and investors to become accustomed to the smaller increments. Time period Minimum pricing increment First Implementation Period a .............................. (1) NMS stocks with a Time Weighted Average Quoted Spread that is $0.04 or less:
The first and second quarters of effectiveness .. $0.005 increment, and (2) NMS stocks with a Time Weighted Average Quoted Spread greater than $0.04: $0.01. Minimum pricing increments would not apply to trading. Second Implementation Period b ........................ (1) NMS stocks with a Time Weighted Average Quoted Spread that is $0.016 or less:
The third and fourth quarters of effectiveness ... $0.002 minimum pricing increment, (2) NMS stocks with a Time Weighted Average Quoted Spread that is greater than $0.016 but less than, or equal to, $0.04: $0.005 minimum pricing increment, and (3) NMS stocks with a Time Weighted Average Quoted Spread that is greater than $0.04:
$0.01 minimum pricing increment.
Minimum pricing increments would not apply to trading. Third Implementation Period c ............................ Full implementation. All of the minimum pricing increments would be effective. The fifth quarter of effectiveness ........................ Minimum pricing increments would apply to trading. aThe primary listing exchanges would calculate the Time Weighted Average Quoted Spreads for NMS stocks during the first Evaluation Period that occurs after the proposed rule’s effectiveness. For example, if the proposed rule was effective in July, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads in Sept. and assign the minimum pricing increments for the fourth quarter of that year and the first quarter of the following year. bFor the second implementation period, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads during the month in the Evaluation Period that would fall during the second quarter of effectiveness. In the example above, the primary listing exchange would calculate the Time Weighted Average Quoted Spreads during Mar. and assign minimum pricing increments during the second and third quarters of that year. cFor the final implementation period, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads during the month in the Evaluation Period that would fall during the fourth quarter of effectiveness. In the example above, the primary listing exchange would calculate the Time Weighted Average Quoted Spread in Sept. and assign the minimum pricing increments for the fourth quarter of that year. Specifically, for the first implementation period, upon effectiveness of any amendments to rule 612, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads for all NMS stocks for the first proposed Evaluation Period 248 and assign the relevant minimum pricing increments as required under proposed rule 600(b)(78). The minimum pricing increments calculated during the first Evaluation Period would be in effect for the following two quarters (i.e., for six months). During the first two quarters of proposed rule 612’s effectiveness, proposed rule 612 would be implemented as follows: (1) NMS stocks with a Time Weighted Average Quoted Spread of $0.04 or less would be assigned to the $0.005 increment for the first quarter of effectiveness, and (2) NMS stocks with a Time Weighted Average Quoted Spread greater than $0.04 would be assigned to remain in the $0.01 minimum pricing increment.249 The minimum pricing increments that are less than $0.005 (i.e., $0.002 and $0.001) would not be implemented during the first quarter of effectiveness. For the second implementation period, at the end of the second quarter of effectiveness of any proposed amendments to rule 612, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads during the next Evaluation Period (i.e., the month at the end of the second
quarter of effectiveness) and assign the relevant proposed minimum pricing increment as required under proposed rule 600(b)(78). The minimum pricing increments calculated during the Evaluation Period would be in effect for the following two quarters (i.e., for six months). During the third and fourth quarters of proposed rule 612’s effectiveness: (1) NMS stocks with a Time Weighted Average Quoted Spread that is $0.016 or less would be assigned

250See supra section II.D. to the proposed $0.002 minimum pricing increment, (2) NMS stocks with a Time Weighted Average Quoted Spread that is greater than $0.016 but less than, or equal to, $0.04 would be assigned to the proposed $0.005 minimum pricing increment, and (3) NMS stocks with a Time Weighted Average Quoted Spread of greater than $0.04 would be assigned to the proposed $0.01 minimum pricing increment. The $0.001 minimum pricing increment would not be implemented during the third and fourth quarters of effectiveness. Finally, for the third implementation period, at the end of the fourth quarter of effectiveness of any proposed amendments to rule 612, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads during the next Evaluation Period (i.e., the month at the end of the fourth quarter) and assign the relevant proposed minimum pricing increment as required under proposed rule 600(b)(78). During the fifth quarter of effectiveness of proposed rule 612, all of the variable minimum pricing increments would be effective. Accordingly, (1) NMS stocks with a Time Weighted Average Quoted Spread that is $0.008 or less would be assigned to the proposed $0.001 minimum pricing increment, (2) NMS stocks with a Time Weighted Average Quoted Spread that is greater than $0.008 but less than, or equal to, $0.016 would be assigned the proposed $0.002 minimum pricing increment, (3) NMS stocks with a Time Weighted Average Quoted Spread that is greater than $0.016 but less than, or equal to $0.04, would be assigned to the proposed $0.005 minimum pricing increment, and (4) NMS stocks with a Time Weighted Average Quoted Spread that is greater than $0.04 would be assigned to the proposed $0.01 minimum pricing increment. The Commission proposes to implement the requirement to trade in the applicable minimum pricing increment during the fifth quarter of effectiveness of any proposed amendments to rule 612. Accordingly, during the first two implementation periods of effectiveness (i.e., the first four quarters), as today, market participants would be permitted to trade in increments that differ from those that are required under rule 612 for accepting, ranking and displaying of quotes and orders.250 The Commission believes that delaying the requirement that orders in NMS stock be executed in the minimum pricing increments until the fifth quarter of effectiveness would help to facilitate an orderly transition by allowing market participants additional time to adjust and comply with the requirement to quote and trade with the proposed minimum pricing increments set forth by the rule for a particular category of NMS stocks. As discussed in
section II.F.1 above, the proposed
variable minimum pricing increments have been developed so that there are increments at which market participants can trade between the spread and they are assigned based on the quoting characteristics of each NMS stock. Therefore, the Commission proposes to implement the trading requirement once all of the proposed minimum pricing increments have become effective. Thereafter, at the end of the fifth quarter of effectiveness of proposed rule 612, the primary listing exchanges would calculate the Time Weighted Average Quoted Spreads during the next Evaluation Period and assign the relevant proposed minimum pricing increment as required under proposed rule 600(b)(78). All of the variable minimum pricing increments for quoting and trading would be effective on a going forward basis. H. Request for Comment The Commission requests comment on the proposed amendments to rule 612 and on other potential alternatives to the proposed minimum pricing increments.

1. Would the proposed variable
   minimum pricing increments for quotes and orders in NMS stocks priced equal to, or greater than, $1.00 per share address the concerns that have been raised in the market about tick￾constrained stocks? If not, why not?
2. Are the proposed minimum pricing
   increments appropriate for NMS stocks? If not, why not, and what minimum pricing increments would be appropriate?
3. Should all NMS stocks have the
   same minimum pricing increment instead of the proposed variable minimum pricing increments determined by the proposed Time Weighted Average Quoted Spreads? If so, why? What should be the minimum pricing increment?
4. Are the proposed average quoted
   spread thresholds for each proposed minimum pricing increment appropriate? Why or why not?
5. Are the proposed minimum pricing
   increments economically significant for the NMS stocks that have the relevant Time Weighted Average Quoted Spread? Please explain.
6. Would the proposed minimum
   pricing increments cause flickering quotes? Please explain.
7. Would the proposed minimum
   pricing increments reduce displayed liquidity? Please explain.
8. Is the Time Weighted Average
   Quoted Spread the appropriate measure for assigning a minimum pricing increment for orders in NMS stocks that are priced $1.00 or more per share? If not, what would be the appropriate measure and why?
9. Is the Evaluation Period an
   appropriate time period to calculate the Time Weighted Average Quoted Spread? If not, what would be an appropriate time period and why?
10. Should the minimum pricing
    increment be modified on a quarterly basis? If not, how often should the minimum pricing increments be potentially modified, e.g., on a monthly basis, on a bi-annual basis, on an annual basis?
11. Should the minimum pricing
    increment be uniform for all NMS stocks based on the per share price of a quote or order similar to today? Should there be more than two minimum pricing increments structures based on the price of an order or quotation of an NMS stock in rule 612? For example, should there be other price cutoffs in addition to the $1.00 price cutoff for specifying the relevant minimum pricing increment structure? If so, what should the price cutoffs be and what should be the minimum increment? If so, what should the uniform minimum pricing increment be? What should the price threshold be?
12. Is the $0.01 minimum pricing
    increment for quotes and orders priced equal to, or greater than, $1.00 per share or more, appropriate for some NMS stocks? If so, which NMS stocks and why?
13. Is each of the proposed Time
    Weighted Average Quoted Spreads that would determine the relevant minimum pricing increments appropriate for establishing the proposed minimum pricing increments? Is each of the Time Weighted Average Quoted Spread thresholds appropriate? Is each of the proposed minimum pricing increments related to the relevant Time Weighted Average Quoted Spreads appropriate? If not, why not, and what would be more appropriate measures and increments? Please explain.
14. The proposed minimum pricing
    increments are determined based upon proposed Time Weighted Average Quoted Spreads and have been designed to facilitate trading within the spread to accommodate price improvement opportunities. Are the proposed

251Currently, all types of NMS stocks are subject to the existing rule 612 minimum pricing increments and rule 612 does not differentiate between different types of NMS stocks. See also note 200, supra. 252See Rule 611 of Regulation NMS; 17 CFR 242.611. 253See Regulation NMS Adopting Release, supra note 16, at 37538–50. 254See id. at 37539. 255See supra note 29 (defining ‘‘protected quotation’’). minimum pricing increments and the proposed spread requirements appropriate to allow price improvement opportunities within the spread? If not, why not? Are there too many or not enough minimum pricing increments?
15. Should a minimum pricing
increment larger than $0.01 be imposed for some NMS stocks, such as high priced stocks with wider spreads? Why or why not? If so, what should the increased minimum pricing increment be? What objective criteria should be used to identify such NMS stocks and why?
16. Should NMS stocks that have a
Time Weighted Average Quoted Spread greater than $0.04 retain the $0.01 minimum quoting increment? Is the proposed $0.04 Time Weighted Average Quoted Spread appropriate for retaining the $0.01 minimum pricing increment for such stocks? If not, why not and what would be more appropriate?
17. Is the $0.0001 minimum pricing
increment for quotes and orders priced less than $1.00 per share still appropriate? Should it be reduced or increased? If so, why?
18. Should the minimum pricing
increment be reduced only for those NMS stocks that are tick-constrained? Why or why not? If yes, what should the minimum pricing increment for tick￾constrained stocks be? If yes, what should be the criteria to determine whether an NMS stock is tick￾constrained?
19. Should certain types of NMS
stocks, such as ETFs or NMS stocks with smaller market capitalization, have a different minimum pricing increment? 251 If so, which types of NMS stocks should have a different minimum pricing increment and why? If so, what should the minimum pricing increment for such stocks be and why?
20. Are there other means to
categorize NMS stocks for determining a minimum pricing increment? For example, should categories be based on share price, market value, trading volume, any other criterion, or a combination of criteria? As proposed, NMS stocks would be assigned a minimum pricing increment based on the Time Weighted Average Quoted Spread. How should average quoted spread be computed, over what time horizon, and how often should this criterion be updated? Should the formula for calculating Time Weighted Average Quoted Spread accommodate other elements, such as, for example, certain corporate actions like stock splits and reverse stock splits that changes the price of the shares? If so, how?
21. New minimum pricing increments
would be established for the following quarter on the first business day following the completion of the Evaluation Period. Is the Evaluation Period the appropriate number of days to calculate the new minimum pricing increments? Is the proposed time to implement, i.e., on the first business day following the completion of the Evaluation Period, sufficient for the markets and market participants to implement? If not, what would be a more appropriate time period to implement the new minimum pricing increment and why?
22. Should the proposed minimum
pricing increments apply to trading?
Should the proposed trading increments be the same as the proposed quoting increments? Please explain why or why not.
23. Do the proposed minimum pricing
increments provide sufficient price levels for trading within the quoted spread? Are there sufficient levels to provide price improvement opportunities given that the trading increments would be governed by the proposed rule? Should there be different minimum pricing increments for quoting and trading? Please explain.
24. Are the proposed exceptions for
trading in the minimum pricing increment appropriate? Why or why not? Should there be other exceptions from the proposed requirement to trade in the minimum pricing increment, such as for retail or segmented orders? How should other exceptions, such as retail or segmented orders, be defined? Please explain.
25. Would the proposed variable
minimum pricing increments be overly burdensome or complex for the markets to implement? Please explain.
26. Would the proposed variable
minimum pricing increment be confusing for investors? Would the variable minimum pricing increments add unnecessary complexity to the market? If so, please explain.
27. Should the primary listing
exchange be required to provide an indicator of the applicable minimum pricing increments to competing consolidators, self-aggregators, and the appropriate exclusive SIP? Why or why not?
28. In section V.F., the Commission
discusses different reasonable alternatives—uniform $0.005 tick, a two-tier alternative ($0.005 and $0.01 depending on the Time Weighted Average Quoted Spread), $0.001 for retail or segmented trades, and variable tick size based on share price. Would any of these alternatives address the concerns identified in a more appropriate manner? If so, which alternative and why?
29. Should the Commission stagger
the implementation of rule 612 as proposed? If yes, are the time periods for the staggered implementation appropriate? Should the implementation phases be structured differently, and if so, how? If not, should there be an additional time period to implement rule 612 so the market and market participants can have sufficient time? Should the proposed minimum pricing increments for trading be implemented at the end of the implementation period? If not, when should the proposed minimum pricing increment be applied to trading?
III. Amendments to Rule 610 of
Regulation NMS—Fees for Access to Quotations A. Background

1. Regulation NMS
   Regulation NMS, among other things, established intermarket protection against trade-throughs for all NMS stocks.252 The Commission supplemented those requirements with rules addressing fair and efficient access to quotations and limits on fees charged to access newly protected quotations.253 The Commission stated that access to displayed quotations, particularly the best quotations of a trading center, is ‘‘vital for the smooth functioning of intermarket trading.’’ 254 Specifically, the Commission adopted rule 610, which addresses three areas related to access to quotations: (1) the means of access to quotations; (2) the fees for access to protected quotations and any other quotations that are the best bid or best offer of an exchange or national securities association; and (3) locking and crossing quotations. In the context of fees for access to quotations, rule 610(c) imposes an access fee cap which prohibits a trading center from imposing, or permitting to be imposed, any fees for the execution of an order against a protected quotation 255 of the trading center or any other quotation of the trading center that is the best bid or best offer of an exchange or association that exceed or accumulate to more than $0.0030 per

256See 17 CFR 242.610(c). See also Regulation NMS Adopting Release, supra note 16, at 37543–
46. In the Regulation NMS Proposing Release, the
Commission initially proposed to cap the access fees that any individual market participant could charge for equities at $0.001 per share, with a total accumulated access fee limit of $0.0020 per share in any transaction. See Regulation NMS Proposing Release, supra note 16, at 11158–59. In its proposal, the Commission expressed concern that access fees added significant non-transparent costs to transactions, potentially encouraged locked markets, and created an unequal playing field as non-ECN broker-dealers were not permitted to charge access fees in addition to their posted quotations. See id. at 11157–58. The Commission ultimately adopted an access fee cap of $0.0030 in order to simplify the initial proposal and align the amount of the cap with the amount charged by most trading centers at the time, among other reasons. See Regulation NMS Adopting Release, supra note 16, at 37502 and 37545. 257See Regulation NMS Adopting Release, supra note 16, at 37545 n.419 (noting that ‘‘[f]or the relatively small number of NMS stocks priced under $1.00, fees will be limited to 0.3% of the quotation price per share to prevent fees from constituting an excessive percentage of share price.’’). 258See supra note 29. As stated above, rule 610(c) also applies to any other quotation of a trading center that is the best bid or offer of an exchange or association. The Commission stated that the access fee caps should apply to manual quotations that are the best bid or offer to the same extent that it applies to protected quotations to preclude any incentive for trading centers to display manual quotations as a means to charge higher access fees. See Regulation NMS Adopting Release, supra note 16, at 37546. For purposes of this discussion, references to protected quotations also include manual quotations that are the best bid or best offer of an exchange or association. 259 If an ATS or OTC market maker displayed a protected quotation, its fees would be subject to the access fee caps under rule 610(c). However, exchange fees and the fees of non-exchange trading centers are treated very differently under the Federal securities laws. For example, one of the distinguishing features of registered national securities exchanges is that—unlike non-exchange trading centers—their fees are subject to the principles-based standards set forth in the Exchange Act, as well as the rule filing requirements thereunder. In particular, the Federal securities laws require the entirety of each and every fee, due, and charge assessed by an exchange to be transparent and publicly posted, and must be an equitable allocation of reasonable dues, fees and other charges and not be unfairly discriminatory. See 15 U.S.C. 78f(b)(4) and (5). Similar requirements do not apply to the fees of non￾exchange trading centers that do not provide public transparency into their respective fee schedules and typically are negotiated on a customer-by-customer basis. The fees assessed by non-exchange trading
centers are bespoke, and the fees paid (or not paid) by market participants to ATSs and other off￾exchange venues are negotiated between each market participant and the trading venue, the result being that the number of fee permutations and differences across brokers for any single ATS could be substantial. 260See Regulation NMS Adopting Release, supra note 16, at 37546. 261See id. at 37543–46 (The Commission expressed concern that without a fee limitation, the adoption of the Order Protection Rule and private linkages could ‘‘significantly boost the viability of the outlier business model.’’ Such outlier markets ‘‘might well try to take advantage of intermarket price protection by acting essentially as a toll booth between price levels’’ with the high fee market likely to be the last market to which orders would be routed, but prices could not move to the next level until someone routed an order to take out the displayed price at such outlier market. Therefore, the outlier market ‘‘might see little downside to charging exceptionally high fees, such as $0.009, even if it is last in priority.’’). Id. at 37546. 262See id. at 37497. 263The $0.0030 per share cap largely codified the then-prevailing fee level set through competition among the various trading centers. See id. at 37545 (stating that ‘‘the $0.003 fee limitation is consistent with current business practices, as very few trading centers currently charge fees that exceed this amount.’’). 264See id. at 37544 n.406. 265See id. at 37502, 37583, and 37595. 266 Id. at 37502. (The Commission stated that the fee limitation was necessary to achieve the purposes of the Exchange Act because ‘‘[a]ccess fees tend to be highest when markets use them to fund substantial rebates to liquidity providers, rather than merely to compensate for agency services.’’ Consequently, [i]f outlier markets are allowed to charge high fees and pass most of them through as rebates, the published quotations of such markets would not reliably indicate the true price that is actually available to investors or that would be realized by liquidity providers.’’ Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission to adopt rules assuring the fairness and usefulness of quotation information. In adopting the current fee caps, the Commission stated that, for quotations to be fair and useful, ‘‘there must be some limit on the extent to which the true price for those who access quotations can vary from the displayed price.’’ The Commission concluded that ‘‘the $0.0030 fee limitation will further the statutory purposes of the NMS by harmonizing quotation practices and precluding the distortive effects of exorbitant fees.’’). Id. at 37584. 267See Securities Exchange Act Release No. 84875 (Dec. 19, 2018), 84 FR 5202 (Feb. 20, 2019) (‘‘Transaction Fee Pilot Adopting Release’’). Further, the Equity Market Structure Advisory Commission also considered, among other things, whether the access fee cap should be modified. See
Equity Market Structure Advisory Committee, Oct. 27, 2015, information available at https:// www.sec.gov/spotlight/emsac/emsac-archives.htm. 268See SRO fee schedules, which are available on each SRO’s website. See also infra section V.C.2,
Table 5. This discussion focuses on exchange fees
because, currently, only exchanges display protected quotations. If an ATS or OTC market maker displayed a protected quotation, its fees would be subject to the access fee caps under rule 610(c). However, exchange fees and the fees of non￾exchange trading centers are treated very differently under the Federal securities laws. See supra note 259. 269A few exchanges have adopted a ‘‘taker￾maker’’ pricing model (also called an inverted model), in which they charge a fee the provider of liquidity and pay a rebate to the taker of liquidity. See, e.g., Nasdaq BX fee schedule available at https://www.nasdaqtrader.com/trader.aspx?id=bx_ pricing (as of July 5, 2022); NYSE National fee
schedule available at https://www.nyse.com/
publicdocs/nyse/regulation/nyse/NYSE_National_ Schedule_of_Fees.pdf (as of Jan. 1, 2022); and Cboe EDGA fee schedule available at https:// www.cboe.com/us/equities/membership/fee_
schedule/edga/ (as of Apr. 1, 2022). See also infra
section V.C.2, Table 5. For taker-maker exchanges,
the amount of the maker fee charged to the provider of liquidity is not bounded by the rule 610(c) access fee cap because such fee is not a charge to access the market’s best bid/offer for NMS stocks, but such fees typically are no more than $0.0030. share for quotations of $1.00 or more per share.256 Rule 610(c) also imposes an access fee cap of 0.3% of the quotation price if the price of the protected quotation or other quotation is less than $1.00 per share.257 The access fee caps apply to executions against protected quotations 258 and therefore the fees of trading centers that do not display protected quotations, such as ATSs or OTC markets makers, are not subject to rule 610(c)’s access fee caps.259 Further, the rule 610(c) access fee caps do not apply to non-displayed interest or depth-of-book quotes.260 The Commission adopted the rule 610(c) access fee caps in order to prevent high fees from undermining Regulation NMS’s price protection and linkage requirements, while leaving trading centers otherwise free to set fees subject only to other applicable standards (e.g., prohibition on unfair discrimination).261 The access fee caps were designed to ensure that all investors would have fair and non-discriminatory access to protected quotations.262 At the time of adoption, the $0.0030 fee limitation was consistent with the then-prevailing market level and general business practices, as very few trading centers charged fees in excess of that amount.263 The Commission adopted the 0.3% fee limitation on quotations priced less than $1.00 to prevent fees from constituting an excessive percentage of share price.264 The purpose of the access fee limitation was to help ensure the fairness and accuracy of displayed quotations by establishing an outer limit on the cost of accessing such quotations.265 In adopting the rule, the Commission sought to ‘‘assure order routers that displayed prices are, within a limited range, true prices.’’ 266 Since the adoption of rule 610 in 2005, the Commission has continued to consider the impact of access fees on market structure and market quality, but has not previously proposed to modify the amount of the access fee caps despite significant changes in the equity markets.267
2. Exchange Fee Models
The predominant pricing structure for transactions that has developed among the equities exchanges to attract order flow is the ‘‘maker-taker’’ pricing model, in which the exchange pays a rebate to a ‘‘maker’’ or provider of liquidity and charges a fee to a ‘‘taker’’ of liquidity.268 The exchange earns as revenue the difference between the fee paid by the ‘‘taker’’ of liquidity and the rebate paid to the provider or ‘‘maker’’ of liquidity.269 For maker-taker exchanges, the amount of the taker fee is typically limited by the access fee caps imposed by rule 610(c) on the fees the exchange can charge to access its protected

270This was one of the concerns the Commission identified when it approved the access fee caps. See Regulation NMS Adopting Release, supra note 16, at 37545 (‘‘[T]he fee limitation is necessary to achieve the purposes of the Exchange Act. Access fees tend to be highest when markets use them to fund substantial rebates to liquidity providers, rather than merely to compensate for agency services.’’). 271See, e.g., Stanislav Dolgopolov, ‘‘The Maker￾Taker Pricing Model and its Impact on the Securities Market Structure: A Can of Worms for Securities Fraud?’’ 8 Va. L. & Bus. Rev. 231, 270 (2014), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2399821 (retrieved from SSRN Elsevier database). One academic study of selected market data suggested that some broker￾dealers route non-marketable orders to the trading center offering the highest rebate, and do so in a manner that the authors contended might not be consistent with the broker-dealers’ duty of best execution. See Robert H. Battalio, Shane A. Corwin, and Robert H. Jennings, ‘‘Can Brokers Have It All? On the Relation Between Make-Take Fees and Limit Order Execution Quality,’’ Journal of Finance 71, 2193–2237 (2016), available at https:// onlinelibrary.wiley.com/doi/10.1111/jofi.12422/full (‘‘Battalio Equity Market Study’’). 272See Letter from Richard Steiner, Global Equities Liaison to Regulatory & Government Affairs, RBC Capital Markets, to Elizabeth Murphy, Secretary, Commission, at 2–3 (Nov. 22, 2013), available at https://www.sec.gov/comments/s7-02- 10/s70210-411.pdf (‘‘RBC Capital Letter’’) (commenting on potential equity market structure initiatives). 273See Larry Harris, ‘‘Maker-Taker Pricing Effects on Market Quotations,’’ at 24–25 (Nov. 14, 2013), available at https://www.lexissecuritiesmosaic.com/ gateway/sec/speech/hujibusiness_Maker-taker.pdf. 274See, e.g., Curt Bradbury, Market Structure Task Force Chair, Board of Directors, SIFMA, and Kenneth E. Bentsen Jr., President and Chief Executive Officer, SIFMA, Opinion, ‘‘How to Improve Market Structure,’’ N.Y. Times (July 14, 2014), available at https://dealbook.nytimes.com/ 2014/07/14/how-to-improve-market-structure/?r=0 (stating that the ‘‘proliferation of order types designed to avoid access fees and capture rebates . . . adds complexity to the system, requires continuing technology changes and creates potential for market instability’’ and recommending access fees charged by exchanges be ‘‘dramatically reduced, if not eliminated’’; RBC Capital Letter, supra note 272, at 2. 275See Menkveld, Albert J., Bart Zhou Yueshen, and Haoxiang Zhu, ‘‘Shades of darkness: A pecking order of trading venues.’’ Journal of Financial Economics 124, no. 3 (2017), at 503–534, available at https://www.mit.edu/∼zhuh/ MenkveldYueshenZhu_2017JFE_dark.pdf; RBC Capital Letter, supra note 272, at 2. 276See RBC Capital Letter, supra note 272, at 2– 4; Letter from Mehmet Kinak, Vice President— Global Head of Systematic Trading & Market Structure,
and Jonathan Siegel, Vice President— Senior Legal Counsel (Legislative & Regulatory Affairs), T. Rowe Price, to Brent J. Fields, Secretary, Commission, dated June 12, 2018, at 2, available at https://www.sec.gov/comments/s7-05-18/s70518- 3832746-162769.pdf (sec.gov) (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks). 277See, e.g., Michael Brolley & Katya Malinova, ‘‘Informed Trading and Maker-Taker Fees in a Low Latency Limit Order Market,’’ at 2 (Oct. 24, 2013), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=2178102 (‘‘If a maker rebate is introduced in competitive markets, the bid-ask spread will decline by (twice) the maker rebate.’’ This article provided theoretical modelling, not empirical analysis.); Shawn O’Donoghue, ‘‘The Effect of Maker-Taker Fees on Investor Order Choice and Execution Quality in U.S. Stock Markets’’ (Jan. 23, 2015), available at https:// papers.ssrn.com/sol3/papers.cfm?abstract id=2607302; and Jean-Edouard Colliard & Thierry Foucault, ‘‘Trading Fees and Efficiency in Limit Order Markets,’’ Oxford University Press, at n.13 (Sept. 1, 2012), available at https:// academic.oup.com/rfs/article/25/11/3389/1566107 (arguing that maker-taker rebates may help equities exchanges compete with off-exchange payment for order flow arrangements, in which wholesale broker-dealers purchase retail order flow for trading off-exchange). 278See, e.g., Letter from Richie Prager, Managing Director, Head of Trading and Liquidity Strategies, BlackRock, Inc., to Mary Jo White, Chair, SEC, at 2 (Sept. 12, 2014), available at https://www.sec.gov/ comments/s7-02-10/s70210-419.pdf (commenting on File No. S7–02–10 ‘‘Concept Release on Equity Market Structure’’ and File No. S7–01–13 ‘‘Regulation Systems Compliance and Integrity, and Equity Market Structure Review’’ by stating ‘‘Some participants have called for elimination of rebates and maker-taker pricing in its entirety in conjunction with access fees, but BlackRock believes that incentives for providing liquidity positively impact market structure. Incentives promote price discovery in public markets, increase available liquidity and tighten spreads. Rebates compensate liquidity providers for exposing orders to adverse selection and information leakage.’’). See also infra section V.C.2. 279See, e.g., Concept Release on Equity Market Structure, supra note 4 (evaluating broadly the performance of market structure since Regulation NMS, particularly for long-term investors and for businesses seeking to raise capital, and soliciting comment on whether regulatory initiatives to improve market structure are needed). 280See supra note 30 (defining ‘‘trading centers’’). 281 ‘‘NMS stock’’ is defined as ‘‘any NMS security other than an option’’ under 17 CFR 242.600(b)(55). 282See 17 CFR 242.610(c). See also Regulation NMS Adopting Release, supra note 16, at 37549. 283See Regulation NMS Adopting Release, supra note 16, at 37549. quotation or best bid/offer for NMS
stocks. The rule 610(c) access fee caps apply to the fees assessed on an incoming order that executes against a resting protected quote, but does not address the rebates that may be paid. However, the rule 610(c) access fee caps typically indirectly limit the average amount of the rebates that an exchange offers to less than $0.0030 per share in order to maintain net positive transaction revenues. Thus, an exchange may have higher access fees to fund higher liquidity rebates 270 to attract more trading volume. In recent years, a variety of concerns have been expressed about the prevailing maker-taker fee model, in particular the rebates exchanges pay to attract orders. For example, many have argued that the prevailing access fee structure creates a conflict of interest for broker-dealers, who must provide the best execution to their customers’ orders while facing potentially conflicting economic incentives to avoid fees or earn rebates from the trading centers to which they direct those orders for execution.271 Others have expressed concern that maker-taker access fees may: (1) undermine market transparency since displayed prices do not account for exchange transaction fees or rebates and therefore do not reflect the net economic costs of a trade; 272 (2) serve as a way to effectively quote in sub-penny increments on a net basis when the effect of a maker-taker exchange’s sub-penny rebate is taken into account even though the minimum quoting increment is expressed in full pennies; 273 (3) introduce unnecessary market complexity through the proliferation of new exchange order types (and new exchanges) designed solely to take advantage of pricing models; 274 (4) drive orders to non￾exchange trading centers as market participants seek to avoid the higher fees that exchanges charge to subsidize the rebates they offer to attract liquidity; 275 and (5) may benefit sophisticated market participants like market makers and proprietary traders at the expense of other market participants.276 Conversely, others argue that the maker-taker model may have positive effects by enabling exchanges to compete with non-exchange trading centers and by narrowing quoted spreads by subsidizing posted prices.277 Specifically, maker-taker fees may narrow displayed spreads in some securities insofar as the liquidity rebate effectively subsidizes the prices of displayed liquidity by allowing a maker to post a more aggressive price than it may have in absence of a rebate.278 In turn, that displayed liquidity may establish the NBBO, which is often used as the benchmark for marketable order flow, including retail order flow, that is executed off-exchange by either matching or improving upon those prices.279 Accordingly, retail orders may benefit indirectly from the subsidy provided by maker-taker exchanges. B. Current Rule 610(c) Rule 610(c) under Regulation NMS prohibits trading centers 280 from imposing, or permitting to be imposed, any fee or fees for the execution of an
order against a protected quotation of the trading center or any other quotation of the trading center that is the best bid or best offer of an exchange or association in an NMS stock 281 that exceed or accumulate to more than $0.0030 per share if the price of the protected quotation or other quotation is $1.00 or more per share.282 Rule 610 also imposes an access fee cap of 0.3% of the quotation price per share if the price of the protected quotation or other quotation is less than $1.00 per share.283 As discussed above, the access fee caps apply to executions against protected

284See supra note 255 and accompanying text. 285See supra notes 255 and accompanying text, and 259. Non-exchange fees are not subject to the requirements applicable to exchange fees under
section 19(b) and rule 19b–4. While equities
exchanges charge transaction-based fees, ATSs, especially ‘‘dark pool’’ ATSs that are part of a large broker-dealer order handling business, typically do not charge separate transaction-based fees for executions in their ATSs, and instead might use bundled pricing that does not associate particular orders with particular fees. See, e.g., Letter from William P. Neuberger and Andrew F. Silverman, Managing Directors and Global Co-Heads of Morgan Stanley Electronic Trading, to Brent J. Fields, Secretary, Commission (May 19, 2016), available at https://www.sec.gov/comments/s7-23-15/s72315- 37.pdf (commenting on File No. S7–23–15 concerning regulation of NMS Stock ATSs and noting that ATS fees may be bundled with brokerage services and such commission rates are typically negotiated between the parties). 286Specifically, as discussed above, the access fee caps would continue to apply only to executions against protected quotations and therefore the fees of non-exchange trading centers, such as ATSs or OTC markets makers that do not display protected quotations, would continue not to be subject to Rule 610(c)’s access fee caps. See supra note 259 and accompanying text. 287Regulation NMS Adopting Release, supra note 16, at 37545. 288See Letter from Theodore R. Lazo, Managing Director & Associate General Counsel, SIFMA, to Brent J. Fields, Secretary, Commission, dated May 24, 2018, at 2 (‘‘SIFMA Transaction Fee Pilot Letter’’) (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’) at 2 (discussing cost savings due to market efficiencies and stating that SIFMA has long recommended lowering the existing access fee caps because such caps have ‘‘not been adjusted to reflect market developments since Regulation NMS was adopted more than a decade ago’’) and Letter from Theodore R. Lazo, Managing Director & Associate General Counsel, SIFMA, to Brent J. Fields, Secretary, Commission, dated Mar. 29, 2017), at 3 (‘‘SIFMA 2017 Letter’’) (commenting that because spreads have narrowed and commissions have decreased since Regulation NMS was adopted, the existing access fee caps have become ‘‘outsized relative to current market realities.’’) See also infra notes 293, 315, 316, 317, and accompanying text. 289See Regulation NMS Adopting Release, supra note 16, at 37545 (Section 11A of the Exchange Act ‘‘authorizes the Commission to adopt rules assuring the fairness and usefulness of quotation information’’ and stating that for quotations to be fair and useful, there ‘‘must be some limit on the extent to which the true price for those who access quotations can vary from the displayed price.’’). 290 If broker-dealers could more easily pass￾through rebates to their customers, the potential financial benefit of such rebates would inure to the customer, not the broker-dealer. Thus, the potential conflict of interest faced by a broker-dealer when routing its customers’ orders to a market for execution would be reduced or eliminated because the broker-dealer
would have no direct economic interest in the level of the rebate and would be able to better objectively assess best execution for each customer’s order. 291As discussed above, exchange fees and the fees of non-exchange trading centers are treated differently under the Federal securities laws. See supra notes 259 and 285. 292See Regulation NMS Adopting Release, supra note 16, at 37544, n.406 and 37545. 293See, e.g., Citadel Report, supra note 100, at 4 (stating that advances in technology and innovation since the adoption of Regulation NMS have ‘‘markedly improved conditions for all investors, who benefit from dramatically lower trading costs and market transparency,’’ but recommending the Commission undertake further reform measures); SIFMA 2017 Letter, supra note 288, at 3 and 8 (arguing that the $0.0030 access fee cap is too high relative to today’s narrower spreads and lower commission rates’’ and stating ‘‘[w]hile net costs to execute a transaction have been largely contained since Reg. NMS was adopted, access fees have become and remain an outsized element of overall transaction costs and do not reflect today’s business practices and market realities.’’); U.S. Equity Market Structure: Order Routing Practices, Considerations, and Opportunities, Charles Schwab (Sept. 7, 2022) (‘‘Schwab Whitepaper’’), available at https:// content.schwab.com/web/retail/public/about￾schwab/Schwab-2022-order-routing-whitepaper.pdf (offering observations on current market structure and recommendations for reform). The Schwab Whitepaper states that Regulation NMS was a ‘‘watershed’’ moment for the securities industry and the market evolution that ensued resulted in ‘‘significantly improved trading outcomes for investors, particularly retail investors’’ who benefitted from, among other things, lower trading costs (bid/ask spreads and commissions) and faster executions. Id. at 5. quotations 284 and therefore the fees of non-exchange trading centers, such as ATSs or OTC markets makers that do not display protected quotations, are not subject to rule 610(c)’s access fee caps.285
C. Proposal To Reduce Fees for Access
to Protected Quotations and Increase Fee Transparency In light of the amendments proposed to rule 612 as well as the decrease in trading costs and increased trading efficiencies since NMS was adopted, the Commission believes that rule 610 should be amended in two ways. First, because the Commission proposes to reduce the minimum pricing increment under rule 612 and introduce a variable tick regime, the Commission also proposes to recalibrate the access fee caps that limit what a trading center could charge for the execution of orders against a protected quotation of the trading center or any other quotation of the trading center that is the best bid or best offer of a national securities exchange or association. Specifically, if the protected quotation or other quotation in an NMS stock is priced at $1.00 or more per share, the Commission proposes that the fee or fees assessed to execute against such quotation would not be permitted to exceed (1) $0.0005 per share for NMS stocks that have a minimum pricing increment of $0.001 and (2) $0.001 per share for NMS stocks that have a minimum pricing increment greater than $0.001. Further, the Commission proposes to reduce the access fee cap for an execution against a protected quotation or other quotation priced less than $1.00 per share to 0.05% of the quotation price. The Commission’s proposal with respect to the access fee caps modifies only the level of the caps and does not otherwise make any changes to its application.286 As discussed in the Regulation NMS Adopting Release, the rule 610(c) access fee caps were ‘‘designed to preclude individual trading centers from raising their fees substantially in an attempt to take improper advantage of strengthened protection against trade-throughs.’’ 287 The Commission believes that retaining access fee caps for executions against protected quotations remains appropriate to achieve this purpose. The Commission proposes to recalibrate the access fee caps to reflect the reduction in trading costs due to market efficiencies since rule 610 was adopted,288 while minimizing the potential impact of reduced fees and rebates on trading centers’ business models. Further, lowering the access fee caps in connection with the reduction of the minimum pricing increment, would help to ensure that the fees charged to access a protected quotation do not distort the true price that is available to investors.289 Absent an adjustment to the current fee caps, access fees would make up a larger proportion of the per share quotation price than they do today because of the proposed decreases in the minimum pricing increments, which could lead to unintended market distortions and undermine price transparency. Second, to increase the transparency of exchange fees, and potentially help reduce broker conflicts of interest by allowing fees and rebates to more readily be passed through to customers,290 the Commission proposes to amend rule 610 to require national securities exchanges to
make the amounts of all fees and rebates determinable at the time of execution.291 Each of these proposals is discussed below.

1. Reduce Fees for Access to Protected
   Quotations
   The current access fee caps were designed to prevent fees from constituting an excessive percentage of the share price and reflected the then current rates that were assessed by trading centers.292 In the intervening seventeen years since rule 610 was adopted, the markets have evolved dramatically. Market innovations and technological efficiencies have reduced transaction and trading costs (e.g., lower commissions and more narrow bid/ask spreads) in the equities markets.293 In light of the proposed changes to rule 612 discussed in section II above, and consistent with the original goals of Regulation NMS, the Commission

294The Commission recognized the importance of reducing costs when it adopted Regulation NMS, stating ‘‘[t]he transaction costs associated with the prices at which [investor] orders are executed represent a continual drain on their long-term savings’’ and noting that ‘‘[m]inimizing these investor costs to the greatest extent possible is the hallmark of efficient markets, which is a primary objective of the NMS.’’ See Regulation NMS Adopting Release, supra note 16, at 37498. See also note 289 and accompanying text. 295See also MEMX Report, supra note 105, at 3 (‘‘coupling . . . tick size changes with a targeted reduction in the access fee cap . . . would both prevent potential market distortions that could occur when fees exceed half the minimum increment and reduce industry take fee costs. . . .).’’ MEMX requested an exemption from rule 612(c) to allow a minimum pricing increment of half of one cent ($0.005) for tick-constrained stocks and a corollary reduction of the fee cap in such stocks from $0.0030 to $0.0015. See MEMX Exemption Request, supra note 105, at 1 and 7. 296 In practice, currently, the access fee caps limit only the fees imposed by the national securities exchanges because other trading centers (e.g., ATSs and OTC market makers) do not have protected quotations. If in the future, other trading centers were to execute an order against a protected quotation, such trading centers’ ability to impose fees would be bounded by the access fee caps as well. 297As discussed in section V.C.2, trading venues that utilize a flat fee model do not offer rebates. The fees for both taking and adding liquidity on such markets are significantly lower than the current $0.0030 fee cap and therefore do not appear to be economically constrained by rule 610(c). Similarly, ATSs appear to charge fees in the range of 10 mils. This suggests that the current access fee cap may not be reflective of the actual costs trading centers incur to provide execution services against protected quotations. See SIFMA 2017 Letter, supra note 288, at 8 (stating ‘‘a significant portion of access fees are used to subsidize rebates with the exchanges’ net capture reflecting today’s market norms for accessing liquidity, which is approximately 3–5 cents per 100 shares traded . . . or 3–5 mils.).’’ See also infra notes 303, 315 and 316 and accompanying text. 298 Imposing a $0.001 access fee cap on executions against protected quotations regardless of the minimum pricing increment could result in access fees that exceed half the minimum pricing increment, which could have a negative impact on quote priority. Therefore, the proposal would establish a $0.0005 access fee cap only for NMS stocks that have a minimum pricing increment of $0.001 to ensure that for such stocks, the maximum access fee does exceed half the minimum pricing increment. For NMS stocks that have a minimum pricing increment greater than 0.001, the access fee cap would be $0.001 to avoid interference with existing
agency market business models. Thus, the Commission’s proposed level of the access fee caps seeks to balance the need to reduce the access fee caps to accommodate the reduction in the minimum pricing increments and preserve the ability of the agency market business models to charge fees for access. 299See supra note 289. 300See SIFMA Transaction Fee Pilot Letter, supra note 288 at 2 (recommending that the Commission reduce the access fee cap to ‘‘no more than five cents per 100 shares because the cap has not been adjusted to reflect market developments since Regulation NMS was adopted’’). 301See supra note 298. 302Regulation NMS Adopting Release, supra note 16, at 37545. The Commission stated that an important purpose of the fee cap was to prevent an ‘‘outlier’’ exchange from charging an exorbitant fee to access a protected quotation. Id. at 37503. One market participant stated that the current cap is ‘‘simply too high’’ and dislocated from ‘‘true prices in the marketplace.’’ See Letter from Paul M. Russo, Managing Director, Goldman Sachs & Co. LLC, to Brent J. Fields, Secretary, Commission, at 2 (May 24, 2018), available at https://www.sec.gov/ comments/s7-05-18/s70518-3711788-162473.pdf (‘‘Goldman Letter’’) (commenting on File No. S7– 05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’). 303 15 U.S.C. 78k–1(c)(1)(B). See also Goldman Letter, supra note 302, at 1 (‘‘[A] reduction in the Fee Cap from $.0030 to $.0010 per share could be supported today and would be better calibrated with present-day trading and execution costs, which have decreased substantially since 2005 when the current Fee Cap was adopted.’’). believes the current access fee caps should be recalibrated to ensure that they do not represent an outsized portion of the displayed quotations.294 A reduction in the minimum pricing increment without reducing the access fee caps could permit fees to become a higher percentage of the minimum pricing increment, which could potentially undermine price transparency and exacerbate the other concerns with maker-taker fees described in section III.A.2 above. Therefore, the Commission proposes to reduce the level of the access fee cap for protected quotations in NMS stocks priced $1.00 or more and proposes to introduce a variable access fee cap structure to reflect the variable minimum pricing increments proposed in rule 612 for quotations priced equal to or greater than $1.00 per share. Specifically, for NMS stocks that have a minimum pricing increment of $0.001, the Commission proposes a $0.0005 access fee cap, and for NMS stocks that have a minimum pricing increment greater than $0.001, the Commission proposes a $0.001 access fee cap. This proposal would balance several considerations, such as ensuring that the access fees do not exceed half the minimum pricing increment 295 while also seeking to preserve the ability of trading centers 296 to continue to operate and affording them continued flexibility to develop and utilize different fee
structures. For protected quotations in NMS stocks priced less than $1.00, the fee cap would be adjusted to 0.05% of the quotation price per share to maintain the current proportional structure with the access fee caps on protected quotations that are priced $1.00 or more. The Commission believes the proposed reduction of the access fee caps is necessitated by the changes to the minimum pricing increments. The adjustments are also designed to recalibrate the access fee caps to better align pricing limitations with current transaction costs.297 Finally, the Commission has proposed access fee cap levels that would balance the need to reduce the access fee to reflect the lower minimum pricing increments and reduced trading costs, with leaving market centers otherwise free to establish fees to preserve the agency market business model.298 The proposed reduction in the minimum pricing increments under rule 612 without a corresponding adjustment to the access fee caps would permit access fees to become too high in relation to the minimum pricing increment, which would potentially undermine price transparency.299 The proposed reduction to the access fee caps would ensure that access fees continue to be appreciably below the minimum pricing increment. If the access fee cap for protected quotations that have a minimum pricing increment of $0.001 were kept at the current level of $0.0030, an access fee set at the maximum allowed under rule 610(c) would add an undisplayed additional three ticks per share to the displayed price.300 The Commission proposes the $0.0005 access fee cap for these NMS stocks so that the access fee cap does not exceed half the minimum increment, which could disrupt quote priority and result in unintended market distortions.301 Further, for an NMS stock that has a proposed minimum pricing increment of $0.002, the current access fee cap would be larger than the minimum pricing increment. In addition, for an NMS stock that has a minimum pricing increment of $0.005, the current access fee cap would exceed half the minimum pricing increment. Reducing the access fee caps to the proposed levels would help to ensure that the displayed protected quotation reflects the price of the quotation, within a reasonable range, which would not be the case if the current access fee caps were not reduced. In the Regulation NMS Adoption Release, the Commission stated when adopting the current limits that, for quotations to be fair and useful, ‘‘there must be some limit on the extent to which the true price for those who access quotations can vary from the displayed price.’’ 302 The proposed change to the access fee caps should preserve transparency regarding the true prices of protected quotations consistent with the requirements under section 11A(c)(1)(B) of the Exchange Act.303 The Commission proposes to allow a higher access fee cap ($0.001 per share) for those NMS stocks that have a minimum pricing increment greater than $0.001. The two proposed
access fee caps would allow trading centers largely to maintain their current net capture rate and not impair the agency market business models, though some

304See infra section V.D.3 discussing impact of proposed lower access fee caps on exchanges’ net capture. ‘‘Net capture’’ is the amount earned by the trading center for facilitating a transaction, which is typically the difference between the average access fee charged by the trading center and the average rebate paid by the trading center. One market participant stated that a review of the maker-taker exchanges fee schedules as of May 2018 indicated that the average net capture between the base level fee/rebate and the highest level fee/ rebate was approximately $0.0005 per share. The market participant further stated that lowering the fee cap to $0.001 would still allow a maker-taker exchange to yield the same $0.0005 per share net capture rate. The market participant concluded that lowering the fee cap to $0.001 per share would shrink the range within which exchanges could set fees and rebates and fee schedules would likely vary less across exchanges, but exchanges could ‘‘still choose to offer rebates to incentivize liquidity provision and maintain their current net capture rates.’’ See Goldman Letter, supra note 302, at 3. 305See note 499 infra and accompanying text. See also SIFMA 2017 Letter, supra note 288 (stating ‘‘the exchanges’ net capture reflecting today’s market norms for accessing liquidity, which is approximately 3–5 cents per 100 shares trading ($0.0003–$0.0005), or 3–5 mils.’’). ATSs typically do not offer rebates, but generally do charge fees to access liquidity in the range of 10 mils, suggesting a net capture in the range of $0.001 per share. See Letter from Stacey Cunningham, President, NYSE, to Brent Fields, Secretary, Commission, dated Oct. 2, 2018 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ and noting that a reduction of the fee cap to $0.001 per share ‘‘would bring the fees exchanges charge for removing liquidity in line with those charged by ATSs’’). However, the suggestion that the access fee caps be reduced to $0.001 per share was made in the context of the minimum pricing increment remaining at current levels under rule 612 (i.e., one cent for NMS stock quotes and orders priced $1.00 or more). Because the Commission proposes to reduce the minimum pricing increment for some NMS stocks to $0.001, the Commission is proposing a smaller access fee cap for those NMS stocks so that the maximum access fee does not have a negative impact on quote priority. 306See SIFMA Transaction Fee Pilot Letter (stating that over time, ‘‘competitive pressures, increased efficiencies from automation, and electronic trading have each operated to reduce transaction costs throughout the markets’’ but ‘‘access fees have remained at or near 30 cents per hundred shares.’’). 307See Regulation NMS Adopting Release, supra note 16, at 37545. 308 Id. 309See Regulation NMS Adopting Release, supra note 16, at 37545 (stating the adopted fee limitation of $0.0030 will not impair the agency market business model). Similarly,
the Commission chose not to extend the application of the fee cap to all displayed quotes of a trading center (e.g., including depth-off-book quotes), but instead concluded the fee caps should apply more narrowly only to the best bid or offer of a national securities exchange or national securities association, in part, to have a ‘‘minimal impact on competition and individual business models’’ while also preserving the fairness and usefulness of quotes. Id. at 37546. 310See infra note 585 and accompanying text. 311See infra section V.C.2. 312See infra section V.C.2 and Table 5 and accompanying text, discussing the complexity of the existing exchange fee schedules and the number of changes thereto. The exchanges would likely need to develop at least four different fee (and corresponding rebate) levels and would be required to file proposed rule changes to accommodate the four new access fee caps. 313See, e.g., Citadel Report, supra note 100, at 5 (stating ‘‘[t]o the extent the Commission reduces the minimum tick size for certain symbols, the access fee cap should be commensurately reduced to reflect the reduction in bid-offer spreads’’ and recommending reduction of the current access fee cap ‘‘by 50% to 15 cents per 100 shares for symbols trading above $1.00 per share that are tick constrained (i.e., have a penny spread the overwhelming majority of the time)’’). Citadel recommended the minimum pricing increment for tick-constrained symbols trading at or over $1.00 should be $0.005. See also MEMX Exemption Request, supra note 105, at 8 (requesting a reduction in the access fee cap as a condition to MEMX’s request to lower the minimum pricing increment for tick-constrained stocks noting that ‘‘a lower fee cap may be necessary in connection with an exemption that permits certain NMS stocks to trade in $0.005 increments, as any fee charged to access quotations in such securities would make up a commensurately larger proportion of the spread’’). 314Citadel Report, supra note 100, at 5. See also MEMX Report, at 5 (‘‘[A] change [to the minimum pricing increment for tick constrained stocks] should also be coupled with a targeted change to the access fee cap . . . further reducing costs in these securities.’’). MEMX estimates a potential savings of as much as $879 million for investors Continued business models may change.304 For example, as discussed in section V.C.2, the exchanges use one of three pricing models, which result in different net capture rates. Such rates vary between $0.0002 and $0.0006 per share. However, the Commission estimates that, for the overwhelming majority of trading volume on exchanges, the average total net capture is around $0.0004 per share for all trading types and likely closer to $0.0002 for non￾auction trading in stocks that have a price equal to or greater than $1.00.305 The proposal to adopt two access fee caps for executions against protected quotations priced equal to, or greater than, $1.00 per share is designed to
allow current business practices to continue while adjusting access fee levels to align with the proposed lower minimum pricing increments as well as reflect market innovations and technological efficiencies that have driven transaction costs down since rule 610(c) was adopted.306 Reducing access fees to amounts slightly above the current net capture rates would continue to allow trading centers that choose to operate solely by charging transaction fees to continue to do so, while also minimizing the costs to investors who must access protected quotations. The Commission took into account the then-current business models when it adopted the access fee cap levels in rule 610(c).307 The Commission stated that ‘‘agency trading centers perform valuable agency services in bringing buyers and sellers together, and that their business model historically has relied, at least in part, on charging fees for execution of orders against their displayed quotations.’’ 308 At that time, the Commission did not want to unduly harm the agency market business model by prohibiting access fees entirely.309 The Commission’s proposal is designed to preserve the fairness and usefulness of quotes while minimizing the impact to current agency market business models. If the Commission adopted a flat $0.0005 access fee cap regardless of the minimum pricing increment, it would potentially impair certain agency market business models because such a fee level would not allow certain markets to maintain their current net capture rates.310 Allowing a higher access fee cap for those NMS stocks that have a minimum pricing increment greater than $0.001 would preserve current agency market business models and would allow trading centers continued flexibility in structuring their businesses. The Commission’s proposal seeks to balance concerns about lowering the access fee caps too far such that the reduction would jeopardize certain agency market business models while also recognizing that the access fee caps need to be reduced to accommodate the lower minimum pricing increments, capitalize on technological and cost improvements to the market that support lowering the caps, and avoid introducing market distortions. The proposed rule would not establish individual access fee cap levels for each minimum pricing increment. Introducing four access fee caps to go along with the proposed four minimum pricing increments would introduce unnecessary complexity into the national market system. Exchange fee and rebate schedules are complex and change frequently.311 The Commission believes that adding four access fee caps would increase the complexity of exchange fee and rebate structures.312 The Commission believes that the two proposed access fee caps for protected quotations priced at $1.00 or more is appropriate to accommodate the reduction in the minimum pricing increments and would not introduce unnecessary complexity. Some market participants have also suggested lowering the access fee
caps, arguing that a reduction of the access fee caps to reflect the reduction in bid-offer spread may be appropriate if the Commission were to lower the minimum pricing increment.313 Proponents of this approach maintain that a reduction in access fees that is proportionate to the tick size reduction would reduce trading costs and increase the competitiveness of on-exchange trading.314 The Commission proposes to

annually if each exchange with a take fee of more than $0.0015 were to reduce the take fee to that level in tick-constrained securities. See MEMX Report, id. at 20 n.15. 315See, e.g., Letter from Hubert De Jesus, Global Head of Market Structure and Electronic Trading, and Joanne Medero, U.S. Head of Global Public Policy, BlackRock, Inc., to Brent J. Fields, Secretary, Commission, dated May 23, 2018, at 1 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ stating ‘‘[T]he existing access fee cap is outdated and permits market forces to drive fees and rebates to excessive levels relative to the current magnitude of commissions and bid-ask spreads.’’); Letter from Tim Gately, Managing Director, Head of Americas Equities, Citigroup Global Markets Inc., to Brent J. Fields, Secretary, Commission, dated May 25, 2018, at 1–2 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ stating that ‘‘today’s 30- mil cap on access fees that the exchanges can charge to access liquidity on their venues represents a more significant percentage of the economics of each trade’’). 316 Goldman Letter, supra note 302, at 2 and 4 (stating there is ‘‘broad support in favor of lowering the Fee Cap’’ and noting that since the adoption of Rule 610(c), spreads have narrowed considerably and commission rates have contracted and therefore the access fee cap ‘‘creates an upper-range that is simply too high and far from representative of true prices in the marketplace.’’). See also Letter from Theodore R. Lazo, Managing Director & Associate General Counsel, SIFMA, to Brent J. Fields, Secretary, Commission, dated May 24, 2018, at 2 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ and recommending a reduction to the access fee cap because ‘‘the cap has not been adjusted to reflect market developments since Regulation NMS was adopted’’ and noting that over time, ‘‘competitive pressures, increased efficiencies from automation, and electronic trading have each operated to reduce transaction costs throughout the markets—but not access fees, which have remained at or near 30 cents per hundred shares.’’); Letter from Stacey Cunningham, President, NYSE, to Brent Fields, Secretary, Commission, dated Oct. 2, 2018 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ and acknowledging that ‘‘the primary concern raised by EMSAC and many commenters’’ is that ‘‘the existing access fee cap is anachronistic’’ and recommending the Commission study a reduction of the fee cap to $0.001 per share, which ‘‘would bring the fees exchanges charge for removing liquidity in line with those charged by ATSs’’). 317See, e.g., Letter from Susan M. Olson, General Counsel, Investment Company Institute, to Brent J. Fields, Secretary, Commission, dated May 23, 2018, at 2 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ stating ‘‘Transaction fees and rebates also undermine market transparency because the
prices displayed by exchanges—and provided on trade reports—do not include fee or rebate information and therefore do not fully reflect net trade prices.’’); Goldman Letter, supra note 302, at 3 (stating that ‘‘displayed prices do not reflect the actual economic costs because exchange fees and rebates are not reflected in those prices’’); Letter from Cynthia Lo Bessette, General Counsel & Executive Vice President, OFI Global Asset Management, Inc., et al., Oppenheimer Funds, Inc., to Brent J. Fields, Secretary, Commission, dated May 25, 2018, at 2 (commenting on File No. S7–05–18 ‘‘Transaction Fee Pilot for NMS Stocks’’ stating ‘‘[T]o the extent that transaction fees and rebates obfuscate the actual price bid or offered for a security, the ‘maker-taker’ pricing model has the potential to undermine price transparency . . . .’’); SIFMA 2017 Letter, supra note 288, at 8 (stating ‘‘in today’s trading environment, a significant portion of access fees are used to subsidize rebates’’). 318See Battalio Equity Market Study, supra note 271, at 2194. 319See id., at 2193–2238. 320See MEMX Report, supra note 105, at 20 n.14 (stating ‘‘[a]lthough the access fee cap pursuant to Rule 610(c) does not explicitly limit rebates provided by trading centers, it imposes a practical limitation on rebates as the amount that can be recouped by the trading center is limited by the access fee that it can charge’’). 321National securities exchanges establish and amend their fee schedules by filing proposed fee rule changes, pursuant to section 19(b) of the Exchange Act and rule 19b–4 thereunder, for Commission review. Some national securities exchanges currently use volume calculated on a monthly basis to determine the applicable threshold or tier rate. See, e.g., fee schedules of Nasdaq PSX reduce the access fee caps in conjunction with reducing the minimum pricing increment, but is not reducing them proportionally so as to not unduly impair current agency market business models within the national market system. Further, some market participants argue that the historic access fee cap reflects a non-competitive and artificially high rate.315 Specifically, according to one market participant, ‘‘there is well-developed, general consensus amongst market participants that a $0.0030 per share Fee Cap is an outdated benchmark for execution costs in today’s trading environment . . . and creates an upper range that is simply too high and far from representative of true prices in the marketplace.’’ 316 Others have stated that current pricing models have resulted in the kind of distortive pricing that rule 610(c) was designed to prevent.317 The rebates exchanges pay to attract liquidity have drawn much attention over the years. Typically, brokers do not directly pass along exchange fees and rebates to customers.318 One academic study concluded that this creates conflicts of interest that may harm customer order execution quality because brokers route customer orders to the trading
venues that offer the highest rebates and not the best execution quality.319 This may also lead to excessive intermediation, i.e., excessive quoting in sufficiently liquid securities in order to earn rebates, which crowds out individual investors from being able to supply liquidity, in tick-constrained stocks. The proposed reduction in the access fee caps to reflect the proposed changes in the minimum pricing increments might have the ancillary effect of addressing some of the concerns regarding the rebates exchanges pay to attract order flow because the reduction in the access fee caps might reduce the amount exchanges could offer as rebates and thus reduce the incentives available to divert order flow to a particular venue.320 Finally, the Commission is also proposing to delete the references to ‘‘The Nasdaq Stock Market, Inc.’’ in rule 610(c). Since the Nasdaq Stock Market is now a national securities exchange, the language is redundant.
2. Require That All Exchange Fees and
Rebates Be Determinable at the Time of an Execution Today, many of the fees and rebates of the exchanges are calculated at the end of the month, which impedes the ability of market participants to understand at the time of execution the full cost of their transaction. For example, the exchanges have developed complex fee and rebate schedules, some of which include tiers or other incentives based on a market participant’s relative monthly trading volume or relative volume compared to the consolidated trading volume in the current month, with higher volume tiers receiving a higher (lower) per unit rebate (fee). This means that the exact fee or rebate for an order cannot be determined until the end of the month, after an execution occurs, and is not known to the parties to the trade at the time of execution. This lack of transparency impedes the ability of market participants to understand at the time of execution the full cost of their transaction. Uncertainty regarding the fee amount at the time of execution has implications for market participants conducting best execution analyses and can affect order routing decisions. To provide further transparency regarding transaction pricing, the Commission proposes to amend rule 610 to add a new subsection (d) ‘‘Transparency of Fees,’’ which would prohibit a national securities exchange from imposing, or permitting to be imposed, any fee or fees, or providing, or permitting to be provided, any rebate or other remuneration (e.g., discounted fees, other credits, or forms of linked pricing) for the execution of an order in an NMS stock unless such fee, rebate or other remuneration can be determined at the time of execution. Under the proposal, any national securities exchange that imposes a fee or provides a rebate that is based on a certain volume threshold, or establishes tier requirements or tiered rates based on minimum volume thresholds, would be required to set such volume thresholds or tiers using volume achieved during a stated period prior to the assessment of the fee or rebate so that market participants are able to determine what fee or rebate level would be applicable to any submitted order at the time of execution.321 For example, if an

available at https://listingcenter.nasdaq.com/ rulebook/phlx/rules/Phlx%20Equity%207 (as of July 2022) (calculating fees based on ‘‘average daily volume during the month’’) and Cboe EDGA available at https://www.cboe.com/us/equities/ membership/fee_schedule/edga/ (as of Apr. 1, 2022) (calculating fees based on ‘‘average daily volume’’ and ‘‘daily volume’’ on a monthly basis). 322This proposal does not alter an exchange’s ability to determine the measurement period during which volume is calculated (e.g., a week prior, two weeks prior, prior monthly, two months prior, or quarterly with one month lead time), rather it would instead require the measurement period to be prior to the date of execution so that market participants can determine the amount of the fee at the time of execution. 323While tiers that are based on volume from a previous time period could still induce routing by a broker-dealer to try to secure a higher rebate/ lower fee tier in the following month, the proposal would allow broker-dealers to pass those fees and rebates through to their customers and enable investors to identify whether a broker-dealer is routing to secure a higher rebate/lower fee. exchange proposed a lower fee for members that reach a certain level of trading volume in a month, the required level of trading volume would have to be achieved based on a month prior to the imposition of the fee or payment of the rebate.322 The Commission believes that requiring all exchange fees, rebates and other forms of remuneration to be determinable at the time of execution would have several benefits. Certainty about the cost of a transaction at the time of the trade may help broker￾dealers make better order routing decisions. The proposal should reduce order routing incentives that are based on achieving a threshold in order to gain a specific fee or rebate. Today, lower fees or higher rebates based on volume achieved in a current trading month can lead to routing to exchanges solely for purposes of achieving a certain level of volume or attaining a possible tier level rather than routing to achieve best execution.323 In addition, the proposal would allow market participants to know with certainty the cost of their transactions at the time of the trade, which would facilitate a broker-dealer’s ability to pass through the fee/rebate associated with a transaction because it would know at the time of the transaction the amount of the fee/rebate that is applicable to each execution. Further, the proposal would provide more transparency into whether a broker-dealer may be routing to certain venues based on the fee/rebate that venue assesses. Investors could more readily request details about fees and rebates related to their orders. If market participants pass through exchange fees/ rebates, an ancillary benefit of the proposed amendment would be that the potential inducement to broker-dealers to route orders solely based on garnering the highest rebate/paying the lowest fee
would be reduced since broker-dealers would no longer directly benefit from such remuneration, but instead would pass along such fees/rebates to their customers. Although a broker-dealer could still choose not to pass along fee/ rebate, the proposal would facilitate a customer’s ability to ask more direct questions of its broker-dealer about how the broker-dealer handles fees and rebates, which could increase accountability of the broker-dealer, which in turn could lead to better order execution and more transparency regarding fees/rebates. The proposed rule would enhance transparency about the cost of executing a trade at the time of execution and would allow market participants to better assess the current state of the market when making trading and order routing decisions. D. Request for Comment The Commission requests comment on the proposed changes to rule 610 and on other potential reasonable alternatives, including:
30. Are the proposed levels of the
access fee caps appropriate? Why or why not? If not, what factors should be considered in determining the appropriate level of the access fee caps?
31. Are the current access fee caps too
high? What would be the appropriate level of an access fee cap(s)?
32. Should reduction of the access fee
caps be proportional to the reduction of the minimum pricing increment? Why or why not?
33. Should rule 610(c) include access
fee caps for each proposed minimum pricing increment? Why or why not?
34. If an access fee cap is proportional
to the minimum pricing increment, what should the proportion of the access fee cap to the minimum pricing increment be and why?
35. Would two access fee caps for
executions against protected quotations priced equal to, or greater than, $1.00 per share introduce additional complexity in the market? If so, please describe.
36. How would the proposed
reduction in the amount of the access fee caps affect rebates provided by exchanges?
37. Would the proposed access fee
caps preserve current agency market business models and allow for sufficient flexibility in structuring innovative business models? If not, why not?
38. Do current exchange fees and
rebates impact order routing decisions? Would a reduction of the current access fee caps impact order routing decisions? If so, how?
39. Would proposed rule 610(d) affect
the provision of volume-based discounts or other tiered fee structures by exchanges? If so, how?
40. Proposed rule 610(d) is designed
to increase transparency regarding the amount of volume-based discounts and other tiered fee structures available at the time of execution. Do volume-based discounts and other tiered fee structures affect order routing decisions? If so, please explain. Do volume-based discounts and other tiered fee structures increase market complexity, present conflicts of interest, or burden competition? Why or why not? Is proposed rule 610(d) sufficient to address these concerns? If not, why not? What would be an appropriate means to address these concerns, for example, should volume based discounts or other tiers be limited or otherwise restricted?
41. Should exchange fees based on
volume be determinable at the time of execution? Why or why not?
42. Would proposed rule 610(d) cause
market participants to pass through fees and rebates to their customers? Why or why not?
43. In section V.F.3, the Commission
discusses different reasonable alternatives to the proposed amendment to rule 610(c) access fee caps, including, for example, implementing higher or lower access fee caps than the levels proposed; implementing access fee caps that maintain the current 30% proportional relationship to the minimum pricing increment; adopting a uniform $0.001 access fee cap regardless of the minimum pricing increment; implementing a uniform $0.0003 or $0.0004 access fee cap regardless of minimum pricing increment; banning rebates and retaining the current access fee caps; or banning rebates and reducing the current access fee caps. Would any of these reasonable alternatives address the concerns identified regarding the current access fee caps in a more appropriate manner? If so, which alternative and why?
IV. Transparency of Better Priced
Orders
A. Background
On December 9, 2020, the
Commission adopted the MDI Rules, which expanded the data that will be made available for dissemination within the national market system (‘‘NMS data’’) and adopted a decentralized consolidation model—pursuant to which ‘‘competing consolidators’’ will eventually replace the exclusive SIPs— for the collection, consolidation, and

324See MDI Adopting Release, supra note 5. For purposes of this release, ‘‘NMS data’’ refers to the ‘‘information with respect to quotations for and transactions in securities’’ that is collected, consolidated and disseminated within the national market system pursuant to section 11A of the Exchange Act. See 15 U.S.C. 78k–1(a)(1)(C). Under the existing exclusive SIP model, this consists of SIP data. See infra note 327 and accompanying text. Under the decentralized consolidation model, this will consist of ‘‘consolidated market data,’’ including ‘‘core data,’’ as defined in the MDI Rules. See 17 CFR 242.600(b)(19), (21). 325See infra notes 344–358 and accompanying text. 326Currently, the Securities Industry Automation Corporation (‘‘SIAC,’’ an affiliate of the New York Stock Exchange) is the exclusive SIP for the CTA and CQ Plans, and Nasdaq is the exclusive SIP for the UTP Plan. See MDI Adopting Release, supra note 5, at 18728. 327See MDI Proposing Release, supra note 39, at 16730. 328See id. at 16738. A ‘‘round lot’’ is not defined in the Exchange Act and, prior to the MDI Rules, it was not defined in Regulation NMS. Exchange rules typically define a round lot as 100 shares, but they also allow the exchange, or the primary listing exchange for the stock, discretion to define it otherwise. See, e.g., NYSE rule 7.5 (‘‘A ‘round lot’ is 100 shares, unless specified by the primary listing market to be fewer than 100 shares.’’); Nasdaq rule 5005(a)(40) (‘‘‘Round Lot’ or ‘Normal Unit of Trading’ means 100 shares of a security unless, with respect to a particular security, Nasdaq determines that a normal unit of trading shall constitute other than 100 shares.’’). 329According to NYSE Trade and Quote (‘‘TAQ’’) Data, as of Apr. 2022, eleven stocks had a round lot size other than 100. Nine stocks had a round lot of ten and two stocks had a round lot of one. 330See MDI Proposing Release, supra note 39, at 16738; MDI Adopting Release, supra note 5, at 18599. 331 17 CFR 242.600(b)(82); MDI Adopting Release, supra note 5, at 18617. 332 17 CFR 242.600(b)(82). The MDI Rules also required that a round lot indicator be included in NMS data so that market participants would know the size of a round lot for each NMS stock. Specifically, the definition of regulatory data requires the primary listing exchange to provide, among other things, an ‘‘indicator of the applicable round lot size’’ to competing consolidators and self￾aggregators. 17 CFR 242.600(b)(78); MDI Adopting Release, supra note 5, at 18634. In addition, the MDI Rules require competing consolidators to represent quotation sizes for certain core data elements in terms of the number of shares, rounded down to the nearest multiple of a round lot. 17 CFR 242.600(b)(21)(iii); MDI Adopting Release, supra note 5, at 18615. 333As shown in the MDI Proposing and Adopting Releases, orders currently defined as odd-lots often reflect superior pricing. See MDI Proposing Release, supra note 39, at 16740 (describing
analysis that found, among other things, that ‘‘43% of [ ] odd-lot transactions [in Sept. of 2019] (representing approximately 39% of all odd-lot volume) occurred at a price better than the NBBO’’); MDI Adopting Release, supra note 5, at 18616 (describing analysis that made similar findings using data from May of 2020). More recent data and updated analyses confirm that these pricing patterns in odd-lot trading have continued. See infra notes 364–369 and accompanying text. 334MDI Adopting Release, supra note 5, at 18613, 18742. 335 17 CFR 242.600(b)(59); MDI Adopting Release, supra note 5, at 18613. 336Odd-lot transaction information is currently collected, consolidated, and disseminated by the exclusive SIPs. See Securities Exchange Act Release Nos. 70793 (Oct. 31, 2013), 78 FR 66788 (Nov. 6,
2013) (order approving Amendment No. 30 to the
UTP Plan to require odd-lot transactions to be reported to consolidated tape); 70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 2013) (order approving Eighteenth Substantive Amendment to the Second Restatement of the CTA Plan to require odd-lot transactions to be reported to consolidated tape). 337 17 CFR 242.600(b)(59); MDI Adopting Release, supra note 5, at 18613. 338Unlike orders in the round lot sizes adopted pursuant to the MDI Rules, odd-lots are not ‘‘protected quotations.’’ See 17 CFR 242.600(b)(70), (71), (11). 339Under the MDI Rules, competing consolidators are permitted to offer consolidated market data products that contain a subset of the information included in the definition of consolidated market data. See MDI Adopting Release, supra note 5, at
18659. The Commission, however, stated that it
believed that there will be widespread demand for a product that contains all elements of consolidated market data, and particularly for the additional information included in core data. See id. at 18659– 60. 340See infra section IV.A.1; notes 381–384 and accompanying text. 341See infra notes 356–360 and accompanying text. 342See infra notes 360–363 and accompanying text. 343See infra notes 421–425 and accompanying text. dissemination of this data.324 The MDI Rules have been adopted but have not yet been implemented.325 Therefore, the data currently disseminated within the national market system by the exclusive SIPs 326 includes, for each NMS stock, the price, size, and exchange of each last sale, each exchange’s current highest bid and lowest offer and the shares available at those prices (the ‘‘best bid and best offer’’ or ‘‘BBO’’), the NBBO, odd-lot transaction information, and certain regulatory and administrative data (‘‘SIP data’’).327 Information on NMS stock quotations is provided in round lots, which, until the round lot definition adopted pursuant to the MDI Rules is implemented, continue to be defined in exchange rules.328 For most NMS stocks, a round lot is defined as 100 shares.329 Information about orders that have a size less than a round lot, i.e., odd-lot orders, is available on individual exchange proprietary data feeds, and market participants interested in quotation data for individual odd-lot orders must purchase these proprietary feeds.330 One goal of the expansion of NMS data in the MDI Rules is to increase transparency about the best priced quotations available in the market. To accomplish this goal, the Commission amended Regulation NMS to include a definition of round lot that assigns each NMS stock to a round lot size based on the stock’s share price.331 Specifically, for NMS stocks priced $250.00 or less per share, a round lot will be 100 shares; for NMS stocks priced $250.01 to $1,000.00 per share, a round lot will be 40 shares; for NMS stocks priced $1,000.01 to $10,000.00 per share, a round lot will be 10 shares; and for NMS stocks priced $10,000.01 or more per share, a round lot will be 1 share.332 As a result of the round lot definition, each exchange’s BBO and the NBBO for an NMS stock can be based upon smaller, potentially better-priced orders,333 which will improve transparency regarding the better priced quotations available in the market and the ability of market participants to access these quotations.334 In addition, to further increase the transparency and availability of better priced orders in the market, the Commission adopted a definition of odd-lot information as part of the MDI Rules.335 Odd-lot information is defined as (1) odd-lot transactions,336 and (2) odd-lots at a price greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association.337 Therefore, once
implemented, information on odd-lot orders priced better than the NBBO 338 will be included in NMS data that is made available to market participants within the national market system.339 The Commission believes that this information about the best priced orders available in the market should be readily and widely available. For the reasons discussed below, as part of a broader transition period for the implementation of the MDI Rules, the Commission decided to phase in the implementation of the definitions of round lot and odd-lot information.340 However, in light of delays in the implementation of the MDI Rules,341 the Commission now believes that a timelier implementation of these new data elements would allow investors to benefit from greater transparency and accessibility of better priced orders and improved execution quality 342 sooner. In addition, the Commission now believes that the best priced interest available in the market, including the best odd-lot order, should be identified and made widely and readily available. Identifying the best odd-lot order would enhance the utility of NMS data for trading and order routing and facilitate the ability of investors to assess execution quality.343 Therefore, the Commission proposes to: (1) accelerate the implementation of the previously￾adopted round lot and the odd-lot information definitions; and (2) amend the definition of odd-lot information to

344MDI Adopting Release, supra note 5, at 18698–18701. 345 Id. at 18700–01. See also infra note 351 and accompanying text (describing the parallel operation period). 346 17 CFR 242.614(e). The Operating Committees of CTA Plan and UTP Plan filed proposed amendments on Nov. 5, 2021, which were published for comment in the Federal Register. See 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’’). 347See 17 CFR 242.608(b)(2) (‘‘The Commission shall approve a national market system plan or proposed amendment to an effective national market system plan . . . if it finds that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.’’). 348See 17 CFR 242.608(b)(2). The Commission instituted proceedings to determine whether to approve or disapprove the MDI Plan Amendments. See 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). 349See supra note 347. 350See MDI Adopting Release, supra note 5, at 18699–700. 351 During the parallel operation period, the exclusive 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, the exclusive SIPs and competing consolidators will collect, consolidate and disseminate NMS data that will be based on the current exchange definitions of round lot. Id. at 18699–18701. See also supra note 328. 352MDI Adopting Release, supra note 5, at 18701. 353 Id. 354Odd-lots priced better than the current round lot NBBO (typically based on orders of 100 shares or more) will be made more widely available in the national market system and could be included in the consolidated market data products offered by competing consolidators during the parallel operation period, which is scheduled to begin nine months after the Commission’s approval of the plan amendment(s) required by rule 614(e). See also supra note 351 and accompanying text. 355See supra note 346. 356See supra note 348. 357See Securities 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). 358The amendments to the effective national market system
plan(s) required under rule 614(e) were published in the Federal Register in Nov. 2021 and, if consistent with the standard set forth in rule 608(b), could have been approved by the Commission by Feb. 2022. See supra notes 346–347 and accompanying text. Thereafter, the 180-day development period, 90-day testing period, and 180-day parallel operation period would have concluded by May 2023. See supra notes 350–351 and accompanying text. Plan amendment(s) to effectuate the cessation of the operations of the exclusive SIPs could then have been proposed and approved, and round lot testing and implementation completed, in 2024. See supra notes 352–353 and accompanying text. include a new data element for the best odd-lot orders available in the market.

1. Infrastructure Implementation:
   Phased Transition Plan and Current Status The Commission outlined a phased transition plan for the implementation of the MDI Rules.344 Pursuant to the transition plan, the round lot definition is currently set to be implemented as
   part of the last phase and odd-lot
   quotation information is currently set to be implemented during a ‘‘parallel operation period.’’ 345 The first step in the implementation of the MDI Rules was the filing of amendments to the effective national market system plan(s) as required under rule 614(e).346 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,347 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.348 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,349 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.350 Once the testing period concludes, a 180-day parallel operation period will begin during which the exclusive SIPs and the decentralized consolidation model will operate in parallel.351 Within 90 days of the end of the parallel operation period, the Operating Committee of the effective national market system plan(s), in consultation with relevant market participants, will make a recommendation to the Commission as to whether the exclusive SIPs should be decommissioned. The exclusive SIPs will only cease operations if the Commission approves an amendment pursuant to rule 608 to the effective national market system plan(s) to effectuate such a cessation.352 Following the cessation of the operations of the exclusive SIPs, the changes necessary to implement the new round lot sizes will be tested for 90 days and then implemented.353 Therefore, based on the times provided in the transition plan for implementation of the MDI Rules, the full implementation of the MDI Rules, including the implementation of the round lot definition and the inclusion of odd-lots priced better than the NBBO based on the new round lot definition,354 will be at least two years after the Commission’s approval of the plan amendment(s) required by rule 614(e). The Operating Committees of the CTA/CQ Plan and UTP Plan filed the MDI Plan Amendments on November 5,
   2021.355 On February 24, 2022, pursuant
   to rule 608(b)(2)(i), the Commission instituted proceedings to determine whether to approve or disapprove the proposed MDI Plan Amendments.356 On September 21, 2022, the Commission disapproved the proposed amendments.357 As a result, the participants to the effective national market system plan(s) will need to develop and file new proposed amendments pursuant to rule 608. Accordingly, the implementation of the MDI Rules will take significantly longer than the Commission estimated when it adopted the transition plan.358 At this time, because amendments to the effective national market system plan(s) required under rule 614(e) are not yet in place, full implementation pursuant to the phased implementation schedule likely will not occur until at least two years after new proposals are developed, filed, and approved by the Commission. B. Accelerate Implementation of Round Lots and Odd-Lot Information In light of the delay in the implementation of the MDI Rules, the Commission proposes to accelerate the implementation of the round lot and odd-lot information definitions. The Commission believes that the transition plan for implementing the MDI Rules should be modified so that the benefits of the round lot and the odd-lot information definitions would be made available to investors and other market participants sooner. Earlier implementation would accelerate the transparency benefits of these definitions by making information about better priced interest available in the

359 In addition to the round lot and odd-lot information definitions, the MDI Rules expanded the content of NMS data by, among other things, adopting definitions of ‘‘depth of book data’’ and ‘‘auction information.’’ See 17 CFR 242.600(b)(26), (5); see also MDI Adopting Release, supra note 5, at 18602. The Commission is proposing to accelerate the implementation of the round lot and odd-lot information definitions in particular because their inclusion in NMS data would offer investors direct opportunities to obtain price improvement by transacting against the best priced orders available in the market. Moreover, these definitions could be efficiently implemented under the current exclusive SIP model. See infra sections IV.B.4, V.D.5, V.D.6.c, and VI.D. 360See supra note 333. 361MDI Adopting Release, supra note 5, at 18615–16. 362 Id. at 18742. 363 Id. at 18612. The additional transparency resulting from the inclusion of better priced odd￾lots in core data extends to lower priced stocks as well. See id. at 18618 (‘‘The Commission acknowledges that increasing the minimum stock price for the first sub-100 share round lot tier from $50 to $250 will not improve odd-lot transparency for stocks priced between $50 and $250. However, as discussed above, the Commission is including information about all odd-lots priced at or better than the NBBO in core data, which will counterbalance this loss of odd-lot transparency.’’) (citations omitted). 364See MDI Proposing Release, supra note 39, at 16739 (stating that ‘‘between 2004 and 2019, the average price of a stock in the Dow Jones Industrial Average nearly quadrupled.’’). Between Jan. of 2020 and Aug. of 2022, the average price of a stock in the Dow Jones Industrial Average increased by 18%. Sources: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ; Indices, Dow Jones Industrial Average, FINANCIAL TIMES (last visited Nov. 29, 2022), available at https://markets.ft.com/data/indices/ tearsheet/constituents?s=DJI:DJI (describing the current constituent stocks of the Dow Jones Industrial Average); S&P Dow Jones Indices, Salesforce.com, Amgen and Honeywell International Set to Join Dow Jones Industrial Average (Aug. 24, 2020), available at https:// www.spglobal.com/spdji/en/documents/indexnews/ announcements/20200824-1208960/1208960_ aug20aaplsplitcrmxomamgnpfehonrtxdjia.pdf (describing changes to the constituents of the Dow Jones Industrial Average in Aug. of 2020); Aparna Narayanan, Raytheon Technologies Debuts On The Dow As Rival GE Deepens Cuts (Apr. 3, 2020), available at https://www.investors.com/news/ raytheon-technologies-stock-debuts-dow-jones￾industiral-average-ge-aviation-cuts/(describing changes to the constituents of the Dow Jones Industrial Average in Apr. of 2020). 365Based on data from the SEC’s MIDAS analytics tool, the daily exchange odd-lot rate (i.e., the number of exchange odd-lot trades as a proportion of the number of all exchange trades) for all
corporate stocks ranged from approximately 52% to 64% of trades and the daily exchange odd-lot rate for all ETPs ranged from 33% to 46% of trades in
2021. More recently, in June 2022, the daily
exchange odd-lot rate for all corporate stocks averaged 65% and reached almost 41% for all ETPs in the same period. Exchange odd-lot volume as a proportion of total exchange-traded volume also rose in June 2022, reaching approximately 19% for all corporate stocks (and over 39% for the top decile by price) and approximately 7% for all ETPs. These levels are higher than the levels observed in the data from 2018 and 2019. See MDI Proposing Release, supra note 39, at 16739; MIDAS, available at https://www.sec.gov/marketstructure/ midas.html. See also Cboe, An In-Depth View Into Odd Lots (Oct. 27, 2021), available at https:// www.cboe.com/insights/posts/an-in-depth-view￾into-odd-lots/#:∼:text=Odd%20lots%20 currently%20make%20up,the%20 beginning%20of%20the%20year (‘‘Odd lots currently represent 54.8% of all trades in the U.S. financial markets, up from 43% at the beginning of 2020 . . . While odd lot average daily executed share volume has decreased about 22% from the highs reached in Feb. and Mar. [of 2021], their percentage of trades continues to increase, and overall share volume remains higher than the prior year . . . As stock price increases, odd lot share volume percentage also increases. Since first￾quarter 2020, the percentage of odd lots has increased across all price groups. The largest increase was in stocks priced between $100 and $499.99, where odd lots increased 3.3% to comprise 15.2% of share volume.’’); Robert P. Bartlett, Justin McCrary, and Maureen O’Hara, The Market Inside the Market: Odd-lot Quotes (2022), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_ id=4027099 (retrieved from SSRN Elsevier database) (finding that the proportion of trades in S&P 500 stocks occurring in odd-lots increased from around 30% in 2016 to 65% in 2021 and that, based upon data from Jan. through Mar. of 2021, ‘‘the rate of odd lot orders ranges from 5.6% of all submitted orders for less than 500 shares [for stocks priced $20 or lower] to 46.9% of all such orders [for stocks priced over $250].’’). 366See Elliot Banks, BMLL Technologies, Inside the SIP and the Microstructure of Odd-Lot Quotes (observing an upward trend in odd-lot trading inside the NBBO from Jan. 2019 to Jan. 2022); Bartlett et al., supra note 365, at 2 (stating, based upon data from Jan. through Mar. of 2021, that ‘‘[p]erhaps most intriguing are our results on the incidence of superior odd lot quotes relative to the NBBO. While for the lower price stocks this is only the case an average 5.1% of the time, this incidence reaches almost 30% for [stocks priced between $100 and $250] and it averages 42% for [stocks priced over $250]’’). 367MDI Adopting Release, supra note 5, at 18616 (describing analysis that examined quotation data for the week of May 22–29, 2020 for stocks priced from $250.01 to $1000.00 and found that there is odd-lot interest priced better than the new round lot NBBO 28.49% of the time, and, in 48.49% of those cases, there are better priced odd-lots at
multiple price levels). A similar analysis using data from all trading days in Mar. 2022 confirms that better-priced odd-lots continue to be distributed across multiple price levels. 368For example, odd-lot rates for corporate stock price deciles 1–3 (the lowest priced corporate stocks comprising 30% of all corporate stocks) have been higher on average in 2021 and June 2022 (34%, 39%) as compared to 2019 and 2020 (26%, 29%). Similarly, ETPs also exhibit higher average odd-lot rates in price quartiles 1 and 2 (the lowest priced ETPs comprising 50% of all ETPs) on average in 2021 and June 2022 (26%, 29%) compared to 2019 and 2020 (20%, 23%). See MIDAS, available at https://www.sec.gov/ marketstructure/midas.html. market more widely available on a faster timetable.359 With respect to round lots, the Commission described in the MDI Rules that smaller sized orders in higher priced stocks are often priced better than the orders that are currently in round lots.360 The Commission reduced the round lot size for high-priced NMS stocks to ‘‘better ensure the display and accessibility of significant liquidity for higher-priced stocks’’ and ‘‘improve the comprehensiveness and usability of core data, facilitate the best execution of customer orders, and reduce information asymmetries.’’ 361 The round lot definition will ‘‘make these quotes [in sizes less than 100 shares for stocks priced over $250] visible . . . thereby improving transparency’’ and ‘‘narrow NBBO spreads for most stocks with prices greater than $250.’’ 362 With respect to odd-lot information, the Commission stated that including better priced odd-lot orders in odd-lot information will ‘‘help investors and other market participants to trade in a more informed and effective manner and to achieve better executions and reduce the information asymmetries that currently exist between subscribers to SIP data and subscribers to proprietary data.’’ 363 Since the adoption of the MDI Rules, the market dynamics that supported the Commission’s adoption of the round lot and odd-lot information definitions have persisted. Average stock prices have continued to increase over time,364 and odd-lot quoting and trading rates remain high, particularly for higher priced stocks.365 Odd-lot quotes in higher priced stocks continue to offer prices that are frequently better than the round lot NBBO for these stocks,366 and this better priced odd-lot liquidity is distributed across multiple price levels.367 In addition, odd-lot rates have increased among lower priced stocks.368 Furthermore, as shown in Tables 1 and 2—which examine the portion of all corporate stock and ETP volume and trades executed on an exchange, transacted in a quantity less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the MDI Rules—the tier structure reflected in the round lot definition the Commission adopted in the MDI Rules continues to capture significant
percentages of better priced odd-lot trades and volume.

369Only one stock, which is already quoted in one share round lots on the exclusive SIP feed, was priced over $10,000 per share, so the simulated feed and exclusive SIP feed showed the same prices for this stock. 370See MEMX, Why We Should Change Round Lots Now (June 2021), available at https:// memx.com/wp-content/uploads/MEMX_Round￾Lots_white-paper.pdf (‘‘MEMX White Paper’’) (‘‘There is significant consensus among market participants on round lot reform and implementing these changes now will result in fairer and more efficient markets. Based on our analysis, it should also save investors billions in transaction costs over the next three years. As the saying goes, ‘time is money’ and investors will be left footing the bill if we don’t act soon to expedite these changes. That’s why we’re asking the listing exchanges to work together with us and the industry to get round lot reform implemented ahead of schedule by voluntarily changing round lot sizes in their listed securities to match the infrastructure rule’s requirements.’’); letter from Citadel to CTA and UTP Plan Operating Committees (Apr. 27, 2022) available at https://www.ctaplan.com/publicdocs/ ctaplan/Citadel_Securities_Comment_Letter_on_ the_Odd_Lot_Proposal.pdf at 2 (‘‘Citadel Odd-Lot Letter’’) (stating, in response to a request for comment on a proposal from the Operating Committees of CTA and UTP Plans to add certain odd-lot quotes to SIP data, that ‘‘[a] better solution to address the growth in odd lot trading is to recalibrate the definition of a round lot as directed by the SEC in its final Market Data Infrastructure Rule . . . we recommend that the SIP Operating Committees . . . pursue a market-led approach that is consistent with the Market Data Infrastructure Rule (including revising the round lot definition)’’); Citadel Report, supra note 100, at 7 (‘‘It is also important to note that the Commission recently finalized, but has yet to implement, a revised round lot definition that is tiered based on the price of a stock . . . We supported this revised round lot definition and look forward to it being implemented.’’). 371See Proposal of the CTA and UTP Operating Committees Regarding Odd Lots on the SIPs (‘‘2022 SIP Odd-Lot Request for Comment’’), available at https://www.ctaplan.com/publicdocs/ctaplan/CTA_ Odd_Lots_Proposal_2022.pdf. The 2022 SIP Odd￾Lot Request for Comment would not include all odd-lot information as defined in rule 600(b)(59). Specifically, the 2022 SIP Odd-lot Request for Comment would include only the best odd-lot quote of each exchange, if at or better than that exchange’s round lot BBO, and an ‘‘Odd Lot NBBO,’’ if at or better than the round lot NBBO, in SIP data. Id. at 2. By contrast, the Commission’s definition of odd-lot information includes all odd￾lot quotes priced at better than the NBBO at every price level (aggregated at each such price level by exchange). 17 CFR 242.600(b)(59).
TABLE 1
Round lot tier Round lot size Portion of all corporate stock and ETP share volume executed on an exchange, transacted in a quantity less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the MDI Rules May 2020 (%) Mar. 25–31, 2022 (%) $0–$250.00 ....................................................... 100 Shares ....................................................... 0 0 $250.01–$1,000 ................................................ 40 Shares ......................................................... 65.35 54.77 $1,000.01–$10,000.00 ...................................... 10 Shares ......................................................... 88.28 79.36 $10,000.01 or more .......................................... 1 share ............................................................. 100.00 100.00 Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ.
TABLE 2
Round lot tier Round lot size Portion of all corporate stock and ETP trades executed on an exchange, transacted in a quantity less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the MDI Rules May 2020 (%) Mar. 25–31, 2022 (%) $0–$250.00 ....................................................... 100 Shares ....................................................... 0 0 $250.01–$1,000 ................................................ 40 Shares ......................................................... 20.19 14.71 $1,000.01–$10,000.00 ...................................... 10 Shares ......................................................... 39.81 26.48 $10,000.01 or more .......................................... 1 share ............................................................. 100.00 100.00 Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS; NYSE Daily TAQ. Moreover, using exchange direct feed data from MIDAS for every trading day in March 2022, a simulation was conducted of a competing consolidator feed that provides quotation information for a sample of NMS stocks priced at or over $250.01 using the priced-based round lot sizes adopted in the MDI Rules as opposed to the round lot size that is applicable today (which is usually 100). Snapshots of this simulated feed were compared against snapshots of the exclusive SIP feed for that NMS stock at the same point in time. For each of the three price tiers and corresponding round lot sizes, the simulated feed showed better prices, on average, than the exclusive SIP feed. For stocks priced between $250.01 and $1,000.00 per share, which will have a round lot size of 40 under the round lot definition, the price reflected in the simulated competing consolidator feed was better than the exclusive SIP feed 21.47% of the time and worse less than .1% of the time. For stocks priced between $1,000.01 and $10,000.00 per share, which will have a round lot size of 10 under the round lot definition, the price reflected in the simulated competing consolidator feed was better than the exclusive SIP feed 64.67% of the time and worse less than .1% of the time.369 Since the adoption of the MDI Rules, some market participants have called for earlier implementation of the new round lot definition or otherwise welcomed its implementation.370 In addition, the Operating Committees of the CTA and UTP Plans published a request for comment on a potential proposal to include the best priced odd￾lots from each exchange, if at or better than that exchange’s round lot BBO, as well as an ‘‘Odd-Lot NBBO,’’ if at or better than the round lot NBBO, on the exclusive SIP feeds.371 While the implementation of the MDI Rules proceeds, investors are not yet

372See supra notes 361–363 and accompanying text. 373See MEMX White Paper, supra note 370, at 6 (estimating that investors could lose up to $7.5 billion if round lot implementation is delayed by three years). Cf. Letter from Cboe to CTA and UTP Plan Operating Committees re 2022 SIP Odd-Lot Request for Comment (Apr. 13, 2022) available at https://www.ctaplan.com/publicdocs/ctaplan/ Cboe_Comment_Letter_2022_Odd_Lot_Proposal.pdf at 4 (‘‘Cboe Odd-Lot Letter’’) (‘‘[C]ontinuing to withhold Odd Lot Quotations from the SIP would needlessly deprive investors of having access to the best prices available in the market.’’). See also infra
section IV.B.1.
374Letter from MEMX to CTA and UTP Plan Operating Committees re 2022 SIP Odd-Lot Request for Comment (Apr. 26, 2022) available at https:// www.ctaplan.com/publicdocs/ctaplan/Odd_Lot_ 20220426_MEMX_Comments_SIP_Proposal.pdf at 3 (‘‘MEMX Odd-Lot Letter’’) (‘‘Investors would . . . benefit from this information being made available sooner than may be the case if the industry were compelled to wait for competing consolidators to begin disseminating such data.’’). 375See supra notes 361–363 and accompanying text. 376See supra note 336. Odd-lot information as defined in rule 600(b)(59)(i) includes ‘‘[o]dd-lot transaction data disseminated pursuant to the effective national market system plan or plans required under § 242.603(b) as of April 9, 2021.’’ 377See MDI Proposing Release, supra note 39, at 16738; MDI Adopting Release, supra note 5, at
18599. Odd-lot information as defined in rule
600(b)(59)(ii) includes ‘‘[o]dd-lots at a price greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association.’’ 378See supra notes 351–354 and accompanying text. 379While the MDI Rules do not require competing consolidators to disseminate all consolidated market data elements, such as odd-lot information, in consolidated market data products, the Commission proposes to require the exclusive SIPs to collect, consolidate, and disseminate odd-lot information. Under the decentralized consolidation model, competing consolidators will be permitted to design consolidated market data products with different elements of consolidated market data for their subscribers and subscribers will be able to choose competing consolidators and consolidated market data products that meet their needs. See MDI Adopting Release, supra note 5, at 18659; supra note 339 and accompanying text. Under the existing exclusive SIP model, the exclusive SIPs are the only source of consolidated NMS data and— while proprietary data products offer some of the same data content, including odd-lot quotations— subscribers would have no alternative providers of consolidated NMS data if such data were not required to be collected, consolidated, and disseminated by the exclusive SIPs. Therefore, the Commission proposes that the exclusive SIPs be required to disseminate odd-lot information. 380See MDI Adopting Release, supra note 5, at 18700, n.1355. receiving the benefits 372 of increased transparency of better priced orders available in the market through the distribution of NMS data. If the implementation of the definitions of odd-lot information and round lot is not accelerated, market participants— particularly those that do not subscribe to proprietary data products containing odd-lot quotation data—would not receive information about opportunities to trade against liquidity that has superior pricing, which could result in inferior executions and significant costs for investors.373 By accelerating implementation of the round lot and odd-lot information definitions, investors and market participants would be able to receive these benefits and avoid these costs sooner and for a more extended period of time.374 This period of time would vary depending upon the timing of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions and Commission approval of the plan amendments required under rule 614(e), but it is likely to be significant. For example, assuming 90 days after Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions and the Commission’s approval of the plan amendment(s) required by rule 614(e) occur at roughly the same time, the benefits of the round lot and odd-lot information definitions would accrue to
investors and other market participants approximately two years sooner. Therefore, the Commission proposes to accelerate the implementation of the round lot and odd-lot information definitions so that market participants can reap the benefits of increased transparency and enhanced execution quality sooner than originally planned.375 Specifically, the Commission proposes to require compliance with the round lot and odd￾lot information definitions 90 days from the publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions in the Federal Register.

1. Odd-Lot Information
   Today, information about odd-lot quotations and transactions that is defined as odd-lot information in rule 600(b)(59) is provided in several ways. Odd-lot transaction information is collected, consolidated, and disseminated by the exclusive SIPs.376 Odd-lot quotation and transaction information is also disseminated via the individual exchange proprietary feeds.377 Pursuant to the MDI Rules, odd-lot quotation information as defined in rule 600(b)(59)(ii) will not be required to be collected, consolidated, or disseminated by the exclusive SIPs. Rather, this information will be collected, consolidated, and disseminated by competing consolidators, beginning during the parallel operation period.378 To accelerate the compliance date for odd-lot information as defined in rule 600(b)(59), the Commission proposes to require self-regulatory organizations (‘‘SROs’’) to provide the data necessary to generate odd-lot information to the exclusive SIPs and to require the exclusive SIPs to collect, consolidate, and disseminate odd-lot information. Specifically, the Commission proposes to amend rule 603(b) to require the national securities exchanges and national securities associations to make all data necessary to generate odd-lot information available to the exclusive SIPs and to require the exclusive SIPs to collect, consolidate, and disseminate odd-lot information.379 The Commission proposes to divide rule 603(b) into three new subsections to reflect the requirements under rule 603(b) that remain in effect until the changes to rule 603(b) that were adopted under the MDI Rules are implemented. Proposed rule 603(b)(1) would govern the applicability of proposed rules 603(b)(2) and (b)(3) by describing the compliance dates set forth in the MDI Rules for each of these proposed subsections. Specifically, proposed rule 603(b)(1) would state that compliance with proposed rule 603(b)(2) is required 180 calendar days from the date of the Commission’s approval of the amendments to the effective national market system plan(s) required under rule 242.614(e).380 It would also state that compliance with proposed rule 603(b)(3) is required until the date indicated by the Commission in any order approving amendments to the effective national market system plan(s) to effectuate a cessation of the operations of the plan processors that disseminate consolidated information regarding NMS stocks. Proposed rule 603(b)(2) would govern the provision of consolidated market data by competing consolidators and self-aggregators pursuant to the decentralized consolidation model set forth in the MDI Rules, which includes the collection, consolidation, and dissemination of odd-lot information. Proposed rule 603(b)(3) would govern the provision of NMS data by the exclusive SIPs, including the new requirements regarding the collection, consolidation, and dissemination of odd-lot information. In the MDI Adopting Release, the Commission did not require the exclusive SIPs to collect,
   consolidate, or disseminate odd-lot information, stating that ‘‘requiring the existing exclusive SIPs to continue disseminating the same data that they currently do will prevent the imposition of unnecessary costs— namely, any change to the data content

381 Id. at 18700.
382See supra notes 360–363 and accompanying text. 383MDI Adopting Release, supra note 5, at 18700. See also infra sections V.D.6.c and VI.D (describing the estimated costs of the proposed requirement that the exclusive SIPs collect, consolidate, and disseminate odd-lot information). Although the scope of the odd-lot quotation data that would be included in SIP data pursuant to the 2022 SIP Odd￾Lot Request for Comment is more limited than odd￾lot information as defined in the MDI Rules, see supra note 371, the 2022 SIP Odd-Lot Request for Comment nonetheless demonstrates that the Operating Committees of the CTA and UTP Plans may be willing to enhance SIP data content for a period of time before the exclusive SIPs are ultimately retired and to incur the costs of such enhancements. Similarly, many comments submitted in response to the 2022 SIP Odd-Lot Request for Comment reflect support for earlier availability of some odd-lot quotation data via the exclusive SIPs, as opposed to waiting for odd-lot information to become available pursuant to the original implementation schedule set forth in the MDI Rules. See generally comment file for 2022 SIP Odd-Lot Request for Comment, available at https:// www.ctaplan.com/oddlots. 384MDI Adopting Release, supra note 5, at 18701. The Commission stated that ‘‘the consolidated market data products offered by competing consolidators during the initial parallel operation period would be based on the current definition of round lot.’’ Id. at 18700. However, because the Commission now proposes to accelerate implementation of the round lot definition, the exclusive SIPs would be providing SIP data that reflects the new round lot sizes during the initial parallel operation period. Further, the acceleration of the implementation of the round lot definition would result in its use during the parallel operation period by both the exclusive SIPs and competing consolidators. 385See infra sections V.D.5.a and V.D.6.c. 386The Commission proposes that the compliance date for this requirement would coincide with the proposed compliance date for the round lot definition (i.e., 90 days from the publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions in the Federal Register). 387See supra note 332. 388MDI Proposing Release, supra note 39, at 16762. 389MDI Adopting Release, supra note 5, at 18619. 390As discussed below, since the MDI Rules already require the primary listing exchanges to provide an indicator of the applicable round lot size to competing consolidators and self-aggregators, the Commission believes that the incremental cost of providing this indicator to the two exclusive SIPs would be low. See infra section VI.G. 391See supra section IV.B.2; infra section IV.B.4. 392Under the MDI Rules, the definition of ‘‘core data’’ requires competing consolidators to represent certain core data elements, including the best bid and best offer, the NBBO, and protected
quotations—but not including odd-lot information—in terms of the number of shares, rounded down to the nearest multiple of a round lot. MDI Adopting Release, supra note 5, at 18615; 17 CFR 242.600(b)(21)(iii). 393This amendment would be reflected in proposed rule 603(b)(3), which would govern the provision of NMS data by the exclusive SIPs. See supra section IV.B.1. See also MDI Adopting Release, supra note 5, at 18615 (providing the following example of the required quotation size representation and rounding convention: ‘‘a 275 share buy order at $25.00 for a stock with a 100 share round lot would be disseminated as ‘‘200.’’). 394MDI Adopting Release, supra note 5, at 18615 (‘‘For example, if a 200 share bid at $25.00 establishes the national best bid, the SIP feed shows ‘‘2’’ at $25.00.’’). 395 Id. (‘‘For example, an investor would have to know that, for a $300 stock, ‘‘2’’ means 80 shares pursuant to the adopted round lot sizes.’’). 396 ‘‘Quotation size’’ is defined in rule 600(b)(76). 17 CFR 242.600(b)(76). 397Consistent with the approach taken in the MDI Rules, see supra note 392, the Commission is proposing to exclude odd-lot quotations from the rounding convention that would be required of the exclusive SIPs under proposed rule 603(b)(3) because it would defeat the purpose of including odd-lots in NMS data—particularly the transparency and usability benefits associated with their inclusion—to round odd-lots down to the nearest round lot; since odd-lots are, by definition, less than a round lot, such an approach would result in ‘‘0’’ being shown rather than the number of shares associated with an odd-lot quotation. the SIPs currently disseminate—on the existing exclusive SIPs immediately prior to their retirement.’’ 381 However, in light of the delay of the implementation of the MDI Rules and the benefits—including enhanced transparency and usability of NMS data and improved execution quality 382— that would be provided to the market by the ready and widespread availability of odd-lot information, the Commission believes that the exclusive SIPs should be required to collect, consolidate and disseminate odd-lot information. Moreover, in light of the delay in the implementation of the MDI Rules and the corresponding extension in the amount of time that the exclusive SIPs will continue to operate, the costs imposed on the exclusive SIPs by this requirement would not represent ‘‘unnecessary costs’’ on the exclusive SIPs ‘‘immediately prior to their retirement.’’ 383
2. Round Lots
The Commission proposes to accelerate the implementation of the round lot definition set forth in rule 600(b)(82). In the MDI Adopting Release, the Commission stated that ‘‘sequencing [round lot implementation] after the parallel operation period is important to avoid either: (1) potential confusion and market disruption that could result from two different round lot structures operating at the same time; or (2) imposing reprogramming costs on the exclusive SIPs for a limited time period prior to their retirement.’’ 384 However, in light of the delay in the overall implementation of the MDI Rules and the benefits that would be available to investors sooner if implementation of this aspect of the MDI Rules is accelerated, the Commission believes that the benefits justify the costs.385 The Commission also proposes to amend an element of the definition of ‘‘regulatory data’’ under rule 600(b)(78) to facilitate the accelerated implementation of the round lot definition. Specifically, the Commission proposes to add new paragraph (b)(78)(iv) to require the primary listing exchanges also to make the indicator of the applicable round lot size available to the exclusive SIPs.386 Under the MDI Rules, the definition of ‘‘regulatory data’’ requires the primary listing exchange to make an indicator of the applicable round lot size for each NMS stock available to competing consolidators and self-aggregators, but not to the exclusive SIPs (as they were to be retired by that time).387 The Commission stated that this indicator will ‘‘help market participants ascertain the applicable round lot size for each NMS stock on an ongoing basis’’ 388 and ‘‘reduce confusion as market participants adjust to the new round lot sizes.’’ 389 Therefore, for these same reasons, the Commission believes that this indicator should be provided to the exclusive SIPs for collection and dissemination.390
3. Display of Round Lots and Odd-Lot
Information
Because the exclusive SIPs would be required to collect and disseminate SIP data in the new round lot sizes,391 the Commission proposes—consistent with the quotation size representation and rounding conventions required of competing consolidators under the MDI Rules 392—to require the exclusive SIPs to represent quotation sizes in SIP data in terms of the number of shares and to round quotation sizes, except for odd-lot quotations, down to the nearest multiple of a round lot.393 Currently, quotation sizes are represented in SIP data in terms of the number of round lots.394 However, after the implementation of the round lot definition, which assigns each stock to one of four round lot sizes based on its share price, this convention could be confusing because the number of round lots will represent different quotation sizes depending upon the price of the stock.395 In addition, in the MDI Rules, the Commission adopted a provision requiring the rounding of quotation sizes,396 except for odd-lot quotations,397 down to the nearest multiple of a round lot to help ensure that certain core data elements, such as each exchange’s BBO, ‘‘reflect orders of meaningful size’’ and that, with respect to the NBBO in particular, ‘‘the protected portion of the order is clearly represented, which addresses concerns about impacts on investor confidence and confusion that could result from showing unprotected size at the

398See rule 600(b)(21)(iii); MDI Adopting Release, supra note 5, at 18615. 399The Commission proposes that the compliance date for this requirement would coincide with the proposed compliance date for the round lot definition (i.e., 90 days from the publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions in the Federal Register) so that the exclusive SIPs could continue the current convention of representing quotation sizes in terms of the number of round lots until such time as they would be required to provide SIP data using the new round lot definition, at which point that convention would become confusing. 400Currently, odd-lot quotation information is available only on the exchanges’ proprietary data feeds. See supra note 330 and accompanying text. By moving up the compliance date for odd-lot information, this data would no longer be limited to the exchanges’ proprietary data products. 401See supra note 328. 402See supra note 351 and accompanying text. ‘‘Odd-lot’’ is defined as ‘‘an order for the purchase or sale of an NMS stock in an amount less than a round lot.’’ 17 CFR 242.600(b)(58). Hence, until the round lot definition is implemented, odd-lot quotation information will reflect the existing, exchange-based definition of round lot. See also MDI Adopting Release, supra note 5, at 18700 (‘‘The consolidated market data products offered by competing consolidators during the initial parallel operation period would be based on the current definition of round lot.’’). 403See supra note 354 and accompanying text. Further, this time frame could potentially be considerably longer depending upon a number of factors, including the evaluation of the performance of the decentralized consolidation model during the parallel operation period by the Operating Committee of the effective national market system plan(s), the timing of when an NMS plan amendment to effectuate the cessation of the exclusive SIPs is submitted to the Commission, and whether and when the Commission approves such an amendment. 404See supra note 402. 405See supra note 354 and accompanying text. 406Cf. supra note 371 and accompanying text (comparing the scope of odd-lot data that the exclusive SIPs would disseminate pursuant to the 2022 SIP Odd-Lot Request for Comment with the data included in the definition of odd-lot information adopted as part of the MDI Rules); 2022 SIP Odd-Lot Request for Comment, supra note 371, at 1 (stating that the Operating Committees of the CTA and UTP Plans anticipate that certain odd-lot data could be made available through the exclusive SIPs by the first half of 2023); MDI Adopting Release, supra note 5, at 18701 (‘‘For a period of 90 days starting with the date of the cessation of the operation of the exclusive SIPs, the changes necessary to implement the new round lot sizes will be tested. At the end of the 90 day test period, the new round lot sizes will be implemented.’’). 407Based on
average closing prices on the primary listing exchange in Mar. 2022, there are 181 NMS stocks priced over $250. 408The exchanges that have defined round lots in their rules would need to file proposed rule changes pursuant to section 19(b) of the Exchange Act and rule 19b–4 thereunder to change their rules to reflect the implementation of rule 600(b)(82). See supra note 328. 409See supra note 399 and accompanying text. NBBO.’’ 398 For these reasons, the Commission proposes to require the exclusive SIPs to represent quotation sizes in SIP data in terms of the number of shares, rounded down to the nearest multiple of a round lot, except for odd￾lot quotations.399
4. Proposed Compliance Date
The Commission proposes to amend the date by which market participants must comply with the odd-lot information and round lot definitions, including, as required under proposed rule 603(b)(3), that national securities exchanges and associations make the data necessary to generate odd-lot information available to the exclusive SIPs and that the exclusive SIPs disseminate odd-lot quotation information as defined in rule 600(b)(59). Specifically, the Commission proposes to require compliance with the odd-lot information and round-lot definitions 90 days from Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions. Advancing the compliance date for odd-lot information to 90 days from Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions would significantly move up the date by which this information would be more widely available in the national market system.400 Under the implementation
schedule set forth in the MDI Adopting
Release, the odd-lot information definition will not be fully implemented in the near term. Specifically, odd-lot quotation information as defined in rule 600(b)(59)(ii) that is based on the definitions of round lot set forth in the rules of national securities exchanges 401 will not be made available until the ‘‘parallel operation period,’’ which does not begin until nine months after Commission approval of the amendments to the effective national market system plan(s) required by rule 614(e).402 Pursuant to the MDI Rules implementation schedule, the round lot definition set forth in rule 600(b)(82) will be implemented after the retirement of the exclusive SIPs, which the Commission estimates will be at least two years after the approval of the effective national market system plan(s) amendment required under rule 614(e).403 The implementation of the round lot definition affects the full implementation of odd-lot information definition, as odd-lot information that is based on round lots as defined in rule 600(b)(82) will not occur until the round lot definition is implemented.404 Therefore, full implementation of the odd-lot information definition will not occur until the exclusive SIPs have been retired, which, as estimated above, will be at least two years from the Commission’s approval of the plan amendment(s) required by rule 614(e).405 The Commission preliminarily believes that a compliance date of 90 days from Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions would provide market participants with sufficient time to make the changes necessary to implement the round lot and odd-lot information definitions.406 These changes would include reprogramming systems to facilitate the acceptance and handling of orders in the one round lot size that is not currently in use (i.e., 40) and to assign the approximately 181 NMS stocks priced above $250 407 to their relevant round lot size, and systems enhancements to support the distribution and consumption of odd-lot information. For the round lot definition, broker￾dealers would need to modify their systems to accept and handle orders in the new round lot sizes. Trading centers would need to modify their systems to accept and process orders in the new round lot sizes.408 The exclusive SIPs would need to modify their systems to accept and process orders in the new round lot sizes. The exclusive SIPs would also have to make systems changes to represent quotation sizes in the number of shares rounded down to the nearest multiple of a round lot.409 For odd-lot information, broker￾dealers would need to make changes to their systems that accept SIP data that would now reflect additional information, i.e., certain quotations in odd-lot sizes as defined in rule 600(b)(59)(ii). The SROs would have to make systems changes to provide the information necessary for the generation of odd-lot information to the exclusive SIPs, and
the exclusive SIPs would have to make systems changes to collect, consolidate, and disseminate odd-lot information. As discussed above, the SROs already provide, and the exclusive SIPs already collect, consolidate, and disseminate, transaction information for executions of odd-lot orders. Therefore, the systems changes necessary for the SROs and exclusive SIPs related to implementing the odd-lot information definition would be limited to changes necessary to accommodate quotations in odd-lots as defined in rule 600(b)(59)(ii). These systems changes would include modifications necessary to aggregate odd-lot quotes at each price better than the NBBO at each exchange. As discussed below, the Commission does not believe that the proposed

410See infra sections V.D.5 and V.D.6. 411See supra note 407 and accompanying text. 412See MEMX White Paper, supra note 370, at 8 (‘‘Specifically, the infrastructure rule requires: (1) the dissemination of an indicator that displays the applicable round lot size for the security; and (2) that information disseminated in consolidated market data be represented in actual shares. Of these two changes, the potential implementation burden rests almost entirely with the dissemination of actual shares, which would require systems changes for both the SIPs and downstream users of SIP data whose systems may also need to be coded to the new specifications.’’). 413Cf. 2022 SIP Odd-Lot Request for Comment, supra note 371, at 4 (‘‘The OCs project that this proposal will result in a 35% increase in the amount of quotation traffic sent to the SIPs each day, as well as a 35% increase in the quotation messages generated during peak periods.’’). As the exclusive SIPs already collect and disseminate odd￾lot transaction data, see supra note 336 and accompanying text, accelerated implementation of the odd-lot information definition would impose no additional costs on the exclusive SIPs with respect to odd-lot transaction data. 414See infra sections V.D.5 and V.D.6. Cf. Cboe Odd-Lot Letter, supra note 373, at 3 (‘‘[T]he technology efforts needed to manage Odd Lot Quotations on the SIPs will be far outweighed by the benefits Odd Lot Quotations will provide to today’s investors.’’). accelerated compliance date for the round lot and the odd-lot information definitions—rather than implementing these definitions under the implementation schedule set forth in the MDI Adopting Release—would greatly increase the costs of implementing these definitions.410 The acceleration of the implementation of the round lot and odd-lot information definitions, however, would impose costs on the exclusive SIPs that would not have resulted from the MDI Rules. The exclusive SIPs would have to make systems changes in order to collect, consolidate, and disseminate SIP data that reflects the round lots as defined in rule 600(b)(82) and odd-lot quotation information. The Commission believes that the costs of these changes would be relatively modest. First, round lot sizes of 100, 10, and 1 are already in existence today, so the exclusive SIPs can already accept information in three out of the four new round lot sizes, which would limit the scale of the necessary reprogramming. Further, the round lot definition affects a relatively low number of NMS stocks. Based on pricing during March 2022, only 181 stocks would have been assigned a new round lot size as a result of having a share price that is $250 or higher.411 However, representing quotation sizes in terms of the number of shares, rounded down to the nearest multiple of a round lot, would be a departure from the current convention of representing quotation sizes in terms of the number of round lots, and would require the exclusive SIPs and
the users of SIP data to modify their systems.412 For odd-lot information, the exclusive SIPs would have to modify their systems to collect, consolidate, and disseminate quotations that are included in the definition of odd-lot information. The additional odd-lot information would likely increase message traffic coming in to the exclusive SIPs and in the exclusive SIP feeds.413 Therefore, the exclusive SIPs would have to modify their systems to accommodate increased message traffic and to calculate odd-lot information. The Commission believes that the benefits of implementing the round lot definition and providing odd-lot information would justify the costs of the necessary technological changes.414
C. Request for Comment
The Commission requests comment on all aspects of the proposed accelerated implementation of the round lot and odd-lot information definitions. In particular the Commission solicits comment on the following:
44. Should the implementation of the
round lot definition adopted as part of the MDI Rules be accelerated? Why or why not?
45. If so, by how much time should
the round lot definition be accelerated? Does the proposal to require compliance with the new definition within 90 days of Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions provide market participants with sufficient time to make necessary changes and adjustments? Please explain the specific modifications that each type of market participant—including, but not limited to, broker-dealers, trading centers, and the exclusive SIPs—would have to make to comply with the round lot definition. In addition, please explain the amount of time each type of market participant would need to make such modifications and whether a timeframe shorter or longer than the proposed compliance date of 90 days from Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions would be more appropriate?
46. Should the exclusive SIPs be
required to represent quotation sizes in terms of the number of shares, rounded down to the nearest multiple of a round lot, rather than the number of round lots? Why or why not? If not, would investors be confused by representing quotation sizes in the number of lots? Please describe any systems changes to the exclusive SIPs, SIP data users, or other market participants that would be necessary to represent quotation sizes in terms of the number of shares, rounded down to the nearest multiple of a round lot.
47. Should the primary listing
exchange be required to provide an indicator of the applicable round lot size for each NMS stock to the appropriate exclusive SIP? Why or why not?
48. Should the implementation of the
definition of odd-lot information, which would include odd-lots priced better than the NBBO in NMS data, be accelerated? Why or why not?
49. If so, by how much time should
the odd-lot information definition be accelerated? Does the proposal to require compliance with the new definition 90 days after publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions in the Federal Register provide market participants with sufficient time to make necessary changes and adjustments? Please explain the specific modifications that each type of market participant—including, but not limited to, broker-dealers, trading centers, and the exclusive SIPs—would have to make to comply with the odd-lot information definition. In addition, please explain the amount of time each type of market participant would need to make such modifications and whether a timeframe shorter or longer than the proposed compliance date of 90 days from Federal Register publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions would be more appropriate.
50. Should the round lot and odd-lot
information definitions be accelerated by different amounts of time (as opposed to requiring compliance with both definitions 90 days after publication of any Commission adoption of an earlier implementation of the round lot and odd-lot information definitions in the Federal Register, as proposed)? For example, would the modifications necessary to comply with the round lot definition take longer to implement than the modifications necessary to comply with the odd-lot information definition (or vice-versa)? Please explain.
51. Do the costs or benefits of the
round lot or odd-lot information definitions depend upon when they are implemented? Please explain. D. Proposed Definition of Best Odd-Lot Orders As discussed above, in the MDI Rules, the Commission defined odd-lot

415See 17 CFR 242.600(b)(59); see also supra note 335 and accompanying text. 416MDI Adopting Release, supra note 5, at 18612. 417The best odd-lot order would not be a ‘‘protected quotation’’ for purposes of Regulation NMS, including rules 611 (order protection rule) and 610 (access to quotations). 17 CFR 242.611,
610. The term ‘‘protected quotation’’ is defined in
rule 600(b)(71) as a protected bid or protected offer; the term bid or offer is further defined in rule 600(b)(11) and is limited to round lots. See 17 CFR 242.600(b)(11), (71). 418The best odd-lot order to buy (sell) will only be included in NMS data when it is priced higher (lower) than the NBB (NBO). Because the best odd￾lot order will be defined as odd-lot information, the proposed amendments to rule 603(b) to require SROs to provide the data necessary to generate odd￾lot information to the exclusive SIPs and to require the exclusive SIPs to disseminate odd-lot information, see supra note 379, will require the SROs to provide the data necessary to generate the best odd-lot order to the exclusive SIPs and the exclusive SIPs to disseminate the best odd-lot order. 419See 17 CFR 242.600(b)(50) (defining NBBO and setting forth the manner in which the NBBO is determined ‘‘in the event two or more market centers transmit to the plan processor, a competing consolidator or a self-aggregator identical bids or offers for an NMS security’’). 420See supra note 418. 421 15 U.S.C. 78k–1(a)1)(C)(iii). 422 15 U.S.C. 78k–1(c)(1)(B). 423See supra note 367 and accompanying text; 17 CFR 242.600(b)(59). 424The 2022 SIP Odd-Lot Request for Comment contains an ‘‘odd-lot NBBO,’’ similar to this proposal’s best odd-lot order. See supra note 371 and accompanying text. See also comment file for 2022 SIP Odd-Lot Request for Comment, available at https://www.ctaplan.com/oddlots. 425 17 CFR 242.605 (requiring market centers to make available standardized, monthly reports of statistical information concerning their order executions). The Commission has issued a proposal to amend rule 605, which includes execution quality metrics based on the best odd-lot order. 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. 426MDI Proposing Release, supra note 39, at 16738–39; 17 CFR 242.600(b)(50). In addition, the proposed definition of best odd-lot order and the method by which it is determined from among the information submitted by national securities exchanges and associations is modelled upon and parallel to the definition of NBBO. See supra notes 418–419 and accompanying text. 427See 17 CFR 242.600(b)(17). information to include odd-lots at a price greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association.415 The Commission stated that ‘‘this better￾priced odd-lot liquidity needs to be reflected in core data because it will help investors and other market participants to trade in a more informed and effective manner and to achieve better executions and reduce the information asymmetries that currently exist between subscribers to
SIP data and subscribers to proprietary data.’’ 416 The Commission proposes to amend the definition of odd-lot information to include a specified best odd-lot order to buy and best odd-lot order to sell.417 Specifically, for each NMS stock, the best odd-lot order to buy would mean the highest priced odd-lot order to buy that is priced higher than the national best bid, and the best odd-lot order to sell would mean the lowest priced odd￾lot order to sell that is priced lower than the national best offer.418 Similar to the definition of the NBBO, in the event that two or more national securities exchanges or associations provide odd￾lot orders at the same price, the exclusive SIPs, competing consolidators and self-aggregators would be required to determine the best odd-lot order by ranking all such identical odd-lot buy orders or odd-lot sell orders (as the case may be) first by size (giving the highest ranking to the odd-lot buy order or odd￾lot sell order associated with the largest size), and then by time (giving the highest ranking to the odd-lot buy order or odd-lot sell order received first in time).419 The Commission believes that proposing to require the identification and dissemination of the best odd-lot orders to buy and sell 420 consolidated across all national securities exchanges and national securities associations is consistent with the goals set forth in
section 11A of the Exchange Act
because it would make information about quotations in NMS stocks available to broker-dealers and investors 421 and would enhance the usefulness of odd-lot information.422 Although odd-lot liquidity better than the NBBO often resides at multiple price levels and information reflecting all of these odd-lot prices is already included in the definition of odd-lot information,423 requiring the identification and dissemination of the best of all such inside the NBBO odd￾lots on both the buy and sell side would help inform market participants of the best possible prices at which their orders (or their customers’ orders) could—in whole or in part—be executed. The identification and dissemination of the price, size, and market of the best odd-lot orders would enhance the ability of market participants to make effective trading and order routing decisions using NMS data and facilitate best execution.424 Moreover, including the best odd-lot order in odd-lot information would help to ensure the wide availability of a useful metric against which investors could assess the execution quality of their orders. For example, rule 605 execution quality statistics 425 could leverage this data point to provide more meaningful information, such as the quantity of orders that are executed at, outside, or with price improvement with respect to the best odd-lot order. Using the best odd-lot orders as a benchmark in this manner could provide investors with an enhanced view of how their orders are handled and executed. The Commission proposes a compliance date of 90 days from Federal Register publication of any Commission adoption of an amended definition of odd-lot information to include the best odd-lot orders in NMS data. The Commission preliminarily believes this timeframe should be sufficient to make the systems changes necessary to implement this data element because the process of determining and disseminating the best odd-lot quote at a given time from among the odd-lot quotes submitted to the exclusive SIPs by the national securities exchanges and associations is fundamentally similar to the process of determining and disseminating the prevailing NBBO, which the exclusive SIPs already do today based on the quotation information they receive from national securities exchanges and associations.426 E. Request for Comment The Commission requests comment on all aspects of the proposed definition of best odd-lot order. In particular, the Commission solicits comment on the following:
52. Should the definition of odd-lot
information include the best odd-lot order to buy and best odd-lot order to sell? Why or why not?
53. How would market participants
use information about the best odd-lot orders to buy and sell? Do commenters believe this information would be useful for market participants? How so? Would it promote more informed trading or facilitate best execution? Please explain.
54. Should rule 605 require the
reporting of execution quality statistics in which the best odd-lot order is used as a benchmark? If so, what specific statistics would be most useful? Please explain.
55. Should the definition of
‘‘consolidated display’’ 427 be amended so that rule 603(c), known as the ‘‘Vendor Display Rule,’’ would require the best odd-lot orders to buy and sell to be provided in contexts in which a trading or order-routing decision can be implemented? Please explain the costs and benefits of such a requirement.
56. Should national securities
exchanges and associations be required

428Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking 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 would promote efficiency, competition, and capital formation. Additionally, section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition. Exchange Act section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. 429See infra sections V.D.1 and V.E.1 for a discussion of the effects of the proposed changes to tick size on trade execution and market efficiency. 430See infra section V.E.2.a for a discussion of the effects of tick size harmonization on competition for execution services. 431Wholesalers are OTC market makers that, according to CAT analysis, execute around 90% of the dollar volume of individual investor NMS stock orders on a principal basis via internalization. There are currently 6 wholesalers in the U.S. handling NMS stock orders. 432See supra section II.F.4 for a description of the possible exceptions. 433Absent a reduction in the 30 mil access fee cap, distortions could increase because the access fee could, in some instances, exceed the spread. See infra note 713. 434See infra section V.C.2 for a discussion of the effects of access fees and rebates on the markets. See infra section V.D.3 for a discussion of the benefits of the proposed lower access fee cap. 435See MDI Adopting Release, supra note 5. 436For the reasons explained in the MDI Adopting Release, when adopting the MDI Rules the Commission decided not to implement the adopted provisions for the round-lot definition and incorporating odd-lot information into NMS data until after the competing consolidator model came online. See MDI Adopting Release, supra note 5, at 18701. 437As the proposal would not accelerate the implementation of the decentralized consolidation model adopted pursuant to MDI Rules, it would not result in the acceleration of the benefits of the decentralized consolidation model, including the consolidation and dissemination to market participants of NMS data at lower latencies. to provide the data necessary to generate odd-lot information, including the best odd-lot orders to buy and sell, to the exclusive SIPs, and should the exclusive SIP be required to identify and disseminate this information? Why or why not? By how much would such a requirement increase message traffic for the exclusive SIP feeds?
57. Is 90 days from Federal Register
publication of any Commission adoption of an amended definition of odd-lot information to include the best odd-lot orders in NMS data an appropriate amount of time for the exclusive SIPs to make any changes necessary to calculate and disseminate the best odd-lot orders? Would other market participants—including, but not limited to, broker-dealers and trading centers—need to make modifications to facilitate the calculation, dissemination, or use of the best odd-lot orders? Please describe any such modifications and the amount of time each type of market participant would need to make such modifications and whether a timeframe shorter or longer than 90 days from Federal Register publication of an amended definition of odd-lot information to include the best odd-lot orders in NMS data would be more appropriate.
V. Economic Analysis
A. Introduction
The Commission has considered the economic effects of the proposed Rule and, wherever possible, the Commission has quantified the likely economic effects of the proposed Rule.428 The Commission is providing both a qualitative assessment and quantified estimates of the potential economic effects of the proposed Rule where feasible. The Commission has incorporated data and other information to assist it in the analysis of the economic effects of the proposed Rule. 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 data, it is not practicable to quantify certain economic effects due to the number and type of assumptions necessary, which render any such quantification unreliable. Our inability to quantify certain costs, benefits, and effects does not imply that 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 proposed Rule. The Commission believes that the proposed amendments to rule 612 establishing a variable minimum pricing increment, where the tick size would be determined by the stock’s Time￾Weighted Average Quoted Spread, would result in lower transaction costs for the subset of affected stocks. The Commission expects lower transaction costs primarily because the proposed tiered tick size regime would help mitigate the impact of some mechanical impediments currently preventing the market from realizing otherwise more competitive bid and ask prices. Thus, the proposal prescribes a tick size reduction to the NMS stocks that have Time-Weighted Average Quoted Spread of $0.04 or less.429 The Commission believes it is reasonable to assume that the proposed changes to rule 612 to apply a minimum pricing increment to trade executions, subject to exceptions, could result in greater competition between exchanges and ATSs with other OTC market makers,430 including wholesalers,431 while still preserving opportunities for economically meaningful price￾improvement.432 Due to their greater reliance on quotations, harmonizing the minimum pricing increment for the quoting and trading would allow exchanges and ATSs to better compete on price for order flow with OTC market makers. When taken together with harmonization, the proposed changes to the tick size are expected to maintain sufficient intra-spread price levels to allow OTC market makers to continue to provide economically meaningful price improvement over the best displayed quotes. The Commission expects that the proposed amendments to rule 610, which would lower the access fee caps, would also lower transaction costs and promote market efficiency. Lowering the access fee caps would
lower the total amount of access fees collected and rebates distributed, reducing, though not eliminating, any distortionary effects of exchange rebates on order routing and likely improving market efficiency.433 The reduction in access fees would lower transaction costs for liquidity demanders.434 The Commission preliminarily believes that the primary impact of earlier implementation of the definition of round lots and including odd-lot information in NMS data would be to accelerate some, but not all, of the benefits articulated in the MDI Adopting Release.435 Given the delay in the full implementation of the MDI Rules, the Commission believes that putting off longer the benefits of those provisions is not justified and, as a result, the Commission is now proposing to accelerate the implementation of those portions of the MDI Rules.436 The Commission expects that the proposed amendments to accelerate the implementation of the new definition of round lot and the inclusion of odd-lot information in NMS data, would improve price transparency and facilitate monitoring execution quality.437 The Commission expects that the proposed amendments to specify the best odd-lot orders to buy and sell (BOLO) would further facilitate execution quality monitoring by providing a standard benchmark with which to compare trades. Odd-lot trades make up an increasingly important part

438One academic paper, examining order book data from 2009 to 2011, finds that odd-lot trades make up 24% of trades in the median stock. See Maureen O’Hara, et al., What’s Not There: Odd Lots and Market Data, 69 J. Fin. 2199 (Oct. 2014). Another, more recent study, finds evidence that odd-lot quotes provide valuable information to traders with access to the data. See Bartlett, et al. (2022), supra note 365. See also MDI Adopting Release, supra note 5, at 18729. 439This would also avoid other market participants having to estimate their own BOLO, as they would currently do if using it as a benchmark. 440Broker-dealer fees and rebates are generally tied to the monthly aggregate trading volume of the broker-dealer on different exchanges. 441Under Rule 606(b)(3), broker-dealers are required to provide a customer, upon request, a report on the broker-dealer’s handling of that customer’s NMS stock orders, which includes information on the average fees and rebates paid/ received from those orders. If fees and rebates were determinable at the time of execution, customers could more easily evaluate the 606(b)(3) disclosures or request additional, more specific information. See Disclosure of Order Handling Information, supra note 4. 442 If broker-dealers had to internalize and could not pass through fees (but were free to pass through rebates), a potential conflict of interest would still exist as there would exist an incentive to minimize fees at the potential expense of other factors important to order execution. 443See section V.D.1 for a discussion of the potential costs of a smaller tick size. 444See section V.D.3. 445See section V.D.3 and section V.E.2.a. 446Some of these adjustments might constitute new rather than accelerated costs if they are incompatible with future data feeds under MDI’s competing consolidator model. 447This thought experiment considers only the direct effect of the reduction in spread on the tick size in order to define what it means to be tick￾constrained. Note that the spread is unlikely to ever be zero due to inventory costs, adverse selection risks, the direct costs associated with providing liquidity, and trading rules meant to prevent the locking and crossing of markets. See P.C. Kumar, Bid-Ask Spreads in U.S. Equity Markets, 43 Q. J. Bus. & Econ 85 (2004). 448For the purpose of empirically identifying stocks that are constrained by the $0.01 tick; tick￾constrained stocks are those with time weighted quoted spreads equal to $0.011 or less calculated during regular trading hours on a given day. See supra note 17 and accompanying text defining ‘‘tick-constrained’’ for the release, and infra Table 4 and accompanying text. Because of the $0.01 minimum pricing increment for NMS stocks priced equal to or greater than $1.00 per share, a stock cannot have a quoted spread less than $0.01 unless markets become locked or crossed. The existence of locked and crossed markets can in some cases result in time weighted quoted spread that
are very slightly lower than $0.01. Even for stocks with spreads most constrained by the tick, a large trade can exhaust liquidity deeper in the limit order book such that the stock’s quoted spread temporarily increases from $0.01. Thus, time weighed quoted spreads will virtually always be greater than $0.01. Consequently, the Commission has selected the threshold of $0.011 as the threshold that identifies stocks that are likely tick-constrained. These stocks quote at $0.01 most of the time and thus could be considered tick-constrained. 449Empirically, near-tick-constrained stocks are defined as those with time average quoted spreads between $0.011 and $0.02 during regular trading hours. of the market.438 However only round￾lot quotes are disseminated as part of the NMS data; having a standardized price for the best available odd-lot orders would provide a more relevant benchmark than the round-lot NBBO for odd-lot trades. As the Commission anticipates that the BOLO will be an important benchmark for estimating the execution quality of some trades, requiring the exclusive SIPs and competing consolidators to compute and disseminate the BOLO would promote standardization.439 Lastly, the proposed amendments would make fees and rebates determinable at the time of trade. Certainty about the cost of transactions at the time of trade could help broker￾dealers make better order routing decisions.440 Second, being able to determine the fees and rebates at the time of trade would make it easier for customers to ask more direct questions of broker-dealers and facilitate broker￾dealers passing on fees and rebates to end customers if they so desire.441 Passing fees and rebates through to end customers may mitigate or eliminate the potential conflicts of interest caused by exchange rebates.442 The proposal would result in a number of costs. For affected stocks, the proposed smaller tick size may increase the cost of executing large orders by fragmenting liquidity across multiple price levels and increasing the complexity of locating shares for the orders.443 The Commission expects the proposed reduction in the access fee caps would decrease the overall net capture of exchanges primarily due to the decreased fees from sub-$1.00 stocks.444 Rebate disbursement is expected to decrease under the proposal, and so firms that profit from rebates, such as high-frequency trading firms that specialize in rebate capture trading strategies, would experience revenue declines and some that rely on rebates could exit the market.445 Reduced access fees could increase the amount of volume routed to exchanges compared to off exchange by making exchanges less expensive venues to transact and potentially causing some order flow that was previously directed off exchange to avoid high fees to revert to exchanges. There would be implementation and ongoing compliance costs associated with the proposal. Exchanges and market participants would need to update systems to account for the
new tick sizes. Market participants would need to reconfigure order routing strategies to account for the different tick sizes and lower access fees. Additionally, market participants would experience an acceleration of many of the costs associated with odd-lot information articulated in the MDI Adopting Release including the need for exchanges to adjust and maintain systems to provide odd-lot information to the NMS data feed. The exclusive SIPs would need to adjust and maintain systems to receive and disseminate odd￾lot information, and market participants receiving SIP data would need to adjust systems to receive odd-lot information.446 B. Market Failure The Commission is proposing to update regulations that set and apply a minimum pricing increment (tick size), reduce the access fee caps to better improve the market’s capacity for efficient price competition, and promote more efficient order routing by resolving deficiencies in the information available to market participants. Current tick sizes for NMS stocks restrict price competition in stocks for which the tick size may be too large, leading to greater transaction costs. The lack of harmonization between minimum quoting and trading increments has also restricted the degree to which exchanges and ATSs can compete on price with OTC market makers including wholesalers. The minimum achievable bid-ask spread for a stock is constrained by the minimum pricing increment and limits price competition. A high tick size can artificially increase transaction costs, keeping the bid-ask spread wider than it might otherwise be. Consider, for example, a stock that would trade at an ask price of $10.005 absent the $0.01 tick, should the tick size be $0.005. If forced to trade at a $0.01 tick size, the prevailing ask price would most likely be $10.01, namely a half cent worse.447 Stocks that would otherwise trade with a spread less than the tick size, were they allowed to do so, are considered to be tick-constrained. Because these stocks cannot trade with spreads less than the tick size, they typically trade with spreads that are at or near the minimum tick size.448 A stock that is near-tick-constrained is one that has a reasonable probability of becoming tick￾constrained in the course of normal trading, or one for which the tick is a substantial portion of the spread.449 Even if a stock is not tick-constrained but is near-tick-constrained, Commission analysis suggests that the tick size increases transaction costs for market participants. This may be because the tick constraint sometimes binds for these stocks, or because there may be market participants who want to

450See supra note 17 for a definition of tick￾constrained, and supra note 449 for a definition of near-tick-constrained. See infra note 458 for discussion of near-tick-constrained stocks. See also
Table 4 and surrounding text for a further
discussion of volumes associated with tick￾constrained and near-tick-constrained stocks. 451The effect of access fees and rebates as incentives becomes less pronounced as spreads widen. For example, if the spread is 10 cents wide, an access fee of 30 mils would represent only 6% of the half spread. Thus, as spreads widen the effectiveness of rebates to induce liquidity provision diminishes. 452See infra sections V.C.1.c and V.C.2 for additional discussion on why the trading environment of tick-constrained stocks tends to favor high-frequency traders. 453See section V.C.1.b and section V.C.1.a for discussion of how applying a minimum pricing increment to quotes but not trades limits price competition between exchanges and ATSs and other OTC market venues. 454See, e.g., Lawrence E. Harris, Minimum Price Variations, Discrete Bid–Ask Spreads, and Quotation Sizes, 7 Rev. Fin. Stud. 149 (1994). See also Anne Dyhrberg, et al., When Bigger is Better:
The Impact of a Tiny Tick Size on Undercutting Behavior, J. Fin. & Quantitative Analysis (2022). 455For example, consider the case of one maker￾taker and one inverted exchange, both with rebates and fees equal to 20 mils with both exchanges quoting a 1.01x1.02 spread. Using net-fee/rebate prices, the maker-taker exchange would effectively be quoting at 1.008x1.022 whereas the inverted exchange would be quoting at 1.012x1.018. The degree of intra-spread pricing would be limited to the number of exchanges and the variation in their fees and rebates. For example, a market with 3 exchanges could collectively make possible only 3 intra-spread levels to any one market participant at a time. See infra section V.D.3 for a discussion of intra-tick pricing. See infra section V.C.2 for a discussion of current state of the fees and rebates and the variation in pricing structure across exchanges. 456Technological advances that would improve the efficiency of exchange functions such as matching trades, as well as changes in the market environment such as the proliferation of high frequency market making that increases the amount of trading volume, could increase the feasibility for exchanges to lower fees and/or rebates without reducing revenues. 457The Commission believes that the exchanges do not lower their access fees and rebates because doing so may cause the exchange to lose market share. Notably, research surrounding a NASDAQ experiment where it unilaterally lowered fees and rebates found that NASDAQ lost market share to other maker-taker venues with a higher rebate. See, e.g., Yiping Lin, et al., A Model of Maker-Taker Fees and Quasi-Natural Experimental Evidence (working paper Feb. 8, 2021), available at https://ssrn.com/ abstract=3279712 (retrieved from SSRN Elsevier database). Consequently, it could be harmful to an exchange to unilaterally reduce access fees and their associated rebates if other exchanges do not follow suit. Further, even if each of the exchanges lowered its fees, there would be the risk that a new exchange would see the opportunity and enter the market with high fees and rebates and thus capture market share, inducing the other exchanges to abandon their low fee models to remain competitive. 458As a concept, the degree to which a stock is tick-constrained lies on a continuum. At one end of the continuum are stocks that would always trade narrower if the tick size constraint was relaxed, and on the other are stocks that would only rarely trade narrower than the current tick size given a smaller tick. For empirical purposes tick￾constrained stocks are defined as in supra note 17. See also section I.A, and supra note 448 for additional details. We define near-tick-constrained stocks as those with time average quoted spreads less than two ticks wide ($0.02) but greater than $0.011 (the threshold for being defined as tick￾constrained) during regular trading hours. See supra note 449. In contrast to tick-constrained stocks which quote
at the tick size all or most of the time, near-tick-constrained stocks will alternate between quoting at the tick size or at one tick size wider implying that that they are sometimes tick￾constrained and other times not tick-constrained. See also Table 4 and surrounding text for a further discussion of volumes associated with tick￾constrained and near-tick-constrained stocks. improve the price and offer a narrower spread, but not to the point where they are willing to narrow the spread by an entire tick. In the first 5 months of 2022 approximately 56% of share volume transacted in NMS stocks was considered to be tick-constrained while an additional 16% traded in stocks that was considered to be near-tick￾constrained.450 Thus, approximately 72% of share volume transacted in stocks that are tick or near-tick￾constrained during that time period. Access fees and their associated rebates tend to increase transaction costs for demanders of liquidity as well as exacerbate a problem of liquidity oversupply for stocks with narrow spreads while doing very little to enhance liquidity in stocks with wide spreads.451 Broadly speaking, spreads reflect a price of liquidity and, when they are constrained to be wider than they could otherwise be, a greater amount of liquidity will be supplied at the constrained price point. This extra liquidity supply corresponds to longer limit order queues, which makes it more difficult for non-high-frequency traders to execute their trades via passive orders. Thus, they will resort to using liquidity-demanding orders more frequently, thus increasing transaction costs.452 In the current predominant maker-taker structure, where demanders of liquidity pay an access fee while providers of liquidity receive a rebate, the fee and rebate effectively widen the spread. In other words, the distortion from being tick-constrained is exacerbated by adding the access fee and rebates, which further effectively widens an already too wide spread. The lack of harmonization between quoting and trading increments has also restricted the degree to which exchanges and ATSs can compete on price with OTC market venues.453 This competitive disparity is particularly acute in competition for order-flow in tick￾constrained and near-tick-constrained stocks where the ability to publicly quote a more competitive price is restricted. Some minimum pricing increment is necessary for proper functioning of markets.454 The problem of coordinating across multiple venues and participants suggests a role for setting a price increment through regulation rather than leaving it to market forces. In principle, variation in fees and rebates across trading venues could allow for a degree of intra-tick pricing, though it has offsetting costs in terms of fragmentation and complexity, making it an inefficient solution.455 The Commission does not believe that exchanges will lower access fees or their associated rebates absent the proposed regulatory action to lower the access
fee cap. Contrasted with marketable orders, market participants have greater discretion in the routing of liquidity￾supplying orders. Under rule 611, the NBBO restricts the routing behavior of marketable orders and often forces liquidity demanders to pay the access fee to trade against a NBBO order. Exchanges are thus incentivized to attract more competitively priced liquidity with large rebates, which are funded by similarly large access fees, in order to capture more trading volume. The effects of these incentives are evident: both average fees and rebates have remained near the 30 mil access fee cap introduced in 2005, despite technological and market structure changes.456 The Commission believes that the exchanges do not lower their access fees and rebates because a unilateral reduction in rebates would likely cause market participants to route their competitive liquidity-providing orders to another exchange.457
C. Baseline
A significant fraction of total trading volume occurs in stocks that are tick- or near-tick-constrained, which can cause them to trade at spreads wider than they would otherwise.458 Access fees, which are frequently used to fund rebates to liquidity providers, increase the relative cost of demanding liquidity, particularly for stocks with narrower spreads. Exchange access fees and rebates are also complex. Lastly, the delay in the implementation of the MDI Rules postpones their anticipated benefits.

1. Tick Sizes
   Rule 612 of Regulation NMS establishes tick sizes and applies to ranking, accepting, and displaying quotes. In determining what tick size is optimal for any given stock, there is a tradeoff between price competition on the one hand, and incentives for liquidity provision on the other. A smaller tick allows liquidity providers to better compete on price. On the other hand, a smaller tick can also leads to

459The term ‘pennying’ refers to when a market participant gets to the front of the queue by posting an economically trivial price improvement. 460See text at infra note 478 for a further discussion of this effect. 461See Barardehi, et al. (2022), supra note 85, for additional analysis of this tradeoff. 462See, e.g., NYSE Continued Listing Standards, § 802.01C, available at https://www.nyse.com/ listings/resources (last visited Sept. 29, 2022); The Nasdaq Stock Market LLC Rules, § 5400, available at https://listingcenter.nasdaq.com/rulebook/ nasdaq/rules (last visited Sept. 29, 2022). 463See supra section II.F.4. 464NYSE Retail Liquidity Program Approval Order, supra note 62. See supra note 62 and accompanying text for a discussion regarding exchange RLPs. See also Pankaj K. Jain, et al., An Examination of the NYSE’s Retail Liquidity Program, 80 Q. Rev. Econ. Fin. 367 (2021), for a discussion of and analysis of NYSE’s RLP. 465See Sean Foley, et al., Tick Size Wars: The Market Quality Effects of Pricing Grid Competition (working paper Dec. 2, 2021), available at https:// ssrn.com/abstract=2866943 (retrieved from SSRN Elsevier database). 466The term ‘‘wholesaler’’ is not defined in Regulation NMS, but commonly refers to a broker￾dealer acting as an OTC market maker that primarily focuses on attracting orders from broker￾dealers that service the accounts of a large number of individual investors, referred to in this release as ‘‘retail brokers.’’ 467Based on analysis of retail broker rule 606(a)(1) reports, there are six broker-dealers classified as wholesalers. 468 If the wholesaler uses proprietary data feeds that offer a more complete view of the market than the SIP feeds offers—for example—for their own trades, then FINRA would expect that wholesaler to use that same data to determine the range of prices at which the broker can internalize trades. See FINRA, Regulatory Notice 15–46, 1, 3 n.12 (2015) (‘‘The exercise of reasonable diligence to ascertain the best market under prevailing market conditions can be affected by the market data, including specific data feeds, used by a firm. For example, 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.’’). See also Securities Exchange Act Release No. 65895 (Dec. 5, 2011), 76 FR 77042 (Dec. 9, 2011) (approving FINRA Rule 5310 on best execution). 469However, research suggests that $0.0001 is a common increment used by wholesalers. See Ekkehart Boehmer, et al., Tracking Retail Investor Activity, 76 J. Fin. 2249 (Oct. 2021). 470FINRA OTC (Non-ATS) Transparency Data Monthly Statistics provides monthly information on wholesaler execution volumes. This data, is combined with Cboe historical market volume data, pennying, which reduces the economic gains
to posting liquidity, leading to a lower incentive to post liquidity.459 The tick size determines the minimum amount of price improvement required to gain priority over existing quotes, as the tick size gets smaller the value of time priority at a price becomes less important.460 Other considerations include market complexity and the spreading of liquidity over more price levels (though it is also the case that market complexity may increase with wider ticks, as participants adjust to inefficient pricing), and the fact that too small ticks may inefficiently award speed.461 As discussed below in Section V.C.1.c, the Commission estimates that 72% of share volume and 45% of dollar volume in U.S. equity markets occurs in stocks that are tick or near-tick￾constrained stocks, suggesting that for many stocks the tick size may be a hindrance to market quality. a. Current Regulations Rule 612 of Regulation NMS, which was adopted on April 6, 2005, and had a compliance date of January 31, 2006, prohibits a national securities exchange, national securities association, ATS, vendor, or broker or dealer from displaying, ranking, or accepting quotations, orders, or indications of interest in any NMS stock priced in an increment smaller than $0.01 if the quotation, order, or indication of interest is priced equal to or greater than $1.00 per share. If the quotation, order, or indication of interest is priced less than $1.00 per share, the minimum pricing increment is $0.0001. Most listing exchanges require stocks listed on their exchanges to maintain a price greater than $1.00 per share, and consequently $0.01 is the prevailing tick size for most quotes and orders for NMS Stocks.462 Regulation NMS effectively establishes $0.01 as the minimum spread that can be quoted for stocks priced equal to, or greater than, $1.00 per share because the NBBO is determined by the best displayed round lot quotes, and locked and crossed markets are prohibited. b. Sub-Penny Transactions While NMS stocks cannot be quoted in a sub-penny increments, they may trade in sub-penny increments.463 Sub￾penny trading on exchanges and ATSs occurs in limited circumstances while sub-penny trading by off-exchange market makers occurs more often. Sub￾penny trading on exchanges and ATSs occurs primarily as a result of midpoint orders and benchmark trades. Benchmark trades, such as VWAP and TWAP orders, may not be explicitly priced in an impermissible sub-penny increment, but the ultimately determined execution price may be in a sub-penny increment. Additionally, ATSs sometimes offer order types where the execution price is determined to be some fraction of the way between the prevailing midpoint and the NBB or NBO. Sub-penny trading on registered exchanges may also occur as a result of their RLPs. Since 2012, the Commission has offered limited exemptive relief from rule 612 for these programs so that they may offer qualifying retail trades price improvement relative to the NBBO, usually in
increments of $0.001.464 Exchanges established RLPs as a competitive response to the various market structure and trading dynamics that divert retail order flow from exchanges to OTC market makers, referred to as wholesalers, who can trade more readily in sub-penny increments.465 ATSs also offer sub penny transactions separate from midpoint or benchmark trades. Some ATSs offer order types which effectively split the distance between the NBB or NBO and the midpoint. These trades offer price improvement to the liquidity demander—though not at the same levels as a midpoint trade—while still enabling the liquidity provider to earn at least some spread on the transaction. They are a form of pre-set price￾improvement trades. Trading at sub-penny increments also occurs as a result of broker-dealers, including some OTC market makers known as wholesalers, internalizing customer order flow at sub-penny prices.466 OTC market makers, including wholesalers, receive market orders and offer price improvement over the NBBO for the orders they receive, which often originate from individual investors, often in sub-penny increments.467 For example, if a broker￾dealer acting as a wholesaler, has two customers, and one submits a market order to buy a stock while the other submits a market order to sell a stock, the wholesaler is not required to send those orders to an exchange or ATS for execution. Rather, the broker-dealer can internalize the two trades by executing both against internal inventory; it could also cross the two trades internally at a price that is within the NBBO because doing so would not involve a quote subject to rule 612, or it could route some or all of the trades to an exchange or ATS for execution. If the wholesaler chooses to act in a principal capacity and transact both orders against its own inventory—earning the bid-ask spread in the process—the wholesaler can execute the order in any pricing increment that it chooses so long as the wholesaler meets its best execution obligation.468 Increments of $0.01, $0.001 and $0.0001 are typical in off￾exchange trading.469 Using data from FINRA for the first quarter of 2022, we estimate that wholesalers internalized approximately 24% of all share volume.470

and U.S. historical market volume data FINRA data. See OTC Transparency Data, FINRA, available at https://otctransparency.finra.org/otctransparency/ OtcData (last visited Sept. 29, 2022); see also Historical Market Volume Data, Chi. Bd. Options Exch., available at https://cboe.com/us/equities/ market_statistics/historical_market_volume/ (last visited Sept. 29, 2022). 471The analysis uses data from prior to the implementation of the MDI Rules and once implemented, the changes to the current arrangements for consolidated market data may impact the numbers reported in Table 3 and throughout, including by reducing those for realized spread, effective spread, and amount of price improvement. The NBBO will likely tighten in stocks priced greater than $250 because it will be calculated based on a smaller round lot size. A tighter NBBO spread could increase the number of NMS stocks which are considered tick-constrained or near-tick-constrained. See infra section V.C.3. 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 against which the marketable order executes, which may decrease the effective and realized spreads in stocks above $250 when the MDI Rules are fully implemented. It is also uncertain how or to what degree these changes would affect the proportion of trading volume that executes off-exchange. This analysis is qualitatively and quantitatively similar to the analysis provided by NYSE in its NYSE Tick Harmonization Paper, supra note 70. 472For the purposes of this analysis a sub-penny transaction is any regular trade for which the execution price of the trade is not a multiple of $0.01. See Table 3 note a. Not all price improvement occurs in sub-penny increments. A trade receives price improvement if it transacts at a price superior to the NBBO. Trades can transact inside the NBBO on an exchange due to an odd-lot order priced better than the NBBO or due to hidden orders. Table 3 provides price improvement statistics for the first half of 2022.471 Summing the total dollar value of price improvement associated with trades that execute in sub-penny increments that are not midpoint trades (rows 5, 7, 9, and 11) reveals that approximately 18% of the daily dollar value of price improvement, or approximately $12 million, was from trades which transacted at a sub-penny pricing increment and was not associated with a midpoint or VWAP trade—i.e., trades that make use of the fact that rule 612 does not apply to trading.472 Of this value, 11% occurred on exchange, and the remaining 89%
occurred off exchange. Extrapolating from these estimates, by multiplying the $12 million of price improvement in trades which executed at sub-penny pricing increments by 252 trading days, suggests that sub-penny pricing enabled by rule 612 not applying to trades offers investors price improvement relative to the NBBO of approximately $3 billion per year.
TABLE 3—PRICE IMPROVEMENT STATISTICS DAILY AVERAGE JAN. TO JUNE 2022 ab
Panel A: Price Improvement Volume Row Midpoint On or off exchange Odd or round lot Sub-penny Number of trades (millions) Share volume (millions) Dollar volume (billions) 1 ............... Yes ..................... On ....................... Odd ..................... ............................. 3.8 85.9 7.3 2 ............... Yes ..................... On ....................... Round ................. ............................. 2.9 488.8 23.8 3 ............... Yes ..................... Off ....................... Odd ..................... ............................. 2.1 35.9 3.7 4 ............... Yes ..................... Off ....................... Round ................. ............................. 2.4 735.1 37.3 5 ............... No ....................... On ....................... Odd ..................... Sub-Penny .......... 0.4 9.5 0.6 6 ............... No ....................... On ....................... Odd ..................... Penny ................. 12.5 249.7 42.0 7 ............... No ....................... On ....................... Round ................. Sub-Penny .......... 0.7 130.2 4.7 8 ............... No ....................... On ....................... Round ................. Penny ................. 2.8 369.9 38.9 9 ............... No ....................... Off ....................... Odd ..................... Sub-Penny .......... 3.7 64.6 7.8 10 ............. No ....................... Off ....................... Odd ..................... Penny ................. 1.5 27.9 6.0 11 ............. No ....................... Off ....................... Round ................. Sub-Penny .......... 2.6 1413.3 60.0 12 ............. No ....................... Off ....................... Round ................. Penny ................. 0.9 219.4 22.9 Panel B: Daily Average Price Improvement Total Row Midpoint On or off exchange Odd or round lot Sub-penny PI (millions of dollars) Total (%) PI (BPS) 1 ............... Yes ..................... On ....................... Odd ..................... ............................. 2.0 3.0 5.7 2 ............... Yes ..................... On ....................... Round ................. ............................. 6.3 9.3 7.6 3 ............... Yes ..................... Off ....................... Odd ..................... ............................. 1.5 2.3 7.0 4 ............... Yes ..................... Off ....................... Round ................. ............................. 14.1 20.8 8.2 5 ............... No ....................... On ....................... Odd ..................... Sub-Penny .......... 0.2 0.3 5.9 6 ............... No ....................... On ....................... Odd ..................... Penny ................. 11.5 16.9 4.8 7 ............... No ....................... On ....................... Round ................. Sub-Penny .......... 1.1 1.6 7.1 8 ............... No ....................... On ....................... Round .................
Penny ................. 10.7 15.8 7.0 9 ............... No ....................... Off ....................... Odd ..................... Sub-Penny .......... 1.4 2.0 3.1 10 ............. No ....................... Off ....................... Odd ..................... Penny ................. 1.7 2.5 6.2 11 ............. No ....................... Off ....................... Round ................. Sub-Penny .......... 9.2 13.6 3.7 12 ............. No ....................... Off ....................... Round ................. Penny ................. 8.0 11.8 8.9

473Other studies may define tick-constrained stocks differently. See also supra note 17 and supra note 448 and accompanying text defining and discussing ‘‘tick-constrained’’ for the release.
TABLE 3—PRICE IMPROVEMENT STATISTICS DAILY AVERAGE JAN. TO JUNE 2022 ab—Continued
Row
Total
PI.
............................. ............................. ............................. ............................. 67.8 100 ........................
aThis table provides estimates of the average daily volume of trades receiving some form of price improvement from Jan. 2022 to June 2022, as well as estimates of the magnitude of the price improvement received. For purposes of this table, a trade is determined to have received price improvement if it occurred within the prevailing NBBO at the time of the trade. The numbers in the table represent daily averages. Panel A pro￾vides statistics for the total number of trades as well as the total share and dollar volume of trades that receive some form of price improvement while Panel B provides estimates of the total dollar value of the price improvement that is received. Price improvement statistics are computed for 12 categories of trade representing a unique combination of trading volume associated with midpoint, on versus off exchange, round versus odd-lot, and sub-penny versus penny transactions. The analysis includes all normal trades that execute during normal trading hours from TAQ. Normal trades are identified in TAQ data by sale conditions ‘‘blank, @, E, F, I, S, Y’’ which correspond to regular trades, intermarket sweep or￾ders, odd lot trades, split trades, and yellow flag regular trades. A trade receives price improvement if it executes inside the prevailing NBBO. Price improvement for trades that occur above the prevailing midpoint is equal to the (NBO¥price)*number of shares transacted, for trades that occur below the prevailing midpoint price improvement is equal to the (price¥NBB)*number of shares transacted. For trades that occur at the midpoint price improvement is equal to one half the spread between the NBO and NBB multiplied by the number of shares transacted. Estimates are provided based on midpoint, location of the trade, odd-lot status, and sub-penny status. A trade is defined as a midpoint trade if it occurs at exactly the midpoint of the NBB and NBO at the time of the trade. Off exchange trades are those with exchange code ‘D’ attached to the trade. Odd-lot trades are trades in sizes other than multiples of 100, and sub penny trades are those executing in prices with three or more decimal places. bSee MDI Adopting Release, supra note 5. The effect of amending the definition of odd-lot information to include the best odd-lot quotes and accelerating the inclusion of odd-lot information might be marginal should the proposal described in a Mar. 2022 request for comment by the SIPs, CTA/UTP SIP Odd-Lot Request for Comment (available at https://www.ctaplan.com/publicdocs/ctaplan/CTA_Odd_Lots_Proposal_2022.pdf), be filed with the Commission as a proposed Plan amendment and approved. Even if that proposal were filed with the Commission and approved, however, it would result in the provision of less odd-lot information than would become available under this proposed rule. See supra notes 374, 386.
c. Tick Sizes and Quoted Spreads
Table 4 presents data on trading
volume in the first five months of 2022 based on average time weighted quoted spreads. The analysis breaks trading volume each day into one of 16 average quoted spread buckets. The first bucket is for tick-constrained stocks, which we define empirically as stocks that have time weighted quoted spreads less than or equal to $0.011 on a given day.473 The second bucket is for near-tick￾constrained stocks with quoted spreads less than $0.02. Each succeeding bin increases the spread by $0.01 until the last bin which contains all stocks with quoted spreads greater than $0.15. This analysis indicates that 56% of share trading volume (23% of dollar volume) occurs in stocks that are tick￾constrained. That is, in the absence of a one cent tick, these stocks would likely have quoted spreads that are narrower than what they currently experience. Table 4 also reports that 15% of share volume (22% of dollar volume) occurs in stocks that are near￾tick-constrained. Table 4 also reports the daily average number of stocks in each bin.
TABLE 4—SHARE VOLUME BY QUOTED SPREAD JAN. TO MAY 2022 a
Quoted spread Share volume (%) Dollar volume (%) Average # stocks Quoted Spread < $0.011 ............................................................................................................. 56.1 23.2 1,337 $0.011< Quoted Spread <= $0.02 ............................................................................................... 15.5 21.7 1,093 $0.02 < Quoted Spread <= $0.03 ............................................................................................... 7.8 9.8 1,170 $0.03 < Quoted Spread <= $0.04 ............................................................................................... 4.2 5.7 946 $0.04 < Quoted Spread <= $0.05 ............................................................................................... 2.5 3.2 762 $0.05 < Quoted Spread <= $0.06 ............................................................................................... 1.8 2.5 629 $0.06 < Quoted Spread <= $0.07 ............................................................................................... 1.2 1.8 531 $0.07 < Quoted Spread <= $0.08 ............................................................................................... 1.2 2.1 468 $0.08 < Quoted Spread <= $0.09 ............................................................................................... 1.0 1.7 426 $0.09 < Quoted Spread <= $0.10 ............................................................................................... 0.9 1.5 383 $0.10 < Quoted Spread <= $0.11 ............................................................................................... 0.8 1.3 337 $0.11 < Quoted Spread <= $0.12 ............................................................................................... 0.7 1.1 279 $0.12 < Quoted Spread <= $0.13 ............................................................................................... 0.6 1.0 243 $0.13 < Quoted Spread <= $0.14 ............................................................................................... 0.5 0.9 214 $0.14 < Quoted Spread <= $0.15 ............................................................................................... 0.5 0.8 190 $0.15 < Quoted Spread ............................................................................................................... 4.8 21.6 2,500 aThis table provides share volume by stocks with different quoted spread profiles. To create this table, for each day the universe of stocks covered in the WRDS Intra-Day Indicators data are assigned into one of the 16 quoted spread bins based on that days’ time-weighted quoted spread as computed by WRDS Intra-Day Indicators. Then all share and dollar trading volume across all trading days in Jan.–May 2022 is aggre￾gated for each of the 16 quoted spread bins. Percentages based on these totals are then computed. This table also presents the daily average number of stocks in each bin. To compute this variable, for each trading day in Jan.–May 2022 the number of stocks in each
bin is tabulated, then the average across all trading days is presented here. Certain items in this Table 4 may also be affected by the MDI Rules once they are fully implemented. See Table 3 note b. I

474Market participants can use inverted exchanges or ISO orders to help ameliorate some of the negative effects of tick size constraints. 475See e.g., Barbara Rindi and Ingrid M. Werner, U.S. Tick Size Pilot (working paper Mar. 4, 2019), available at https://ssrn.com/abstract=3041644 (retrieved from SSRN Elsevier Database); Mao Ye and Chen Yao, Tick Size Constraints, Market Structure and Liquidity (working paper Dec. 26, 2019), available at https://ssrn.com/ abstract=2359000 (retrieved from SSRN Elsevier database); Phil Mackintosh, Why Ticks Matter, Nasdaq (May 19, 2022), available at https:// www.nasdaq.com/articles/why-ticks-matter; and MEMX Report, supra note 105. 476See, e.g., Roberto Ricco´ et al., Optimal Market Asset Pricing (working paper Feb. 4, 2021), available at https://ssrn.com/abstract=3779195 (retrieved from SSRN Elsevier database) (showing in a theoretical model that rebates can be optimal for exchanges because they both induce and attract high-frequency trading activity). 477See, e.g., Edwin Hu, et al., Tick Size Pilot Plan and Market Quality (DERA White Paper, Jan. 31, 2018), available at https://www.sec.gov/files/dera_ wp_tick_size-market_quality.pdf; Hendrick Bessembinder, Trade Execution Costs and Market Quality After Decimalization, 38 J. Fin. & Quantitative Analysis 747 (2003); and Tavy Ronen and Daniel G. Weaver, Teenies Anyone?, 4 J. Fin. Mkt. 231 (2001). 478An order with time priority is executed first when multiple orders are at the best price, regardless of how many orders are at the best price. In longer order queues, liquidity-providing orders deeper in the queue, which do not have time priority, are less likely to be filled in a timely manner and, conditional on being filled, the probability of the order having been adversely selected tends to be greater compared to orders with greater fill priority. Typically, liquidity providers compete to gain priority over other resting orders by quoting a better price but tick-constraints make doing so difficult. In the case when the spread is constrained to a single tick, it would be impossible to improve on the displayed price without locking markets. Even for near-tick-constrained stocks, when the quoted spread may be greater than a single tick, improving the price by an entire tick may be too much in the sense that doing so may narrow the spread beyond what the liquidity providers could tolerate. A narrower tick de￾emphasizes time priority on a stock exchange by making it easier to compete on price. See Hu, et al. (2018), supra note 477; and Todd G. Griffith and Brian S. Roseman, Making Cents of Tick Sizes: The Effect of the 2016 U.S. SEC Tick Size Pilot on Limit Order Book Liquidity, 101 J. Banking Fin. 104 (2019). 479See, e.g., Chen Yao and Mao Ye, Why Trading Speed Matters: A Tale of Queue Rationing Under Price Controls, 31 Rev. Fin. Stud. 2157 (2018). 480Sniping occurs when prices move against a quote and a very fast market participant executes the now stale quote
before the quote submitter can cancel the now stale quote. See Sida Li, et al., Who Provides Liquidity, and When?, 141 J. Fin. Econ. 968 (2021). 481 Id. 482See supra notes 449 and 458 for the empirical definition and discussion of near-tick-constrained stocks. Near-tick-constrained stocks are those with time average quoted spreads greater than $0.011 and less than $0.02. 483This assumes that stock prices are expected to revert to the next worse level. This may occur because standard economic theory suggests that in a competitive market liquidity providers will compete to provide liquidity until the spread—i.e., their compensation for providing liquidity—is equal to the break-even point for liquidity provision. See also Jonathan Brogaard and Corey Garriott, High-frequency Trading Competition, 54 J. Fin. & Quantitative Analysis 1469 (2019) (documenting that as more high-frequency liquidity providers enter the market, spreads decrease until they converge to competitive levels). 484The range of infeasible quoting prices narrows somewhat in the presence of rebates for liquidity providers. Section V.C.2 discusses these effects. For tick-constrained stocks, spreads are potentially wider than they would otherwise be. Wider quoted spreads mean greater cost to liquidity demanders and greater revenue to liquidity suppliers.474 An artificially wide spread due to the tick constraint subsidizes liquidity provision. Because the compensation is above what would exist in a competitive market there is an increased incentive to provide liquidity via limit orders, so queues of limit orders tend to be longer, wait times to get a limit order executed also tend to be longer, and, thus the likelihood that the market moves away from an investor’s limit order increases, leading to lower overall fill rates for limit orders.475 These dynamics mean that some investors who might originally have wanted to trade using a limit order and earn the quoted spread instead trade using a marketable order and pay the quoted spread.476 There is also evidence that when tick sizes are too wide volatility can increase.477 When a stock is tick-constrained or near-tick-constrained it is particularly important for a liquidity provider to get its quote to the front of the queue (i.e., establish price/time priority on an order book). Stock exchange priority rules give greater priority to better priced orders and generally factor order entry time into the priority of limit orders at the same price. Because liquidity providers cannot establish price priority in when the NBBO spread is one tick, establishing time priority becomes more important.478 Consequently, an environment where stocks are tick￾constrained with artificially wider spreads and longer order queues tends to favor traders who are better able to establish positions more quickly so they can be at the front of the queue. Often the key differentiator to get to the front of the queue, and to avoid unfavorable executions once there, is
speed.479 If a liquidity provider is too slow to establish a new quote, then that quote could be buried in the queue. Conversely, even with a favorable position in the queue, if the market moves in an economically disadvantageous manner to a liquidity provider, it will seek to avoid an adverse execution (e.g., by canceling an order) and adjust its order to account for the new prevailing price of the NBB (NBO). Liquidity providers that are too slow run the risk of having their now￾stale quote ‘‘sniped.’’ 480 Sniping is costly to those liquidity providers who get sniped and, so, effectively adds to adverse selection risk for slower liquidity providers.481 Trading quality among stocks that are near-tick-constrained, can also be significantly affected by the tick size.482 For example, consider a stock that would otherwise trade at an offer price of $10.015 and a bid of $10.005 absent the $0.01 tick. This stock would have a spread of $0.01. However, due to tick constraints the stock will quote at the best feasible ask price above $10.015 483 which is $10.02 and the best feasible bid price below $10.005 which is $10.00.484 Consequently, due to the tick constraint, the stock’s actual quoted spread is $0.02 instead of $0.01, or 100% wider than the spread would otherwise be. According to the analysis in Table 4 approximately 16% of trading volume occurs in stocks that are near-tick￾constrained. Combining this volume with the 56% of trading volume that occurs in tick-constrained stocks means that approximately 72% of share trading volume in current markets occurs in stocks that are tick-constrained or near￾tick-constrained.
2. Access Fees
The market for trading services in NMS stocks where traders either demand or supply liquidity is primarily served by the national equity exchanges and ATSs along with 6 wholesalers who internalize large portions of individual investor order flow. Exchanges and ATSs charge an access fee or pay a rebate to either those demanding liquidity or to those supplying it. Liquidity is typically provided through the provision of passive limit orders, which commit to execute against marketable orders that take liquidity. Rebates are typically captured by traders, such as market makers and some high-frequency traders, which specialize in the provision of liquidity and access fees are typically paid by demanders of liquidity. Rule 610(c) limits exchange fees for accessing protected quotations with prices of $1.00 per share or greater to $0.0030 per share (or 30 cents per 100 shares). This level is commonly referred to as 30 mils. The rule also prohibits access fees in excess of 0.3% of the price for stocks priced less than $1.00 per share. The 30 mil fee cap was adopted as a part of Regulation NMS in conjunction with the order protection rule and was implemented to prevent exchanges from charging excessive fees to orders that were required to trade with a protected quote. The 30 mil fee

485See Regulation NMS Adopting Release, supra note 16, at section I.C.2 (page 28 in the SEC version) which states that the selection of the access fee cap was chosen because ‘‘it will not seriously interfere with current business practices’’ and ‘‘[i]n the absence of a fee limitation, some ‘outlier’ trading centers might take advantage of the requirement to protect displayed quotations by charging exorbitant fees to those required to access the outlier’s quotations.’’ 486See Table 5 for information on how often exchanges amend their fees. 487See Letter from Richard Steiner, Electronic Trading Strategist, RBC Capital Markets, to Brent Fields, Secretary, Commission (Oct. 16, 2018), available at https://www.sec.gov/comments/s7-05- 18/s70518-4527261-176048.pdf (commenting on the transaction fee pilot). 488See Chester Spatt, Is Equity Market Exchange Structure Anti-Competitive?, (Dec. 28, 2020) (unpublished manuscript), available at https:// www.cmu.edu/tepper/faculty-and-research/assets/ docs/anti-competitive-rebates.pdf. However, not all exchanges offer volume-based tiers in their fee structures. For example, LTSE does not charge fees to transact and IEX does not offer volume based tiering. For exchanges like these, it is possible to determine with certainty the cost to transact prior to executing a trade. 489The Equity Data Plans disseminate SIP data over three separate networks: (1) Tape A for securities listed on the New York Stock Exchange (‘‘NYSE’’); (2) Tape B for securities listed on exchanges other than NYSE and Nasdaq; and (3) Tape C for securities listed on Nasdaq. These tapes are referred to as the ‘‘consolidated tapes.’’ The CTA Plan governs the collection, consolidation, processing, and dissemination of last sale information for Tape A and Tape B securities. The CQ Plan governs the collection, consolidation, processing, and dissemination of quotation information for Tape A and Tape B securities. Finally, the UTP Plan governs the collection, consolidation, processing, and dissemination of last sale and quotation information for Tape C securities. For details on exchange volume based fees and rebates, see, e.g., Add and Remove Rates, NASDAQ, available at https:// www.nasdaqtrader.com/ Trader.aspx?id=PriceListTrading2; New York Stock Exchange Price List 2022, NYSE, available at https://www.nyse.com/publicdocs/nyse/markets/ nyse/NYSE_Price_List.pdf; and Cboe U.S. Equities Fee Schedules EDGX Equities, Chi. Bd. Options Exch., available at https://www.cboe.com/us/ equities/membership/fee_schedule/edgx/. 490A ‘‘non-directed order’’ means any order from a customer other than a directed order. See 17 CFR 242.600(b)(56). A ‘‘directed order’’ means an order from a customer that the customer specifically instructed the broker or dealer to route to a particular venue for execution. See 17 CFR 242.600(b)(27). 491Rule 606(a)(1) requires broker-dealers to report separate information for market orders, marketable limit orders, non-marketable limit order,
and other orders. See 17 CFR 242.606(a)(1) for the items that need to be disclosed in reports under rule 606(a)(1). 492See 17 CFR 242.606(b)(3). In addition, under rule 606(b)(5)’s customer-level de minimis exception, broker-dealers need not provide upon request execution quality reports for customers that traded on average each month for the prior six months less than $1,000,000 of notional value of not held orders in NMS stocks through the broker￾dealer. See 17 CFR 242.606(b)(5). 493See 17 CFR 242.606(b)(3)(iii) and (iv). 494Reports under rule 606(a)(1) are produced by broker-dealers at the end of the quarter and disclose information on average fees and rebates for each month in that quarter. Reports issued by broker￾dealers to their customers under rule 606(b)(3) disclose summarized information on the handling of the customer’s orders for each calendar month over the prior six months. The broker-dealer must issue these reports to the customer within seven business days of receiving the customer’s request. 495See infra section V.D.1 for more discussion on why exchanges may not subsidize rebates from other sources of revenue. See also Eric Budish, et al., A Theory of Stock Exchange Competition and Innovation: Will the Market Fix the Market? (working paper May 22, 2019) available at https:// ssrn.com/abstract=3391008 (retrieved from SSRN Elsevier database). 496As can be seen from Table 5, which presents information on access fees and rebates for the 16 operating exchanges, in practice the fee that is charged on an inverted fee venue to post liquidity cap was also determined based on existing market practices.485 Rule 610(c) only regulates fees to access protected quotes; it does not regulate fees to access non-protected quotes, nor does it regulate rebates that exchanges can offer. However, the 30 mil fee cap has become a central component of the structure of fees and rebates as access fees for non-protected quotes generally do not exceed the 30 mil fee cap, nor do average rebates. Fee/rebate schedules can be quite complex, and the fee schedules change frequently.486 The actual fee or rebate that an investor is assessed on most exchanges also generally depends on which tier a market participant falls into based on trading volume in that month, with higher volume market participants receiving a higher rebate or a lower fee.487 Exchanges file their fee and rebate schedules with the Commission and post them on their websites, which means that the rebate and fee rates associated with each volume based tier can be known at the time a market participant trades. However, market participants may not know which volume based tier they would fall under at the time of the trade (and thus the fee or rebate rate that would apply to their particular trade) because the volume tier they would fall under is determined based on their trading volume during the current month, which is not finalized until the end of the month.488 More specifically, the volume based
fees or rebates a market participant receives from an exchange are often determined by a market participant’s average total daily traded share volume on the exchange during the month as a percentage of either the average total daily market volume reported by one of the consolidated tapes during the month or as a percentage of the average total daily market volume reported by all consolidated tapes during the month.489 Some information on average exchange fees and rebates is also available through reports available under rule 606. With respect to held orders, rule 606(a)(1) requires broker￾dealers to produce quarterly public reports regarding their routing of non￾directed orders 490 in NMS stocks that are submitted on a held basis. Along with other information, these reports require the broker-dealer to report both the total dollar amount and per share average of net transaction fees paid and net transaction rebates received for different order types for each trading venue to which the broker-dealer reports routing orders.491 Additionally, rule 606(b)(3) requires broker-dealers to produce reports pertaining to order handling upon the request of a customer that places, directly or indirectly, one or more orders in NMS stocks that are submitted on a not held basis, subject to a de minimis exception.492 For each venue to which the broker-dealer routed the customer’s orders, these reports require the broker-dealer to disclose, among other things, the average net execution rebate or fee for shares of orders providing liquidity and the average net execution rebate or fee for shares of order s removing liquidity.493 However, these reports only provide market participants with information on historical average transaction fees and rebates and may not accurately reflect the current exchange fees and rebates a market participate would encounter at the time of its transaction.494 The fee structure on an exchange can take one of three forms. The most common is maker-taker, in which liquidity demanders (i.e., takers) are assessed the access fee and liquidity providers (i.e., makers) are offered a rebate. Exchanges can also be inverted (also known as taker-maker), in which liquidity demanders are offered a rebate and liquidity providers are assessed an access fee. The last form of fee structure is flat; a flat exchange either charges one or both sides a fee but does not offer rebates. While the exchanges are free to subsidize rebates beyond what they earn through collecting access fees, in practice this does not appear to happen.495 The difference between the average access fee charged and the average rebate paid is the net capture earned by the exchanges for facilitating a transaction. The regulatory access fee cap is most relevant for maker-taker markets where the trader accessing a protected quote must pay the access fee. This is because the access fee cap applies only to fees for accessing protected quotations and does not apply to fees for posting
quotations. Therefore, on an inverted venue the exchange is not restricted by rule 610 in terms of the rebate that it can offer to access a protected quote or the fee to post a protected quote.496 Flat rate

is generally very close to the 30 mil access fee cap even though not constrained by rule 610. 497Panel A of Table 5 provides the category of exchange, maker-taker, inverted, or flat/free, the number of fee revisions since Jan. 2018 as indicated by the number of transaction fee specific rule 19b– 4 filings that the exchange has filed with the Commission, the date that each exchange’s website states that the fee schedule posted there is effective and the range of fees and rebates along with the number of categories of fees and rebates for transactions priced equal to, or greater than, $1.00 per share. 498The two are Cboe EDGX and Members MEMX. venues, which do not offer rebates, do not appear to be economically constrained by rule 610(c) as their fees for both taking and adding liquidity are significantly lower than the 30 mil fee cap.
Table 5 provides an analysis of
current fee and rebate schedules based on rule 19b–4 filings with the Commission for each of the equity exchanges operating in the United States as of June 1, 2022 as well as a review of the transaction prices that each exchange posts.497 What becomes apparent from this analysis is that the current structure of fees and rebates is complex and consistently changing. On average, each exchange filed 11.4 rule 19b–4 filings per year with the Commission. Market participants interacting with all exchanges had to adjust to an average of 155 fee changes per year across all exchanges. Exchanges also tend to have numerous fee and rebate categories. The effect of the 30 mil fee cap as an anchor point is also apparent. For most exchanges the maximum fee assessed, presumably for non-protected quotes, is close to the 30 mil fee cap for protected quotes. The maximum rebate is generally in the vicinity of 30 mils, further suggesting the 30 mil access fee cap effectively limits what the exchanges offer as rebates. Panel B provides information on the exchange’s fee schedules for stocks priced lower than $1.00. For these transactions the fee schedules tend to be simpler. Most exchanges do not offer a rebate for transactions lower than $1.00 even if the exchange offers rebates for other transactions—only two exchanges offer any sort of baseline rebate.498 Additionally, the exchanges tend to charge the maximum access fee of 0.3% of the share price. A few exchanges charge a fee to both sides to transact with one exchange charging 0.3% to both sides of a transaction.
TABLE 5—SUMMARY OF TRANSACTION-BASED FEE SCHEDULES FOR U.S. NATIONAL EQUITIES EXCHANGES AS OF
MAY 2022 a
Panel A: Fees and Rebates for Transactions Greater than $1.00 Exchange Fee model Number of revisions Jan 2018–June 2022 (per year) Date of fee
schedule
Fees
(number of categories)
Rebates
(number of categories)
Cboe BZXb ........................ Maker-Taker ...................... 98
(21.8)
4/1/2022 $0.0030
(5)
[$0.0000–$0.0032]
(11)
Cboe BYXc ........................ Inverted .............................. 42
(9.3)
5/2/2022 [$0.0010–$0.0030] (10) [$0.0000–$0.0015] (6)
Cboe EDGAd ..................... Inverted .............................. 26
(5.8)
4/1/2022 [$0.0008–$0.0030] (12) [$0.0000–$0.0024] (9)
Cboe EDGXe ..................... Maker-Taker ...................... 71
(15.8)
5/2/2022 [$0.0000–$0.0030] (7) [$0.0000–$0.0032] (14)
BXf ..................................... Inverted .............................. 45
(10.0)
10/12/2021 [$0.0010–$0.0030] (9) [$0.0000–$0.0021] (15)
Phlx (PSX) g ....................... Maker-Taker ...................... 48
(10.7)
1/2/2022 $0.0030
(1)
[$0.0005–$0.0020]
(5)
Nasdaq h ............................ Maker-Taker ...................... 83
(18.4)
4/12/2022 [$0.0004–$–$0.0030] (3) [$0.0000–$0.00325] (7)
NYSE Arca i ....................... Maker-Taker ...................... 77
(17.1)
5/1/2022 [$0.0000–$0.0030] (15) [$0.0000–$0.0032] (21)
NYSE American ................. Maker-Taker ...................... 11
(2.4)
5/1/2022 [$0.0010–$0.0030] (9) [$0.0020–$0.0030] (10)
NYSE ................................. Maker-Taker ...................... 82
(18.2)
5/1/2022 [$0.0000–$0.0030] (50) [$0.0000–$0.0030] (69)
NYSE National ................... Inverted .............................. 27
(6.0)
1/2/2022 [$0.0022–$0.0029] (16) $0.0000 (1)
NYSE Chicago ................... Maker-Taker ...................... 7
(1.6)
5/1/2022 [$0.0010–$0.0010] (5) $0.0010 (6)
IEXj .................................... Flat ..................................... 19
(4.2)
4/1/2022 [$0.0006–$0.0010] (2) [$0.000 (1) Members MEMXk .............. Maker-Taker ...................... NA 6/1/2022 [$0.0000–$0.0030] (3) [$0.0018–$0.0035] (4) Miami MIAXl ...................... Maker-Taker ...................... NA 9/24/2020 $0.0028 (1) [$0.0022–$0.0028] (2) Long Term LTSE m ............ Free ................................... NA N/A $0.0000 (1) $0.0000 (1) Panel B: Fees and Rebates for Transactions Under $1.00 Exchange Fee model Rebate Fee Charged both sides Cboe BZX ........................................ Maker-Taker .................................... 0 ....................................................... 0.30 Cboe BYX ........................................ Inverted ............................................ 0 ....................................................... 0.10 Cboe EDGA ..................................... Inverted ............................................ 0 ....................................................... 0.30

499 Intercontinental Exchange, the parent firm of NYSE, reports on page 51 of its 2021 Form 10–K filing that their net capture for U.S. equity transactions was approximately 4.2 mils in 2021. Nasdaq did not report its net capture in its Form 10–K filing, however Nasdaq provides information on its investor relations web page which, when we average the relevant 2021 volumes, indicates that the average net capture across all Nasdaq platforms for U.S. equity transactions was 5.9 mils (see Nasdaq 2022/2021 Monthly Volumes, NASDAQ, available at https://ir.nasdaq.com/static-files/ 465d2157-c476-4546-a9f7-8d7ad0c9be77). Cboe reports in its Form 10–K filing that its net capture for U.S. equity transactions was approximately 2 mils. 500The estimate for the 0.28% net capture is obtained by taking the estimated net transaction fee for each exchange and multiplying it by the dollar trading volume presented in Panel B of Table 6 below. Exchange Fee model Rebate Fee Charged both sides Cboe EDGX ..................................... Maker-Taker .................................... 0.00009 (per share) ......................... 0.30 BX .................................................... Inverted ............................................ 0 ....................................................... 0.30 Phlx (PSX) ....................................... Maker-Taker .................................... 0 ....................................................... 0.20 Nasdaq ............................................ Maker-Taker .................................... 0 ....................................................... 0.30 NYSE Arca ...................................... Maker-Taker .................................... 0 ....................................................... 0.30 NYSE American ............................... Maker-Taker .................................... 0 ....................................................... 0.25 NYSE ............................................... Maker-Taker .................................... 0 ....................................................... 0.30
NYSE National ................................. Inverted ............................................ 0 ....................................................... 0
NYSE Chicago ................................. Maker-Taker .................................... 0 ....................................................... 0.10 Yes. IEX ................................................... Flat ................................................... 0 ....................................................... 0.30 Yes. Members MEMX .............................. Maker-Taker .................................... 0.10% (of value) .............................. 0.25 Miami (MIAX) ................................... Maker-Taker .................................... 0 ....................................................... 0.30 Long Term (LTSE) ........................... Free ................................................. 0 ....................................................... 0.30 aThe number of fee revisions is obtained by counting each rule 19b–4 filing for each exchange that is not clearly marked for a non-transaction fee related purpose such as connectivity fees, listing fees, options fees, etc. To determine the fee and rebate information each exchange’s webpage was searched for its current posted access fee and rebate schedule and collected information only on access fees and rebates per￾taining to non-auction trading in stocks priced equal to, or greater than, $1.00 per share. Sources for Current Access Fee Data were effective on the dates shown in Panel A of Table 5, and were accessed during May 2022 at the websites shown beneath the table. b https://www.cboe.com/us/equities/membership/fee_schedule/bzx/. c https://www.cboe.com/us/equities/membership/fee_schedule/byx/. d https://www.cboe.com/us/equities/membership/fee_schedule/edga/. e https://www.cboe.com/us/equities/membership/fee_schedule/edgx/. f https://listingcenter.nasdaq.com/rulebook/bx/rules/BX%20Equity%207. g https://listingcenter.nasdaq.com/rulebook/phlx/rules/phlx-equity-7. h https://listingcenter.nasdaq.com/rulebook/nasdaq/rules/Nasdaq%20Equity%207. iAll NYSE Exchange Family fees: https://www.nyse.com/markets/fees. j https://exchange.iex.io/resources/trading/fee-schedule/. k https://info.memxtrading.com/fee-schedule/. l https://www.miaxoptions.com/sites/default/files/alert-files/MIAX_PEARL_Equities__Initial_FS_09242020.pdf. m https://ltse.com/trading/faqs. Complex fee schedules and volume based tiers mean that it is difficult to determine the net capture on a given exchange (the difference between average fees levied and rebates paid). Additionally, financial statements for exchange groups generally do not break down performance on a per venue level and they generally combine auction access fees collected with regular trading access fees. Furthermore, some exchanges are privately held and thus do not release the same financial statements that public exchanges do. Using information from the financial statements of the three major exchange groups which collectively account for the overwhelming majority of trading volume on exchanges, the Commission
estimates that the average total net capture is around 4 mils for all trading types.499 However, the Commission understands based on Staff conversations with industry members that the net capture for non-auction trading in stocks that have a price equal to or greater than $1.00 is likely close to 2 mils, and in further analysis where the net capture needs to be assumed, we use 2 mils. This analysis suggests that the primary reason that access fees remain near 30 mils on most exchanges is to fund rebates. For stocks trading below $1.00 the Commission estimates an average net capture of around 0.28% of the transaction volume.500 This amount is very close to the 0.30% access fee cap and arises because, as seen in Panel B of Table 5, most exchanges set their baseline fee at 0.30% but do not offer baseline rebates for transactions under $1.00 and some charge fees to both sides of the transaction leading to more than 0.30% per trade earned by the exchange.
Table 6 presents tabulations of the
total share (Panel A) and dollar (Panel B) trading volume executed on the 16 exchanges in the first six months of
2022. This table provides estimates for
the total volume that executed below $1.00 and that which executed above $1.00. These numbers represent an estimate of the total number of shares that would have been subject to the access fees and rebates discussed in this release.
TABLE 6—TRADING VOLUME BY EXCHANGE, EXCHANGE TYPE, AND EXCHANGE GROUP JAN. TO JUNE 2022 a
Panel A: Share Volume
Exchange name Exchange type <$1 Volume (billions) >=$1 Volume tick￾constrained (billions) >=$1 Volume non-tick￾constrained (billions) % of exchange volume
Off Exchange .................................... ........................................................... 67.6 258.1 296.6 ........................
Nasdaq .............................................. Maker-Taker ..................................... 13.3 111.8 169.2 26.5

501 1.4T shares 683 billion tick-constrained shares

• 737 billion non-tick-constrained shares. Also, off
  exchange trading volume has increased in recent years. See, e.g., Jonathan Brogaard and Jing Pan, Dark Pool Trading and Information Acquisition, 35 Rev. Fin. Studies 2625 (2022).
  TABLE 6—TRADING VOLUME BY EXCHANGE, EXCHANGE TYPE, AND EXCHANGE GROUP JAN. TO JUNE 2022 a—CONTINUED
  Exchange name Exchange type <$1 Volume (billions) >=$1 Volume tick￾constrained (billions) >=$1 Volume non-tick￾constrained (billions) % of exchange volume NYSE Arca ........................................ Maker-Taker ..................................... 8.7 62.2 53.5 14.1 NYSE ................................................ Maker-Taker ..................................... 1.2 48.8 54.9 12.9 Cboe BZX ......................................... Maker-Taker ..................................... 2.8 45.3 38.3 10.6 EDGX ................................................ Maker-Taker ..................................... 7.1 38.8 40.7 10.3 MEMX ............................................... Maker-Taker ..................................... 1.9 36.8 22.9 7.6 IEX .................................................... Flat ................................................... 0.5 14.7 26.0 5.2 EDGA ................................................ Inverted ............................................ 0.7 13.1 9.6 2.9 Cboe BYX ......................................... Inverted ............................................ 0.7 14.1 6,.5 2.6 MIAX Pearl ........................................ Maker-Taker ..................................... 0.4 10.6 4.0 1.9 NYSE National .................................. Inverted ............................................ 0.2 10.9 3.0 1.8 Nasdaq OMX PSX ............................ Maker-Taker ..................................... 0.08 9.3 3.9 1.6 Nasdaq OMX BX .............................. Inverted ............................................ 0.2 4.2 4.1 1.0 NYSE American ................................ Maker-Taker ..................................... 0.7 3.8 2.5 0.9 NYSE Chicago .................................. Maker-Taker ..................................... 0.02 0.5 1.9 0.1 LTSE ................................................. Free .................................................. 0.002 0.003 0.01 0.0
  Total ........................................... ........................................................... 106.0 683.1 737.6 ........................
  Exchange Total .......................... ........................................................... 38.4 425.1 441.0 ........................
  Panel B: Dollar Volume
  Exchange name Exchange type <$1 Volume (billions) >=$1 Volume tick￾constrained (billions) >=$1 Non-tick￾constrained (billions) % of exchange volume
  Off Exchange .................................... ........................................................... $31.5 $5,947.1 $23,715.1 ........................
  Nasdaq .............................................. Maker-Taker ..................................... 6.6 2,896.6 15,518.6 30.2 NYSE Arca ........................................ Maker-Taker ..................................... 4.0 1,953.9 5,274.7 15.1 NYSE ................................................ Maker-Taker ..................................... 0.6 1,080.5 4,034.4 11.5 Cboe BZX ......................................... Maker-Taker ..................................... 1.2 1,278.2 3,807.3 11.3 EDGX ................................................ Maker-Taker ..................................... 3.5 857.5 3,213.9 8.9 MEMX ............................................... Maker-Taker ..................................... 1.0 841.3 1,588.8 5.5 IEX .................................................... Flat ................................................... 0.2 387.7 2,356.1 6.3 EDGA ................................................ Inverted ............................................ 0.4 373.0 802.4 2.7 Cboe BYX ......................................... Inverted ............................................ 0.4 319.8 626.2 2.1 MIAX Pearl ........................................ Maker-Taker ..................................... 0.2 285.2 424.8 1.6 NYSE National .................................. Inverted ............................................ 0.09 280.4 209.4 1.1 Nasdaq OMX PSX ............................ Maker-Taker ..................................... 0.04 270.7 411.5 1.5 Nasdaq OMX BX .............................. Inverted ............................................ 0.09 139.1 438.9 1.3 NYSE American ................................ Maker-Taker ..................................... 0.3 90.0 222.9 0.7 NYSE Chicago .................................. Maker-Taker ..................................... 0.01 20.3 351.5 0.3 LTSE ................................................. Free .................................................. 0.001 0.1 1.0 0.0
  Total ........................................... ........................................................... 50.1 17,021.7 62,997.5 ........................
  Exchange Total .......................... ........................................................... 18.6 11,074.6 39,282.4 ........................
  aThis table is created by aggregating all trade information from the TAQ database for every trading day in Jan. to June 2022. Only trading vol￾ume reflecting normal trades during regular trading. Normal trades are identified in TAQ 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. We aggregate total remaining share volume by exchange, exchange type (maker-taker, inverted, flat, free), and exchange family (NYSE, Nasdaq, CBOE, Independent). We combine volume from exchange codes T and Q into ‘Nasdaq.’ Panel A presents share volume totals and Panel B presents dollar volume totals. Certain items in this Table 6 may also be affected by the MDI Rules once they are fully implemented. See Table 3 note b. Transaction fees for trades in stocks priced equal to or greater than $1.00 are generally levied per share transacted. From Table 6 we see that in the first half of 2022, there were approximately 1.4 trillion shares transacted at prices equal to or greater than $1.00 per share across all venues, 59% of which (866 billion shares) were executed on a registered exchange.501 Of these on-exchange transactions priced equal to or greater than $1.00 per share, approximately half were in tick-constrained securities while the other half were not. These numbers provide the basis for estimating the total amount of access fees and rebates collected and distributed in transactions priced equal to, or greater than, $1.00 per share. For transactions less than $1.00 per share the access fee is generally levied as a percent of the transaction share price. In Panel B we see that in the first half of 2022 there was approximately $18 billion transacted on exchanges in shares priced less than $1.00 per share. Panels A and B of Table 7 break down the share and dollar volume statistics presented in Table 5 by venue type:
  maker-taker, inverted, and flat/free. The overwhelming majority of both dollar and share exchange trading volume occurs on maker-taker venues with approximately 88% of both dollar and share volume executing on maker-taker

502These estimates are computed by assuming a 30 mil access fee and 28 mil rebate on all transactions that occur on maker-taker or inverted exchanges and an 8 mil access fee (and no rebate) on the volume priced equal to, or greater than, $1.00 per share that occurs on IEX. For trading in sub $1.00 transactions, the various access fees and rebates for each exchange presented in Panel B of
Table 5 are multiplied by the corresponding dollar
volume of trade in transactions priced less than $1.00 per share to compute the total access fees collected and rebates distributed for this volume. The figures are summed together to provide the estimates of total access fees collected and rebates distributed. 503This estimate presumes that for shares transacted in prices equal to or greater than $1.00 per share on maker-taker venues the liquidity demander pays a 30 mil access fee and the liquidity provider receives a 28 mil rebate. On inverted exchanges the opposite occurs. On IEX it is presumed that liquidity demanders pay an 8 mil access fee and liquidity providers receive no rebate. For trading in sub $1.00 transactions the various access fees and rebates for liquidity suppliers and demanders are computed by taking the respective fees and rebates for sub $1.00 transactions for each exchange presented in Panel B of Table 5 and multiplying them by the corresponding dollar volume of trade in transactions priced less than $1.00 to compute the total access fees collected and rebates distributed for liquidity-providing and demanding trades. The figures are summed together to provide the estimates of total access fees collected and rebates distributed. 504 IntelligentCross ATS, for example, offers matching processes for all NMS stocks eligible for trading, and disseminates bids and offers in real￾time to subscribers to the ATS’s proprietary data feed, but these are not protected quotes. See IntelligentCross, Form ATS–N, Item 15 (Display) (dated Apr. 11, 2022) available at https:// www.sec.gov/Archives/edgar/data/1708826/ 000170882622000002/xslATS-N_X01/primary_ doc.xml. 505See ATS Transparency Data Quarterly Statistics, available at https://www.finra.org/filing￾reporting/otc-transparency/ats-quarterly-statistics. 506See supra note 371 and accompanying text for a discussion of a current request for comment by the exclusive SIPs about the potential to amend the plans to include some odd-lot information in the SIP data. 507See supra section IV.A.1 for a discussion on the expected time of the implementation of the MDI Rules. venues. Inverted exchanges capture about 6% of both dollar and share volume, and the remaining share volume transact on flat/free exchanges.
TABLE 7—VOLUME BY EXCHANGE TYPE AND ESTIMATED ACCESS FEE/REBATE ESTIMATES JAN. TO JUNE 2022 a
Price <$1
(billions)
Price >$1 tick￾constrained (billions) Price >$1 non-tick￾constrained (billions) % Total Panel A: Exchange Share Volume By Venue Type Maker-Taker ............................................................................. 35.5 364.1 389.3 88.7 Inverted .................................................................................... 1.9 38.4 18.9 6.6 Flat/Free ................................................................................... 0.5 14.7 26.1 4.6 Panel B: Exchange Dollar Volume by Venue Type Maker-Taker ............................................................................. 17.1 9,484.4 34,625.4 88.4 Inverted .................................................................................... 1.0 986.1 2,036.9 6.1 Flat/Free ................................................................................... 0.2 387.8 2,357.1 5.5 Panel C: Estimated Fees Collected and Rebates Distributed (Billions)
Fees Collected ......................................................................... .............................. $2.55 .............................. ..............................
Rebates Distributed ................................................................. .............................. 2.31 .............................. ..............................
Exchange Capture ................................................................... .............................. 0.24 .............................. ..............................
Panel D: Total Estimated Net Fees by Liquidity Type (Billions)
Demander ................................................................................ .............................. $2.13 .............................. ..............................
Provider .................................................................................... .............................. ¥1.89 .............................. ..............................
Exchange Capture ................................................................... .............................. 0.24 .............................. ..............................
a Certain items in this Table 7 may also be affected by the amendments in the MDI Rules once they are fully implemented. See Table 3 note b. Panel C provides an estimate of the total amount of access fees collected and rebates distributed.502 In the first 6 months of 2022 there were an estimated $2.55 billion in access fees collected across all exchanges and $2.31 billion in rebates distributed, resulting in a net capture to all exchanges of $242 million. Panel D of Table 7 provides estimates of the net access fee paid by liquidity demanders and liquidity suppliers.503 In the first 6 months of 2022 liquidity demanders paid an estimated $2.1 billion in net access fees and liquidity providers received an estimated $1.89 billion in rebates. With the difference of $242 million being the exchanges’ estimated net capture. Although not subject to rule 610(c), because they do not post protected quotes, ATSs also often assess transaction fees.504 As of the second quarter of 2022 there were 32 ATSs that reported trading volume to FINRA transacting a total of 81 billion shares.505 Unlike exchanges, the fees that ATSs charge generally do not have a standard structure and are often negotiated between the ATS and the customer. Based on a review of item 19 in form ATS–N, ATSs generally do not provide rebates, and when transaction fees are explicitly discussed, they are often in the range of 10 mils.
3. Round Lots and Market Data
Infrastructure
Currently, information on odd-lots inside the NBBO is only available to investors who subscribe to proprietary data feeds, and comprehensive odd-lot information is only available to market participants who subscribe to the proprietary data feeds of all the exchanges.506 The implementation of the MDI Rules will include odd-lot information inside the NBBO.507 The MDI Rules will also change the definition of a round lot. Specifically, the MDI Rules will lower the round lot size to 40 shares for stocks priced greater than $250 and less than $1,000. The round lot definition will become 10 shares for stocks priced greater than $1,000 and less than $10,000. The round lot definition will become 1 share for stocks priced greater than $10,000.

508See MDI Adopting Release, supra note 5,
section V.C.1.(b).(i) for the full discussion of the
effect of changing the round lot size on the NBBO. 509See MDI Adopting Release, supra note 5, sections V.C.1.b.(ii) and V.C.i.b.(iii) for the full discussion of the effect of changing the round lot size on transparency and execution quality. 510See MDI Adopting Release, supra note 5,
section V.C.1.b.(iv) for the full discussion of the
effect of changing the round lot size on exchange competition and order routing. 511See MDI Adopting Release, supra note 5,
section V.C.1.b.(vi) for the full discussion of the
expected costs of changing the round lot size. 512See MDI Adopting Release, supra note 5,
section V.C.1.b.(vii) for the full discussion of the
effect of changing the round lot size on other rules and regulations. 513See MDI Adopting Release, supra note 5,
section V.C.1.c.(i) for the full discussion of the
effect of including odd-lot information inside the NBBO in its definition of core data. 514 Id. 515 Id. 516See MDI Adopting Release, supra note 5, sections V.C.1.c.(iv), for the full discussion of the costs associated with expanding core data to include odd-lot information inside the NBBO. 517 Id. 518See MDI Adopting Release, supra note 5, at footnote 1945 and surrounding text. 519Exchanges can also facilitate the routing of orders to other exchanges. 520Trade 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. 521See supra note 330 and infra note 612 and associated text for a further discussion on the nature of proprietary data feeds. 522See MDI Adopting Release, supra note 5, at 18773–64. 523Based on information from broker-dealers’ 2021 FOCUS Report Form X–17A–5 Schedule I. This includes both carrying broker-dealers, who maintain custody of customer funds and securities, and introducing broker-dealers, who accept customer orders and introduce their customers to a carrying broker-dealer that will hold the customers’ securities and cash. When adopting the MDI Rules, the Commission enumerated numerous economic effects specifically related to changing the round lot definition and including odd-lot information as a part of core data. For the change in the definition of round lots, these effects include: (1) a mechanically tighter NBBO for higher priced stocks due to the redefinition of the round lot sizes,508 (2) increased transparency and better order execution,509 and (3) potentially more orders for high priced stocks being routed to exchanges instead of ATSs.510 The costs of changing the round lot definition are also discussed and include upgrading systems to account for additional message traffic and modifying and reprogramming systems.511 The Commission also discussed the expected effect that changing the round lot definition would have on other rules and regulations.512 For the inclusion of odd-lot information inside the NBBO to core data,513 these effects include reducing information asymmetries between investors who currently have access to odd-lot information through proprietary data feeds and those who do not, leading to better order execution and price efficiency.514 Providing a reasonable alternative to some market participants to proprietary data will allow some market participants to reduce data expenses required for trading.515 The costs of including odd￾lot information inside the NBBO include: 516 the cost of upgrading existing infrastructure and software to handle the dissemination of additional core data message traffic, the cost to SROs to implement system changes required in order to make regulatory data and other data needed to generate consolidated market data available to competing consolidators, the cost of technological investments market participants might have to make in order to receive the new core
message traffic, and lastly, the cost to users of proprietary data whose information advantage would dissipate somewhat.517 The MDI Rules do not require the competing consolidators to disseminate odd-lot information. However, the Commission estimated that at least one competing consolidator will disseminate the odd-lot information because it believed that there will be demand for the data.518
4. Affected Entities and Markets
The proposal would affect trading in NMS Stocks, particularly on exchanges that charge high access fees and in stocks with lower quoted spreads, many odd-lots inside the spread, or higher prices. Therefore, the proposal would affect a wide variety of market participants, including national securities exchanges, other trading venues, exclusive SIPs and their data users, competing consolidators (eventually), broker-dealers operating order entry and order routing systems, and others who engage in the trading of NMS Stocks, including investors. There are 16 national securities exchanges on which NMS Stocks are traded that would be affected by the proposal. The exchanges compete with each other and other trading venues to attract order flow. Exchanges compete with each other in how they set the rules that dictate how orders routed to it interact given the broader requirements of the Exchange Act and rules thereunder. Such rules are coded into the systems of exchanges that match buy and sell orders. Exchanges also differentiate themselves with the access fees they charge or the rebates they pay out for particular order types.519 As a subset of national securities exchanges, the five listing exchanges, set rules for listing standards for securities and are responsible for tracking certain regulatory information regarding their listed stocks. Other trading venues, including 33 ATSs and 238 other FINRA members, including OTC market makers, also compete with exchanges and each other to attract order flow in NMS Stocks and can route orders to the various trading venues. The order flow they attract depends on a number of factors such as fees and price improvement over the NBBO amongst other aspects of execution quality. Pending the full implementation of the MDI rules, the market for market data is serviced by the two exclusive SIPs and exchange proprietary feeds. The two exclusive SIPs collect trade, quote, and regulatory data from the 16 exchanges and three trade reporting facilities,520 consolidate those data, determine an NBBO, and disseminate those data directly to users or through vendors and broker-dealers. The exclusive SIPs can also collect information from the alternative display facility (‘‘ADF’’) operated by FINRA though no one currently uses the ADF to display quotes. Upon full implementation of the MDI Rules, the exclusive SIPs will be retired and an unknown number of competing consolidators will take over the collection, consolidation, estimation, and dissemination. The volume of data to be processed through these competing consolidators will be greater than that currently processed through exclusive SIPs, but competing consolidators will have flexibility to design data products tailored to different user types. In addition to the exclusive SIPs, the exchanges also disseminate market data to paying subscribers via proprietary data feeds. These proprietary data feeds provide more data than the exclusive SIPs at a lower latency.521 Following the
transition to a competing consolidator model for market data, the Commission expects total fees for market data are likely to decline.522 Broker-dealers typically route their own orders or their customers’ orders for execution to trading venues. There were 3,564 registered broker-dealers as of the end of calendar year 2021. A portion of these broker-dealers focus their business on individual and/or institutional investors in the market for NMS stocks.523 According to CAT data,

524Customer accounts are identified in CAT as accounts belonging to either the ‘‘Institutional Customer’’ account type, defined as accounts that meet the definition in FINRA Rule 4512(c), or the ‘‘Individual Customer’’ account holder type, defined as accounts that do not meet the definition of FINRA Rule 4512(c) and are also not a proprietary account. 525See Disclosure of Order Handling Information, supra note 4 at nn.59–60 and corresponding text. Meanwhile, a broker-dealer must attempt to execute a held order immediately, which typically better suits individual investors who seek immediate executions and rely less on broker-dealer order handling discretion. 526FINRA’s best execution obligation requires that, ‘‘A member must make every effort to execute a marketable customer order that it receives fully and promptly.’’ See FINRA Rule 5310, Supplementary Material paragraph .01. 527See infra note 625. 528See supra note 459 for the definition of pennying. 529 It is possible that changes in the stocks priced greater than $1.00 with quoted spreads of less than $0.04 could have spill-over effects in these stocks, but the net effect of such is uncertain and likely insignificant. For instance, tighter spreads in stocks receiving a tick size reduction could potentially result in the withdrawal of some liquidity providers from all markets (which would harm liquidity in stocks with no tick size adjustment) and/or lead some liquidity providers to shift their activity to stocks with no tick size adjustment (improving liquidity in those stocks). there were approximately 1,037 broker￾dealers that originated NMS stocks orders on behalf of individual investors and approximately 909 broker-dealers originated NMS stocks orders on behalf of institutional investors.524 Institutional investor orders are typically ‘‘not held’’ orders, which provides the broker-dealer with more time and price discretion to execute the order or to minimize price impact.525 In contrast, broker-dealers must attempt to execute a marketable held order immediately, which typically better suits individual investors who tend to seek immediate executions and rely less on broker-dealer order handling discretion since their orders typically have much lower price impacts.526 Brokers-dealers serving individual investors often distinguish themselves by the customer service and financial advice they provide and the accessibility and functionality of their trading platforms. Many broker-dealers that handle customer accounts do not directly access national securities exchanges or ATSs for their orders and rely on other broker-dealers to facilitate market access for them through those broker-dealers’ order entry systems. The Commission estimates that there are 1,192 broker￾dealers with order entry systems that submit orders in NMS stocks to exchanges in the minimum pricing increments.527 Of these broker-dealers, an estimated 282 broker-dealers operate smart order routers to facilitate order routing. D.
Economic Effects The Commission expects the proposal to lead to lower transaction costs for liquidity demanders on exchanges trading in stocks with narrow spreads. The proposal for a minimum increment to trading would improve exchanges’ and ATSs’ abilities to potentially innovate in ways that could potentially increase competition for retail order flow. A lower access fee cap would reduce the transaction costs of liquidity demanders in the predominant maker￾taker structure. Making fees and rebates determinable at the time of trade may enhance broker-dealer order routing by helping mitigate a potential conflict of interest and providing clarity in terms of all in execution costs. Accelerating the inclusion of odd-lot information into the exclusive SIPs, updating the definition of a round lot, and providing the best odd-lot order, would accelerate some of the benefits of the MDI Rules, and could also lead to better order-execution by enhancing benchmarking. The proposed rule would also impose compliance costs on various market participants.

1. Modification of Rule 612 To Create a
   Tiered Tick Structure
   The proposal would create a smaller tick size for some NMS stocks. A smaller tick, as proposed, would have two competing effects on transaction costs. First, a smaller tick leads to pricing that more effectively balances liquidity supply and demand—which, all else equal, can lower transaction costs. Second, a smaller tick fragments liquidity in the order book into more price levels, which can increase complexity and the incidence of pennying 528—which could harm liquidity. The primary mechanism by which a smaller tick would lead to improved market quality is by reducing the tick size constraints that prevent spreads from narrowing. The proposal would not change the tick for NMS stocks when their prices drop below $1.00 or for stocks with Time-Weighted Average Quoted Spread greater than $0.04 during an evaluation month. The Commission expects that the trading environment for stocks with these characteristics is unlikely to be significantly affected.529 The proposal assigns each NMS stock priced equal to, or greater than, $1.00 to one of 4 tick sizes: $0.001, $0.002, $0.005, and $0.01 depending on the stock’s Time-Weighted Average Quoted Spread during an evaluation month.
   Table 8 presents estimates of the
   amount of share trading volume that would have been associated with each of the four tick sizes.
   TABLE 8—PROPOSED TICK SIZES AND QUOTED SPREAD a
   Average quoted spread Tick Number of stocks Estimated % share volume Estimated % dollar volume Spread ≤$0.016 ............................................................................................... $0.001, 0.002 1,707 64.0 37.9 $0.016 <Spread <$0.04 ................................................................................... 0.005 2,648 17.9 22.3 $0.04 <Spread ................................................................................................. 0.01 7,792 18.1 39.8 aQuoted spreads are determined by computing the time-weighted quoted spread during regular trading hours as computed by the WRDS intra-day indicators for every sym_root and sym_suffix combination in the dataset and taking the equal weighted average across all trading days in Mar. 2022. The number of stocks assigned to each group is indicated in the Number of Stocks column. The tick size is then applied to all trad￾ing volume for Apr. to June 2022 with the fraction of share and dollar trading volume attributable to each tick group presented in the respective columns. Once implemented, the changes to the current arrangements for consolidated market data pursuant to the MDI Rules may impact the number of stocks and their estimated % volumes anticipated for each tick level. In particular, under the MDI Rules, NMS stocks priced $250 or more will receive reductions in round lot sizes which is anticipated to lower their quoted spreads; however the effect on the reported numbers is likely small both because these stocks make up less than 3% of share volume and because they are unlikely to have spreads less than $0.04. Based on an analysis of data from Mar. 2022, the average spread of a stock priced between $250 and $1,000 was $0.35 in Mar. 2022, far greater from the $0.04 that would trigger a smaller minimum increment. Similarly, for stocks priced between $1,000 and $10,000 the average quoted spread was $2.90 in Mar. 2022 and the only stock that had a value weighted average price greater than $10,000 already has a round lot size of one share and was not near-tick-constrained.

530Some stocks could potentially have spreads just less than $0.01 due to locked or crossed markets. This is more likely to occur among stocks with relatively low prices and very high trading volume. See supra note 448. 531 It is possible that, for unknown reasons, some stocks may trade better with a wider tick even though their quoted spread suggests that a smaller tick may be warranted, though the Commission does not think the scenario to be likely. For example, one market participant expressed the idea that the optimal tick size could be a function of the stock’s price and trading volume, rather than the stock’s current quoted spread. Based on this analysis, it is possible that due to variation in price and volume, a stock in this proposal could trade outside the optimal tick range according to this market participant. See Phil Mackintosh, Looking for the Perfect Stock Price, Nasdaq (Sept. 19, 2019), available at https://www.nasdaq.com/articles/ looking-for-the-perfect-stock-price-2019-09-19. 532See Dyhrberg, et al., supra note 454, studying the effects of imposing a tick size on a crypto exchange that previously did not have a tick size. The authors report an improvement in market quality due largely to a reduction in pennying behavior. 533See supra note 478 and related text. 534The pennying effect would be particularly acute for wide spread stocks with lower stock prices because a lower stock price reduces the amount of capital needed to supply a round-lot quote and hence make pennying less capital intensive. 535For example, if a stock has a spread of one cent and a $0.001 tick, gaining priority through price improvement would require narrowing the Continued b Initially the Commission expects that no stock would qualify for the $0.001 tick size due to the minimum pricing increment restricting the time weighted-average quoted spread. Thus, after the first evaluation period stocks that would eventually be assigned a $0.001 tick size would initially be assigned a tick size of $0.002.
Table 8 indicates that if March 2022
were the first evaluation month then almost two thirds of stocks would have retained the $0.01 tick size because they have Time-Weighted Average Quoted Spreads greater than $0.04. These stocks account for approximately 18% of share trading volume and 40% of dollar trading volume. The next most frequent outcome would be among the approximately 22% of stocks that would have received a $0.005 tick because they have Time-Weighted Average Quoted Spreads between $0.016 and $0.04. These stocks account for approximately 18% of share volume and approximately 22% of dollar volume. For the remaining approximately 14% of stocks, those with spreads less than $0.016, there is significant uncertainty regarding which bin these stocks would be assigned to, either the $0.001 or $0.002 tick size bin. The $0.01 tick size creates a floor on Time-Weighted Average Quoted Spreads that, absent an actual tick size change, makes it difficult to determine the prevailing tick size that may occur given a smaller tick.530 Thus,
Table 8 combines together statistics for
all stocks with prevailing quotes less than $0.016. These stocks comprise approximately 64% of total share volume and 38% of dollar trading volume. For the 14% of stocks that would likely receive either the $0.001 or $0.002 tick, the Commission expects liquidity to generally improve. Empirical analysis presented and discussed below in Table 9 suggests that for stocks with fewer than approximately 2 ticks intra-spread, a 1:5 reduction in the tick size generally improved market quality. This is a similar reduction in the tick size to what the proposal would offer and so the Commission believes it is reasonable to extrapolate from this analysis that these stocks would see an improvement in liquidity.531 For the 22% of stocks that would receive a $0.005 tick size under the proposal the effect of the proposal is less certain. For these stocks, the proposal would target 3–8 ticks intra￾spread whereas currently these stocks have approximately 1.5–4 ticks intra￾spread. In this case, the empirical guidance from the analysis in Table 9 is not clear as to which regime produces better market quality outcomes. Stocks that retain the $0.01 tick would have market quality that is likely unchanged relative to the baseline. All else equal, reducing the tick size could narrow the spread. In a competitive market, and in the absence of rebates or other price distortions, the prevailing bid or ask price would be the feasible price equal to just worse than the price that equates liquidity supply and demand—as any price better than this would lead to an excess of liquidity demand which would induce more liquidity providers. This tick size effect diminishes as spreads widen. As a conceptual example, consider a stock that, should the tick size be $0.0005, would trade at an ask of $10.0065 and a bid of $10.0045. If the minimum tick were at a penny, absent other effects, it is reasonable to believe that the ask would be $10.01 and the bid $10.00. In contrast, were the tick size to be $0.001, it would be feasible to have an ask of $10.007 and a bid of $10.004. Rather than $0.01, the spread would be $0.003. In this conceptual example that abstracts from other effects described below, the stock would receive a 70% reduction in its quoted spread if the tick size decreased from $0.01 to $0.001. As spreads widen, tick-size-induced distortions attenuate. To see this, consider the same example above, but two orders of magnitude larger where the prices that equate liquidity supply and demand are an ask price of $1000.65 and a bid price of $1000.45. In the current one-cent tick regime, the prevailing ask and bid would equal the spread that equates liquidity supply and demand and there would be no tick-size induced distortion. Consequently, reducing the tick size could have a significant effect for stocks with narrow spreads, and this effect may attenuate as the stock’s spread widens. A risk of a smaller tick is that it spreads liquidity over more price levels, which may potentially
create adverse effects— particularly for larger orders. Additionally, a smaller tick could increase the incidence of pennying, which occurs when limit order providers get to the front of the queue by providing economically trivial price improvement, and could reduce the importance of time priority. The risk of being pennied could discourage liquidity provision, particularly by market participants that are slower to respond to changes in market conditions, and could increase trading costs for these investors.532 To compensate for additional costs associated with a fragmented order book, liquidity providers may post less aggressive quotes leading to worse market quality. The reduction in the importance of time priority would lower the risk of sniping and increase the opportunity for slower traders (non￾high-frequency traders) to fill orders using liquidity-providing instead of liquidity-demanding transactions.533 This could reduce adverse selection costs for these traders, countering the effects of pennying. In contrast to the pricing effect discussed above, the pennying effect would be most pronounced for stocks with wide spreads because there are more intra-spread price levels and the cost of gaining priority over other liquidity providers, by updating the best price by a single tick, is lower.534 For example, a stock with a spread of one cent, and a $0.001 tick, would have 10 price levels within the spread, whereas a stock with a $0.10 spread would have
100. Because price has first priority in
order execution, a primary way to gain priority for a trader providing liquidity is to price-improve over existing orders. Without a small tick size relative to the spread, getting to the front of the queue via price improvement would be more costly, requiring larger relative price concessions.535

half-spread (i.e., the distance between the current quote and the midpoint) by 20%. If instead a stock has a spread of $0.10 with a $0.001 tick, a market participant would only need to improve the half spread by 2% to get to the front of the queue. 536However, the inclusion of odd lot information helps to mitigate this effect, and the eventual inclusion of depth of book information in consolidated market data due to the implementation of the MDI rules would render this effect temporary. At that point in time, consolidated market data is expected to contain depth information at many more price points, which would largely counteract the effects of a reduction in displayed depth from a reduction in tick size. 537See, e.g., Exchange Act Release No. 42914 (June 8, 2000), 65 FR 38010 (June 19, 2000) (‘‘Decimal Pricing Release’’); Commission Notice:
Decimals Implementation Plan for the Equities and Options Markets, SEC (July 24, 2000), available at https://www.sec.gov/rules/other/decimalp.htm. 538See supra note 84. 539See Bessembinder (2003) supra note 477. See also Michael A. Goldstein and Kenneth A. Kavajecz, Eighths, Sixteenths and Market Depth: Changes in Tick Size and Liquidity Provision on the NYSE, 56 J. Fin. Econ. 125 (2000) and Charles M. Jones and Marc L. Lipson, Sixteenths: Direct Evidence on Institutional Execution Costs, 59 J. Fin. Econ. 253 (2001), both examining the earlier tick size change from 1⁄8 to 1⁄16 of a dollar. See also Sugato Chakravarty, Venkatesh Panchapagesan, and Robert A. Wood, Did Decimalization Hurt Institutional Investors?, 8 J. Fin. Mkts. 400 (Nov. 2005) and Sugato Chakravarty, Bonnie F. Van Ness, and Robert A. Van Ness, The Effect of Decimalization on Trade Size and Adverse Selection Costs, 32 J. Bus. Fin. & Acc. 1063 (June/July 2005), both suggesting that large institutional trades may have become more costly following decimalization. 540See MEMX Report, supra note 105; see also Adrian Griffiths, The Tick Size Debate Revisited, MEMX (Jan. 2022), available at https://memx.com/ wp-content/uploads/MEMX_MSR_Tick￾Constrained-Securities-2_03b.pdf. 541See, e.g., Terrence Hendershott, Charles M. Jones, and Albert J. Menkveld, Does Algorithmic Trading Improve Liquidity?, 66 J. Fin. 1 (Feb. 2011). 542See Barardehi, et al. (2022) supra note 85. 543See Hu, et al. (2018), supra note 477; Kee H. Chung, et al., Tick Size Liquidity for Small and Large Orders, and Price Informativeness: Evidence From the Tick Size Pilot Program, 136 J. Fin. Econ. 879 (2020); Rindi and Werner (2019) supra note 475; Griffith and Roseman (2019) supra note 478; Barardehi, et al. (2022), supra note 85. Part of this effect may be mechanical. 544See, e.g., Chung, et al. (2020) supra note 543; Rindi and Werner (2019) supra note 475; and Maureen O’Hara, et al., Relative Tick Size and the Trading Environment, 9 Rev. Asset Pricing Stud. 47 (2019). 545 Griffith and Roseman (2019) supra note 478 find evidence that the imposition of the TSP had either no effect on or slightly increased the cost of trading large trades for treatment stocks with an average pre-pilot quoted spread greater than $0.05, though the results were not statistically significant. They found statistically significant evidence that trading costs for large trades increased for treatment stocks with an average pre-pilot quoted spread less than $0.05. Barardehi, et al. (2022), supra note 85, and Chung, et al. (2020), supra note 543, both document that depth increases and the cost of executing large trades decreases. 546See, e.g., sources cited supra note 543. 547 Griffith and Roseman (2019), supra note 478, use the order book data from (NASDAQ) and find In the presence of an NBBO and a differentiation between pricing feeds that disseminate top of book versus depth of book data, there may be informational consequences of a change in the
tick size. As mentioned above, fragmenting of the order book reduces the displayed liquidity at the NBBO. This would temporarily reduce the information about liquidity available in the market for market participants who do not receive depth of book information from proprietary data feeds. Having less information about available liquidity could make it more difficult, more complex, and more expensive to locate shares for larger trades and to manage liquidity provision strategies.536 For those who do not currently receive depth of book data or those who would otherwise not purchase depth of book data from competing consolidators, the proposal could increase the demand to purchase depth of book data. Before the full implementation of the MDI Rules, this could result in more market participants purchasing data from exchange depth of book proprietary data feeds than do currently. Afterward, this could result in more market participants purchasing depth of book data from either competing consolidators or exchanges than in the absence of the proposal. The expectation that a smaller tick size would lead to tighter spreads for stocks that currently have narrow spreads finds empirical support. The academic literature examining the effect of tick sizes on financial markets largely studies two events: decimalization, which occurred in 2001 537 and reduced the tick from 1/16th ($0.0625) to $0.01; and the TSP which ran from October 2016 to October 2018 and temporarily increased the minimum tick increment to $0.05 for a sample of small cap stocks.538 Most of the literature surrounding decimalization suggests that, on average, decimalization was associated with a decline in spreads consistent with the notion that, on average, and during this time period, lowering the tick relieved distortions related to having a tick size that is too wide.539 Industry studies show examples of reverse splits leading to large reductions in spreads and hence trading costs.540 When a stock undergoes a reverse split its share price goes up, the current penny tick is lower as a fraction of the share price, implying that in economic terms, the stock could go from being tick-constrained to non￾tick-constrained. The Commission supplements existing analysis with its own analysis on the TSP. Focusing on the TSP, as opposed to decimalization, has several advantages. Additionally, the Commission relies more on its own analysis and the existing literature on the TSP than that for decimalization for this purpose because market dynamics have changed dramatically in the more than two decades since decimalization. Most notably over that period, electronic, algorithmic, and high￾frequency trading have come to dominate the trading landscape today, whereas they were much less prominent in 2001.541 Using the TSP for analysis also has limitations because the TSP affected a subset of small cap stocks and primarily focused on changes in tick size 542—it did not affect access fee caps for instance. The
TSP also did not contain ETPs. Nonetheless, the fact that it concluded relatively recently suggests that its outcomes may be more generalizable to current markets than decimalization. The academic literature studying the TSP shows that for stocks with average quoted spreads close to $0.05 prior to the TSP (namely, stocks likely to fall under our conceptual definition of tick￾constrained), the TSP led to an increase in effective and quoted spreads.543 That is, these stocks tended to trade better with a $0.01 tick than with a $0.05 tick. These results suggest that a tick that is too wide increases the cost of transacting small and average sized orders. Mechanically wider spreads in some stocks could mean that relatively small orders that do not need to take advantage of any additional NBBO depth may execute at a higher cost.544 The TSP literature provides mixed results with regards to the trading costs for large orders.545 Multiple academic studies have found that a wider tick increases depth at the NBBO.546 This finding is intuitive because all the quotes that would have been placed within the spread with a $0.01 tick prior to the TSP, congregated at the next best available prices under the $0.05 tick. In addition, any wider spreads and greater pennying costs associated with a larger tick would also serve to attract more liquidity to the NBBO. More depth at the NBBO would mean that a larger order could execute without having to go deeper into the book—potentially decreasing the cost to executing a larger order if the added depth at the NBBO is sufficient to overcome costs from the wider tick. However, one empirical study using different data for the TSP found evidence suggesting that the TSP led to a decrease in cumulative liquidity beyond the NBBO for test group stocks with an average pre-pilot quoted spread less than $0.05 suggesting an increase in the cost to transact a large order— although the authors do not articulate a clear mechanism for this result.547

that cumulative depth away from the BBO is lower and larger trades became more costly to execute for treatment stocks with an average pre-pilot quoted spread less than $0.05 and hence became tick￾constrained by the TSP. By focusing on a single exchange the paper does not take into consideration depth available on other exchanges, which could affect the paper’s measure of trading cost. 548Existing studies do not to agree on the overall impact of a wider tick for stocks that were not tick￾constrained by the $0.05 tick. For example, Rindi and Werner (2019), supra note 475, document that while quoted spreads increased among non-tick￾constrained stocks, effective spreads decreased for these same stocks suggesting that while displayed prices were worse with a $0.05 spread, the actual transaction prices that investors received improved. Chung, et al., (2020), supra note 543 find that in general, transaction costs among stocks that were not tick-constrained decreased with a $0.05 tick. Griffith and Roseman (2019), supra note 478 find that the $0.05 tick was not associated with any change in order book depth for non-tick-constrained stocks. Additionally, DERA White Paper (2018), supra note 477 finds that for non-tick-constrained stocks, the imposition of a $0.05 spread led to no change in quoted spreads and very little change in effective spreads. 549The exact threshold, in terms of the time weighted quoted spread at which a stock is considered tick-constrained, is subject to debate and researchers use various thresholds. The Commission’s review of the literature and of industry publications suggests that a time-weighted quoted spread of $0.011 is the most commonly used. That spread is used for the analysis herein. 550 Difference-in-differences is a statistical technique in which the effect that a treatment has on some response variable is estimated by comparing the average change in the response over time in the treatment group to the average change in the control group. 551Bin assignments are calculated according to the stock’s average quoted spreads for May and June of 2018, near the end of the TSP. Specifically, we use WRDS Intra-day indicators to collect the time￾weighted quoted spread for all TSP and control stocks for each trading day in May and June 2018. Then for each stock we calculate the equally￾weighted average quoted spread across all trading days. Based on this average, TSP and control stocks are sorted into one of four bins. The first bin is for stocks with quoted spreads ($0.00, $0.06). Empirically, for stocks in the TSP, this bin is said to include those stocks that were tick-constrained by the $0.05 tick increment during the pilot. The second bin is for stocks with quoted spreads in the range ($0.06, $0.09]. For stocks in the TSP, this bin is said to include those stocks that were near-tick￾constrained by the $0.05 tick increment during the pilot. The third bin is for stocks that had quoted spreads of ($0.09, $0.15) or approximately 2–3
ticks intra at a $0.05 tick increment. The fourth bin is for stocks with quoted spreads greater than $0.15. The TSP had three test groups: the first group applied the $0.05 tick only to quoting, the second group applied the $0.05 tick to quoting and trading (with exceptions for benchmark and midpoint trades and for certain retail price improvement trades), and the third group applied the $0.05 tick to trades and quotes the same as the second group but also had a trade at rule applied. Because the proposal would apply the tick size to both trading and quoting, the analysis presented here includes only stocks in the latter two groups—i.e., test groups two and three. Barardehi, et al. (2022), supra note 85 provide similar analysis, and also expand the analysis in many dimensions and find evidence that all key results presented here are robust to the test group analyzed and to many other factors. 552Ordinary least squares (OLS) regression refers to a statistical technique for estimating the linear relationship between an independent variable and dependent variables by minimizing the sum of squared errors between the estimate and the observed independent variable. The use of OLS and quantile regressions is common in the literature on the TSP pilot. 553The primary advantage to quantile regressions is that they are less sensitive to outliers that can affect mean inference in OLS. Thus median regressions provide additional robustness to the analysis and ensure that results are not driven by outliers. 554 In this equation the variable Y denotes the response variable of interest such as quoted spread and depth. The subscripts j and t serve to index stocks and days respectively. a0, ap, ae, and b are coefficients (to be estimated), and uj,t is the error term. Pilotj is an indicator variable that equals 1 if stock j was in the treatment group, or 0 if stock j was in the control group. Eventt is a indicator variable which is equal to 1 if the day t was post the treatment event and equals 0 otherwise. Table 9 reports the difference-in-difference estimator of b for a different response variable Y across the different spread bins. 555 In this equation uj,t is the error term from the previous regression specification equation, supra note 554, and the loss function is defined as: rt(u) = t max(u, 0) + (1¥t) max(¥u, 0) ; where 0 < t <1. The current literature offers little guidance regarding the expected effect of a tick size change for stocks with wider spreads. For stocks that were not tick-constrained by the $0.05 tick, i.e., those with quoted spreads wider than $0.05 prior to the TSP, the literature examining the TSP is much less uniform in its assessment of the effect of a wider tick on market quality for stocks with wider spreads.548 The fact that this literature does not provide consistent results on how a wider tick affects stocks with wider spreads is likely the result of the different researchers using different definitions of tick-constrained, and by
virtually all studies simply bifurcating stocks into either tick or non-tick-constrained stocks to perform comparisons and assuming that all non￾tick-constrained stocks will be affected in a similar manner by the tick size change.549 In contrast, the theoretical discussion at the beginning of this
section suggests that a simple
bifurcation might not be the proper way to study the effect of tick size on stocks with various quoted spreads, since the relation between market quality and tick size is unlikely to be a binary function of whether or not the stock is tick￾constrained, but rather depends on the number of ticks within the spread. That is, if there were to be negative effects on spreads when ticks are made too narrow, theory suggests that these would be most likely to be observed in stocks for which spreads are especially wide, with many ticks within the spread. The Proposal would reduce the tick size for some stocks with narrower spreads that do not meet the definition of tick-constrained. To provide greater insight into the impact of tick sizes on various aspects of market quality across the quoted spread spectrum, Table 9 provides additional analysis that examines the impact of the TSP on a wider range of quoted spread profiles than simply tick-constrained or not. This analysis focuses on the end of the TSP, when the tick size was reduced from $0.05 back to $0.01, because that event more closely matches the proposal, which considers a tick size reduction. The analysis presented in Table 9 uses a difference-in-difference methodology to study the effect of lowering the tick size from $0.05 to $0.01 on TSP stocks at the end of the TSP.550 TSP treated and control stocks are assigned near the end of the TSP into one of four bins ranging from the most tick-constrained in the first bin to the least constrained in the fourth bin.551 Key variables such as quoted depth and spreads were measured before and after the tick size was lowered and difference in difference estimation methods were used to examine how these variables reacted to the tick size change. The analysis uses ordinary least squares 552 and quantile (median) regressions 553 to estimate the following regression model: 554 Yj,t = a0 + aPPilotj + aEEventt + b(Pilotj × Eventt) + uj,t where the quantile regression optimizes: 555 EP29DE22.000</GPH> /3 E argmin L Po.s(uj,t) ao,ap,a£,f3 j,t

TABLE 9—EFFECTS OF A REDUCTION IN TICK SIZE ON QUOTING AND TRADING OUTCOMES a
OLS Quantile (median) regression Quoted spread ($) May & June 2018 Quoted spread ($) May & June 2018 Spread bin # 1st 2nd 3rd 4th 1st 2nd 3rd 4th Depth (100 shares) ........................................... *¥22.5 *¥5.30 *¥1.55 ¥0.51 *¥11.8 *¥3.16 *¥0.96 *¥0.21 [¥12.02] [¥7.09] [¥4.40] [¥1.30] [¥16.99] [¥23.52] [¥17.81] [¥4.30] Depth ($1,000) .................................................. *¥16.7 *¥8.41 *¥4.67 *¥2.06 *¥11.2 *¥7.27 *¥3.96 *¥1.48 [¥14.58] [¥10.94] [¥7.82] [¥3.66] [¥22.04] [¥20.70] [¥12.58] [¥4.14] Quoted Spread ($) ............................................ *¥0.033 *¥0.027 * 0.023 * 0.12 *¥0.034 *¥0.031 * 0.012 * 0.12 [¥18.71] [¥6.46] [2.99] [5.51] [¥35.41] [¥10.31] [2.03] [6.80] Relative quoted Spread .................................... *¥0.0049 *¥0.00097 0.00034 * 0.0046 *¥0.0041 ¥0.0014 0.00021 * 0.0034 [¥9.59] [¥1.80] [0.53] [3.30] [¥8.54] [¥6.89] [0.74] [4.66] Effective spread ($) ........................................... ¥0.027 ¥0.026 *** 0.029 0.038 *¥0.026 ¥0.021 ¥0.0018 * 0.051 [¥4.97] [¥1.43] [5.17] [2.16] [¥58.10] [¥12.81] [¥0.63] [4.81] Relative eff. spread ........................................... ¥0.0039 0.00043 0.0055 * 0.0028 ¥0.0030 ¥0.0010 ¥0.00013 * 0.0016 [¥3.12] [0.17] [1.36] [4.42] [¥10.78] [¥9.58] [¥1.09] [3.23] Cancel-to-trade .................................................. * 5.10 * 6.69 * 7.56 * 18.8 * 4.56 * 5.49 * 6.87 * 12.3 [5.99] [6.38] [6.79] [8.44] [7.75] [7.79] [10.44] [10.61] Odd-lot rate (%) ................................................ * 4.89 * 5.61 *** 2.85 1.49 * 5.59 * 6.39 *** 3.29 1.85 [9.62] [8.04] [4.35] [2.15] [8.02] [8.99] [4.72] [2.51] Realized spread ($) ........................................... *¥0.014 *¥.0099 .00037 * 0.040 *¥0.014 *¥0.013 *¥0.0068 * 0.038 [¥27.94] [¥7.43] [0.12] [4.45] [¥48.36] [¥17.96] [¥5.13] [5.64] Relative real. spread ......................................... *¥.0024 ¥.00032 ¥.00039 .0014 *¥.0014 *¥.00054 *¥.00013 * .0012 [¥11.82] [¥1.36] [¥1.25] [2.37] [¥14.08] [¥12.52] [¥2.77] [3.65] Volume (1,000 shares) ...................................... 26.5 30.3 12.5 ¥5.41 19.1 3.35 0.20 ¥3.25 [1.30] [2.13] [1.32] [¥1.07] [1.42] [0.40] [0.04] [¥2.44] Cum Depth 10c from mdpt ............................... *¥0.17 *¥0.26 ¥0.27 ¥0.34 *¥0.49 *¥0.54 *¥0.45 ¥0.63 [¥3.93] [¥5.00] [¥2.59] [¥2.37] [¥5.51] [¥6.29] [¥4.91] [¥3.15] Cum Depth –10c from mdpt ............................. *¥0.22 *¥0.19 *¥0.37 ¥0.45 *¥0.49 *¥0.42 *¥0.50 ¥0.79 [¥5.28] [¥3.74] [¥3.44] [¥2.83] [¥6.33] [¥5.21] [¥5.68] [¥2.75] CRT 10 round lots ............................................. ¥0.026 ¥0.001 * 0.035 * 0.14 ¥0.037 * 0.085 *** 0.035 0.075 [¥19.56] [¥0.19] [3.99] [1.03] [¥2.72] [2.75] [4.20] [2.37] aThis table presents the effects of a reduction in minimum tick size from $0.05 to $0.01 cent on various quoting and trading outcome variables. The 1st bin is most tick-constrained and the 4th bin is least tick-constrained. See supra note 554 for bin
descriptions. A difference in difference regression with no control variables is esti￾mated using data covering Control, Test Group 2, and Test Group 3 TSP stocks from 08/01/2018–11/30/2018. All observations are at the stock day level. The same model is used for all outcome variables. See supra note 554 for a discussion of why Test Group 2 and Test Group 3 were selected. For each outcome variable Yjt, the table presents only the difference in difference coefficient estimates that indicate the effect of the TSP on the dependent variable. Estimates are performed by past quoted spread subsamples that decompose the sample based on average quoted spreads during June and July of 2018. Each regression is estimated using both OLS and quantile (median) regressions. The first four columns present the result from OLS regression results, the last four columns present the results from quantile regression results. Column titles 1st, 2nd, 3rd, and 4th represent results estimated for bin 1, bin 2, bin 3 and bin 4 stocks respectively. The quoted spread re￾fers to the distance between the NBBO midpoint and the NBBO quote. The effective spread is the distance between the NBBO midpoint and the realized trade price; the realized spread is the distance between a future NBBO midpoint (5-minutes ahead) and the trade price. Relative spread measures are calculated as the spread scaled by the NBBO midpoint. The cancel-to-trade ratio is the daily number of order cancellations divided by the number of trades, for displayed orders. The odd-lot rate is the percentage of trades in a day which executed against an odd-lot quote. CRT 10, or the cost of a round-trip trade of 10 round lots, measures the cumulative transaction costs from buying and then immediately selling 10 round lots. The CRT assumes that an order that is larger than the displayed depth at the best price will not execute in full at that price. Instead, the assumed unfilled portion will execute at worse prices until completely filled with displayed depth. All data are Winsorized at the 1% and 99% level. The numbers in the [ ] brackets reflect t-statistics that are based on two-way stock-and-date clustered standard errors. Symbols *, , and * reflect statistical significance at 10%, 5%, and 1% type-1 error levels. This analysis provides evidence of a fundamental tradeoff between accurate pricing on one hand and incentives for liquidity provision on the other. Across all specifications, the end of the TSP was associated with a decrease in depth at the NBBO, when the tick size was reduced from $0.05 to $0.01, as signified by the negative and, in most cases, statistically significant coefficients reported. The magnitude of the coefficients suggest that the reduction in shares available at the NBBO was the greatest for stocks with tighter spreads and smaller for stocks with wider spreads. The finding that tighter spread stocks experience the greatest decline in depth at the NBBO is consistent with the -idea that, for
these stocks, the $0.05 tick was the most constraining, and so liquidity that would have naturally spread out within the quoted spread given a smaller tick, bunched at the wider tick increments, and that once the tick-constraint was relaxed this liquidity naturally spread out over the additional price levels. For less tick-constrained stocks, the bunching was less severe since liquidity already had some room to spread out. For stocks in the first or second bins, we find that lowering the tick to $0.01 leads to significantly lower quoted spreads. These stocks went from having approximately 1–2 ticks inside the spread, with a $0.05 tick, to having 1– 10 ticks inside the spread, with a $0.01 tick. For these bins, relaxing the tick size served to narrow the spread. This finding is consistent with the idea that for stocks that are tick-constrained, or near-tick-constrained, the effect of decreasing the tick size will narrow spreads by improving competition. For the stocks in the third and fourth bins, the story is different, as the reduction in the tick size was associated with a widening of the quoted spread. These stocks went from having more than two or more ticks within the spread, with a $0.05 tick, to having more than 10 ticks within the spread, with a $0.01 tick. This result is consistent with the idea that for wider spread stocks, the prevailing effect of reducing the tick size was to increase fragmentation of liquidity and the risk of pennying which made trading more costly leading to wider spreads. This pattern of results— namely narrower spreads for the first and second bins and wider spreads for the fourth—holds regardless of whether dollar spreads, relative spreads, OLS, or quantile regressions are used, suggesting this as a robust outcome of the end of the TSP. The pattern for effective spreads is similar to that observed for quoted spreads. Effective spreads measure the average realized transaction cost for trades as it measures the absolute distance between the realized trade price and the NBBO midpoint at the time of the trade. Effective spreads do not always equal quoted spreads because trades can execute inside the NBBO for numerous reasons, such as odd-lot trades, midpoint trades, and

556Effective spreads can be interpreted as what liquidity providers expect to earn from providing liquidity, assuming that prices do not change before the liquidity provider is able to unwind its position and realize their profit. Under this interpretation, realized spreads would proxy for what they actually earn, taking into account that the market price may have moved against the liquidity provider before it could unwind its position. Effective Spread = Realized Spread + Price Impact. For a full mathematical decomposition of effective spreads into realized spread and price impact components see Peter N. Dixon, Why Do Short Selling Bans Increase Adverse Selection and Decrease Price Efficiency, 11 Rev. Asset Pricing Stud. 122 app. at 165 (2021). 557Realized 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. hidden orders. For stocks in bin one— i.e., stocks for which the $0.05 tick was the most restrictive—all specifications suggest that reducing the tick size was associated with a decrease in realized transaction costs as measured by effective spreads. For stocks in bin four, those with the widest spreads prior to the tick size reduction, all specifications suggest that the reduction in the tick size lead to an increase in transaction costs, measured by effective spreads. For stocks in between these extremes in bins two and three, the results are not as uniform. For stocks in bin two, the sign of the coefficients for all estimates (dollar effective spreads, relative effective spreads, OLS, and quartile regressions) suggest that lowering the tick size decreased effective spreads, although not all specifications agree as to statistical significance. The OLS regressions suggest that the effect was statistically insignificant, while the quantile regressions found a statistically significant effect and suggest that effective spreads decreased. For stocks in the third bin, the analysis did not find a consistent, statistically significant change in effective spreads, or in other words, lowering the tick size did not appear to reliably help or harm transaction costs as measured by effective spreads. These results, like the results for quoted spread, suggest that for stocks for which the narrowing of the spread
meant that the stock went from having less than 2 ticks within the spread to 1– 10 ticks within the spread, the effect of reducing the tick was beneficial in terms of reducing transaction costs. For stocks with very wide spreads, reducing the tick size appeared to harm liquidity, which is consistent with fragmentation and pennying being the prevailing effect. The theoretical discussion above suggests that executing an order may become more complex with a smaller tick size—meaning it may take visiting more venues as well as across more price levels to execute an order with a smaller tick size. This potential outcome is explored using the ‘‘cancel-to-trade’’ ratio. A higher ratio indicates more frequent canceling of orders per the amount of trading volume, and is an indication that market participants are more active in managing their quotes and their order strategies. In this analysis, both the OLS and the quantile regressions confirm that a smaller tick resulted in a statistically significant increase in the cancel to trade ratio, suggesting more complexity. Additionally, the magnitude of the effect is increasing in the quoted spread, with wider quoted spreads having larger coefficients, suggesting a larger effect in the cancel-to-trade ratio than stocks with narrower spreads. This pattern is consistent with pennying and increased complexity having a greater impact on stocks with wider spreads. The analysis also looks at the effect of lowering the tick size at the end of the TSP on the usage of odd-lot orders. Across all quoted spread bins, the usage of odd-lot orders increases when the tick size decreases. This finding is consistent with the notion that liquidity would be spread out over more levels and liquidity providers would be willing to offer less liquidity at a given price level—leading to an increased use of odd-lot orders to allow liquidity providers to offer smaller levels of liquidity at finer price increments. This result also suggests that a lower tick size increases the need for market participants to have ready access to odd￾lot information given that the lower tick size can be expected to increase the usage of odd-lot quotes. Effective spreads provide a measure of liquidity providers’ revenue and the contrasting economic effects also have implications for how liquidity providers’ revenue would be affected by a lower tick. The effective spread captures the liquidity premium, paid by those submitting orders for immediate execution, and can theoretically be decomposed into two components:
Effective Spread = Realized Spread + Price Impact.556 One component of the effective spread is the price impact or adverse selection component. It is the change in the NBBO midpoint at the time of trade to some point in the future. This component of the spread captures the portion of the spread liquidity providers lose from trading with investors who are more informed than they are, and is also referred to as the adverse selection component of the bid ask spread. The remainder of the effective spread, after removing the adverse selection component, is the realized spread. This portion of the spread acts as a proxy 557 for the compensation to the liquidity provider for its non-adverse selection costs. If a smaller tick decreases revenue for liquidity providers, by allowing bid and ask prices to more accurately reflect supply and demand, then this effect should manifest as a decrease in realized spreads for liquidity providers. However, if increased order book fragmentation and pennying risk increase the cost of providing liquidity, then liquidity providers would need to be compensated for these costs in order to provide liquidity and, thus, realized spreads would increase. To the extent that the two effects offset one another, realized spreads might not change. For tick-constrained stocks in bin one, the analysis indicates a decrease in realized spreads across all specifications, and when using dollar or relative realized spreads when the tick size was reduced from $0.05 to $0.01. This result is consistent with the notion that liquidity providers’ non-adverse selection revenues would decrease due to bid and ask prices being more reflective of supply and demand with a smaller tick. The opposite occurs for stocks with wide spreads in bin four, where realized spreads increase significantly—consistent with liquidity providers needing to be compensated for the increased cost and complexity associated with trading a wide spread stock in a small tick environment. For stocks in the middle two bins, the effect of lowering the tick size on realized spreads is unclear, as about half of the specifications indicate no change in realized spreads while the other half indicate lower effective spreads. The specifications often do not agree between relative and effective spread specifications and between OLS and quantile regressions. The analysis also uses MIDAS data to study how the tick size change affected liquidity deeper in the book. Analyzing liquidity deeper in the book is valuable because it gives an indication of how trading larger orders that must go deeper in the book to be fulfilled may be affected by a change in the tick size. This analysis uses MIDAS data to calculate the daily average cumulative

558 In the regressions we take the natural log of shares available. This conversion helps standardize shares available for stocks with different prices by making the interpretation in terms of percentage changes. 559See analysis presented in Nasdaq Intelligent Tick Proposal, supra note 180; see also Justin Cox, et al., Increasing the Tick: Examining the Impact of the Tick Size Change on Maker-Taker and Taker￾Maker Market Models, 54 Fin. Rev. 417 (2019); Amy K. Edwards, Paul Hughes, John Ritter, Patti Vegella, and Hao Zhang, The Effect of Hidden Liquidity:
Evidence from an Exogenous Shock (working paper Mar. 1, 2021), available at https://ssrn.com/ abstract=3766512 (2021) (retrieved from SSRN Elsevier database). 560Consider a numeric example. A market with a $0.05 tick is quoting asks of 500 shares at $10.05 and 500 shares at $10.10. An investor wishing to purchase 700 shares would purchase 500 at $10.05 and 200 at $10.10 for a total price of $7,045. If the tick shrinks to $0.01 and cumulative shares posted decline by 20%—for example—but those shares are spread evenly over the finer grid then there would be 80 shares at each price level from $10.01 to $10.10. An investor wishing to buy 700 shares would need to purchase 80 shares at each price level from $10.01 to $10.08 and 60 shares at $10.09 for a total purchase price of $7,034. So even though total depth declined, the cost to execute a 500 share trade would decrease due to more efficiently spreading liquidity across more price levels. 561A round trip trade refers to executing an order to buy or sell the stock and immediately reversing the position with an equal countervailing order. We compute the cost of a round trip trade following the methodology laid out in Griffith and Roseman (2019), supra note 478, and Chung, et al. (2020), supra note 543. The methodology uses MIDAS data to take snapshots of the order book at 15 minute increments throughout the trading day and calculates the transaction costs associated with walking the book up 5 or 25 round lots to execute a large trade. 562See supra note 461. 563See supra note 551. Barardehi, et al. (2022), supra note 85 use stocks from TSP test groups 1 and 2 in their analysis. In order to provide more statistical power the authors, in addition to test group 1, include test group 2 stocks, citing that extant literature had shown little statistical differences between test group 1 and test group 2 stocks. By contrast, Table 9 analyzes test groups 2 and 3 because these involved comparing TSP test groups that experienced a change in both trading and quoting increment—with the caveat that the conclusion of the tick size pilot ended the harmonization of the quote and trade increments that had been implemented under that program, while this proposal would introduce it. 564Barardehi, et al. (2022), supra note 85 also included additional analysis to demonstrate that the results were also robust to bifurcating the TSP sample into high and low trading volume, to the exclusion of penny stocks, and using quantile regressions at the 25th and 75th quantiles as opposed to the median. shares available at $0.10 above and below the midpoint for control and treated stocks, and uses the same difference-in-difference analysis to examine the effect of reducing the tick size on cumulative depth.558 Our analysis suggests that reducing the tick size also reduced the total depth available deeper in the book with the coefficient for bin 4—i.e., those with the widest spreads—being the largest in magnitude. This finding is
consistent with a smaller tick discouraging the posting of displayed liquidity due to pennying concerns for stocks with wide spreads. These depth of book findings do not directly imply that trading deeper in the book became more expensive for two reasons. First, research suggests the use of non-displayed quotations increases significantly when the tick size is reduced.559 Thus the decline in liquidity that we document is only a decline in displayed liquidity. Second, quotes tend to congregate at the price just worse than the quoter’s desired price so that the quoter does not lose money on a transaction. When a wider tick is tightened, quotes that were previously congregated at the wide tick will spread out at prices better than the previous tick allowed. Thus, a market participant taking liquidity from multiple price layers in the order book to fulfill an order would have some shares that transact at superior prices than it would have with the wider tick.560
Table 9 also presents the effect of the
TSP conclusion on the round-trip cost to transact a trade for 10 round lots (1,000 shares).561 This analysis suggests mixed results for the effect of the tick size reduction on the cost of executing a 10 round lot trade. For pilot stocks that were tick-constrained by the Pilot with a $0.05 tick, the total round-trip cost of a 10 round lot trade decreased when the tick size was lowered— suggesting an improvement in liquidity deeper in the book. For near-tick￾constrained stocks, the effect was not clear. The OLS regressions suggested no effect, while the quantile regressions suggested an increase in trading cost. For stocks in bins 3 and 4 (i.e., those that were not tick-constrained by the $0.05 tick), the effect of lowering the tick size was to increase transaction costs for larger trades. These results cohere with the idea that when stocks are tick-constrained the pricing efficiency made possible by a smaller tick improves liquidity, and for stocks with wider spreads a smaller tick harms liquidity by making individuals less willing to post displayed liquidity due to complexity and the risk of pennying. In conclusion, the analysis provided here suggests that, for stocks that were limited to just 1–2 ticks intra-spread by the $0.05 tick, the reduction to a $0.01 tick provided an improved trading environment. Thus, trading in an approximate 1–10 tick range intra￾spread provided a superior environment to trading in a 1–2 ticks intra spread range. Additionally, for stocks with spreads greater than $0.15, where a $0.01 tick implied more than 15 ticks intra-spread, a $0.05 tick where there were only 3 ticks intra-spread, appeared to provide a superior trading environment. For stocks with spread between $0.10 and $0.15, it is not clear which tick size provided a superior trading environment. These conclusions are consistent with results in Barardehi, et al. (2022), which more broadly examines the effect of tick size changes under the TSP.562 Barardehi, et al. (2022) arrives at the same conclusions with respect to the effects of a tick size reduction in the context of the TSP while using different methodology. Specifically, the Commission’s analysis focuses on the end of the TSP, when the tick size for treated stocks was reduced, because the proposal would lower the tick size for some stocks. In addition to looking at the end of the TSP, Barardehi, et al. (2022) also considers the effect of raising the tick size at the initiation of the TSP. Both the Commission’s analysis and Barardehi, et al. (2022) find that stocks that either were tick￾constrained or near-tick-constrained by the $0.05 tick benefited from a reduction in the tick size. Examining the imposition of the TSP, Barardehi, et al. (2022) additionally found a deterioration in market quality for stocks that became tick-constrained by the $0.05 tick. All together, these results provide robust support for the benefits of reducing the tick size in tick￾constrained stocks. Another methodological
difference between the Commission’s analysis and Barardehi, et al. (2022) is in the selection of TSP stocks used in the analyses. The Commission’s analysis focuses on comparing TSP test groups that experienced a change in both trading and quoting increments, whereas Barardehi, et al. (2022) looked at a wider set of TSP test group combinations, including looking at the test groups separately.563 Robustness checks in Barardehi, et al. (2022) show that analytical conclusions are similar regardless of the test groups used, thereby showing the robustness of the Commission’s results as well. Barardehi, et al. (2022) further provide additional tests of the effect of tick size changes on trading costs, none of which provide results inconsistent with the Commission’s analysis.564 Barardehi, et al. (2022) includes an exhibit with more granular analysis on the impact of a reduction in tick size at the end of the TSP, from 5 cents to 1 cent, on investor transaction costs, as captured by effective spreads. That exhibit is included below in Figure 1, and its results are broadly consistent

565Barardehi, et al. (2022), supra note 85, subset their sample into overlapping segments of TSP stocks based on their quoted spreads and perform difference-in-difference analyses on each segment to quantify the effect of a narrower tick size as a function of number of intra-spread ticks. In their setting, each segment of stocks is identified based on average quoted spreads in a period prior to the end of the TSP (08/08/2018–11/20/2018), where tick size decreased from 5 cents to 1 cent for pilot stocks. The stocks are grouped into overlapping 6- cent intervals of average May and June 2018, (pre￾shock) quoted spreads in cents {($0.00, $0.06), ($0.01, $0.07), ($0.02, $0.08), . . . , ($0.15, $0.21), ($0.16, $0.22)}. For each intervals, the effect of a tick size change on dollar effective spreads are estimated in a difference-in-difference setting using quantile (median) regressions that control for date fixed effects and double-cluster standard errors by stock and date. Point estimates of the treatment effects along with the corresponding 95% confidence intervals are plotted against the median pre-shock quoted spread in the respective interval. 566One academic theoretical paper suggests that having a two tick spread is optimal. See Sida Li and Mao Ye, The Optimal Nominal Price of a Stock: A Tale of Two Discretenesses, (working paper Nov. 3, 3021), available at https://ssrn.com/ abstract=3763516 (retrieved from SSRN Elsevier database). The paper suggests that stocks reach their optimal price whenever the quoted spread is two ticks wide. While the paper advocates for a lower tick size, particularly for tick-constrained stocks, the two tick spread conclusion is the result of a highly stylized trading model which does not take into account pertinent factors from outside the model which likely affect spreads such as considerations of time priority and pennying concerns. Conditional on there being non￾infinitesimal tick and round-lot sizes, their model suggests that a two-tick wide spread is optimal. Otherwise, their model suggests an optimal policy choice of infinitesimal tick and round-lot sizes. with the findings reported in Table 9.
Figure 1 shows how the quoted spread
of a stock during the pilot (‘‘pre-shock dollar quoted spread’’) correlates with how effective spreads changed when the pilot ended. For stocks with an average of fewer than two ticks intra-spread (those with pre-shock quoted spreads of $0.10 or less), a reduction in tick size from 5 cents to 1 cent significantly reduces effective spreads.565 Whereas for stocks with an average of more than three ticks intra-spread (those stocks with pre-shock quoted spreads greater than $0.15), a narrower tick size increases effective spreads. The Commission’s results in Table 9 help provide guidelines for predicting how the proposed tick size reductions may affect market quality for stocks priced at, or greater than, $1.00 per share compared to the current baseline. For stocks that are tick-constrained by the current $0.01 tick, the proposal would increase the number of ticks intra-spread from 1 to either 1–8, or 4– 5 depending on whether the stock was assigned a $0.001 or a $0.002 tick. The analysis in Table 9 suggests that 1–10 ticks intra spread provides a better trading environment than does just one tick intra-spread.566 Additionally, the results for bin 2 stocks suggest that moving from 1–2 ticks intra spread to 5– 10 ticks also generally improves market quality across most measures. Regardless the tick size that a current tick-constrained stock receives ($0.001 or $0.002) Table 9 suggests that across most liquidity metrics, liquidity would likely improve for these stocks. For stocks with a time-weighted average spread below $0.016, there are currently an average of 1–1.6 ticks intra spread. The proposal would increase this number to 4–8 ticks intra-spread by assigning a $0.002 tick to these stocks. The analysis of bin 2 stocks is analogous to stocks that would be subject to the $0.002 tick in terms of the effect of the tick size change on market quality. In both cases, the stocks are moving from EP29DE22.001</GPH> LO 0 "C LO Ctl N Q) 0 ... . C. Cl) ~ u ~ ... .!!:! 0 .. 0 LO 0 ~ ,·
Figure 1
I II
I
.06 .08 .1 .12 .14 .16
Pre-shock dollar quoted spread Source: Barardehi, et al. (2022), Figure 3, supra note 85 .18

567Barardehi, et al. (2022), supra note 85, show that statistical results for wider spread stocks, such stocks in bin #4 in Table 9, vary somewhat when they estimate their model separately on data for each of the three TSP groups. When separately estimated, the effects for lower spread stocks, bins 1 and 2, remain consistent and statistically significant across all three TSP test groups. 568Likewise, two stocks with equal average quoted spreads may not be equally tick-constrained. For example, one stock with a $0.02 average quoted spread could have a $0.01 quoted spread 40% of the time while another has a $0.01 spread 10% of the time. The effect of the proposal on market quality could differ in much the same way as the effects described in this paragraph. 569The empirical analysis in this section suggesting that a lower tick size benefits tick and near-tick-constrained stocks is an ‘‘on average’’ result. While the Commission expects that a lower tick would on average decrease transaction costs for tick and near-tick-constrained stocks, for some of these stocks, a smaller tick could lead to wider spreads. For these stocks, if spreads increase to a sufficient degree then the stock could be re-assigned a wider tick after the next evaluation month. 570We use WRDS intra-day indicators for all stocks in the database to estimate the time weighted quoted spreads for Mar. 2022. No stock is assigned a $0.001 tick in this estimation as quoted spreads for stocks priced $1.00 or more per share are currently constricted by the $0.01 tick. Thus all stocks with Time-Weighted Average Quoted Spread below $0.02 are assigned a tick of $0.002. an environment with just less than two ticks intra spread to one of 5–10 ticks intra spread in the case of the TSP, or 4–8 ticks in the case of the proposal. These changes are likely similar enough that comparison of the two groups is instructive. The analysis of bin 2 stocks in Table 9 indicated that across most liquidity metrics these stocks experienced improved liquidity with the smaller tick. Consequently, the Commission also expects that on average, stocks receiving the $0.002 tick size would likely experience an improvement in market quality. The analysis is less clear about the effect of the proposal in trading in stocks that would receive the $0.05 increment:
stocks with Time-Weighted Average Quoted Spreads between $0.016 and $0.04. These stocks would transition from having an average 1.6–4 ticks intra spread to having 3–8 ticks intra spread. The TSP analysis in Table 9 suggested that, for stocks with approximately 2–3 ticks intra spread, moving to 10–15 ticks intra spread was not clear, while for stocks with 3 or more ticks intra spread, moving to 15 or more ticks intra spread appears to have been harmful.567 None of the stocks in the proposed $0.005 tick group would have prevailing spreads with more than 15 ticks intra spread, so for this group the analysis does not provide clear predictions regarding the effect of the tick size reduction on transaction costs for these stocks. Quoted spreads are not static from day to day. It is possible that a stock could have a narrow quoted spread during an evaluation month, and thus be assigned a small tick, and then during the following month it could experience points in time where the quoted spread is much wider.568 If the spread widens sufficiently, relative to the quote, then the stock could trade in a range of ticks intra-spread that may harm market quality.569 To provide an estimate of the fraction of trading volume that could be affected in this manner, the following estimation is computed. March 2022 is treated as a hypothetical evaluation month and all stocks are assigned a tick size based on their prevailing time-weighted quoted spread during this month.570 No stock is assigned a $0.001 tick in this estimation, as Time-Weighted Average Quoted Spreads for stocks priced at, or greater than, $1.00 per share are currently have a lower bound because of the $0.01 tick. Thus, all stocks with Time-Weighted Average Quoted Spreads below $0.016 are assigned a tick of $0.002. Then, for the months of April through June 2022, all trading volume during regular trading hours is evaluated for all stocks and the Time-Weighted Average Quoted Spread is determined at the time of trade. If the NBB for the trade is below $1.00, that trade is assigned a tick size of $0.0001. Trading volume with an NBB greater than $1.00 that would have received a tick size lower than $0.01 based on March 2022 Time-Weighted Average Quoted Spreads is then analyzed. The total trading volume within this subsample that executed at a time when the quoted spread would have had more than 10 or 15 ticks within the spread if it had had the lower tick size is computed and presented in
Table 10 as a fraction of total trading
volume during the period.
TABLE 10—VOLUME RECEIVING A TICK
REDUCTION EXECUTING DURING PE￾RIODS OF WIDE SPREADS a 10 + ticks (%) 15 + ticks (%) Share Volume ..................... 3.4 1.1
TABLE 10—VOLUME RECEIVING A TICK
REDUCTION EXECUTING DURING PE￾RIODS OF WIDE SPREADS a—Contin￾ued 10 + ticks (%) 15 + ticks (%) Dollar Volume ...................... 7.4 2.2 aThis table provides estimates of the amount of share and dollar trading volume in stocks that meet the following conditions. The NBB is greater than $1.00 per share at the time of trade. The stock had a time-weighted quoted spread of less than $0.04 in Mar. 2022, and the stock’s quoted spread was great￾er than 10 or 15 times its hypothetical tick size based on Mar. 2022 time-weighted quoted spreads com￾puted from the WRDS Intra-day indicators. The uni￾verse of securities in the WRDS intra-day indicators dataset is used. Only trading volume associated with normal trades during regular trading hours is consid￾ered. Normal trades are identified in TAQ data by sale conditions ‘‘blank, @, E, F, I, S, Y’’ which cor￾respond to regular trades, intermarket sweep orders, odd lot trades, split trades, and yellow flag regular trades. We exclude these trades because they are not typically representative: for example the codes in￾clude trades that result from an acquisition, trades reported out of sequence, and extended hour trades.
Table 10 provides an estimate that
approximately 3.4% of total share trading volume met the following conditions. It would have been associated with a stock receiving a lower tick size and would have executed when spreads were wider than 10 ticks based on the estimated tick size.
Table 10 also provides an estimate that
1.1% of total share volume would have executed when spreads were more than 15 ticks wide. For this fraction of trading volume, it is possible that the reduction in the tick size could lead to a worse trading environment for the period of time that spreads remain significantly higher than the evaluation period compared to what the trading environment could have been had the stock retained a $0.01 tick. This effect would not be indefinite because, if a stock’s spread remains elevated, then at the end of the next evaluation period, the stocks would be assigned a wider tick—mitigating the negative consequences of having a tick size that is too narrow relative to the quoted spread.
2. Minimum Pricing Increment for
Trading
The proposal would require all trades that are not midpoint or benchmark trades, including trades executed by OTC market makers, including wholesalers, to execute in increments determined by the minimum pricing increment for trading, which would be harmonized with the minimum pricing increment for quoting. Applying a minimum pricing increment to trading, coupled with reducing the minimum pricing increment for quoting, could affect measures of the frequency and magnitude of price improvement either

571Here, price improvement is defined as any trade that transacts inside the NBBO and includes midpoint and intra-spread trades executed on ATSs and exchanges in addition to OTC market maker internalized trades. A $0.01 price improvement would be feasible with any of the tick sizes considered in this proposal. 572This figure does not represent the potential harm to retail investors. The discussion later in this
section explains that these trades could be
positively or negatively affected. Further, trades that do not have an opportunity for price improvement currently, could have an opportunity for price improvement under the proposed rules. 573See, e.g., Boehmer, et al. (2021), supra note
469. For this reason, the remainder of the
discussion in this section focuses on the effects of harmonization on stocks priced equal to, or greater than, $1.00 per share. 574See Boehmer, et al. (2021), supra note 469. positively, negatively or insignificantly, on average. The Commission recognizes that any changes to these measures could affect transaction costs paid by investors or could affect where broker￾dealers route customer order flow, or both, potentially leveling the playing field between exchanges/ATSs and off￾exchange dealers in attracting retail order flow. Because of this competitive pressure, the Commission expects that trading venues will continue to compete on providing price improvement and that the harmonization of trading and quoting increments will not mitigate the execution quality improvements from a reduction in the minimum pricing increment. Requiring trades to occur at the minimum pricing increment would have uncertain net effects on total price improvement, which is the primary mechanism for the economic effects of a trading increment. The Commission expects that for most trading volume receiving a smaller tick, quoted spreads would likely narrow, on average. While narrower spreads mean less opportunity for further price improvement, investors would not be getting worse trade prices under the proposed rules, because the narrower spreads imply better prices for most trades. While price improvement is a measure of execution quality, lower price improvement does not necessarily translate into worse outcomes for investors, particularly when quoted spreads are narrowing. Because price improvement is measured relative to the quoted spreads, price improvement is a more meaningful measure of execution quality when quoted spreads are held constant. Therefore, an increase in the frequency and level of price improvement in conjunction with an expected narrowing of quotes does not inform on overall investor execution quality from the proposal, though it may inform on whether the harmonization furthers or mitigates the expected improvements from narrower quotes in execution quality for investors. The Commission does not anticipate that the proposal for a minimum trading increment would affect most current price improvement. In particular, Table 3 indicates that most price improvement in stocks with prices greater than $1 currently occurs as a result of midpoint trades or in increments of $0.01, neither of which would be affected by the proposed trading increment.571 From Panel B of Table 3, we observe that 82.5% of the dollar value of price improvement fits this description. The remaining 17.5% of price improvement ($12 million per day) 572 occurred in sub-penny increments and were not associated with midpoint trades and, therefore, could potentially be affected by the rule. In addition, the harmonization of tick sizes across venues will likely have very little impact on trades for stocks priced less than $1.00. The designated increment of $0.0001 already appears to be the
minimum pricing increment for wholesaler price improvement.573 The proposed pricing increment for quoting and the proposed acceleration of the round lot definition would have an effect on price improvement that alters the basis by which the isolated effects of the trading increment are compared. However, the Commission is uncertain of the effect these proposals would have on the magnitude of price improvement, but anticipates they could increase the frequency of price improvement and change the basis for the effects of the trading increment. Because price improvement is benchmarked to the NBBO, the magnitude of price improvement available could decline as a result of reductions in the NBBO from the change in the round lot definition, which would narrow the spread in stocks priced more than $250, or from a smaller tick, which could narrow the spread in tick-constrained stocks. Conversely, the frequency and magnitude of price improvement could also increase for stocks that are currently tick-constrained because, for tick-constrained stocks, the only way to offer price improvement on an exchange or ATS is with a midpoint trade. If the reduction in tick sizes results in tick￾constrained stocks no longer being tick￾constrained, then exchanges and ATSs could accept odd-lot orders inside the NBBO that offer price improvement relative to the NBBO. It is unclear which effect would dominate: the decline in the NBBO spread leading mechanically to less reported price improvement or the increased ability to offer price improvement on stocks that are currently tick-constrained. For currently price improved trades the effect of the proposal would depend on a few factors. Consistent with the analysis in Table 3, one study also reports that common price improvement levels are $0.0001, $0.001 and $0.002.574 For stocks priced equal to or greater than $1.00, price improvement of $0.0001 would no longer be achievable. However, for a stock priced at $20, price improvement of $0.0001 represents only 0.05 bps of price improvement, which is not economically meaningful. The Commission expects that on such trades the wholesaler would likely round down to the price improvement that it offers in the majority of cases to the nearest permissible increment reducing price improvement by $0.0001 per share traded by retail investors, which could mitigate some of the benefits of the proposal as a whole. This is because the cost to an OTC market maker of rounding up almost an entire tick could be high. For price improvement that occurs in increments of $0.001 or $0.002 the effect of the rule would be dependent on the stock’s designated tick size. For the estimated approximately half of trading volume that would likely receive a $0.001 tick, price improvement of either $0.001 or $0.002 would still be possible because both increments align with the $0.001 tick size. For the fraction of trading volume receiving a $0.002 tick, price improvement of $0.001 would not be possible but price
improvement of $0.002 would still be possible. For the subset of retail trades in stocks that would have a $0.002 tick and would have received price improvement of $0.001 absent harmonization, the OTC market maker could offer greater price improvement on these trades to $0.002, or it could choose to not offer price improvement. Both options come with costs to the OTC market maker, so the decision depends on the margins earned by OTC market makers when internalizing trades. If it chooses to price improve from $0.001 to $0.002 it would earn $0.001 less per share transacted. However, if it fails to price improve then both the total price improvement offered to retail investors and the fraction of trades receiving price improvement would decline, potentially making the OTC market maker appear less competitive in terms of attracting retail order flow. Additionally, the less price improvement that OTC market makers in sum offer to retail traders, the less attractive they might appear to the broker-dealers who handle retail traders. This coupled with the fact that OTC

575See infra sectionV.E.2.a. for further discussion on these competitive effects. 576Market participants have also expressed similar uncertainty. NYSE, providing an analysis of the potential effect of a $0.0025 tick increment that applies in all settings, stated, ‘‘We expect the reaction to [harmonizing the tick increment] will be some mix of favorable and unfavorable changes for marketable orders. For example, some buy orders will pay higher prices, but some will also pay lower prices as additional market participants can effectively use price points previously available only on bilateral trades.’’ See NYSE Tick Harmonization Paper, supra note 126 at 6. Given the uncertainty regarding how OTC market makers, including wholesalers could react to applying the tick size to trading situations, the Commission is not providing quantitative estimates of the effect of the proposal on retail price improvement. 577See infra section V.E.2.a. for further discussion on these competitive effects. 578For a tick-constrained stock, the cost of demanding liquidity is one half the spread ($0.005) plus the access fee. An increase of $0.005 to $0.008 is a 60% increase. 579Estimates in this paragraph are computed by multiplying by two the estimates in Table 11. 580The exception is IEX, which the Commission estimates might experience a reduction in access fees collected on trading in tick-constrained stocks greater than $1.00. This is because the 5 mil access fee cap for these stocks is lower than the estimated 6 mils that IEX currently charges to access protected quotes. Thus the Commission estimates that the IEX might lose approximately $3 million per year in transaction revenue on trading in these securities. 581At certain pricing tiers rebates may exceed the access fee cap. However, because total overall fees exceed the total rebates paid out, the average rebate would remain lower than the average access fee. 582See Staff Report on Equity and Options Market Structure, supra note 20. market makers would be restricted to the same minimum trading increment as exchanges and ATSs would put competitive pressure on OTC market makers to price improve trades because exchanges and other ATSs would have an increased ability to potentially innovate and compete for retail order with OTC market makers, including wholesalers.575 Similar arguments follow for stocks that receive a tick size of $0.005 or $0.01. A wholesaler would not be able to offer price improvement at common levels and could thus offer less or no price improvement—which might harm its competitive standing in terms of competing for retail order flow. To offset this consequence the OTC market makers, including wholesalers, could instead increase the amount of price improvement that it offers. To the extent that OTC market makers choose to not offer as much price improvement, total price improvement received by retail investors might decrease. But, to the extent that OTC market makers choose to increase the levels
of price improvement to match the tick, then retail price improvement might increase. If OTC market makers increase price improvement in some instances to match the tick and decrease it in others, the net effect for retail price improvement could be positive, negative, or neutral.576 The Commission believes that investors may benefit overall from harmonizing trading and quoting increments regardless of the effect on price improvement because of the potential long-term competitive effects.577
3. Lower Access Fee Cap
The proposal would lower the access fee cap from $0.003 per share (30 mils) to $0.001 per share (10 mils) for NMS stocks priced $1.00 or greater and having a minimum pricing increment greater than $0.001, from $0.003 (30 mils) to $0.0005 (5 mils) for NMS stocks priced $1.00 or greater and a minimum pricing increment of $0.001, and from 0.3% to 0.05% of the share price for stocks with prices less than $1.00. Most exchanges currently charge the maximum access fee allowed under the cap. For stocks with narrow spreads such as tick-constrained stocks, a 30 mil access fee can increase the cost of demanding liquidity by as much as 60%.578 The direct economic effect of a lower access fee cap is therefore likely to be a lower price to take liquidity, and thereby lowering the cost of trading for many investors. Moreover, to avoid increasing distortions in order routing, a reduction in the tick size must be accompanied by a reduction in the access fee cap in the presence of the NBBO. Because the NBBO offers quote protection, a liquidity taker must go to the best quote regardless of the fee, limiting the ability for market forces alone to lower access fees. Some reduction in the access fee cap would be necessary to prevent a situation in which the access fee exceeds the quoted spread. At present, many exchanges offer rebates for liquidity providers and charge fees for liquidity takers (Section V.C.2), with a net capture rate of 2 mils for stocks with prices greater than or equal to $1.00. Table 11 estimates the rebates exchanges would pay, should this 2 mil capture fee prevail; that is, for stocks with a 10 mil access fee, the rebate would on average be 8 mils per share, for example. The analysis also assumes that the behavior of inverted exchanges and off-exchange venues changes proportionally, though the proposal would not require this. As shown in Table 11 below, the Commission estimates that the reduction in the access fee cap would lead to a decrease in the total access fees collected and rebates distributed of approximately $3.8 billion per year, amounting to a 73% reduction in access fees paid or an 80% reduction in rebates distributed.579 Balancing out expected rebates paid on make-take, inverted, and flat fee venues, the Commission expects that liquidity demanders would pay $3.2 billion per year less in access fees netted across all venues under the proposal and liquidity providers would receive $3.2 billion per year less in rebates netted across all venues. These numbers represent an 80% reduction in rebates received by liquidity providers and a 73% reduction in access fees paid by liquidity demanders. Additionally, the Commission estimates that the reduction in the access fee cap could decrease the net capture of the exchanges by $89 million per year with the decline in net capture coming almost exclusively from a lower net capture for trading in stocks priced less than $1.00 (see below).580 The analysis in this section assumes that exchanges
would maintain the practice of financing rebates through access fees, and thus for transactions in stocks priced $1.00 or more the Commission expects the average access fee to be near the 10 or 5 mil access fee cap and the rebate to be approximately 2 mils lower on average.581 There are several reasons for this assumption to hold, at least approximately. First, on inverted venues, there is currently no restriction on the level of fees for taking liquidity or rebates for posting, yet as shown in Table 5 inverted venues generally have fee and rebate levels similar to maker-taker venues and approximately a 2 mil capture rate. Second, this proposal does not directly alter the ability or the incentives for an exchange to subsidize rebates. Additionally, if exchanges were to subsidize rebates by taking a net loss per share transacted, they would be vulnerable to experiencing extreme and unpredictable losses if volumes spike. Trading volumes can vary significantly through time with very little ability to predict the timing and magnitude of changes in trading volume. For example, in January 2021 volume spiked dramatically for certain stocks relative to pre-January 2021 levels.582 The Commission nonetheless acknowledges uncertainty over whether this 2 mil capture rate would persist or be lower. The capture rate could be lower should exchanges choose to subsidize rebates on stocks priced $1.00 or more to a greater extent, choose to subsidize trading on stocks with prices less than $1.00, or choose to alter their business model in response to the changes.
Table 11 uses volume estimates from
Table 6 to provide estimates of the fees

583This assumes that exchanges continue the practice of funding rebates through access fees, that trading volumes are unchanged relative to the first six months of 2022, that the distribution of trading volume across exchanges is unchanged, and that the distribution of trading volume priced below $1.00 and at or above $1.00 remains unchanged. 584See Table 7 for additional analysis on current estimates of exchange net capture. 585As discussed in section III.C.2, the Commission believes that most exchanges have a net capture of approximately 2 mils on transactions priced greater than $1.00. For reasons discussed in this section the Commission believes that it is reasonable to assume that exchanges with a current 2 mil net capture would be able to continue to earn a 2 mil net capture. The Commission expects one exception to its general belief that all exchanges would likely be able to maintain their net capture on transactions priced greater than $1. The Commission believes that IEX might receive a lower net capture for transactions associated with volume assigned the 5 mil access fee cap. The Commission estimates, based on Table 5 that IEX has estimated net capture of 6 mils per transaction priced equal to, or greater than, $1.00 per share. Under the assumption IEX would not begin charging access fees to liquidity providers, its maximum net capture per transaction on stocks with a 5 mil access fee cap would be 5 mils. Thus our estimates assume that IEX would lose 1 mil of net capture on estimated volume that IEX executed that would have received the 5 mil access fee cap. The Commission estimates that this loss would account to approximately $1.5 million in lost transaction fee revenue in the first six months of 2022, or $3 million annualized. 586See Table 5. and rebates that would have been collected and disbursed in the first six months of 2022 if the proposed access fees were implemented.583 Annualized estimates are simply these estimates multiplied by two. Panel A shows that under the current system with a 30 mil access fee cap for quotations priced $1.00 or more and a 0.3% access fee cap for transactions less than $1.00 the exchanges collected an estimated $2.55 billion in access fees and distributed $2.31 billion in rebates in the first six months of 2022, providing an estimated net capture of $240 million for the exchanges in that time period.584 Under the proposed amendment to rule 610 the Commission estimates that the exchanges would collect $652 million in access fees and distribute $455 million in rebates, providing the exchanges a net capture of $197 million over the same time period. Thus total access fees collected would be expected to decline by $1.91 billion ($3.82 billion annually) and rebates distributed by $1.86 ($3.72 billion annually) billion in the first six months of 2022. This amounts to an estimated decline in net capture of $44.5 million ($89 million annually) across all exchanges. Panel B provides estimates of the effect
of the proposal on access fees paid and rebates received by liquidity demanders and providers separately under the proposed rule. The Commission estimates that under the proposed rule liquidity demanders would pay $1.56 billion ($3.12 billion annually) less in access fees and liquidity providers would receive $1.52 billion ($3.04 billion annually) less in rebates over the same time period. Thus, the current estimated $1.9 billion transfer facilitated by access fees and rebates from liquidity demanders to liquidity providers in the first six months of 2022 would be decreased by 80% under the proposal.
TABLE 11—ESTIMATED ACCESS FEES AND REBATES COLLECTED CURRENT AND PROPOSED JAN. TO JUNE 2022 a
Current Proposed Difference Panel A: Estimated Access Fees Collected and Rebates Distributed Jan–Jun 2022 Fees Collected ........................................................................................................... $2,554,250,000 $652,318,000 ¥$1,901,932,000 Rebates Distributed ................................................................................................... 2,312,561,000 455,081,000 ¥1,857,480,000 Exchange Capture ..................................................................................................... 241,688,000 197,237,000 ¥44,451,000 Panel B: Estimated Fees by Liquidity Type Liquidity Demander .................................................................................................... 2,135,292,000 568,631,616 ¥1,566,668,000 Liquidity Provider ....................................................................................................... ¥1,893,604,000 ¥371,394,303 1,522,210,000 Exchange Capture ..................................................................................................... 241,688,000 197,237,312 ¥44,451,000 aThis table takes trading volumes presented in Table 6 to calculate aggregate fee and rebate estimates under the proposal. It separately ac￾counts for volume priced less than $1.00 as well as trading that occurred in stocks that had time weighted quoted spreads less than or equal to $0.011—i.e., stocks that would likely have received a $0.001 tick under the proposed changes to rule 612. These stocks are determined using Dec. 2021 time weighted quoted spreads for all trading volume in Jan. through Mar. and Mar. 2022 time weighted quoted spreads for volume Apr. through June. Current estimates are drawn from Table 7 while proposed estimates are computed assuming that non-tick-constrained volume priced equal to or greater than $1.00 on maker-taker or inverted exchanges pay a 10 mil access fee and receive an 8 mil rebate. For tick-con￾strained volume the assumption is 5 mil access fee and 3 mil rebate. For IEX we assume a 6 mill access fee for non-tick-constrained volume and a 5 mil access fee for tick-constrained volume. For volume priced less than $1.00 we assume that no exchange offers a rebate and that all exchanges charge 0.05% to take liquidity except for IEX whom we assume charges both sides 0.05%. Computations are made at the exchange and then aggregated as shown above.
Table 11 presents analysis suggesting
that the exchanges could lose approximately $89 million per year in net capture. This estimated decline in transaction revenue comes almost exclusively from the reduction in the access fee cap for transactions in securities below $1.00. This is because for transactions priced equal to or greater than $1.00 the Commission expects that, except for exchanges that choose to rely mostly on transaction fee revenue which tend to have a higher net capture, the exchanges would largely maintain their current net capture.585 Thus the decline in exchange net capture would be driven almost exclusively by an anticipated decline in the net capture on transactions below $1.00. For these transactions most exchanges currently charge the maximum 0.3% but offer no rebates.586 Because very few exchanges offer rebates on stocks priced below $1.00, the access fee represents the exchange’s net capture. Lowering the access fee from 0.3% to 0.05% on these transactions would represent a decrease in net capture of 83% for many exchanges. This decline would not be expected to be uniform. Some exchanges do not charge any fees for trading in sub $1.00 securities while others charge a fee to both sides of a sub $1.00 transactions. Additionally, the exchanges differ in the fraction of sub $1.00 trading volume that they handle.
Table 12 provides annualized estimates
of the effect of lowering the access fee on exchange net capture given realized volumes in the first 6 months of 2022.

587See supra section V.C.2 588For example, on a stock with a $0.01 spread the liquidity demander would earn half the spread ($0.005) plus the rebate ($0.0028), or $0.0078 per share in the current market. Under the current regime if this stock was assessed a 5 mil access fee cap the expected rebate would decline to $0.0003 for a total profit of $0.0053, or a 32% reduction in total revenue to the liquidity provider on the transaction. This reduction would occur before any tick size reduction in the spread is taken into account. 589See, e.g., Colliard and Foucault (2012), supra note 277; James Angel, Lawrence Harris, and Chester Spatt, Equity Trading in the 21st Century, 1 Q. J. Fin. 1 (2011).
TABLE 12—ESTIMATED EFFECT OF POLICY ON EXCHANGE TRANSACTION CAPTURE a
Revenues
($)
Revenues
(%)
Nasdaq ..................................................................................................................................................................... ¥$33,527,000 ¥21 NYSE ....................................................................................................................................................................... ¥24,676,000 ¥20 Cboe ........................................................................................................................................................................ ¥22,356,000 ¥20 MEMX ...................................................................................................................................................................... ¥1,960,000 ¥7 IEX ........................................................................................................................................................................... ¥5,378,000 ¥10 MIAX ........................................................................................................................................................................ ¥1,005,000 ¥14 LTSE ........................................................................................................................................................................ 0 0 Total .................................................................................................................................................................. ¥88,902,000 ¥18 aTo compute the variable Revenue ($) which provides an annualized estimate of the effect of the proposed amendment to rule 612 on ex￾change net capture, we assume that IEX loses 1 mil on transactions that are priced equal to, or greater than, $1.00 per share and are tick-con￾strained and (and thus may receive the $0.001 tick and 5 mil access fee). For all other exchanges the net capture on transaction priced equal to, or greater than, $1.00 per share is expected to remain unaffected by the proposal. For transaction volume below $1.00 per share estimates for the decline in transaction revenue is computed by assuming that under the proposal all exchanges would charge 0.05% to one side of the trans￾action and nothing to the other side of the transaction. Sub $1.00 dollar volume estimates for each exchange are taken from Table 6. This rev￾enue is then compared to the estimated transaction revenue in the current environment that is estimated using the sub $1.00 transaction fees/re￾bates for each exchange presented in Table 5 Panel B and multiplying them by volume estimates for each exchange from Table 6. The dif￾ference is presented in the table. To estimate the impact on total transaction fee revenues the Commission assumes that all make-take and in￾verted exchanges would earn 2 mils on all transactions priced equal to or greater than $1.00 per share and Flat fee venues earn 6 mils. This revenue is added to the sub $1.00 transaction revenue estimated as stated earlier in this
footnote. The variable Revenue (%) is computed as the Revenue ($) divided by the revenue total revenue converted to a percent. To annualize, all totals are multiplied by 2. The estimated $3 billion annual reduction in rebates received by liquidity providers under the proposal could impact market participants, specifically algorithmic and high￾frequency traders, which specialize in liquidity provision and rebate capture strategies. Holding the spread constant, a rebate of 28 mils provides a significant fraction of the total revenue earned by liquidity providers on each share transacted.587 Even absent a reduction in the tick increment, the reduction in rebates from an estimated 28 mils average to either 8 or 3 mils would significantly decrease the revenue earned per share transacted by a liquidity provider.588 Any additional reduction in the spread due to the reduction in the tick size for tick￾constrained stocks would further reduce the revenue earned by liquidity providers. The primary likely effect of the decline in rebates disbursed and access fees collected would be to reduce the amount of liquidity provision— particularly among stocks with narrow spreads. This reduction in liquidity provision may not be harmful to trading quality for these stocks, under the reasoning that the reduction in rebates would alleviate currently existing distortions that lead to an oversupply of liquidity relative to the demand of liquidity, and would better allow the forces of supply and demand to determine market prices and lower overall transaction costs for liquidity demanders. If tick sizes were infinitely small, and absent other distortions, then fees and rebates would not affect the cost of trading because markets would simply adjust quotes by the amount of the rebate such that the spread with rebates included is the same.589 However, current U.S. equity markets differ from this frictionless construct because there is a finite tick. In this environment, and particularly for stocks with narrower spreads, high access fees and rebates can distort liquidity supply and demand by artificially increasing the cost of taking liquidity and the revenue to providing liquidity. This dynamic creates an environment with too much liquidity supply relative to liquidity demand. Consider a stock with a $0.01 spread. In this case, a liquidity provider offering a protected quote at a maker-taker venue under the current system with a 30 mil access fee and a 28 mil rebate will earn one half the spread ($0.005) plus the rebate ($0.0028) yielding a profit of $0.005+$0.0028=$0.0078 per share traded. In this case a rebate of 28 mils increases the liquidity provider’s profit on the transaction by approximately 50%. For liquidity demanders, the 30 mil access fee produces the exact opposite effect, increasing transaction costs by approximately 50%. The existence of a $0.01 tick prevents spreads from adjusting to levels that can equate liquidity supply and demand, leading to an oversupply
of liquidity relative to demand. Reducing the access fee cap to 10 or 5 mils significantly reduces the effect that access fees have on the incentive to demand and provide liquidity and would allow markets to realize prices that better reflect the underlying economics of liquidity supply and demand. For example, consider a stock with a prevailing spread of approximately $0.01, an access fee cap of 5 mils, and an average rebate of 3 mils. In this case a liquidity provider on a maker-taker exchange will earn half the spread plus a 3 mil rebate for a total of ($0.005+$0.0003=) $0.0053. In this case the total cost to demanding liquidity falls by approximately 50% and the access fee is just 5.7% of the total transaction costs. For a stock with a $0.03 spread and a $0.005 tick, a 10 mil access fee, and an 8 mil rebate the liquidity provider in this case earns half the spread plus the rebate for a total of ($0.0150+$0.0008=) $0.0158. In this case the rebate is only 5% of the total revenue for providing liquidity. The effect of rebates diminishes as an economic incentive as spreads widen. For example, consider a stock with a $0.10 spread. Even in the baseline case with a 28 mil rebate. A liquidity provider will earn half the spread plus a 28 mil rebate for a total revenue of ($0.0500+$0.0028=) $0.0528 per share. In this case the rebate is 5.6% of the total cost, a fraction that drops to 1.5% with an 8 mil rebate under the proposal.

590Market participants sometimes refer to the oversupply of liquidity relative to demand as excessive intermediation (see supra note 100). Thus reducing the access fee would reduce excessive intermediation. 591For a tick-constrained stock, the cost of demanding liquidity is one half the spread ($0.005) plus the access fee. An increase of $0.005 to $0.008 is a 60% increase. 592See, e.g., Roni Michaely, Jean-Luc Vila, and Jiang Wang, A Model of Trading Volume with Tax￾induced Heterogeneous Valuation and Transaction Costs, 5 J. Fin. Intermediation 340 (Oct. 1996) for an empirical analysis of the relation between trading volume and transaction costs. 593See Menkveld, et al. (2017), supra note 275. 594See Foley, et al. (2016), supra note 465. 595 If rebates and transaction fees are both approximately 30 mils on both maker-taker and inverted venues, then the realized price difference for an order with the same nominal value can be as much as 60 mils depending on where the order is submitted. Standard supply and demand arguments suggest that if the revenue earned per share transacted decreases— i.e., the price of liquidity decreases—the amount of liquidity supply will also decrease, reducing the oversupply of liquidity. This reduction in liquidity provision likely means that some proprietary trading desks and firms that currently specialize in providing liquidity and capturing rebates would cease operation as the market adjusts from one with significant liquidity subsidization to one with less subsidization and where the ask and bid prices are more reflective of the forces of supply and demand for liquidity.590 The primary beneficiaries of the reduction in the access fee cap would be liquidity demanders. For stocks with narrow spreads such as tick-constrained stocks, a 30 mil access fee can increase the cost of demanding liquidity by as much as 60%.591 Consequently, reducing the access fee significantly reduces the cost of demanding liquidity in the predominant maker-taker trading environment. This effect coupled with the expected decrease of liquidity suppliers can be expected to decrease competition to provide liquidity. Less competition to provide liquidity means that queue lengths could decrease and fill rates increase because it would be easier to get to the front of the order book. This effect could allow non high￾frequency traders -more opportunity to fill orders using liquidity-providing instead of liquidity-demanding transactions. The Commission expects the decline in the access fee to have opposing effects on trading volume. If more investors end up interacting with one another without the intermediation of a specialized liquidity provider or high frequency market makers the total number of transactions and trading volume may decrease. However, the basic forces of supply and demand suggest that as the price of a good decreases, the demand for that good increases. Thus, if the cost of demanding liquidity decreases, more investors will seek to
trade which would increase trading volume. This could occur as market participants take advantage of the lower cost of demanding liquidity to more actively manage their portfolios—generating more trading.592 Taken alone, a reduction in the access fee could lead to wider spreads in some cases by reducing the ability to use rebates as a form of intra-tick pricing. However, the reduction in tick size also reduces the need for intra-tick pricing. For instance if the ask price that equates supply and demand is equal to $10.0015 then absent a rebate and with a $0.01 tick, the prevailing ask price would be $10.01—the next feasible price. This price would indicate a distortion of $0.0085. However, with a 28 mil rebate, the prevailing ask price will be $10.00 because once the rebate is taken into account, the net price including the rebate would be $10.0028 which is greater than $10.0015. While still a distortion, the distortion in this case would be smaller at $0.0015. Thus, in this case the existence of a 28 mil rebate can narrow the spread by allowing a form of intra-tick pricing. In this example with a rebate of either 3 or 8 mils the prevailing price would still be $10.01 because the net price including rebates on a maker-taker venue would still be less than $10.0015. However, because the reduction in the access fee is also accompanied by a reduction in the tick size, markets would be able to more naturally find prices that equate supply and demand without needing rebates to minimize the distortion. In the example, where the ask price that equates liquidity supply and demand is $10.0015, and if the stock were assigned a tick of $0.001 under the proposed changes, the prevailing ask price would be $10.002 and the distortion would be $0.005. Thus because of the reduced tick, the need for intra-tick pricing via rebates is significantly reduced. The reduction of the access fee cap, as well as relaxing of the tick constraint, could also simplify markets by reducing the need for complex order types that are designed to take advantage of the system of fees and rebates. The reduction would also likely simplify the overall system of fees by compressing the fees that are possible to charge and thereby also constraining the ability for exchanges to offer multiple pricing tiers with economically meaningful differences. This simpler market structure could reduce the cost associated with designing and executing an order routing strategy and could thus decrease transaction costs. Simpler fees and rebates could also translate into a reduced frequency and complexity of amendments to exchange access fees and rebates. If so, the proposal could result in cost savings to exchanges associated with fewer Rule 19b–4 filings. A lower access fee cap could induce some trading volume that currently transacts on ATSs to revert to exchanges. This would occur to the extent that traders who may route orders to ATSs in order to avoid high access fees instead route orders to exchanges
due to lower access fees.593 More trading volume on exchanges could improve overall price efficiency.594 However, these effects could be lessened or reversed due to the reduction in rebates, since rebates incentivize trading on exchanges versus off-exchange. Finally, for stocks priced less than $1.00 the effect of lowering the access fee will primarily be to lower the transaction costs associated with trading in these securities. Most exchanges do not offer rebates for stocks priced less than $1.00, or if they do the rebates are quite small. Therefore, the effect of the proposal on such rebates is likely to be minimal. Lower transaction costs for these securities may improve liquidity for stocks with prices less than $1.00. However, given the relatively low natural trading interest, the Commission does not expect a significant improvement in the trading environment for these securities.
4. Exchange Fees and Rebates
Determinable at the Time of Execution The proposal requires that exchange fees and rebates be determinable at the time of execution. In the current environment, the prices adjusted for the fees and rebates that investors pay can vary by as much as 60 mils (0.6c) per share for orders with the same nominal execution price.595 Thus, allowing market participants to determine the applicable fees and rebates at the time of execution could help improve investor execution quality by providing certainty as to the net fee and rebate price applicable at a given exchange at the time that an order is routed to that exchange. Having fees and rebates determinable at the time of execution could make it easier for broker-dealers to pass such fees and rebates on to the end customer.

596See Amber Anand, et al., Performance of Institutional Trading Desks: An Analysis of Persistence in Trading Costs, 25 Rev. Fin. Stud. 557 (2012). 597See infra section V.E.2.c. 598See infra Section V.D.5.c. for additional discussion of this effect. While this proposal requires the exclusive SIPs to distribute odd-lot data, the MDI Rules do not require the competing consolidators to disseminate odd-lot data. However, the MDI Adopting Release anticipated that at least one competing consolidator will do so because there would be demand for the data. See supra
section V.C.3.
599See infra section V.E.2.c for additional discussion of MDI acceleration and the potential effect on competitive consolidator competition. 600See MDI Adopting Release, supra note 5,
section V.C.1.(b).(i), for the full discussion of the
effect of changing the round lot size on the NBBO. 601See MDI Adopting Release, supra note 5, sections V.C.1.b.(ii) and V.C.1.b.(iii), for the full discussion of the effect of changing the round lot size on transparency and execution quality. 602See MDI Adopting Release, supra note 5, sections V.C.1.b.(iv) for the full discussion of the effect of changing the round lot size on exchange competition and order routing. 603See MDI Adopting Release, supra note 5,
section V.C.1.b.(vi) for the full discussion of the
expected costs of changing the round lot size. See also infra section V.D.6. for an estimation and discussion of these compliance costs as they pertain to the proposed acceleration. 604See MDI Adopting Release, supra note 5,
section V.C.1.b.(vii), for the full discussion of the
effect of changing the round lot size on other rules and regulations. 605See supra section IV.A.1 for a discussion of the delays. 606See supra section II.B. for a discussion of the factors that affect when MDI will be implemented and a discussion of an estimate of the proposed acceleration of at least two years after the Commission’s approval of the plan amendment(s) required by rule 614(e). 607See supra Table 8 note a, for a discussion of the impact of the round lot definition on the estimates of which stocks would receive a reduced tick size. In the MDI Rules the Commission estimated an average reduction in quoted spreads, conditional on the round lot definition resulting in a reduction of roughly 15% for stocks priced $250- $1,000 and 28% for stocks priced $1,000-$10,000. Given the average quoted spread of $0.35 for stocks priced $250–1,000 and $2.90 for stocks priced $1,000-$10,000 the expected mechanical reductions are likely not sufficient to reduce the spreads of many of these stocks to the point where they would qualify for a lower tick size in this proposal. See MDI Adopting Release, supra note 5, section V.C.1.b.(i). dealer to pass on fees and rebates to individual customers because the level of fees and rebates is not determinable at the time of execution and the tier into which a broker-dealer falls, which determines total fees and rebates, is based on total broker-dealer activity and not an individual trade. Access fees create potential conflicts of interest. Passing on fees and rebates to end customers could eliminate such distortions and lead to improved overall order execution for end customers. Additionally, the ability to pass on the fees and rebates to end customers might also make customers more aware of these fees and rebates so that they can better inform their broker-dealers how to route with respect to fees and rebates which could also lead to better execution for end customers. While the ability to determine fees and rebates at the time of execution would make passing fees and rebates on to the end customer more feasible, it is not clear in practice how much this would occur as there are significant uncertainties regarding how much demand currently exists for rebates to be passed through by end investors. Academic research shows that execution skill can have a significant impact on an investor’s portfolio returns.596 It is possible that more sophisticated market participants with high trading volumes, and thus higher transaction costs, might welcome the opportunity to better manage access fees and rebates for their trades. On the other hand, less sophisticated traders with low trading volumes might be less inclined to request that their broker￾dealers pass through access fees and rebates. Making fees and rebates determinable at the time of execution could also enable the customers of broker-dealers to better discuss transaction fees and rebates with their broker-dealers, and potentially request data on such fees. Doing so
could improve broker-dealer accountability and lead to better outcomes for customers.597
5. Acceleration of the MDI Rules and
Addition of Information About Best Odd-Lot Orders The proposal would result in four changes to NMS data. Two of the changes would accelerate the implementation of specific aspects of MDI, namely the round lot definition and the inclusion of odd-lot quotations priced better than the NBBO in NMS data, and would, therefore, result in realizing the economic effects of these MDI Rules sooner. The Commission acknowledges that the economic effects of the proposed acceleration would be temporary only until the accelerated aspects of the MDI Rules would otherwise have been implemented. The proposal would impose a new requirement on the exclusive SIPs to disseminate the accelerated odd-lot information until the exclusive SIPs are retired, the effect of which is to guarantee that the odd-lot information would be disseminated.598 The proposal does however present the possibility that the new requirements on the SIPs could reduce competing consolidator competition, which could reduce the expected benefits of the MDI Rules.599 The proposal would also require the dissemination of a standardized best odd-lot order or BOLO. The primary economic effect of this would be to provide a standard benchmark that market participants could use to gauge execution quality—particularly for smaller or odd-lot orders. a. Round Lot Definition The round lot definition in the MDI Rules will result in numerous economic effects and the proposal would result in realizing these effects sooner. The primary effects stem from the MDI Rules round lot definition mechanically shrinking the NBBO for stocks priced greater than $250.600 Other effects of changing the round lot definition include increased transparency and better order execution,601 as well as any effects from potentially having more orders routed to exchanges instead of ATSs.602 The costs of changing the round lot definition derive from upgrading systems to account for additional message traffic and modifying and reprogramming systems.603 The Commission also expects that changing the round lot definition will impact the mechanics of other rules and regulations.604 These economic effects would be realized earlier than is currently estimated under the existing MDI timeline because this portion of the MDI Rules is not set to be implemented until the end of the implementation timeline. Further, because the first steps of the timeline have not been accomplished,605 and the Commission is uncertain when exactly the round lot definition otherwise will be implemented, the degree of the effect of the acceleration, is unknown.606 The Commission recognizes that the earlier implementation of the round lot definition could affect the proposed tiered tick structure by sooner increasing the number of stocks subject to a minimum pricing increment of less than $0.01, but does not expect this effect to be substantial. Specifically, a mechanically tighter NBBO would reduce the Time-Weighted Average Quoted Spread used to determine the appropriate
tick increment for stocks priced greater than $250. However, higher-priced stocks also tend to have higher spreads that are unlikely to narrow enough for the proposal to result in a smaller minimum pricing increment.607 The Commission also recognizes that both the reduction in tick size and accelerating the definition of round lot would reduce the depth of liquidity at the NBBO. These effects might amplify each other in a small set of stocks. A

608See MDI Adopting Release, supra note 5,
section V.C.1.c.(i), for the full discussion of the
effects of including odd-lot information inside the NBBO in its definition of core data. Also, the MDI Rules do not require that the competing consolidators to disseminate odd-lot information, but the Commission anticipated in the MDI Adopting Release that at least one would do so. The proposed requirement that the exclusive SIPs disseminate odd-lot information helps ensure that the economic effects of the proposed acceleration of the MDI Rules occur. See infra section V.D.6. for a discussion of the costs to the exclusive SIPs. 609See MDI Adopting Release, supra note 5, at
section V.C.1.c.(iv) for the full discussion of the
costs associated with expanding core data to include odd-lot information inside the NBBO. See also infra section V.D.6 for further discussion of compliance costs. 610 Id. 611 Id. 612See MDI Adopting Release, supra note 5, at n.1939. reduction in tick size would spread liquidity across more price levels while the implementation of the round lot definition would result in displaying smaller quotes at the NBBO. The proposal could result in this effect being amplified for stocks that trade above $250 with spreads narrower than $0.04 as these stocks would receive both smaller tick and smaller round lot sizes, which is likely only a small number of stocks. This reduction in depth at the NBBO would temporarily reduce the information about liquidity available in the market for market participants who do not receive depth of book information from proprietary data feeds. However, the eventual implementation of including the depth of book information in consolidated market data due to the implementation of the MDI rules would render this effect temporary. At that point in time, consolidated market data is expected to contain depth information at many more price points, which would largely counteract the effects of a reduction in displayed depth from the implementation of the round lot definition and even from a reduction in tick size. b. Including Odd-Lots in NMS Data The proposed acceleration of the implementation of the MDI Rules that expands the NMS data to include odd￾lot information inside the NBBO would result in sooner realizing some, but not all economic effects of this aspect of the MDI Rules.608 The Commission believes that this odd-lot information could be useful to consumers of SIP data who could use it to make inferences about market conditions and, thus, could lead to better investment decisions and increased market efficiency. It could also lessen the effect of a reduction in displayed depth at the NBBO resulting from either a smaller tick size or a smaller round lot. Specifically, the proposal to expedite implementation of inclusion of odd-lot data would sooner allow individual investors whose broker-dealers subscribe to the data to visually monitor the market environment and determine profitable trading opportunities. In addition, the proposal would change the timing and magnitude of compliance costs and other costs.609 These costs would include: the cost for exclusive SIPs to upgrade existing infrastructure and software to handle the dissemination of additional message traffic, the cost to SROs to implement system changes required in order to make the data needed to generate odd-lot information available to exclusive SIPs, and the cost of technological investments market participants might have to make in order to receive the proposed SIP data.610 While these economic effects would be realized sooner, the Commission does not expect that the proposal would accelerate all the effects described in the MDI Rules related to adding to NMS data
odd-lot information inside the NBBO. The proposal would not accelerate the benefits from allowing some market participants to reduce data expenses required for trading by providing a reasonable alternative to some market participants to proprietary data.611 As such, the proposal would also not accelerate the cost to users of propriety data whose information advantage would dissipate somewhat. In particular, the Commission does not believe that adding the specified odd-lot information to the exclusive SIPs would result in low-latency traders substituting the exclusive SIPs for their current proprietary data usage. This is because a key component of the MDI Rules for this functionality is an expected reduction in latency of NMS data anticipated from the competing consolidator model of NMS data distribution.612 The exclusive SIPs are not expected to be fast enough to replace proprietary data because existing SIP latency would not be reduced or affected by this proposal. Thus, the proposal would not accelerate the benefits anticipated in the MDI Rules that pertain to using low-latency odd-lot information. Instead, the Commission expects these effects after the implementation of all MDI Rules. Market participants who receive and use odd-lot information from the exclusive SIPs would also incur costs if the acceleration results in additional systems changes. Specifically, if the exclusive SIPs changed data specifications to add odd-lot information, market participants receiving odd-lot information from exclusive SIPs would need to make systems changes upon implementation of the proposal. Because the data specifications of the competing consolidators are unknown and could differ from the data specification of the exclusive SIPs, market participants receiving SIP data could need to make systems changes again to receive the additional data from a competing consolidator upon full implementation of the MDI Rules. If there are significant fixed costs associated with system changes that are incurred on each change, then multiple system changes would be inefficient and could increase costs. Because market participants who receive odd-lot information from the exclusive SIPs would need to make an extra systems change stemming from this proposal, they could be discouraged from making systems changes to make use of the odd-lot information and, instead, wait until MDI implementation. This could dampen some of the benefits of the proposal. To the extent that some market participants store SIP data for various purposes (such as transaction cost analysis) the storage costs could increase with the proposal as the amount of SIP data increases with the inclusion of odd-lot data. Many factors affect these costs, such as the number of market participants storing SIP data, the data structures they use to store SIP data, whether these market participants would choose to store all or just some of the SIP data provided by the proposal, and the period over which the proposal
would affect these storage costs. Based on the nature of several of these factors, the Commission is unable to estimate these costs.

613See infra section V.D.6 for additional discussion of the costs the exclusive SIPs are expected to incur. 614See supra note 518. 615The Commission recognizes that the exclusive SIPs have some incentive to offer odd-lots as indicated by the exclusive SIPs seeking comment on doing so. See, e.g., 2022 SIP Odd-Lot Request for Comment, supra note 371. 616While the Commission does not expect most retail traders would engage in this sort of benchmarking due to a lack of technical capacity to do so among most retail traders, institutional traders likely have such capacity and so would engage in this type of monitoring. Institutional traders have strong incentives to monitor all aspects of transaction costs as these costs can significantly affect portfolio performance. See Anand, et al. (2012), supra note 596. 617This is consistent with the expectations that exclusive SIPs would likely become competing consolidators expressed in the MDI Adopting Release, supra note 5, at section V.C.2.(a)(ii).
c. Dissemination of Odd-Lots in SIP
Data
The proposed requirement for the exclusive SIPs to disseminate odd-lot data would ensure realizing the benefits of accelerating the implementation of including odd-lot information in NMS data while imposing costs on exclusive SIPs and potentially market participants.613 The MDI Rules do not require the competing consolidators to disseminate odd-lot data. However, the Commission estimated that at least one competing consolidator will do so because there would be demand for the data.614 Unlike competing consolidators, each exclusive SIP is the only distributor of the entirety of its data and may lack the incentive to disseminate the data. As a result, the Commission is not certain whether the exclusive SIPs would disseminate odd￾lot information absent a requirement to do so, the benefits of the acceleration could be at risk without the requirement to disseminate.615 While the inclusion of the odd-lot data could impose costs on those who receive and use exclusive SIP odd-lot data, the requirement that exclusive SIPs disseminate the data could impose costs on those who receive but do not have an interest in using odd-lot information provided in SIP data. In particular, depending on the SIP data specifications, such SIP data users might need to alter their systems to remove odd-lot information. Further, such SIP data users could incur the cost of any SIP data fee increases intended to offset the costs to exchanges and exclusive SIPs. However, the Commission notes that SIP data fees did not increase when the exclusive SIPs started to include odd-lot trades. d. Best Odd-Lot Order Definition The proposal goes beyond the MDI Rules by proposing that NMS data also include information on the best priced odd-lot orders across all markets. Including the best odd-lot order in a standardized form would offer market participants a standard benchmark, like the NBBO, to use to measure execution quality. Currently, this information is only available to market participants who have proprietary data feeds, and even then there could be differences across market participants with this data in how exactly market participants calculate the best odd-lot order (or how many proprietary feeds they include). The best odd-lot information in the NMS data would provide a standardized benchmark. This benchmark may allow market participants to better monitor the execution quality of their broker-dealers and send more trading volume to broker-dealers with better performance.616 Thus, including the best odd-lot information could enhance competition among broker-dealers leading to better trade execution and perhaps a lower cost to customers for execution services.
6. Compliance Costs
The Commission believes that various market participants would incur implementation and ongoing costs to comply with the proposal. These costs are presented in Table 13 and discussed below. Some costs presented in Table 13 represent costs that might not be new but rather were anticipated in the MDI Rules. Specifically, those costs are associated with the acceleration of aspects of the MDI Rules. These include an estimated $1.1 million of one-time costs and $340 thousand in annual ongoing costs to exclusive SIPs. If we assume that exclusive SIPs will become competing consolidators absent this proposal and that the cost of estimating and disseminating the best odd-lot order is minimal,617 the cost of the proposal would be approximately $57.3 million in one-time costs and $158,000 per year in ongoing costs. However, the Commission recognizes some uncertainty in the assumption that exclusive SIPs will be competing consolidators and recognizes that exclusive SIPs would incur costs to estimate and disseminate the best odd￾lot order. Therefore, the Commission estimates that total costs of the proposal if exclusive SIPs will otherwise not be competing consolidators would be approximately $58.4 million in initial one-time costs and $500 thousand in annual ongoing costs. Further, the ongoing costs for exchanges and exclusive SIPs to comply with proposed rules 600 and 603 would be incurred only until the exclusive SIPs are retired, after which time these costs were previously accounted for in the MDI Adopting Release.

618An exchange commenting on the tick size pilot estimated $140,000 as its expected expense to comply with the tick size pilot’s requirement to change the tick size for some stocks. The Commission views this estimate as reasonable, but also notes that the proposal is simpler in some aspects than the tick size pilot and more complex in others. Specifically, although the proposal would have more tick levels than the tick size pilot, it would not impose any variation in ‘‘trade at’’ requirements. Thus, the Commission expects the estimate of $140,000 per exchange to be a reasonable estimate of the cost associated with the tick size change for exchanges and ATSs. See James G. Ongena, Chicago Stock Exchange (CHX), Comment Letter Re: File No. 4–657; Notice of Filing of the Proposed National Market System Plan to Implement a Tick Size Pilot Program On a One-Year Pilot Basis (Dec. 2014), available at https:// www.sec.gov/comments/4-657/4657-67.pdf. 619The technical aspect of a wholesaler updating its system to reflect the tiered tick regime is likely similar to that of an exchange or an ATS. Thus the Commission is applying the same estimate to wholesalers and other to update systems as exchanges and ATSs. There were 16 registered exchanges, 32 ATSs, 6 wholesalers, and 232 other FINRA members. See ATS Transparency Data Quarterly Statistics, 2022 Quarterly Tables, 1st Quarter, NMS Stocks, FINRA (2002), available at https://www.finra.org/filing-reporting/otc￾transparency/ats-quarterly-statistics for the number of ATSs. In the first quarter of 2022, there were 286 total entities affected. 620Salaries are derived 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: [(Sr. Programmer at $368 for 25 hours) + (Sr. Systems Analyst at $316 for 10 hours) + (Compliance Manager at $344 for 10 hours)

• (Director of Compliance at $542 for 5 hour)] ≈
  $19,000 per listing exchange). 621 [((Compliance Attorney at $406 for 6 hours) + (Compliance Manager at $344 for 2 hours)) × 4 tick size revisions per year] ≈ $9,000 per listing exchange for a total annual monetized burden of $45,000 ($9,000 × 5 listing exchanges). 622Current rule 605 reports require trading centers to compute and report share-weighted average time to execution statistics among others. Additionally, some listing exchanges have issued white papers that include statistics based on Time￾Weighted Average Quoted Spreads. See, e.g., Nasdaq Intelligent Tick, supra note 180 at Chart 3 and Cboe Proposal, supra note 104 at Exhibit 1. 623See MDI Adopting Release, supra note 5, at n.1133 and surrounding text. The costs for the competing consolidators to connect to the exchanges is accounted for in the MDI Rules and thus would not represent costs associated with this proposal. 624This estimate reflects the Commission’s experiences with and burden estimates for broker￾dealer systems changes: [(Attorney (5 hours) × $401)
• (Compliance Manager (10 hours) × $298) +
  (Programmer Analyst (20 hours) × $232) + (Senior Business Analyst (5 hours) × $265)] ≈ $11,000. See also Transaction Fee Pilot Adopting Release, supra note 267 at n.770.
  TABLE 13—COMPLIANCE COST ESTIMATES
  Rule #/incurring entities Initial Ongoing Number of entities Total initial Total ongoing
  612/All Trading Venues ....................................................... $140,000 ........................ 286 $40,040,000 ........................
  612/Listing Exchanges ......................................................... 19,000 $9,000 5 95,000 $45,000
  612/Order Entry Systems .................................................... 11,000 ........................ 1,192 13,112,000 ........................
  612/Smart Order Routers .................................................... 11,000 ........................ 282 3,102,000 ........................
  610/Exchanges .................................................................... 57,000 ........................ 15 855,000 ........................
  603, 600/Exchanges ............................................................ 4,000 7,000 16 62,864 112,800 603, 600/SIPs ...................................................................... 567,000 170,000 2 1,134,000 340,000 Total .............................................................................. ........................ ........................ ........................ 58,401,000 498,000 a. Estimates for Proposed Rule 612 According to Table 13, the primary driver of costs for the proposed tiered tick structure would be the costs to all trading venues of $40 million. The $40 million comes from an estimated $140,000 618 in one-time costs incurred by each trading venue to update systems to comply with rule 612 619 aggregated across an estimated 286 trading venues. The estimate of 286 trading venues comes from the number of entities who report rule 605 statistics. Therefore, if additional trading venues incur compliance costs, the costs to trading venues of the proposal could be greater than $40 million. The estimated one-time cost of $19,000 620 and $9,000 per year in ongoing costs 621 for listing exchanges is to calculate Time-Weighted Average Quoted Spreads and to transmit the associated tick size to the exclusive SIPs under the proposal. This estimate is based on the Commission’s belief that the listing exchanges currently have access to the data needed to calculate the Time-Weighted Average Quoted Spreads because such data, specifically the NBBO, is needed for the exchanges to compile 605 reports. Thus, the Commission does not believe that the exchanges would incur additional costs associated with gathering data. Additionally, the listing exchanges have experience computing statistics conceptually similar to Time-Weighted Average Quoted Spreads for their 605 reports.622 The listing exchanges also already have connections to the exclusive SIPs, and thus the listing exchanges would need to modify rather than build new systems to transmit tick sizes to the exclusive SIPs. Further, once competing consolidators replace the exclusive SIPs, it is the competing consolidators that have the responsibility to connect to the exchanges in order to receive data and thus, under the MDI Rules the exchanges would not incur additional costs in terms of connecting to the competing consolidators.623 Consequently, the compliance cost estimates provided here represent costs associated with modifying existing systems rather than building systems from scratch. The Commission does not believe that having the listing exchange compute Time-Weighted Average Quoted Spreads and transmit the associated tick to the exclusive SIPs currently, or to the competing consolidators once the exclusive SIPs are discontinued, would require listing exchanges to acquire new hardware or systems. The estimated $11,000 624 in one-time costs to all broker-dealers with order entry systems assumes that broker￾dealers with order entry systems would not need to acquire new
  hardware or develop new systems but rather they would modify existing systems. This assumption is based on the fact that broker-dealers with order entry systems must already have order entry systems that account for multiple tick sizes that can dynamically switch between the $0.01 tick for stocks priced equal to or greater than $1.00 and the $0.0001 tick for stocks priced less than $1.00. These systems would need to be expanded to incorporate data from the exclusive SIPs or the competing consolidators on the tick size and to allow for additional tick sizes for stocks priced equal to or greater than $1.00. The Commission believes that all broker-dealers with order entry systems currently subscribe to SIP data and will subscribe to data from competing consolidators and thus, would not incur additional data expenses to receive regulatory data as a result of the tick size change. The $11,000 cost also depends on an assumption that the costs to modify existing systems to accommodate the proposed tick size regime would be similar for both larger and smaller

625This estimate is obtained using consolidated audit trail data ‘‘CAT’’ data from the month of June
2022. The Commission calculated the total unique
number of Central Registration Depository Numeric Identifier ‘‘CRDs’’ that originated an order in the month of June 2022 as an estimate of the number of entities with an order entry system. 626This estimate reflects the Commission’s experiences with and burden estimates for broker￾dealer systems changes: [(Attorney (5 hours) × $401)

• (Compliance Manager (10 hours) × $298) +
  (Programmer Analyst (20 hours) × $232) + (Senior Business Analyst (5 hours) × $265)] ≈ $11,000. See also Transaction Fee Pilot Adopting Release, supra note 267 at n.796 where the cost to broker dealers to update systems for the TSP was estimated to be $9,000, here we are allowing for an additional 10 hours of Programmer Analyst time. 627This number is estimated by counting the number of unique CRDs that submitted an order directly to an exchange or ATS in the month of June 2022. 628The Commission also expects there may be other costs associated with updating systems to account for an increase in message traffic resulting from the new tick sizes. However, absent an estimate in the change in message traffic or existing bandwidth capacities it would be impractical for the Commission to attempt to place a reliable estimate on these costs. Estimating the change in message traffic would involve predicting how various types market participants would change their trading behavior and how those changes would interact with each other. Such an estimation would depend heavily on tenuous assumptions. 629The Transaction Fee Pilot was expected to impose a similar requirement for exchanges to file rule 19b–4 filings with the Commission to bring access fees into compliance with the TFP. The Commission estimated in the TFP proposing release that each filing would cost the exchanges approximately $48,400 [(Attorney (40 hours) × $401) + (Compliance Attorney (40 hours) × $352) + (Assistant General Counsel (25 hours) × $449) + (Director of Compliance (15 hours) × $470)] = $48,395 ≈ $48,400. See OMB Control No. 3235– 0045 (Aug. 19, 2016), 81 FR 57946 (Aug. 24, 2016) (Request to OMB for Extension of rule 19b–4 and Form 19b–4 Filings). See Transaction Fee Pilot Adopting Release, supra note 267 at section IV.C.2(a)(v). To account for inflation the Commission multiplies this amount by 18% (derived from BLS inflation estimates from 2018 to

2022. to arrive at an estimate of approximately
      $57,000. See CPI Inflation Calculator, U.S. Bureau Lab. Stats., available at https://www.bls.gov/data/ inflation_calculator.htm, for BLS inflation estimates. 630The Commission does not expect other market participants to incur significant incremental costs associated with the proposed change in the access fees and rebates. As shown in Table 5, market participants deal with over 100 fee changes per year across all exchanges and thus the Commission believes it reasonable to expect that one fee change by the exchanges to bring their fees into compliance with the proposal would represent an economically trivial incremental cost to these market participants. broker-dealers with order entry systems because the specific code to manage existing systems likely does not depend on the size of the market participant. The Commission estimates that there are 1,192 broker-dealers with order entry systems.625 Thus, the Commission estimates that the proposal would lead to a one-time aggregate cost of ($11,0001,192) ≈ $13 million across broker-dealers with order entry systems to update their systems to account for the new tick sizes. The $11,000 626 estimated one-time cost to broker-dealers operating smart order routers assumes that broker￾dealers operating smart order routers would not need to acquire new hardware or build new systems to comply with the proposed tick size changes. These broker-dealers already have systems that can adjust for tick sizes that change around the $1.00 threshold. Thus, the Commission expects that they would modify existing systems rather than build new systems. Any broker-dealers that would need to build new systems would likely incur more than $11,000 to do so. On the other hand, any broker-dealers that use vendors for their smart order routers could incur lower costs. The Commission estimates an upper bound of 282 broker-dealers operating smart order routers.627 This number provides an upper bound as it assumes that all entities with direct connections to exchanges or ATSs use a smart order router, which the Commission believes is an over-estimate. Thus, the Commission estimates a one-time upper bound cost of ($11,000282) = $3.1 million for market participants to update smart order routers.628 If fewer than 282 broker-dealers operate their own smart order routers, then the $3.1 million estimate is likely higher than the aggregate cost for broker-dealers to adjust their order routing systems to comply with the proposal. Further, the Commission believes that these broker-dealers operating smart order routers also already subscribe to SIP data and will subscribe to consolidated market data products once the competing consolidators become operative and thus would not incur additional data expense to receive the regulatory messages necessary to comply with rule 612. The Commission also assumes that system updates would impose a similar cost on larger and smaller entities given that once code is written, scaling it up is relatively
      inexpensive. Lastly, the Commission recognizes that proposed rule 612 could increase the overall implementation costs of the MDI Rules. In particular, in stocks for which the proposal would result in a smaller tick size and that would become less tick-constrained as a result, such stocks could have more odd-lot quotes inside the NBBO than anticipated when the Commission adopted the MDI Rules. As a result, the costs to SROs and competing consolidators of collecting, transmitting, consolidating, and disseminating odd-lot information would be greater than those described in the MDI rules. The Commission is unable to estimate this cost increase with any degree of precision because an estimation would require predicting a complex interaction between behavior changes from multiple types of market participants and the resulting effect on the number of ticks inside the NBBO and the volume of odd-lots submitted inside the NBBO. However, any such increase is unlikely to be of a greater magnitude than the other compliance costs discussed here. b. Estimates for Proposed Rule 610 In Table 13, the $57,000 in estimated cost to exchanges to comply with proposed changes to rule 610 relate to the cost of preparing a rule 19b–4 filing to amend access fees and rebates and to make fees and rebates determinable at the time of execution.629 This estimate assumes that exchanges will combine their proposals to include both amendments to fees and rebates and making fees and rebates determinable at the time of execution in the same rule 19b–4 filing and that this combination would not increase the cost of those filings. The Commission recognizes that if these filings would not be efficiently combined, the costs to exchanges could be higher than $57,000. The Commission estimates assume that LTSE would not file a rule 19b–4 filing with the Commission because it does not currently charge access fees or offer rebates, but that the other 15 exchanges would file rule 19b–4s. If so, the proposal would lead to an estimated one-time total cost of $855,000 for the exchanges to comply with the proposed rule 610.630
      c. Estimates for Proposed Rules 600 and
      603
      The exclusive SIPs and exchanges would also face compliance costs associated with including the odd-lot information in SIP data to include the best priced odd-lot order, and to update the round lot definitions. The adoption of updated round lot definitions and the inclusion of odd-lot data inside the NBBO are both parts of the MDI Rules. Thus, the proposal would accelerate the compliance costs associated with these aspects of the MDI Rules. One difference is that the MDI Adopting Release anticipated that these changes to NMS data will occur after the competing consolidator model was up and running. Thus, the MDI Adopting Release did not anticipate that the current exclusive SIPs would incur such costs unless they chose to become competing consolidators. The addition of the best odd-lot order to the SIP data was not

631 In the MDI Adopting Release, supra note 5,
section V.C.2(d)(ii), the Commission estimated costs
to the exchanges of collecting and transmitting the necessary information to the competing consolidators to be approximately $70,000 in one￾time costs and approximately $130,000 in ongoing costs. The additional $4,000 in one-time costs and $7,000 in ongoing costs here represent a 5% addition over the costs in the MDI release to account for the proposed new requirement to send the necessary data to generate odd-lot information to the exclusive SIPs ($70,000 × 0.05 = $3,929 ≈ $4,000 and $130,000 × 005 = $7,050 ≈ $7,000). See infra note 739 and accompanying text. 632Supra note 404 and accompanying text. 633See infra notes 728, 730, 732, and 733 and accompanying text for a breakdown of these cost estimates. 634 In the MDI Adopting Release, the Commission anticipated that both exchanges operating exclusive SIPs would have strong incentives to enter the competing consolidator market. See MDI Adopting Release, supra note 5, at V.C.2.(a).(ii). 635See supra section V.D.6 for further discussion of how or whether this requirement would alter the compliance costs of competing consolidators. 636See, e.g., Dixon, supra note 556 for a discussion of this concept in the context of short selling. 637 Id.
part of the MDI Rules and would thus
be a new cost under this proposal. The discussion below distinguishes costs to the exclusive SIPs accordingly as those included in the MDI Rules and new costs from this proposal. The estimated initial one-time cost of $4,000 and $7,000 in ongoing costs for at least two years for exchanges to comply with the proposed amendments to rule 603 and 600 631 account for the proposed acceleration of the necessary data to generate the odd-lot information, including the best odd-lot order, and transmit to the exclusive SIPs. The costs reported here account for an increase in the costs associated with the MDI Rules that will require the exchanges to transmit all of the data necessary to generate consolidated market data to competing consolidators.632 Consequently, for the exchanges, the costs associated with providing the exclusive SIPs with odd-lot information would represent an acceleration of costs anticipated in the MDI release rather than new costs—with a few differences. First, the odd-lot information would be transmitted to the exclusive SIPs as opposed to the competing consolidators. Second, the ongoing costs of the proposal would be incurred only until the exclusive SIPs are retired, which the Commission estimates will be at least two years after the Commission’s approval of the plan amendment(s) required by rule 614(e). The estimated one-time cost of $567,000 and ongoing costs of $170,000 imposed on the exclusive SIPs to comply with the proposed amendments to Rules 603 and 600 relate to the requirement for the exclusive SIPs to develop, operate, and maintain systems to collect and disseminate the odd-lot information inside the NBBO as required by the proposal.633 The exclusive SIPs would incur these costs to receive and disseminate odd-lot information inside the NBBO and to estimate and disseminate the best odd￾lot order. The Commission expects these costs are primarily made up of costs an exclusive SIP would incur to convert to become a competing consolidator. Thus, for exclusive SIPs that will become competing consolidators in the absence of the proposal, the initial costs represent an acceleration of costs articulated from the MDI Rules more than they do new costs. Further, the ongoing costs for exclusive SIPs to comply with proposed rules 600 and 603 would be incurred only until the exclusive SIPs are retired, after which time these costs were previously accounted for in the MDI Adopting Release. If one or both exclusive SIPs will not become competing consolidators in the absence of the proposal, the initial and ongoing costs in Table 13 would represent new costs associated with the proposal. However, the MDI Adopting Release expressed an expectation that exclusive SIPs would likely become competing consolidators. Likewise, the Commission recognizes that requiring the exclusive SIPs to build out the capacity to disseminate aspects of the data required by the MDI Rules increases the likelihood that the exclusive SIPs would choose to become
competing consolidators because they would already have even more of the technology implemented in order to comply with the requirements of a competing consolidator—lowering the relative cost of becoming a competing consolidator.634 The Commission recognizes that if the proposal results in one or both exclusive SIPs becoming competing consolidators, the costs in
Table 13 could underestimate the full
costs of exclusive SIPs because it does not account for the full costs of becoming a competing consolidator. However, as expressed in the MDI Adopting Release, the Commission expects that exclusive SIPs would likely become competing consolidators and therefore, believes that the costs in
Table 13 are not underestimated.
The Commission recognizes that proposed rule 600 could increase the initial costs of becoming a competing consolidator and would increase the ongoing costs of competing consolidators, but believes that such costs are already accounted for in the MDI Adopting Release.635 In particular, competing consolidators could incur additional compliance costs to estimate and disseminate the best odd-lot order. To the extent such costs are not accounted for in the MDI Adopting Release, they would likely be a small fraction of the compliance costs of including odd-lot information in SIP data noted above because the competing consolidators would already have the information necessary to calculate the BOLO, so most of the cost would be the initial cost of coding the information and the cost of processing that code in real time. E. Effect on Efficiency, Competition, and Capital Formation

1. Efficiency
   The Commission believes that the proposals would improve price efficiency relative to the baseline. The improvement in price efficiency is expected largely to come through the reduction in the tick size and the reduction of the access fee cap. The acceleration of portions of the MDI Rules could also increase price efficiency, but those effects are largely to accelerate the economic impact already anticipated in the MDI Rules. The Commission expects that lowering the tick size for some NMS stocks with prices equal to or greater than $1.00, as well as lowering the access fee cap for all stocks to either 5 or 10 mils for stocks with prices equal to or greater than $1.00, or to 0.05% for stocks with prices lower than $1.00, would increase price efficiency. The Commission expects the reduction in the tick size for some stocks along with the reduction of the access fee cap for all stocks would improve liquidity for many stocks while causing little to no harm. This reduction is expected because research suggests that when trading becomes less costly, market participants have an increased incentive to gather more information because doing so is more profitable.636 Gathering more information and trading on that information means that prices are more reflective of the fundamental value of the firm. Consequently, for stocks that receive an improvement in liquidity due to the lower tick size or the reduction in the access fee the Commission expects an improvement in price efficiency.637 Making fees and rebates determinable at the time of execution, along with the reduction of the access fee cap could also increase price efficiency by helping minimize potential conflicts of interest. The inability for broker-dealers to determine access fees and rebates at the

638See section V.C.2 describing how transaction fees and rebates are currently determined. 639 If order routing decisions are not significantly affected by access fees then the effect on efficiency would be negligible. 640See supra section V.D.5.b for additional discussion. 641See Bartlett, et al. (2022), supra note 365. 642The MDI Rules do not require the competing consolidators to distribute odd-lot information. Thus, it is possible that competing consolidators may not choose to distribute odd-lot information, in which case the positive effect on price efficiency will be lost. The Commission believes that this outcome is unlikely because the odd-lot information appears to be valuable in terms of having information relevant to stock prices (see Bartlett, et al. (2022), supra note 365), and the alternative to odd-lot information from the competing consolidators would be to subscribe to all of the proprietary data feeds, which is expensive. Thus, the Commission believes that there will be significant demand for the odd-lot information and that the competing consolidators will therefore offer the data. 643See Kwan, Masulis, and McInish (2015), supra note 99, see also MEMX Report, supra note 105. 644One industry study suggests that it is not the presence of on-exchange quoting restrictions that drives off-exchange price improvement. This study shows, using Rule 605 data, that stocks with very wide spreads have more price improvement than otherwise. See Market Lens: Unlevel Playing Field? What 605s Can Tell Us About Tick Sizes, Citadel Sec. (Sept. 8, 2022), available at https:// www.citadelsecurities.com/news/market-lens￾unlevel-playing-field-what-605s-can-tell-us-about￾tick-sizes/ (‘‘Citadel Paper’’). time of execution makes it difficult to effectively pass them on to their customers.638 To the extent that order routing decisions are affected by potential conflicts of interest, these potentially conflicted decisions could harm efficiency by leading to inefficient trading decisions and thus an inefficient incorporation of information into stock prices.639 Lowering the access fee and decreasing the tick size will, for tick￾constrained stocks at least, lower overall transaction costs for demanding liquidity and diminish the role that access fees and rebates might play in order routing decisions. Further, making access fees determinable at the time of execution would further enhance efficiency by allowing market participants certainty concerning the fees that they will be charged per transaction. This certainty could also allow broker-dealers to more efficiently examine their own best-execution performance. Additionally, to the extent that this feature allows broker-dealers to pass fees on to end customers they could help eliminate entirely distortions that might occur due to potential conflicts of interest. Greater certainty about fees and rebates in advance of routing an order could also increase the efficiency of the broker-dealers’ best execution
assessments by providing them with greater certainty about the full cost of a transaction prior to placing the order. The acceleration of adding odd-lot information to NMS data and the inclusion of information relating to the best odd-lot quote would realize many of the price efficiency benefits to this data articulated in the MDI Rules at a sooner date, providing improved price efficiency earlier than anticipated in the MDI Rules. Not all efficiency-related benefits articulated in the MDI Rules associated with the inclusion of odd-lot information will be realized sooner because the Commission acknowledges that the proposal would not reduce the latency of SIP data.640 Specifically, research suggests that adding information on the shares available at price levels inside the NBBO may improve price efficiency.641 Currently only market participants who subscribe to proprietary data feeds can view the odd-lot information and thus can adjust trading strategies and decisions based on the information contained therein. Expanding the exclusive SIP feeds to include odd-lot information will sooner provide new information to those investors who subscribe to the SIP data but do not subscribe to proprietary data feeds. The extent to which investors can quickly incorporate this information into stock prices before the full implementation of the MDI Rules and increase efficiency is limited.642
2. Competition
a. Trading
i. Modification of Rule 612 To Create a
Tiered Tick Structure
A smaller tick could lead to greater competition on pricing, which more effectively balances liquidity supply and demand. This greater competition on pricing comes with a reduced importance on time priority and discourages liquidity oversupply thereby allowing slower traders to better compete with faster traders to provide liquidity and earn the spread. Reducing the tick size for tick￾constrained stocks could induce some order flow onto the exchanges. Academic and industry research suggests that tick size constraints create a competitive disadvantage for exchanges because they create long queues for limit order execution and increase the incentives to internalize, leading to more off-exchange trading.643 The disadvantage comes because in stocks that are tick-constrained, queues are longer, fill rates lower, and the relative cost of crossing the spread higher. If a narrower tick alleviates these disadvantages, then more order flow in these securities could be routed to the exchanges.
ii. Minimum Pricing Increment for
Trading
Applying a minimum pricing increment to trading, coupled with reducing the minimum pricing increment for quoting, could affect measures of the frequency and magnitude of price improvement, as previously explained in Section V.D.2. The Commission recognizes that changes to these measures could affect transaction costs paid by investors as well as where broker-dealers route customer order flow. For example, the less price improvement that OTC market makers offer to retail traders, the less attractive they might be to broker￾dealers who handle retail traders. This coupled with the fact that OTC market makers would be restricted to the same minimum trading increment as exchanges and ATSs would help level the competitive playing field between exchanges/ATSs and off-exchange dealers when it comes to attracting retail order flow. Such a development would put competitive pressure on OTC market makers to price improve trades because exchanges and other ATSs would have an increased ability to potentially innovate and compete for retail orders with wholesalers. Accordingly, the Commission expects that trading venues would further compete on providing price improvement and that the harmonization of trading and quoting increments would not mitigate the execution quality improvements from a reduction in the minimum pricing increment.644 In the longer term, the proposed modification of rule 612 to require the tick size to apply to trading could make exchanges and ATSs more competitive in terms of their ability to attract retail order flow. This stems from the fact that currently one reason retail broker￾dealers route orders to wholesalers is to take advantage of sub-penny price improvement that exchanges and ATSs do not offer. By harmonizing the trading increment the proposal would create a more level playing field for exchanges and ATSs to innovate to attract retail order flow. Certainly, the exchanges and ATSs face obstacles to more effectively compete for order flow, but requiring all trade to occur in units of the tick size makes it more likely that the exchanges and ATSs could find a way to innovate. While the Commission cannot predict the type of innovation that that exchanges and ATSs may design to attract retail order flow, a more level playing field increases the likelihood that such innovation could occur.

645Currently, as explained in Section V.C.2, exchanges can differentiate themselves by offering different fee schedules—e.g., inverted, flat fee, or maker-taker with numerous price strata and volume based pricing tiers. That said, the Commission also noted (Table 5 in SectionV.C.2) that the data do not show a high variation in the highest fees charged, which would suggest that the reduction in variation of fee and rebate levels under this proposal would primarily make different exchange fee models more similar. 646This effect considers the impact of MDI implementation on proprietary data feed revenues. Exchanges are expected to collect these data and connectivity fees from competing consolidators and self-aggregators in addition to revenue from proprietary feeds, which may supply information beyond the core data that would be distributed. The MDI Adopting Release anticipated that data revenue for the exchanges is likely to diminish after the full implementation of the MDI Rules. This effect will decrease the likelihood that a new exchange or a low volume exchange could gather sufficient revenue from market data to become or remain viable. See MDI Adopting Release, supra note 5,
section V.C.2.(ii).(d), for the full discussion of the
effect of the competing consolidator model on exchange data fees. 647While the Commission does not expect most retail traders would engage in this sort of benchmarking due to most retail traders lacking the technical capacity to do so, some institutional traders likely have this capacity and so would likely engage in such benchmarking. Institutional traders have strong incentives to monitor all aspects of transaction costs as these costs can significantly affect portfolio performance. See Anand, et al. (2012), supra note 596. 648 It is possible that some institutional traders have access to proprietary data feeds that provide the ability to benchmark trades against odd-lot orders. Or they could contract with specialized firms that have access to the data and provide transaction cost analysis. 649Under the baseline it would be difficult in many cases for a broker-dealer to allocate specific rebates received or fees paid to one customer’s trade because the fees or rebates in a given month are based, in many instances, on that broker-dealer’s total trading volume across all customer accounts (see section V.C.2.b.iv). However, if the fees and rebates are determinable at the time of execution the broker-dealer could feasibly track a specific fee or rebate to a specific trade making it possible for a customer to request such information. 650Retail-broker-dealers may also route to wholesalers to avoid the expenses associated with establishing connections to some the exchanges. Wholesalers also frequently offer other services such as free routing on orders that they do not internalize. However, if such innovation by exchanges were to occur, it could increase the fraction of retail trading volume on the exchanges.
iii. Access fees
The lower access fees under this proposal could affect certain exchanges’ business models. For instance, as discussed in Section V.D.3, lowering the access fee cap is expected to lower the total amount of access fees collected and rebates distributed by certain exchanges, and the Commission estimates that exchanges could lose approximately $89 million per year in net capture under their current business models. Exchanges might respond, in part, by adjusting the rebates they offer, which could affect order routing. For instance, exchanges for which high rebates are currently the means of attracting certain flows could have to adjust their business model or find revenues sources, other than access fees collected, to fund rebates. These effects could impact competition between trading venues. First, since the proposal would make the exchanges more similar in terms of fee structures (i.e., fee/rebate levels and tiers),645 competition in other key dimensions of trading—such as execution quality like fill rates, transaction costs, and speed of execution—could increase and spur innovations, ultimately to the benefit of investors. Second, some exchanges’ profitability, and accordingly their operations, could be impacted, especially in the short run as these exchanges adapt their business models. In an extreme case, some existing exchanges could ultimately shut down, though the Commission notes that exchanges derive revenues from other sources, such as data and connectivity fees, which also impact their viability.646 Third, certain exchanges’ competitiveness could be affected relative to other exchanges as well as relative to other trading venues.
iv. Acceleration of the MDI Rules and
Addition of Information About Best Odd-Lot Orders The acceleration of the inclusion of odd-lot information in the NMS data along with the implementation of the MDI Rules round lot definition might lead to increased competition between exchanges and ATSs and OTC market makers, including wholesalers. NMS stocks priced greater than $250.00 would be expected to benefit sooner from a tighter NBBO, thereby increasing the competiveness of the best displayed protected quotes, following the proposed accelerated implementation of the round lot definition. A greater visibility of more competitively priced odd-lot orders with the NBBO could increase the competitive position of exchanges and ATSs and attract greater order-flow. This effect would be temporary, only lasting until the full implementation of the MDI Rules. After the full implementation of the MDI Rules the effect on competition is accounted for by the MDI Rules. b. Broker-Dealer Services The Commission believes that the proposal could affect certain broker￾dealers’ current business model to the extent that they rely on rebates for revenues. This could affect these broker￾dealers’ operations as they adjust to the new competitive environment. Making fees and rebates determinable at the time of execution could enable the customers of broker-dealers to better discuss transaction fees and rebates with their broker-dealers, and potentially request data on such fees, which could increase competition between broker-dealers along this dimension, leading to better order execution and lower costs. In particular, while there is currently no requirement to either pass on the fees and rebates, or account for them when assessing execution quality, the Commission believes that there could be competitive pressure to do so as it would be straightforward for a competing broker￾dealer to include fees and rebates in its transaction cost analysis, or to simply pass them through to the customer. The Commission also believes that including odd-lot information in the exclusive SIPs and providing the best odd-lot order information, as well as making fees and rebates determinable at the time of execution, would enhance competition for broker-dealer services. First, making the best odd-lot order information accessible through the exclusive SIPs would facilitate better analysis of a broker-dealer’s execution quality than is currently available with just NBBO data.647 Thus, it could be easier for some customers to monitor the performance of their broker-dealers.648 Additionally, making the fees and rebates determinable at the time of execution would further allow customers to monitor the performance of their broker-dealers as it would increase the ability for a customer to request more detailed information on the fees and rebates that the broker￾dealer pays and to have them either passed on to the customer or to have them accounted for when evaluating execution costs.649 Additionally, the Commission does not believe that the
proposal initially would alter the competition to provide market access to retail brokers. Many retail broker-dealers find it economically beneficial to rely on OTC market makers, including wholesalers, who maintain access to multiple trading venues, to facilitate market access rather than becoming a member or subscriber to an exchange or ATS themselves and directly route orders to the venues.650 The benefits from being able to selectively choose what order-flow to internalize helps OTC market makers support payment for order flow to retail broker-dealers, which further incentivizes broker-dealers to continue

651The exceptions would be if a stock with a price greater than $1.00 has a quoted spared less than $0.004. In this case, the stock would be assigned a tick of $0.001 and there would be less than 4 ticks within the spread. The other case would be if a stock had a wide spread during an evaluation period and was thus assigned a wide tick and then subsequently the tick size shrank such that there were fewer than 3 ticks intra-spread. In this case the stock would have fewer than 4 ticks intra spread until after the next evaluation period. 652The effect of the proposal on retail price improvement is discussed in greater detail in
section V.D.2.
653See infra section V.D.5.c for additional discussion of the effects of this requirement, such as to guarantee that the odd-lot information would be disseminated. While this proposal requires the exclusive SIPs to distribute odd-lot data, the MDI Rules do not require the competing consolidators to disseminate odd-lot data. However, the MDI Adopting Release anticipated that at least one competing consolidator will do so because there would be demand for the data. See supra section V.C.3. 654See MDI Adopting Release, supra note 5, for a discussion of how competing consolidators have higher barriers to entry than exclusive SIPs, such as in the form of compliance costs associated with Reg SCI. 655 In the MDI Adopting Release, the Commission anticipated that both exchanges operating exclusive SIPs would have strong incentives to enter the competing consolidator market. See MDI Adopting Release, supra note 5, at V.C.2.(a).(ii). 656See discussion in section V.D.5.b. 657See discussion in section V.C.1 and V.C.2. 658See supra section V.D.1. to route order-flow to OTC market makers such as wholesalers. Thus, lower access fees or harmonized trading increments might not materially affect a retail broker-dealer’s decision to route to an OTC market maker instead of an exchange. Second, while the proposal does not allow OTC market makers to price improve at any level that they wish, the proposal is designed to ensure that there are usually at least 4 ticks within the spread for nearly all stocks.651 Thus, the Commission believes it is reasonable to expect that the OTC market makers, including wholesalers, would still be able to provide meaningful price improvement at the designated tick sizes. Because the Commission expects that OTC market makers would still be able to provide price improvement to retail orders, broker-dealers handling retail trades would still have an incentive to route to wholesalers.652 Thus, it would still likely be cost effective for retail broker￾dealers to continue to route to wholesalers. For these reasons, the Commission does not expect the proposal to lead to a significant reduction in retail orders routed to wholesalers.
c. Market Data
Expediting the inclusion of odd-lot data into the exclusive SIPs could increase competition among data providers of odd-lot information prior to the full implementation of the MDI Rules though it would do so less than envisioned in the MDI release, for the period until the MDI Rules are fully implemented. Specifically, under the implementation schedule in the MDI Rules, adding odd-lot information to core data would occur during the parallel operation period. Adding odd￾lot information to the current exclusive SIPs would enable the exclusive SIPs to compete directly with the exchange’s proprietary data products for use in visual display settings. Currently, the only means to get odd-lot information is to subscribe to multiple proprietary data feeds. This would change if odd-lots are a part of SIP data. Unlike the data provided by the competing consolidators, the Commission does not believe that the current exclusive SIPs are fast enough for use in certain trading. Thus, the competition for odd￾lot data would be limited to odd-lot information used in visual display settings. To the extent that some market participants subscribe to proprietary data for use in visual display settings, the introduction of odd-lot information to the exclusive SIPs can provide competition to this segment of the market and could reduce the prices of odd-lot information provided by the proprietary data feeds. However, the Commission does not believe that this market is very large. Currently, for most display settings market participants use SIP data or one of the top of book data products offered by one of the three highest volume exchange groups and it is unclear to what extent market participants subscribe to proprietary data with odd-lot information for use in visual display settings. However, if the exclusive SIPs choose to charge more for data, then this price increase could provide a competitive advantage to the providers of top of book data as it would become relatively less expensive. The proposed requirement on the exclusive SIPs to disseminate the accelerated odd-lot information until the exclusive SIPs are retired, would guarantee that the odd-lot information would be disseminated.653 This aspect of the proposal presents the possibility that the new requirements on the SIPs could reduce competing consolidator competition, which could reduce the expected benefits of the MDI Rules. However, this effect could be small because non-SIP competing consolidators would still have an opportunity to compete for a significant market share. The proposed requirement could increase the competitive advantage of exclusive SIP competing consolidators relative to non-SIP competing consolidators 654 because they would have established a market for odd-lot information before having to face competition. Because data users could increase the costs to switch to another competing consolidator, they could stay with a SIP competing consolidator to avoid incurring those costs. The
proposal could also reduce the costs for exclusive SIPs to become competing consolidators by accelerating those costs before they transition, increasing the likelihood that they would do so.655 The Commission recognizes that this additional competitive advantage could dissuade some potential competing consolidators from entering the market but believes it is reasonable to expect this to have a limited effect on competition. In particular, if competing consolidators can offer a lower latency product, they can capture a part of the market that the proposal would not affect—those who would use the odd-lot information in ways other than visual display.656 If this market is significantly bigger than the visual display market, the competitive advantage of the exclusive SIPs would be less likely to dissuade entry and competing consolidators could have sufficient incentive to enter the market, thus limiting the effect on competition from the proposal.
3. Capital Formation
The Commission expects that the proposal could enhance capital formation through two channels. First, the proposed reduction in the access fee cap would reduce the amount of access fees paid by liquidity demanders, who are more likely to be non-high￾frequency traders.657 Analysis presented above in Table 11 estimates that, if the proposal had been in place in the first six months of 2022, then it would have saved liquidity demanders approximately $1.56 billion in access fees not paid in that period. Similarly, the Commission expects that the proposal would likely lead to an overall reduction in transaction costs due to the reduction in the tick size.658 Table 4 indicates that approximately 56% of trading volume occurs in stocks that are tick-constrained and this volume can be expected to experience a decrease in transaction costs due to a lower tick size facilitating bid and ask prices that better equate liquidity supply and demand. Lower transaction costs caused by the lower tick size for some stocks and the lower access fee mean more capital available to investors to fund investment.

659See text surrounding supra note 239. 660See supra section V.E.2.a.ii. 661For stocks with a $0.001 tick, this alternative would offer the same price lattice for price improvement as the proposal. For stocks with a wider tick, this alternative would offer a finer pricing lattice for wholesalers to offer price improvement relative to the proposal. 662See supra section V.D.5. 663A uniform trading increment would primarily affect trading centers as opposed to other market participants. To reflect the simplicity of this alternative relative to the proposal, the Commission is revising down the implementation cost for trading centers by $20,000: from $140,000 per trading center to $120,000, for a total reduction in cost of approximately [$20,000*54 ≈] $1.1 million. 664 Id. 665See supra section V.C.1. for a discussion on why the application of the tick size to only quoting provides an advantage to wholesalers competing for order flow. 666See supra section V.D.6. 667Not applying rule 612 to trading increments would primarily affect the implementation costs associated with trading venues as opposed to other market participants. For this alternative the Commission estimates that this alternative would lower compliance costs for trading centers by half because that the alternative would only require modifications to one aspect of the systems of market participants (quoting) as opposed to both quoting and trading. Thus, this alternative would lower the initial $140,000 compliance cost estimate for Continued F. Reasonable Alternatives This section considers alternatives to the proposal. These alternatives would have different costs and benefits than the proposal and these relative costs and benefits are discussed in this section. The alternatives are organized around three key elements of the proposal: the extension of rule 612 to apply to trading increments; alternative tick sizes; and alternative access fee regimes. These alternatives could be used together or in combination with each other and could also be paired with other elements of the proposal. Where applicable the Commission, when considering the economic impact of an alternative, has specified which alternatives would likely be paired together.

1. Alternative Trading Increment
   A primary motivation for extending rule 612 to apply to minimum pricing increments for trading (or ‘‘trading increments’’) is to provide exchanges and ATSs an improved opportunity to potentially innovate in ways that would allow them to be more competitive in terms of attracting retail order flow, which could in turn increase overall competition for retail trades and lead to higher quality order executions for retail trades.659 This section discusses two alternative methodologies that the Commission could pursue to level the playing field in this regard between exchanges and ATSs on the one hand and OTC market makers on the other in terms of competing for retail order flow. It also discusses the economic effects of choosing not to extend rule 612 to apply to trades. a. $0.001 Trading Increment Instead of modifying rule 612 to apply to trades, the Commission could instead modify rule 612 to require trading of all stocks priced equal to or greater than $1.00 to occur in increments of $0.001 regardless of the tick size applicable to quotes. For stocks with prices less than $1.00 the Commission would propose no change relative to the proposal:
   stocks priced less than $1.00 would be allowed to trade in increments of $0.0001. This alternative would also preserve an exception for midpoint or benchmark trades, such as VWAP trades, to execute at finer price increments. This alternative would preserve the ability for exchanges and ATSs to potentially innovate in order to try and attract retail order flow, though to a lesser extent than would be expected of the proposal by creating a level playing field with respect to the trading increment between exchanges and ATSs on the one hand and OTC market makers on the other.660 Under this alternative suppliers of liquidity would, in many instances, be restricted to post their quotes at price increments larger than the trading increment. Relative to the proposal, this could be expected to lower the amount of order flow executed at exchanges that rely on posted liquidity to attract trading interest. This alternative would also allow OTC market makers such as wholesalers to offer price improvement on a price lattice that is at least as fine and in some cases finer than what is included in the proposal.661 The net effect of this alternative on retail price improvement is uncertain. As with the proposal it is not clear whether constraining retail price improvement to a finer price lattice would on average improve or harm the total amount of price improvement received by retail traders relative to what they currently receive.662 In some cases constraining the lattice upon which price improvement can be offered could improve price improvement relative to the baseline by inducing OTC market makers to round up price improvement. In other cases they may round down. The net effect is uncertain. While the net effect of this alternative on retail price improvement is uncertain relative to the baseline, the proposal’s net effects are more uncertain. This is because allowing retail price improvement to always occur in increments of $0.001 is a smaller deviation from the baseline than what is considered in the proposal. This alternative would have somewhat lower implementation costs relative to the proposal. This is because market participants would not have to develop trading systems that have to account for four tick sizes for stocks priced equal to or greater than $1.00 and where the trading increment can change periodically. Instead, they would have to design systems with only one trading increment that applies to all stocks with prices equal to or greater than $1.00 which would be consistent through time. Consequently, the Commission estimates that this alternative would decrease one-time implementation costs by $1.1 million relative to the proposal.663 b. Do Not Apply Rule 612 to Trading The Commission could amend rule 612 to apply only to accepting, ranking, and quoting but not to trading— reflecting the current baseline application of rule 612. The advantage to this alternative would be that broker￾dealers, including wholesalers, could still offer price
   improvement relative to exchanges in whatever increments they choose—leaving unchanged a wholesaler’s ability to offer price improvement relative to the baseline. This alternative would eliminate the uncertainty in the proposal regarding how applying the tick increment to trading could affect retail price improvement.664 Not applying the tick increment to trading would reduce the ability of exchanges and ATSs to potentially innovate in ways that could make them more competitive at some point when competing for retail order flow. This would occur because the OTC market makers would retain their advantages in terms of sub-penny pricing that exchanges and ATSs do not have.665 The Commission preliminarily believes that the compliance costs associated with this alternative would be less than those discussed for the proposal.666 The proposal would require market participants to update systems to account for rule 612 being applied to trading systems. This alternative would remove that proposed expansion of rule 612 and would thus lower the associated compliance costs. The Commission estimates that this alternative would reduce the one-time implementation costs of the proposal by an estimated $3.8 million.667

trading centers by $70,000, to $70,000, for a total reduction in cost of approximately [$70,000*54 ≈] $3.8 million. 668For this alternative the Commission would define an originating broker as 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. 669 17 CFR 240.15l–1(b)(1) (defining ‘‘retail customer’’ as, among other things, 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). 670E.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’’). 671FINRA 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’’). 672Some SRO rules, for example, prohibit the use of any computerized methodology for submitting retail orders. See, e.g., NYSE Rule 7.44(a)(3) (defining ‘‘retail order’’ in the context of NYSE’s RLP to require that ‘‘the order does not originate from a trading algorithm or any other computerized methodology’’). 673Analysis 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
c. Segmented Trade Exemption
Similarly, the Commission could also apply the tick increment to trading and quoting, but exempt segmented trades, such as most retail trades, from the trading requirements of rule 612 in one of two ways as follows. First, to conform with current retail liquidity programs, the Commission could allow a lower uniform trading and quoting increment of $0.001 for segmented orders such as those executed off-exchange (such as by a wholesaler) or on-exchange Retail Liquidity Program in stocks priced equal to or greater than $1.00. This alternative would allow for qualifying segmented orders in an exchange retail liquidity program or an off-exchange trading center such as a wholesaler to receive price improvement on qualifying orders in increments of $0.001. Second, the Commission could exempt segmented trades from the trading requirements of rule 612 altogether, thus not placing any restrictions on the trading increment of segmented trades. Either of these alternatives would produce the same net effect on retail price improvement as those discussed earlier in this section. Specifically, applying a $0.001 increment to retail trades would lead to a net uncertain effect on overall retail price improvement, while exempting retail trades from the trading requirements of proposed rule 612 would leave retail price improvement unchanged relative to the baseline. Additionally, the effect on ATSs’ and exchanges’ abilities to potentially innovate to attract retail order flow would likewise be unchanged. In the case of a $0.001 segmented trading tick, the ability for exchanges and ATSs to potentially innovate in ways that could increase their ability to compete for retail order flow would be increased relative to the baseline and would be similar to the proposal. In the case where retail trades are exempt from the trading requirements of proposed rule 612 the competitive position of exchanges and ATSs relative to OTC market makers would be unchanged relative to the baseline. The originating broker would need to identify qualifying segmented orders 668 with the addition of a segmented order identifier affixed to the order. This alternative would use a two-part definition of the term ‘‘segmented order.’’ First, the order 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. Defining ‘‘segmented order’’ this way would 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. Limiting qualifying segmented orders to ‘‘natural persons’’ for purposes of this alternative would draw on 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.’’ 669 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. This definition of segmented order would be closely related to these rules,670 as well as to FINRA’s fee schedule for Nasdaq’s Trade Repository Facility.671 Patterning the definition of segmented order on existing SRO rules would leverage market knowledge. This would help minimize 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, consistent with SRO rules, cover accounts held in legal form on behalf of natural persons or groups of related family members. Including related family members in this alternative is designed to not 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. The second part of such a definition of segmented orders would focus 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 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,672 however, the proposed definition specifies a maximum level of trading activity as a means to limit the level of adverse selection costs. The 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
2022.673 Across this period, slightly