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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

Conformed to Federal Register version

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 200 and 242
[Release No. 34-84875; File No. S7-05-18]
RIN 3235-0761
Transaction Fee Pilot for NMS Stocks
AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

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

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

FOR FURTHER INFORMATION CONTACT: Richard Holley III, Assistant Director;
Johnna Dumler, Special Counsel; Erika Berg, Special Counsel; or Benjamin Bernstein, Special
Counsel, each with the Division of Trading and Markets, Securities and Exchange Commission,
100 F Street, NE, Washington, DC 20549, or at (202) 551-5777.

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

Executive Summary of Rule 610T

II.

Discussion of Rule 610T
A.

Focus on Exchange Pricing Models and the Distortions They Can Cause
1.

Exchange Fee Models and Regulatory Framework

2.

Impact of Exchange Fee Models

3.

Focus on Exchange Fee Models

4.

Non-Exchange Trading Centers

5.

Options Exchanges
Securities

B.
1.

The Share Price Threshold of Pilot Securities

2.

The Duration of Pilot Securities

3.

Selecting Pilot Securities From All NMS Stocks

4.

The Ability of Issuers to Opt Out of the Pilot
Pilot Design

C.
1.

Need for a Pilot

2.

Pilot Design

3.

No Overlap with Tick Size Pilot

4.

Stratified Selection of Pilot Securities

5.

Number of NMS Stocks Included in Each Test Group

6.

Reduction to the Pilot Size

2

7.

Fee Cap Test Groups

8.

Control Group

9.

Alternative Designs

10.

Metrics to Assess the Pilot

D.

Timing and Duration
1.

Disclosure Initiatives and the Pilot

2.

Automatic Sunset at Year One

3.

Pre- and Post-Pilot Periods

4.

Early Termination

5.

Inclusion of a Phase-In Period

E.

III.

Data
1.

Pilot Securities Exchange Lists and Pilot Securities Change Lists

2.

Exchange Transaction Fee Summary

3.

Order Routing Data

F.

Implementation

G.

The Commission’s Authority to Conduct the Pilot

Paperwork Reduction Act
A.

Summary of Collection of Information

B.

Proposed Use of Information

C.

Respondents

D.

Total Initial and Annual Reporting and Recordkeeping Burdens
1.

Pilot Securities Exchange Lists and Pilot Securities Change Lists

2.

Exchange Transaction Fee Summaries

3

3.

IV.

Order Routing Datasets

E.

Collection of Information is Mandatory

F.

Confidentiality of Responses to Collection of Information

G.

Retention Period for Recordkeeping Requirements

Economic Analysis
A.

Background and Market Failures
1.

Market Failure at the Broker-Dealer Level

2.

Market Failure at the Exchange Level

B.

Baseline
1.

Current Information Baseline

2.

Current Market Environment

C.

Analysis of Benefits and Costs of Transaction Fee Pilot
1.

Benefits of Transaction Fee Pilot

2.

Costs of the Pilot
Impact on Efficiency, Competition, and Capital Formation

D.
1.

Efficiency

2.

Competition

3.

Capital Formation

E.

Alternatives
1.

Propose Rulemaking Without Conducting a Pilot

2.

Expand Transaction Fee Pilot to Include Non-Exchange Trading Centers

3.

Trade-At Test Group

4.

Alternative Pilot

4

5.

Adjustments to the Transaction Fee Pilot Structure

V.

Regulatory Flexibility Analysis

VI.

Statutory Authority and Text of the Rule Amendments

I.

Executive Summary of Rule 610T
Congress directed the Commission, through Section 11A of the Exchange Act, to

facilitate the establishment of a national market system and use its broad authority to carry out
the objectives of Section 11A, including, among others, to assure the economically efficient
execution of securities transactions. 1 In furtherance of these goals, and as part of its oversight of
registered national securities exchanges, the Commission periodically undertakes reviews of
various aspects of market structure and current regulations to evaluate whether, in light of
changes in technology and business practices, the current regulatory framework continues to
fairly, effectively, and efficiently promote fair and orderly markets, serve the public interest and
the protection of investors, and promote capital formation.
As discussed below, one aspect of the current regulatory framework focuses on the
current pricing and fee structure for transactions in securities. As the Commission discussed in
its Pilot proposal, the predominant transaction pricing structure that developed among equities
exchanges to attract order flow is the “maker-taker” fee model. 2 Specifically, out of thirteen
equities exchanges, seven utilize the “maker-taker” fee model, in which they pay a rebate to a
provider of liquidity and charge a fee to a taker of liquidity. Among the remaining exchanges,
four utilize a “taker-maker” pricing model (also called an inverted model) where they charge a
1

15 U.S.C. 78k-1(a)(1)(C)(i). See also supra Section II.G (discussing the Commission’s
authority to conduct the Pilot).

2

See Securities Exchange Act Release No. 82873 (March 14, 2018), 83 FR 13008 (March
26, 2018) (“Proposing Release” or “Proposal”).
5

fee to a provider of liquidity and pay a rebate to a taker of liquidity, 3 and two have a “flat fee”
model. 4 In recent years this area has attracted considerable attention and generated significant
debate, focusing on the effects, both positive and negative, that exchange transaction-based
pricing models may have on market quality and execution quality, with some commenters
advocating action by the Commission.
The Commission is uniquely situated and vested with the responsibility under Section
11A of the Exchange Act to examine the impact that this aspect of our market structure has on
our national market system. And, in light of the questions raised about the impact of these fee
models and the amount of attention garnered, we believe this is an area ripe for Commission
review. But, the Commission currently lacks the data necessary to meaningfully analyze the
impact that exchange transaction fee-and-rebate pricing models have on order routing behavior,
market and execution quality, and our market structure generally. To address this information
gap, the Commission has designed the Pilot to produce data that will facilitate a more thorough
understanding of the potential issues associated with exchange transaction-based pricing models.
3

See Cboe BYX U.S. Equities Exchange Fee Schedule (as of December 2018), available
at https://markets.cboe.com/us/equities/membership/fee_schedule/byx/; Cboe EDGA
U.S. Equities Exchange Fee Schedule (as of December 2018), available at
https://markets.cboe.com/us/equities/membership/fee_schedule/edga/; Nasdaq BX Fee
Schedule (as of December 2018), available at
https://www.nasdaqtrader.com/Trader.aspx?id=bx_pricing; NYSE National Schedule of
Fees and Rebates (as of December 2018), available at
https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fe
es.pdf. EDGA adopted a taker-maker fee schedule in July 2018. See Securities
Exchange Act Release No. 83643 (July 16, 2018), 83 FR 34643 (July 20, 2018) (SRCboeEDGA-2018-012).

4

See Investors Exchange Fee Schedule (as of December 2018), available at
https://iextrading.com/trading/fees/; NYSE American Equities Trading Fees and Price
List (as of December 2018), available at
https://www.nyse.com/publicdocs/nyse/markets/nyseamerican/NYSE_America_Equities_Price_List.pdf. NYSE American offers rebates to
eDMMs in their assigned NYSE American-listed securities.
6

In particular, the Commission has designed the Pilot to gather data on the effect both current
regulatory fee caps and rebates have on market quality and execution quality. The data gathered
will assist the Commission in determining whether any changes in the current regulatory
framework are appropriate and enable the Commission to make more informed and effective
policy decisions. This, in turn, enables the Commission to carry out the objectives of the
national market system and oversee the national securities exchanges.
As discussed fully in the proposing release, the Commission proposed a pilot to test the effect
of exchange transaction fees and rebates. 5 The following chart summarizes the terms of the Pilot as
adopted, which are discussed in more detail below:

Transaction Fee Pilot for NMS Stocks
Duration
Applicable
Trading
Centers
Pilot
Securities

2 years with an automatic sunset at 1 year unless,
no later than 30 days prior to that time, the Commission publishes
a notice that the pilot shall continue for up to 1 additional year;
plus a 6-month pre-Pilot Period and 6-month post-Pilot Period
Equities exchanges (including maker-taker & taker-maker)
but not ATSs or other non-exchange trading centers
NMS stocks with average daily trading volumes ≥ 30,000 shares with a share
price ≥ $2 per share that do not close below $1 per share during the Pilot and that
have an unlimited duration or a duration beyond the end of the post-Pilot Period

# of NMS
Stocks

Fee Cap

Rebates
Permitted?

Test
Group 1

730

$0.0010 fee cap
for removing and
providing displayed
liquidity
(no cap on rebates)

Yes

Test
Group 2

730
(plus
appended
Canadian
interlisted
stocks)

The 17 CFR
242.610(c) (Rule
610(c)) $0.0030 cap
continues to apply to
fees for removing
displayed liquidity

No
Rebates and Linked
Pricing Prohibited
for removing and
providing displayed and
undisplayed liquidity

Group

Pilot
Design

5

See Proposing Release, supra note 2.
7

(except for specified
market maker activity)

Control
Group

Pilot
Data

II.

Pilot
Securities
not in Test
Groups 1 or 2

The Rule 610(c) cap
continues to apply to
fees for removing
displayed liquidity (no
cap on rebates)

Yes

1. Pilot Securities Exchange Lists and Pilot Securities Change Lists
2. Exchange Transaction Fee Summary
3. Order Routing Datasets

Discussion of Rule 610T
In response to its proposal to conduct a Transaction Fee Pilot in NMS stocks (the

“Pilot”), the Commission received a number of comment letters from a diverse group of
commenters, including exchanges, investment managers, broker-dealers, and other market
participants, as well as academics, listed issuers, analytics firms, market observers, and industry
associations. 6 As discussed below, after review and consideration of the comments received, the
Commission is adopting Rule 610T with certain modifications from that in the proposal.
A.

Focus on Exchange Pricing Models and the Effects They Can Cause
1.

Exchange Fee Models and Regulatory Framework

Regardless of the fee model, all fees of a registered national securities exchange
“exchange”) are subject to the standards and process requirements set forth in the federal
securities laws. 7 In particular, Section 6 of the Exchange Act requires, among other things, that
6

The Proposal was developed, in part, by reference to a recommendation for an access fee
pilot submitted to the Commission by the Equity Market Structure Advisory Committee
(the “EMSAC”). See Proposing Release, supra note 2, at 13009, 13012-14.

7

Under the Exchange Act, exchange fee changes are effective on the day that the exchange
files them with the Commission, and neither advance notice nor Commission action is
required before an exchange may implement a fee change. See 15 U.S.C.
78s(b)(3)(A)(ii). The Commission may, within 60 days after an exchange filed its fee
8

the rules of an exchange provide for the “equitable allocation” of “reasonable” fees and that they
not be “designed to permit unfair discrimination.” 8 Section 11A of the Exchange Act directs the
Commission to use its authority to facilitate the establishment of a national market system for
securities that assures economically efficient execution of securities transactions, fair
competition, availability of information with respect to quotations for and transactions in
securities, and the practicability of brokers executing investors’ orders in the best market. 9 In
addition, Rule 610(c) of Regulation NMS imposes upon exchanges a fee cap of $0.0030 per
share for the execution of an order against its “protected quotation.” 10
In 2005, when it adopted the fee limitation in Rule 610(c), the Commission noted, in part:
The adopted fee limitation set forth in Rule 610(c) of Regulation
NMS is designed to preclude individual trading centers from
raising their fees substantially in an attempt to take improper
advantage of strengthened protection against trade-throughs and
the adoption of a private linkage regime. In particular, the fee
limitation is necessary to address ‘outlier’ trading centers that
otherwise might charge high fees to other market participants
required to access their quotations by the Order Protection Rule. It
also precludes a trading center from charging high fees selectively
to competitors, practices that have occurred in the market for
Nasdaq stocks. In the absence of a fee limitation, the adoption of
the Order Protection Rule and private linkages could significantly
boost the viability of the outlier business model. Outlier markets
might well try to take advantage of intermarket price protection by
acting essentially as a toll booth between price levels. The high
change with the Commission, summarily suspend the new fee and institute proceedings
to determine whether to disapprove it. See 15 U.S.C. 78s(b)(3)(C).
8

See 15 U.S.C. 78f(b)(4)-(5).

9

See 15 U.S.C. 78k-1(a)(1).

10

17 CFR 242.610(c); Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR
37496, 37543-46 (June 29, 2005) (“NMS Adopting Release”). See also 17 CFR
242.600(b)(58) (defining “protected quotation”); 17 CFR 242.600(b)(57) (defining
“protected bid or protected offer”); 17 CFR 242.600(b)(3) (defining “automated
quotation”).
9

fee market likely will be the last market to which orders would be
routed, but prices could not move to the next level until someone
routed an order to take out the displayed price at the outlier
market. 11
In light of the considerable debate surrounding exchange fee models that pay rebates,
which is well documented in the comment letters submitted on the proposed Pilot, and the
passage of time since the Commission first adopted the Rule 610(c) fee cap as part of Regulation
NMS in 2005, the Commission now seeks to gather data to facilitate an empirical assessment of
the effect of exchange transaction fees and rebates broadly – including the impact and continued
appropriateness of the Rule 610(c) fee cap 12 – by testing the effects of changes to exchange fees
and rebates on the markets and market participant behavior.
2.

Impact of Exchange Fee Models

In response to the Proposing Release, the Commission received a number of comment
letters criticizing existing fee-and-rebate pricing models, but also a number of comment letters
expressing support for those same pricing regimes. 13
Many commenters focused on one potential distortion – whether current pricing models
“present broker-dealers with a potential conflict of interest,” because their “duty to pursue best
execution could be compromised when their trading venue decision is driven by the economic
11

NMS Adopting Release, supra note 10, at 37545.

12

At the time of its adoption in 2005, the fee cap codified the then-prevailing fee level set
through competition among the various trading centers. See NMS Adopting Release,
supra note 10, at 37545 (stating that “the $0.003 fee limitation is consistent with current
business practices, as very few trading centers currently charge fees that exceed this
amount”).

13

The potential distortions mentioned by the commenters (and discussed in this section)
include, among others: (1) conflicts of interest faced by routing broker-dealers; (2)
excess intermediation and potential adverse selection; (3) market fragmentation; (4)
exchange fee avoidance; (5) complexity; (6) transparency; and (7) elevated fees to
subsidize rebates.
10

incentive to minimize access fees paid and maximize rebates received.” 14 As another commenter
explained, “a broker is incentivized to route an order to the venue that pays it the most (or costs
the least), instead of the venue that has the highest likelihood of offering the best execution for
its customers, such as the one that offers a higher probability of execution or meaningful price
improvement.” 15 As evidence of the potential harm that can result from the conflicts presented
by exchange rebates, one commenter noted that institutional investors “that specifically instruct
brokers to remove rebate-driven trading behaviors from their algorithms achieve significantly
lower trading costs that result in higher returns to their investors.” 16 One commenter attributed
this harm to the tendency of rebates to “affect the length of the order queue of passive limit
orders on the major maker-taker exchanges, while high take fees on these markets make them
less attractive for marketable orders that cross the spread.” The commenter argued that the “net
result of this perverse pricing dynamic is a lower likelihood of execution and a higher likelihood
of adverse selection for orders in the maker-taker queues,” because orders at the “middle or back
of the queue . . . are less likely to trade at their desired price, and when they do trade, the overall

14

Capital Group Letter, at 2. See also, e.g., ICI Letter I, at 2; Vanguard Letter, at 2;
Invesco Letter, at 2; CFA Letter, at 2; Oppenheimer Letter, at 2; Spatt Letter, at 4; AJO
Letter, at 1; Larry Harris Letter, at 3.

15

Healthy Markets Letter I, at 5. See also, e.g., Copeland Letter, at 1; Wellington Letter, at
1; Norges Letter, at 2.

16

Babelfish Letter, at 1-3 (also referencing a Clearpool Group study that found that a “fee
sensitive VWAP algorithm executed during volatile times incurred seven times as much
cost as a fee agnostic algorithm”). See also T. Rowe Price Letter, at 2 (stating that
“[r]etail orders. . . are generally placed on the exchange that offers the highest rebate to
the broker, but show[s] lower execution quality in terms of reduced probability of
execution”); Capital Group Letter, at 2 (“Our internal trade analysis suggests that
execution quality may be negatively impacted when broker-dealers’ routing decisions are
made to minimize access fees.”).
11

market price as reflected by the [National Best Bid and Offer (“NBBO”)] is more likely to move
against them, than when trading on venues that do not pay rebates.” 17
A number of commenters discussed other potential effects of exchange pricing models.
Some commenters believed that transaction fees and rebates contribute to market
fragmentation 18 because they encourage investors to “turn to inverted markets to improve queue
priority” 19 or to “route orders to non-exchange trading centers to avoid the higher access fees
that exchanges charge to subsidize the rebates they offer.” 20 Likewise, one commenter thought
that “transaction fees and rebates contribute to market complexity through the proliferation of
new order types . . . designed to exploit different transaction pricing models.” 21 Other
commenters believed that “[t]ransaction fees and rebates . . . undermine market transparency
because the prices displayed by exchanges – and provided on trade reports – do not include fee

17

IEX Letter I, at 6, A-1-A-2; IEX Letter II, at 7; IEX Letter IV (appending research to
support these views). See also, e.g., Babelfish Letter, at 2 (stating that a “frequently
realized scenario is that flow sent solely to a high rebate destination waits in queue, often
winds up canceled because price moves away, and then receives an inferior price upon
the eventual execution”); Larry Harris Letter, at 1, 3; Brandes Letter, at 1-2. But see
Grasso Letter, at 3 (“waiting for a rebate[] may be fine” if “you have low confidence
about future prices for a large order and don’t mind if the order trades slowly while you
accumulate shares”).

18

See, e.g., ICI Letter I, at 2.

19

Credit Suisse Commentary, at 2. See also, e.g., Larry Harris Letter, at 3 (noting that
“orders standing at inverted exchanges usually execute before orders standing at the same
price at maker-taker exchanges”).

20

Capital Group Letter, at 2. See also, e.g., IEX Letter I, at 3 (“Excessive take fees . . .
have been criticized as leading to the migration of some order flow to less-regulated nonexchange venues in search of reduced transaction costs, resulting in increased market
fragmentation and market complexity.”).

21

ICI Letter I, at 2. See also, e.g., Vanguard Letter, at 2 (indicating that the “desire to
maximize rebate revenue and avoid fees created order complexity within the equity
markets as traders sought profitable trading strategies”).
12

or rebate information and therefore do not fully reflect net trade prices.” 22 Finally, some
commenters asserted that current pricing models unfairly subsidize rebates 23 or benefit
sophisticated market participants like market-makers and proprietary traders at the expense of
other market participants. 24
Other commenters expressed support for current exchange pricing models. For example,
one commenter believed that maker-taker pricing “provides important benefits to issuers and
investors,” because exchanges “use rebates as a tool to promote displayed liquidity and price
discovery, which results in competitive bid-ask spreads, saving transaction costs that investors
may otherwise incur.” 25 Another commenter argued that rebates can promote displayed liquidity
by providing “a payment in exchange for posters of liquidity giving up several valuable options,”
including “the power to decide the time of the trade” and the ability to conceal trading intentions
22

ICI Letter I, at 2. See also, e.g., Goldman Sachs Letter, at 3; Invesco Letter, at 2; State
Street Letter, at 2; Wellington Letter, at 1; Oppenheimer Letter, at 2; Capital Group
Letter, at 3.

23

See, e.g., Clearpool Letter, at 3 (stating that “exchanges chase order flow and provide
rebates and other pricing incentives to the largest trading firms at the expense of smaller
market participants who cannot take advantage of such rebates and, in effect, end up
subsidizing the trading of larger firms”); IEX Letter I, at 3 (stating that transaction fees
are “used in effect to subsidize the payment of rebates,” which “results in a substantial
penalty on investors and other participants who . . . have a need for immediate liquidity”).

24

See, e.g., T. Rowe Price Letter, at 2 (stating that rebates lead to “excessive intermediation
. . . benefiting short-term intermediaries at the expense of long-term investors”);
ModernIR Letter, at 3 (stating that rebates “promote[] arbitrage, and price-setting as its
own end,” leading to a “paucity of real orders”); Larry Harris Letter, at 1, 5-6 (stating that
current pricing models facilitate “the execution of various parasitic trading strategies by
proprietary traders to the detriment of public investors”); Capital Group Letter, at 3.

25

State Street Letter, at 2. See also, e.g., Virtu Letter, at 3; Fidelity Letter, at 3; Nasdaq
Letter I, at 9; Cboe Letter I, at 15-16. See also Nasdaq Letter III, at Exhibit A (providing
graphs using data from September 2018 on average quoted spread across exchanges in
S&P 500 stocks and time at the best quote across those stocks). But cf. Larry Harris
Letter, at 6-9 (acknowledging that “quoted spreads are narrower under maker-taker
pricing,” but opining that “the narrower quoted spreads do not benefit the public”).
13

until the point of execution. 26 Building on this idea, one commenter characterized “[a]ccess fee
caps and related rebates” as features that “enable exchanges to compete with non-exchange
trading venues by essentially subsidizing the posted prices . . . and narrow[ing] the NBBO,
making it slightly more expensive to either match or improve upon those prices off-exchange.” 27
As commenters fundamentally disagreed about the effect of exchange transaction fee
models and whether they have a positive or a negative impact on the U.S. equities markets,
commenters also held conflicting views regarding whether and how the Commission should
conduct the Pilot.
3.

Focus on Exchange Fee Models

Recognizing the unique regulatory framework applicable to exchange fees, and the
disagreement over the impact of exchange fees and rebates on the markets and market
participants, the Commission focused its proposed Pilot on studying the effect of exchange
transaction fees and rebates on order routing behavior, execution quality, and market quality.
Accordingly, the Commission proposed to include within the Pilot all equities exchanges
regardless of fee model.
A large number of commenters supported applying the Pilot to all equities exchanges. 28
For example, one commenter believed that the Pilot “should include all equities exchanges . . .
26

Magma Letter, at 3. See also, e.g., NYSE Letter IV, at 2 (arguing that “pricing incentives
enhance the quality and reliability of display markets”); FIA Letter, at 4.

27

FIA Letter, at 3-4. See also NYSE Letter I, at 6 (stating that rebates “allow liquidity
providers to quote narrower spreads by providing another source of revenue”); Grasso
Letter, at 4 (“the main outcome of exchange pricing seems to be that it forces exchanges
to compete for customers,” because it “keeps their margins tight and gives them
incentives to improve the quality of their offerings”).

28

See, e.g., Joint Asset Managers Letter, at 2; Brandes Letter, at 2; Themis Trading Letter I,
at 3; AJO Letter, at 1-2; OMERS Letter, at 2; Copeland Letter, at 2; Virtu Letter, at 6;
Nuveen Letter, at 2; BlackRock Letter, at 1; RBC Letter I, at 3; Vanguard Letter, at 2;
14

because rebates of any kind provide inducements to trade and distort markets.” 29 A different
commenter thought that including taker-maker exchanges was “both logical and feasible, given
that all equities exchanges assess fees that are subject to the Exchange Act and its rule filing
requirements.” 30 Other commenters “agree[d] with the Commission’s assessment that the Pilot
should apply to all equity exchanges . . . thus treating all similarly situated exchanges equally,”
because this would be “critically important in determining what impact the reduction of access
fees or the elimination of rebates will have on order routing practices.” 31 Some other
commenters, however, opposed including taker-maker exchanges in the Pilot, noting that Rule
610(c) does not apply to taker-maker exchanges. 32
After considering the comments on this issue, the Commission continues to believe that
focusing the Pilot on equities exchanges regardless of fee model is appropriate because it treats
alike similarly situated entities that all are subject to the same regulatory framework and thereby
will allow the Commission to evaluate the effect of exchange fee-and-rebate pricing models and
the continued appropriateness of the Rule 610(c) fee cap. Further, it would be incongruous to
study rebates and fees offered by one type of equities exchange (maker-taker), but not another
type of equities exchange (taker-maker) where the fees of both types of entities are subject to the

CFA Letter, at 4; Wellington Letter, at 2; Joint Pension Plan Letter, at 2; Oppenheimer
Letter, at 2; Clearpool Letter, at 5 n.8; TD Ameritrade Letter, at 4; Capital Group Letter,
at 3; Healthy Markets Letter I, at 10; Morgan Stanley Letter, at 3 n.5; AGF Letter, at 1.
29

AJO Letter, at 1-2.

30

See RBC Letter I, at 3-4.

31

Capital Group Letter, at 3. See also, e.g., Clearpool Letter, at 5 n.8; Oppenheimer Letter,
at 2; Brandes Letter, at 2; Copeland Letter, at 2.

32

See, e.g., Cboe Letter I, at 28.
15

same legal requirements and can introduce the same types of distortions that the Pilot seeks to
study.
4.

Non-Exchange Trading Centers

As proposed, the Pilot would exclude non-exchange trading centers such as alternative
trading systems (“ATSs”). 33 Several commenters opined on this aspect of the proposal. A
number of commenters agreed with the Commission’s proposal to exclude non-exchange trading
centers from the Pilot. 34 Some of those commenters noted that exchanges are subject to various
fee-related regulatory provisions that are entirely inapplicable to non-exchange trading centers.
For example, one commenter noted that non-exchange trading centers are not currently subject to
any access fee caps, and including such trading venues in the Pilot “would have the unintended
and harmful effect of unnecessarily changing ATS business models . . . .” 35
In addition, several commenters emphasized the fundamental ways in which the fee
structures employed by non-exchange trading centers are different from the fee models utilized
by the equities exchanges and, as a result, concluded that excluding non-exchange trading

33

See Proposing Release, supra note 2, at 13014. As discussed in the Proposing Release,
the term “trading center” as used there and throughout this release is a collective term
that refers broadly to the venues that trade NMS stocks. See id. at 13009 n.7. For
purposes of this release, the term “trading center” includes national securities exchanges
that are registered with the Commission and that trade NMS stocks (referred to herein as
“equities exchanges” or “exchanges”), as well as other types of “non-exchange venues”
that trade NMS stocks, including ATSs and broker dealers that internalize orders by
matching them off-exchange with reference to the national best bid and offer.

34

See, e.g., Brandes Letter, at 2; AJO Letter, at 2; MFA Letter, at 2; BIDS Letter, at 1-2;
BlackRock Letter, at 1; SIFMA Letter, at 5; Virtu Letter, at 6; Fidelity Letter, at 10; Citi
Letter, at 2; Clearpool Letter, at 4-5; Luminex Letter, at 1; Morgan Stanley Letter, at 3
n.5.

35

Virtu Letter, at 6. See also, e.g., SIFMA Letter, at 5; Clearpool Letter, at 5.
16

centers was appropriate. 36 For example, one such commenter explained that “inducements (low
fees, no fees, rebates) offered by ATSs and other off-exchange venues are not universal across
all broker-dealers or market participants. Instead, the fees paid (or not paid) by market
participants to ATSs and other off-exchange venues are negotiated between each market
participant and the trading venue,” such that “the number of fee permutations and inconsistencies
across brokers for any single ATS could be substantial.” 37 Still other commenters believed that
excluding non-exchange trading centers from the Pilot was appropriate because “ATSs are not
protected venues, and thus free market competition among them constrains their pricing
power.” 38 One commenter supported excluding ATSs because “there is nothing to be gained by
including venues that don’t have the same underlying issues that exchanges present with their
rebate and ‘maker-taker’ pricing models.” 39
On the other hand, other commenters expressed concerns with omitting non-exchange
venues from the Pilot. 40 One concern was that by excluding non-exchange venues, the Pilot data
would be incomplete. For example, one commenter believed that excluding non-exchange

36

See, e.g., Morgan Stanley Letter, at 3 n.5 (stating that “many broker-dealer[] operators of
ATSs generally charge clients an overall commission rate (rather than an access fee) for a
bundle of services, including access to their ATSs”); BIDS Letter, at 1-2, AJO Letter, at
2; Healthy Markets Letter I, at 10.

37

AJO Letter, at 2.

38

Citi Letter, at 2. See also, e.g., Fidelity Letter, at 10 (stating that “ATS’ fee structures are
already subject to competitive market forces and have more complex pricing models than
exchanges[,] making their participation in the Proposed Pilot less useful”); SIFMA
Letter, at 5 (opining that “competitive forces already push access fees [at ATSs] to an
appropriate level . . . lower than the access fees charged by exchanges,” because ATS
access fees “are included in the total cost consideration of trading”).

39

Luminex Letter, at 1.

40

See, e.g., Nasdaq Letter I, at 2, 5-7; Cboe Letter I, at 12-13; MFS Letter, at 2; RBC Letter
I, at 4; ASA Letter, at 3; ViableMkts Letter, at 2; Angel Letter II, at 2.
17

venues “could create an imperfect picture of the overall impact of the transaction fees put in
place under the Pilot program” and could compromise the value and utility of the data collected
during the Pilot. 41 Another commenter argued that by excluding non-exchange venues, the Pilot
will not return “meaningful data upon which to make informed analysis and conclusions”
because it would “ignore off-exchange trading representing approximately 39 percent of total
U.S. equities market trading.” 42 This commenter further believed that the Pilot would be unable
to properly assess the potential conflicts of interest because it will not know “the baseline for
remuneration occurring off-exchange, or know what impact the Proposal has on that
baseline[.]” 43 One commenter objected to excluding ATSs “based on the fact that the proposed
Pilot is a ‘new regulatory regime’ for ATSs . . . .” 44 While one commenter recognized the
complexity involved with subjecting non-exchange trading centers to the access fee cap under
Rule 610(c), it argued that such complexity did not provide a sufficient basis to treat exchanges
and non-exchange trading centers disparately. 45 A few commenters recommended excluding
ATSs, but requiring them to submit the required order routing data. 46
The Commission believes that excluding non-exchange venues from the Pilot should not
negatively impact the Pilot’s data or impact its results. As noted above, the Pilot is designed,
among other things, to assess the effects of exchange fee models. Because exchange fee models
41

See Wellington Letter, at 2 (acknowledging, however, that it is “impractical for the
Commission to include off-exchange venues”). See also, e.g., RBC Letter I, at 4;
ProAssurance Letter, at 2.

42

Nasdaq Letter I, at 2, 5-7. See also, e.g., NYSE Letter I, at 2.

43

See Nasdaq Letter I, at 7.

44

See, e.g., Cboe Letter I, at 13.

45

See NYSE Letter I, at 7-8.

46

See, e.g., Better Markets Letter, at 8.
18

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

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

48

See supra notes 310-312 and accompanying text (discussing recent amendments to
Regulation ATS and their relevance to the proposed Pilot).
19

data on ATS activity, including data published by the Financial Industry Regulatory Authority
(“FINRA”), will permit researchers to observe changes in ATS activity during the Pilot.
Among commenters critical of excluding non-exchange venues, some believed it could
raise competitive issues to apply the Pilot’s pricing limitations to the equities exchanges, but not
impose the same pricing limitations on non-exchange trading centers that trade the same equities
securities. 49 One exchange commenter found it “inexplicabl[e]” that the Pilot “focuses only on
exchanges and entirely ignores off-exchange venues, which are the venues that are most likely to
benefit from a pilot that pointedly decreases the incentive (i.e., rebates) to post protected quotes
on-exchange.” 50
Several commenters suggested that the exclusion of non-exchange trading centers from
the Pilot could “create incentives for market participants to move more order flow to offexchange platforms,” thereby putting the national securities exchanges at a competitive
disadvantage as compared to off-exchange trading centers. 51 However, a commenter suggested
the opposite could happen and that the Pilot might actually “encourage more order flow to
gravitate to the exchanges” because the Pilot would reduce the access fee cap on the equities
exchanges thereby making it less expensive to transact on an exchange. 52
The Commission does not believe that the Pilot necessarily will put the equities
exchanges at a competitive disadvantage or disproportionally harm them when competing with
49

See, e.g., ASA Letter, at 3; Cboe Letter I, at 12, 26-27; Nasdaq Letter I, at 5-7; NYSE
Letter I, at 3-8.

50

See Cboe Letter I, at 12. See also Nasdaq Letter I, at 6; NYSE Letter I, at 3-5; NYSE
Letter II, at 12.

51

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

52

See, e.g., Citi Letter, at 2; Decimus Letter, at 5-6.
20

non-exchange trading centers for investors’ orders. Currently, only exchanges are subject to the
Rule 610(c) fee cap, and Test Group 1 is designed to test a lower cap. The Commission does not
believe that exchanges charging lower fees will necessarily make them less competitive with
other venues for natural order flow, for example order flow that removes liquidity. Rather, it is
possible that lower fees in Test Group 1 across all exchanges may actually improve their
competitive position in attracting that order flow, 53 particularly with respect to fee sensitive
routing algorithms because, all else being equal, fee sensitive algorithms generally seek to
minimize trading costs and would likely rank exchanges more favorably in their routing tables
when exchanges reduce their fees to remove liquidity.
In addition to testing a lower fee cap level, the Pilot also will test a prohibition on rebates
and “Linked Pricing,” which, as discussed further below, is defined as a discount or incentive on
transaction fee pricing applicable to removing (or providing) liquidity that is linked to providing
(or removing) liquidity. 54 The intent of this is to gather data to assess, among other things, the
effect of exchange rebates. Potential distortions, which may be caused or exacerbated by
exchange rebates, may themselves be placing exchanges at a competitive disadvantage, in which
case the elimination of rebates could improve the competitive position of exchanges, for example
if taker fees are set at levels independent of the need to subsidize maker rebates. Once again,
data is needed to empirically assess this issue, and the Commission believes that the Pilot is the
best way to obtain that data. 55

53

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

54

See Rule 610T(a)(2).

55

See infra Section IV.A.2. and C.1.a.i.
21

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

56

See 15 U.S.C. 78f(b)(4)-(5).

57

All exchange fee changes are published for public comment and required to be publicly
posted on the Internet, whereas fees of non-exchange trading centers are typically
bespoke. Fee changes of non-exchange trading centers are not subject to the provisions
of the federal securities laws requiring that fees be an “equitable allocation” of
“reasonable” fees and not “unfairly discriminatory.”

58

See 15 U.S.C. 78f(b)(4)-(5) (requiring, among other things, that an exchange’s fees be an
“equitable allocation” of “reasonable” fees and that they not be “designed to permit
unfair discrimination.”). In addition, only exchange fees are subject to the rule filing
requirements under Section 19(b) of the Exchange Act and 17 CFR 240.19b-4 (Rule 19b4) thereunder. See also Proposing Release, supra note 2, at 13016.
22

rebates may have on, order routing behavior, execution quality, and market quality more
generally.
The Commission believes that subjecting non-exchange trading centers to the Pilot would
go beyond the scope of the current regulatory framework that applies only to exchanges and
would not further the Commission’s evaluation of the impact of the existing regulatory regime,
including, but not limited to, the Regulation NMS fee cap, which applies exclusively to exchange
fees and rebates. In effect, the Pilot will help the Commission carry out its statutory
responsibility to assess the effect of exchange fees and rebates, which do not apply to nonexchange trading centers. 59
5.

Options Exchanges

Finally, the Commission proposed to exclude options exchanges from the Pilot, because
options and equities are materially different types of securities. In addition, the access fee cap
under Rule 610(c) does not currently apply to the options exchanges. 60
Several commenters agreed with the Commission’s exclusion of the options exchanges. 61
No commenters suggested that the Commission include options markets in the Pilot. For the

59

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

60

See Proposing Release, supra note 2, at 13015.

61

See, e.g., MFA Letter, at 2; SIFMA Letter, at 5; Fidelity Letter, at 10.
23

reasons noted above and discussed in the Proposing Release, the Commission is not including
options markets within the scope of the Pilot. 62
B.

Securities

As proposed, all NMS stocks 63 that meet specified initial and continuing minimum
standards would be eligible for inclusion in the Pilot (collectively, “Pilot Securities”). 64 The
Commission received a number of comments regarding the scope of Pilot Securities to be
included in the Pilot.
1.

The Share Price Threshold of Pilot Securities

The Commission proposed that an NMS stock must have a minimum initial share price of
$2 at the time the pre-Pilot Period commences to be included in the Pilot and that any Pilot
Securities that close below $1 at the end of a trading day during the proposed Pilot would be
removed from the Pilot. 65
One commenter opposed the $2 initial minimum share price threshold as overly
restrictive. 66 Other commenters, however, agreed that the securities in the Pilot should have an
62

See Proposing Release, supra note 2, at 13015.

63

See 17 CFR 242.600(b)(47) (defining “NMS stock”).

64

See Proposing Release, supra note 2, at 13017. See also Proposed Rule 610T(b)(1)(ii).

65

See Proposing Release, supra note 2, at 13017; Proposed Rule 610T(b)(1)(ii). The
Commission notes that the proposed language in Rule 610T(b)(1)(ii) has been modified
slightly. As proposed, Rule 610T(b)(1)(ii) contained the phrase “minimum initial share
price of at least $2 . . . .” As adopted, the clause “minimum initial share price of $2” is
being substituted for the phrase “minimum initial share price of at least $2” to delete
redundant text. In addition, as proposed, Rule 610T(b)(1)(ii) explained that a Pilot
Security that closes below $1 would be “removed from the Test Group or the Control
Group and will no longer be subject to the pricing restrictions set forth in (a)(1)-(3). . . .”
As adopted, this language is being modified slightly to make it more concise.
Accordingly, as adopted, this language provides that if the share price of a Pilot Security
closes below $1 at the end of a trading day “it will be removed from the Pilot.”

66

See Angel Letter I, at 2.
24

initial minimum $2 per share price threshold at the time of the initial stock selection, because this
threshold “will capture virtually all NMS stocks while minimizing the risk that securities will
drop out of the Pilot . . . .” 67 One of these commenters believed the proposed thresholds would
“help ensure consistency among the Test Groups and limit the risk of data anomalies due to
changes in the composition of those groups.” 68 Another commenter noted that the choice of “$2
and $1 thresholds . . . follows the reasonable parameters established during [the] . . . Tick Size
Pilot” and asserted that the “determination to pull out securities that close at under $1 during the
pilot seems appropriate, especially given the fundamentally different fee structures applicable to
stocks with prices less than $1.00.” 69
The Commission continues to believe that the proposed share price thresholds for Pilot
Securities are appropriate. The Commission notes that no commenters opposed the proposed $1
minimum continuing price threshold, which will exclude such stocks from the Pilot because
stocks with quotations of less than $1 are subject to different regulatory and fee treatment. 70 The
Commission continues to believe that an initial $2 share price threshold will best balance the
need to include a broad set of NMS stocks in the Pilot with the desire to ensure that substantially
all of the securities selected at the outset of the Pilot remain part of their respective Test Groups
throughout the duration of the Pilot, including during the pre- and post-Pilot periods. The
Commission does not believe that the $2 threshold is overly restrictive because, as discussed in

67

RBC Letter I, at 5. See also, e.g., Better Markets Letter, at 6; Healthy Markets Letter I, at
11-12.

68

RBC Letter I, at 5.

69

Healthy Markets Letter I, at 12.

70

See Proposing Release, supra note 2, at 13017.
25

the Proposal, it is uncommon for securities priced at $2 or more to fall below $1. 71 Lowering the
initial stock selection threshold below $2 could increase the likelihood that securities selected for
the Pilot get dropped from the Pilot if their share price closed below $1 during the Pilot. Such a
result would change the composition of the Test Groups during the Pilot, which might adversely
impact the quality of the data produced by the Pilot. For these reasons and the reasons discussed
in the Proposing Release, the Commission adopts as proposed the share price thresholds set forth
in Rule 610T(b)(1)(ii).
2.

The Duration of Pilot Securities

The Commission proposed that, in order to be included in the Pilot, an NMS stock must
have an unlimited duration or a duration beyond the end of the post-Pilot period in order to be
included in the Pilot. 72 No comments were received regarding this condition. For the reasons
outlined in the Proposing Release, the Commission adopts this aspect of the Pilot as proposed. 73
3.

Selecting Pilot Securities From All NMS Stocks

The Commission proposed to select Pilot Securities from among the entire universe of
NMS stocks, subject to the minimum share price threshold and duration requirements. As
proposed, the Pilot would include a broad and diverse cross-section of securities, including, for
example, stocks of all market capitalizations as well as ETPs.
The Commission received comments on the universe of Pilot Securities that generally fell
into four categories: (1) the inclusion of stocks with market capitalizations below $3 billion, (2)
the inclusion of ETPs, (3) the inclusion of Canadian interlisted stocks, and (4) the inclusion of
71

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

72

See Proposing Release, supra note 2, at 13017; Proposed Rule 610T(b)(1)(ii).

73

See Proposing Release, supra note 2, at 13018 n.103.
26

NMS stocks other than stocks of operating companies and ETPs. Each of these points is
discussed below.
a.

Market Capitalization and Liquidity

The Commission proposed to select Pilot Securities from among NMS stocks of all
market capitalizations. 74 A few commenters recommended that the Pilot exclude securities with
smaller market capitalizations and/or thinly-traded securities. One commenter suggested that the
“majority of securities within the Test Groups should be more liquid” and that thinly-traded
securities, if included, “should be a minority of all securities in the Test Groups.” 75 Similarly,
one exchange commenter stated that the Pilot “should exclude less active stocks as the liquidity
in such stocks will likely be severely and negatively impacted by this Pilot.”76 This commenter
asserted that “[l]ess active stocks are highly dependent on professional liquidity providers to post
liquidity” and speculated that “[d]ecreasing incentives for liquidity providers to post liquidity in
less active stocks will have a pronounced impact on liquidity . . . manifest[ing] in significantly
wider spreads and significantly less depth in these securities.” 77 Noting that “many industry
participants appear to advocate for increased incentives for liquidity provision in thinly-traded
stocks,” the commenter did not believe that the Pilot’s goals were “worth the risk to liquidity and
capital formation that the Commission itself identifie[d.]” 78
74

See id. at 13018. The EMSAC’s recommendation was to limit a pilot to stocks above $3
billion in market capitalization in order to avoid overlap with the Tick Size Pilot. See id.
The Commission notes, however, that the Tick Size Pilot ended on September 28, 2018
and the Pilot Period for the Transaction Fee Pilot will not start before the post-pilot
period for the Tick Size Pilot ends on April 2, 2019. See Section II.C.3. infra.

75

RBC Letter I, at 6. See also, e.g., Harris Letter, at 1; T. Rowe Price Letter, at 4.

76

Cboe Letter I, at 28.

77

Id. See also, e.g., Morgan Stanley Letter, at 4; Leaf Letter, at 1.

78

Cboe Letter I, at 19. See also, e.g., Proposing Release, supra note 2, at 13069.
27

Another commenter was similarly concerned that the Pilot would “have a significant
impact on small to medium issuers since exchanges will not be able to provide incentives to
market makers to support trading in those companies’ securities.” 79 This commenter stated that
“[l]iquidity rebates can be critical for such securities to motivate market makers to support the
stock with aggressive and actionable quotations.” 80 Further, the commenter opined that the Pilot
would “risk damaging companies’ ability to efficiently raise capital,” which it believed would
“particularly harm small and medium sized companies, for which the current market structure is
already not optimized.” 81 The commenter further argued that “incentives (rebates) are important
to creating two-sided markets across all stocks, especially thinly traded stocks.” 82
Many other commenters supported including a broad scope of Pilot Securities. For
example, a group of twenty-one asset managers submitting a joint letter stated that “[a]s many
NMS stocks as possible should be in scope, including those with market capitalizations below
$3bln,” in order to create a “meaningful” dataset. 83 Another commenter agreed that the Pilot
79

Nasdaq Letter I, at 8-9.

80

Id. at 3, 9 (alleging that the Pilot was “arbitrary and capricious and not in accordance with
law,” because it gave “short shrift” to these concerns). See also Virtu Letter, at 7
(expressing concern that the Pilot would “harm investors in . . . less liquid ETPs, which
will be faced with less liquidity and wider spreads when they seek to sell their holdings”).

81

Nasdaq Letter I, at 2. See also ASA Letter, at 5.

82

Nasdaq Letter III, at 1. The commenter provided a chart showing how the exchanges
compare to each other with respect to maintaining a two-sided quote at least 50% of the
day. In the chart, some of the exchanges with a higher percent of two-sided markets
more than 50% of the day have taker-maker pricing, in which they incentivize the
removal of liquidity and charge fees to the provider of liquidity. Id. at Exhibit A. But cf.
NYSE Letter II, at 9-10 (arguing that rebates are necessary to promote display of
liquidity).

83

Joint Asset Managers Letter, at 2. See also, e.g., Spatt Letter, at 1-2 (stating that the Pilot
was a “very significant improvement over the EMSAC proposal” and that one of the
“major improvements” was “the inclusion of lower market value stocks”); Healthy
Markets Letter I, at 11-12; Wellington Letter, at 2; MFA Letter, at 2; Nuveen Letter, at 2;
28

“should encompass the broadest universe of securities, as is feasible, in order to maximize the
sample size and provide the most robust dataset possible,” further arguing that “[o]mitting
securities of a specific market cap seems arbitrary, would provide an incomplete view of the
overall market, and runs the risk of excluding meaningful data and biasing the study.” 84
Building on these arguments, other commenters believed it was important to specifically
“test the argument that rebates are required to promote liquidity provision in illiquid stocks.” 85
One commenter noted that this debate “has raged for years,” which is “the point of the pilot: to
provide market participants and the Commission with the data needed to make those analyses.” 86
Another commenter similarly asserted that the Pilot should include a broad set of NMS stocks to
“help settle academic debates on the relative impact of rebates on liquid vs. less-liquid stocks and
other supposedly beneficial aspects of rebates.” 87
Notably, some of these commenters directly challenged the argument, set forth by a
number of other commenters, that thinly-traded or smaller-capitalization NMS stocks would be
harmed by the Pilot’s pricing restrictions. One commenter explained that, “for less liquid stocks,
spreads tend to be wider, and as a result rebates become less relevant as a matter of simple

Lipson Letter, at 1; BlackRock Letter, at 1; Vanguard Letter, at 2; CFA Letter, at 4;
CIEBA Letter, at 2; Joint Pension Plan Letter, at 2; Oppenheimer Letter, at 2.
84

AJO Letter, at 2.

85

Babelfish Letter, at 3.

86

Healthy Markets Letter I, at 13.

87

Better Markets Letter, at 6. See also, e.g., Vanguard Letter, at 2 (“By including all NMS
stocks, the SEC will receive data to analyze the impacts of transaction fees on market
quality across various types of securities.”); TD Ameritrade Letter, at 6-7 n.11
(“including securities of small, mid and large cap companies . . . will include some data
on the impact that varying transaction fees will have [on] thinly traded securities”).
29

mathematics.” 88 To illustrate the point, the commenter referred to a “stock that typically trades
at a five-cent quoted spread,” noting that a “typical .0025 per share rebate would equal onetwentieth of the quoted spread, so in these instances a market maker’s revenue from capturing
the spread would far outweigh the contribution of the rebate” 89 (emphasis in original). Another
commenter also questioned the “significance of liquidity rebates for making markets in less
liquid / smaller-cap stocks,” because it believed this “marginal incentive to provide liquidity . . .
is likely to be weak in the smaller-cap space typically characterized by wide bid-ask spreads . . .
.” 90 To support this argument, the commenter referred to “an empirical study of changes in
maker-taker arrangements on two European trading venues owned by BATS,” now owned by
Cboe Global Markets, which suggested that “‘an elimination of the make fee and a reduced take
fee cap would result in worse market quality for large capitalization stocks but better market
quality for small capitalization stocks’” (emphasis in original). 91 For this reason, the commenter
asserted that the “link articulated by the opponents of the proposed pilot is at best uncertain and
that the pilot may in fact result in improved liquidity for smaller-cap stocks” (emphasis in

88

IEX Letter II, at 7. See also Credit Suisse Commentary, at 1, 3 (stating that the Pilot “is
likely to affect stocks differently depending on their liquidity profile,” but expecting
stocks “with wider spreads” in Test Groups 2 and 3 “to continue to behave similarly
given that their liquidity may be less driven by rebate-incentivized trading strategies to
begin with”). But cf. NYSE Letter II, at 11 (asserting that it was “untrue” that “spreads
for less-liquid securities are not sensitive to rebate levels” and referring to chart showing
that NYSE American-listed securities, “which are generally less-liquid securities” spent
less average time at the NBBO compared to maker-taker venues).

89

IEX Letter II, at 7.

90

Decimus Letter, at 4-5 (citing Marios Panayides et al., Trading Fees and Intermarket
Competition 26 (Charles A. Dice Ctr. for Research in Fin. Econ., Ohio State Univ.,
Working Paper No. 2017-3, 2017, available at, https://ssrn.com/abstract=2910438).

91

Id. at 5.
30

original). 92 The commenter therefore contended that it was “imperative to include a set of
smaller-cap stocks in the pilot, as the opponents’ claims on the existence of unambiguous harm
to liquidity appear to be exaggerated and driven by preconceived notions.” 93
The Commission believes that the many commenters have, through their analysis and
ultimate disagreement on this issue, emphasized the need for the Pilot to test the effect of
transaction fees and rebates on NMS stocks of all market capitalizations. It is unclear whether or
not changes to fees and rebates would harm smaller capitalization or thinly-traded NMS stocks. 94
As some commenters have noted, it also is possible that the Pilot may have little effect on
smaller-capitalization or thinly-traded NMS stocks or that the Pilot may even improve the
liquidity of such stocks. 95 The Commission also notes that a pilot focused solely on large
capitalization stocks may not produce sufficient data to investigate how changes to transaction
fees and rebates will affect liquidity or capital formation across the market. Because including
smaller-capitalization NMS stocks in the Pilot will produce a more meaningful dataset to support
a broad investigation into the effect of transaction fees and rebates on the full spectrum of NMS
stocks and among different segments of the securities market, the Commission adopts this aspect
of the rule as proposed.
As discussed further below, notwithstanding the decision to include all NMS stocks
regardless of market capitalization, the Commission believes it is appropriate to exclude certain
thinly-traded securities (e.g., securities that trade fewer than 30,000 shares per day), in part
because rebates at that level of trading would be low enough to be unlikely to impact order
92

Id.

93

Id.

94

See, e.g., Proposing Release, supra note 2, at 13065-66, and 13069.

95

See, e.g., notes 88-92 supra and accompanying text.
31

routing behavior and researchers would be unlikely to get sufficient statistical power to analyze
them in isolation at those volume levels. 96
b.

The Inclusion of ETPs

The Commission proposed to select Pilot Securities from among all NMS stocks,
including ETPs. A number of commenters supported including ETPs in the Pilot. Several
commenters noted, for example, that including ETPs “would produce a more inclusive analysis
of rebates and fees across all segments of NMS stocks.” 97 One such commenter believed that
“the benefits from collecting data that informs long-term market structure improvements will
outweigh any potential temporary disadvantage.” 98
On the other hand, a number of commenters expressed concern with including ETPs in
the Pilot. For example, one commenter stated that “[m]any ETP issuers are . . . strongly opposed
to the inclusion of ETPs in the Pilot” and suggested that the Commission had not “sufficiently
explained why it is appropriate to include ETPs in any Pilot.” 99 This commenter noted that
“exchanges have implemented numerous incentive structures designed to promote liquidity and
narrow spreads in ETPs” that could be disrupted by the Pilot, “negatively impact[ing] liquidity
and spreads in ETPs to the detriment of both new and existing investors.” 100 Similarly, another
commenter expected the Pilot to “result in spreads widening for ETPs holding pilot stocks, even
96

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

97

BlackRock Letter, at 1. See also, e.g., Fidelity Letter, at 9.

98

Vanguard Letter, at 2.

99

Cboe Letter I, at 17-18.

100

Id.
32

if ETPs are not included in the pilot, given that fair value calculations rely on underlying
constituent pricing,” and therefore cautioned that “any negative effects of the pilot on transaction
costs could be intensified for ETP investors.” 101 A few commenters “believe[d] that the goals of
the pilot can be achieved without having to include ETPs in the pilot,” because “[t]he effects of
the pilot on stocks will be sufficient to draw conclusions about potential changes to access fee
rules.” 102
The Commission continues to believe that it is important to include ETPs in the Pilot,
because excluding them would hamper the Commission’s ability to gather key data that could be
used to inform future regulatory action in this area. The Commission does not believe it will be
able to draw meaningful conclusions about the impact of changes to transaction fees and rebates
on ETPs by observing the effects of the Pilot on other securities, in part because ETPs have a
unique create-and-redeem process that does not apply to other NMS stocks. 103 Nevertheless,
ETPs are subject to the same rules and fees that apply to all NMS stocks. To the extent that the
Pilot results may inform future policymaking, Pilot data that includes all types of NMS stocks
that would be impacted, including ETPs, will be more useful.

101

State Street Letter, at 3.

102

See, e.g., id.

103

See, e.g., Securities Exchange Act Release No. 75165 (June 12, 2015), 80 FR 34729,
34732 (June 17, 2015) (Request for Comment on Exchange-Traded Products) (discussing
the create-and-redeem process for ETPs); Transcript of the Division of Trading and
Markets’ Roundtable on Market Structure for Thinly-Traded Securities (April 23, 2018),
available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/thinlytraded-securities-rountable-042318-transcript.txt (Panel Three discussing ETPs). In
particular, large volumes in ETPs can be transacted directly with the ETP issuer in
creation units, making the trading center volume in ETPs less relevant to institutional
traders that transact in large size orders.
33

Further, some commenters expressed concern regarding the potential for competitive
effects among certain ETP issuers. As one commenter noted, “if two ETPs with similar
underliers or that track the same index are placed in the two different [T]est [G]roups, the Pilot
would inevitably determine winners and losers.” 104 Another commenter explained that “ETPs
with similar investment strategies are more substitutable than stocks of operating companies,”
such that “market quality metrics likely play a greater role in driving flows to ETPs.” 105 For that
reason, “[i]f competing ETPs are in different test groups – and market quality varies among the
test groups,” the commenter believed that “investors might migrate toward products in the test
groups with better market quality,” thereby “tilt[ing] the playing field in favor of ETPs that
happen to be assigned – at random – to test groups that perform better at the expense of other
products.” 106
While a few commenters discussed which treatment group would be most problematic, 107
many of the commenters took no position on the direction of the presumed competitive impact
and did not speculate about how (or whether) inclusion in specific Pilot Groups would help or
harm ETPs. 108

104

Morgan Stanley Letter, at 3-4. See also Nasdaq Letter I, at 8-9 (stating that the Pilot was
“arbitrary and capricious and not in accordance with law,” in part because the
Commission had “fail[ed] to consider” the competitive effects of placing “ETPs tracking
similar indexes… in different test groups”); Cboe Letter I, at 17.

105

ICI Letter I, at 4 n.8.

106

Id. at 4. See also, e.g., NYSE Letter I, at 7; Nasdaq Letter I, at 8.

107

See, e.g., Credit Suisse Commentary, at 6 (stating that the Pilot could “unintentionally
advantage ETFs in the lower fee group”). But cf. Nasdaq Letter I, at 8 (stating that ETPs
“in the lower rebate groups would find themselves at a competitive disadvantage to their
competitors and may lose market share during the pilot as a result”).

108

See, e.g., SIFMA Letter, at 4-5; Invesco Letter, at 2-3; Morgan Stanley Letter, at 3-4.
34

To address the potential competitive harm, a few of these commenters recommended that
the Commission exclude ETPs from the Pilot altogether, 109 while most recommended that the
Commission select ETPs in a manner that may avoid any potential competitive effects among
similar ETPs, by: (1) rotating all of the Pilot Securities through the various treatment groups, 110
(2) rotating only ETPs through the various treatment groups, 111 or (3) placing in the same Test
Group ETPs tracking similar indexes or holding similar investments. 112
Other commenters criticized these proposed alternatives for selecting ETPs. One
commenter, for example, questioned “whether any of the proposed remedies would address these
concerns effectively or fairly.” 113 Another commenter expressed concern that the suggestions to
place “similar” ETPs in the same Test Group might be too complex to implement, as determining
whether ETPs are “similar” to one another for purposes of Pilot rotation can be extremely

109

See, e.g., Cboe Letter I, at 28; Invesco Letter, at 2-3; State Street Letter, at 3; STA Letter,
at 4.

110

See, e.g., ICI Letter I, at 4-5, 5 n.10 (suggesting that the Commission rotate securities
every three to six months); Oppenheimer Letter, at 3; Angel Letter II, at 3 (suggesting a
quarterly rotation). These commenters did not believe that rotation would “adversely
affect the validity of pilot data” or “impose more than a de minimis implementation
burden or other costs on market participants.” ICI Letter I, at 4. See also Angel Letter II,
at 3. These commenters suggested that “[a]nalysis of individual security characteristics
before and after a rotation to a new group[] could yield relevant and important results.”
Oppenheimer Letter, at 3. See also Angel Letter II, at 3.

111

See, e.g., SIFMA Letter, at 5; State Street Letter, at 4; Healthy Markets Letter II, at 8.

112

SIFMA Letter, at 4. See also, e.g., Nuveen Letter, at 2; BlackRock Letter, at 2; FIA
Letter, at 4; Fidelity Letter, at 9; State Street Letter, at 4; STANY Letter, at 4; Healthy
Markets Letter II, at 8. But cf. Angel Letter II, at 3 (stating that “similar ETFs are
probably the best natural controls for each other, as their underlying portfolios are
virtually identical,” such that “similar ETFs should definitely be in different treatment
groups to increase the power of the pilot”).

113

Schwab Letter, at 3.
35

nuanced. 114 This commenter explained that an “effective classification should take into account
an ETP’s underlying index, portfolio constituents and asset class to provide an appropriate
‘apples to apples’ analysis,” in addition to “factors such as assets under management, spread size
and daily trading volume,” which the commenter believed “would introduce unnecessary
complexity into the Proposal.” 115
The Commission recognizes the concern that securities placed in one treatment group
could be impacted differently than similar securities placed in a different treatment group. While
that effect could occur for any security (e.g., stocks of different operating companies in the same
industry), it could potentially be more prominent for ETPs that may be substantially similar.
Nevertheless, the Commission notes that similar ETPs are not necessarily identical and many
other factors influence investor demand and trading, including expense ratios, trading
commissions, and existing holdings.
The Commission has carefully considered the three alternatives suggested by the
commenters 116 and declines to adopt them. Rotating either (1) all Pilot Securities or (2) only
ETPs would increase complexity and could increase the costs of the Pilot as the Commission,
exchanges, and market participants would need to manage a pilot whose securities change
treatment groups every several months. In particular, a rotation design would be considerably
more complex than the proposed design by, for example, adding more treatment subgroups and
requiring frequent rotation of those subgroups. Given the choice between a simple Pilot design
114

Invesco Letter I, at 2-3. See also, e.g., Healthy Markets Letter II, at 8 (noting that it may
be “difficult to clearly and consistently define ‘similar’ ETPs”).

115

Invesco Letter, at 2-3.

116

The Commission also considered comments providing suggestions relevant to the
implementation of these three alternatives. As discussed above, the Commission is not
adopting the alternatives.
36

with a short duration, on one hand, and a considerably more complex design with a longer
duration, on the other hand, the Commission prefers to adopt this aspect of the rule as proposed.
Compared to the alternative designs suggested by some commenters, the proposal results in a
short narrowly drawn pilot with fewer complexities and burdens, which is an outcome supported
by many commenters. 117
The Commission also considered the suggestion to group ETPs with similar underlying
holdings into the same treatment group. While this suggestion involves slightly less ongoing
complexity than rotating securities during the Pilot, the Commission declines to adopt this
suggestion because it introduces its own complexity in that categorizing ETPs according to their
underlying holdings (and potentially other characteristics) involves the exercise of subjective
judgment. In addition, grouping similar ETPs can negatively impact the representativeness of
the different treatment groups, particularly if all of the similar ETPs are similar in volume, price,
and market capitalization. The Commission believes it may learn more from a study that
compares how different pricing regimes affect similarly-situated ETPs, whereas keeping similar
ETPs in the same treatment groups could reduce the quality and usefulness of Pilot’s results by
inhibiting the ability of researchers to compare treatment groups. While the potential exists that
similar ETPs in different Pilot treatment groups might trade differently during the Pilot, it is not
certain – and commenters held divergent views concerning – whether and to what extent the
Pilot would be a contributing factor. Whether the absence of rebates or lower fees help or hurt
trading in similar ETPs is far from certain, and whether investors would base trading decisions
on those distinctions is unclear. Excluding ETPs to avoid speculative harm would, however,

117

See Section II.D.2 (discussing the duration of the Pilot) and Section II.C.5. through 6.
(discussing the number of stocks to be included in the Pilot) infra.
37

decidedly reduce the utility of the Pilot’s results to inform future policy making. Therefore, the
Commission has determined not to adopt a requirement to rotate securities or to group like ETPs.
For these reasons, the Commission adopts the rule as proposed to include ETPs in the Pilot.
c.

The Inclusion of Canadian Interlisted Stocks

In the Proposal, the Commission requested comment on the selection criteria and whether
the Commission should consider inclusion or exclusion of certain stocks from the Pilot sample
set. 118 In response, several commenters discussed the inclusion of Canadian interlisted stocks in
the Pilot and recommended that the Commission coordinate with Canadian securities regulators
to avoid altering the trading dynamics between Canada and the U.S. in those securities. 119 For
example, one commenter was “concerned that the inclusion of Canadian interlisted stocks in
either one of the reduced access fee or no rebate test groups may materially impact order flow by
encouraging transactions to move away from U.S. exchanges and on to Canadian exchanges.” 120
Other commenters suggested that the Commission coordinate with the Canadian Securities

118

See Proposing Release, supra note 2, at 13019 (Questions #5 and 8). See also id. at
13013 n.46 (noting the receipt of a letter from the Canadian Security Traders Association
proposing a cross-border study on the effect of rebates on market quality in conjunction
with the Canadian Securities Administrators).

119

See, e.g., Fidelity Letter, at 8; OMERS Letter, at 1; FIA Letter, at 4; Healthy Markets
Letter I, at 35; STA Letter, at 5. Canadian interlisted stocks are stocks of Canada-based
companies that are primarily listed on a Canadian exchange (generally the Toronto Stock
Exchange), but that choose to also dually-list on a U.S. exchange. See
https://www.tsx.com/trading/toronto-stock-exchange/fee-schedule/ni-23-101 (for a
quarterly list of approximately 187 interlisted securities published by the Toronto Stock
Exchange featuring stocks that are listed on the Toronto Stock Exchange or the TSX
Venture Exchange).

120

FIA Letter, at 4. See also Fidelity Letter, at 8.
38

Administrators to avoid “dramatic differences in the trading economics on inter-listed stocks
between Canadian and U.S. markets.” 121
The Commission also received a comment letter from the academics retained by the
Canadian Securities Administrators (“CSA”) to assist with planning, conducting, and analyzing a
Canadian transaction fee pilot (“Canadian Pilot”). 122 According to the CSA researchers, the
Canadian Pilot likely will propose that, for approximately 180 interlisted stocks, 90 of them
would be included in a no-rebate test group with the remaining 90 placed in a control group. 123
In their letter, the CSA researchers requested that the Commission’s Pilot treat interlisted stocks
similarly to their Canadian Pilot proposal – i.e., that both pilots place the same 90 interlisted
stocks into their respective no-rebate group and place the other 90 stocks into their respective
control group. 124 By doing so, the CSA researchers believe that both pilots will avoid
confounding the analysis for each respective pilot with respect to interlisted stocks because
differences in fees and rebates otherwise could incentivize shifts in cross-border routing. 125
The Commission agrees with the CSA researchers and believes that it is appropriate to
coordinate with the CSA on a transaction fee pilot in order to avoid the potential for distortionary
effects between U.S. and Canadian markets if rebates in the “no-rebate” interlisted stocks
continue to be allowed on one country’s exchanges but not the other.

121

See, e.g., STA Letter, at 5.

122

See CSA Letter. The preliminary details of the pilot contemplated by the CSA, as
reflected in the CSA Letter, were not publicly available prior to the Proposing Release.

123

Id. at 1.

124

Id. at 2.

125

Id. at 1-2.
39

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

In the event that the Canadian pilot does not go forward or does not commence
simultaneously with the Commission’s Pilot, interlisted stocks will be placed at the
Pilot’s outset into the Control Group. Placing interlisted stocks in the Control Group will
preserve the status quo for interlisted stocks and avoid altering the trading dynamics in
them between U.S. and Canadian exchanges, which will avoid adversely impacting Test
Groups 1 and 2 with respect to those stocks. If the Canadian pilot does go forward, but
the interlisted stocks that will be included in its no-rebate test group are not known by the
Commission at the time the Commission issues the initial List of Pilot Securities, the
Commission may separately issue a subsequent list identifying the interlisted stocks that
will be appended to Test Group 2 or the Control Group for the remainder of the Pilot.

127

See, e.g., Proposing Release, supra note 2, at 13024 (discussing the design of proposed
Test Group 3 and the prohibition in Linked Pricing to support the integrity of a no-rebate
test group). See also CSA Letter, at 1 (expressing concern that “the results of the
Canadian Pilot may be statistically and economically inconclusive” without coordination
with the Pilot).

128

See CSA Letter, at 1.
40

d.

The Inclusion of Other Types of NMS Stocks

A few commenters addressed the inclusion of other types of NMS stocks, such as
American Depositary Receipts (“ADRs”), rights, and warrants. One commenter supported the
proposed broad scope of Pilot Securities and believed that “analysis of . . . ADRs could provide
additional insight into the effect rebates and fees have on liquidity, spreads and the overall trade
experience.” 129 Another commenter objected to the Commission’s proposal to include rights and
warrants in the Pilot, but did not explain the basis for its objection. 130 As noted above, however,
most commenters expressed general support for a Pilot that includes all NMS stocks. 131
The Commission continues to believe that it is appropriate to select Pilot Securities from
among the overall universe of NMS stocks. Accordingly, the Commission will include all types
of NMS stocks in the Pilot, subject to the selection criteria described below. The Commission
believes this is appropriate because exchange fees and rebates apply to all NMS stocks, as does
the fee cap under Rule 610(c). Aligning the scope of the Pilot with the scope of equities fees and
the equities fee cap will best facilitate analysis of the impact of changes to transaction fees and
rebates on different segments of the securities market. Excluding from its scope any categories
of NMS stocks would deprive the Commission of data to inform future regulatory action
regarding this segment of the market. For those reasons, the Commission adopts this aspect of
the Pilot as proposed, subject to the selection methodology described below in Section II.C.

129

Oppenheimer Letter, at 3.

130

TD Ameritrade Letter, at 4.

131

See, e.g., Vanguard Letter, at 2; Joint Pension Plan Letter, at 2; Oppenheimer Letter, at 2.
41

4.

The Ability of Issuers to Opt Out of the Pilot

The Commission solicited comment as to whether issuers should be allowed to request
that their securities not be included in one of the Pilot’s Test Groups (i.e., “opt out”) and the
potential impact that such an approach might have on the extent and quality of the data collected
by the Pilot. 132
Several commenters argued that issuers should be permitted to opt out of participation in
the Pilot based on process concerns. For example, one commenter’s “largest concern [was] that
the genesis of the proposal . . . deliberately excluded issuer representation” by “excluding the
NYSE and Nasdaq from participation on the [EMSAC].”133 This commenter asserted that the
“exclusion . . . from participation in the pre-proposal discussions renders the ‘Opt Out’ option
absolutely essential.” 134 Another commenter suggested that the Commission could address such
concerns by “conven[ing] a summit for issuers and perhaps [creating] a series of webcasts . . . to
explain the purpose of the test,” as well as by “form[ing] an Issuer Advisory Committee that can
weigh data and let companies opt into or out of a test.” 135
132

See Proposing Release, supra note 2, at 13019.

133

Issuer Network Letter I, at 2 (emphasis omitted) and Issuer Network Letter II. See also
Cboe Letter I, at 14-15 (criticizing the Pilot as “based on recommendations made by a
committee that, however well-meaning, was flawed in its construction” because it lacked
“exchange or issuer representation”); Home Depot Letter, at 2 (stating that the EMSAC
“did not include any input from issuers or issuer advocates . . . like NYSE and Nasdaq”
and that it was “difficult” for “issuers . . . to understand how this Pilot could be
implemented without input from the issuers . . . it will directly impact”); ModernIR Email, at 1 (stating that a “study . . . crafted without input or choice for issuers . . . would
be an inexcusable travesty”).

134

Issuer Network Letter I, at 2, 7 (emphasis omitted).

135

ModernIR E-mail, at 1. See also Issuer Network Letter I, at 7 (suggesting that the
Commission “[p]lace the Access Fee Pilot on hold for 90 days while [it] gathers a Blue
Ribbon Panel . . . of a dozen or so NYSE and Nasdaq listed company financial executives
so that we might conduct a comprehensive review” of the Pilot (emphasis omitted)).
42

The Commission’s proposal was subject to a full notice-and-comment rulemaking
process during which the Commission received a large number of comments from the public,
including issuers and their listing exchanges. While the EMSAC recommendation was one of
many inputs that informed the Commission’s development of the Pilot, the Commission’s Pilot
differs substantially from EMSAC’s recommendation as numerous commenters have
recognized. 136 Accordingly, the Commission believes that issuers, as well as other market
participants, have had ample opportunity to participate in the consideration of the Commission’s
proposal for the Pilot.
Other commenters supported opt out based on specific concerns surrounding the potential
impact of the Pilot. A number of these commenters were listed company issuers that expressed
concern about how the Pilot would affect trading in their securities. 137 Commenters supporting
opt out emphasized the importance of giving issuers the ability to avoid potential costs and
136

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

137

See, e.g., P&G Letter, at 1; McDermott Letter, at 1; Level Brands Letter, at 1; ACCO
Letter, at 1; NorthWestern Letter, at 1-2; Ethan Allen Letter, at 1; Unitil Letter, at 1;
Johnson Letter, at 2; Sensient Letter, at 2; Hawaii Letter, at 1; Cott Letter, at 1; Leaf
Letter, at 1-2; First Majestic Letter, at 1; SIFCO Letter, at 2; Weingarten Letter, at 1;
Ennis Letter, at 2; Trex Letter, at 1; Genesis Letter, at 1; Tredegar Letter, at 1; Energizer
Letter, at 1; ProAssurance Letter, at 1; Home Depot Letter, at 1; SMP Letter, at 2;
Halliburton Letter, at 1; Era Letter, at 2; Natural Grocers Letter, at 2; Newpark Letter, at
2; Knight-Swift Letter, at 2; Farmer Mac Letter, at 1; BancorpSouth Letter, at 1-2;
Haverty Letter, at 1; Ampco-Pittsburgh Letter, at 2; Anixter Letter, at 2; Avangrid Letter,
at 2; NHC Letter, at 1; HP Letter, at 2; Curtiss-Wright Letter, at 2; Murphy Letter, at 1. .
43

uncertainty resulting from the Pilot.138 For example, one commenter believed that the Pilot
could “caus[e] spreads to widen in securities selected for the test groups,” such that “companies
conducting a repurchase program or secondary offering would incur higher costs,” and the
Commission received a number of comment letters from listed issuers specifically referencing
that point and echoing the same concerns. 139 This commenter further argued that “the Proposal
would also harm the ability of issuers whose securities are subject to access fee caps to compete”
with issuers not subject to the Pilot’s exchange fee restrictions. 140
Many other commenters opposed opt out. 141 Some of these commenters dismissed the
concerns described above regarding the potential costs on issuers whose stock is included in the
Pilot.142 For example, one commenter disagreed with the notion that “rebates are needed to
incentivize market makers to quote tight spreads” in the stocks of certain issuers who had
submitted comment letters. 143 This commenter explained that the “fifth of a cent rebate is not
incentivizing a tight bid-ask spread in these issuers’ stocks,” because that rebate represents an
138

See, e.g., Cboe Letter I, at 29; ASA Letter, at 4-5.

139

See Addendum to Healthy Markets Letter II, at 11 (attaching an e-mail from NYSE to its
listed companies). See also note 137 supra.

140

See NYSE Letter I, at 4. In its letter, the commenter mentioned analysis it performed on
NYSE-listed issuer secondary offerings in 2017 that suggested that issuers “with average
spreads under 20 basis points paid an average discount to market price of 2.6%” and that
“companies with spreads above 20 basis points had to discount their offerings nearly
twice as much, to 4.9%.” NYSE Letter I, at 14 n.51. It is unclear, however, whether
wider spreads cause larger offering discounts or whether they are simply correlated with
them. For example, smaller companies that are less well capitalized may have a wider
spread compared to a larger, better capitalized company, which could result in spreads
being correlated with a company’s cost of capital (i.e., wider spreads could be a reflection
of a company’s relative credit risk and cost of capital, not a driver of it).

141

See, e.g., Joint Asset Managers Letter, at 2; Citi Letter, at 5; AJO Letter, at 2; Lipson
Letter, at 1.

142

See supra notes 138-140 and accompanying text.

143

Themis Trading Letter II, at 3.
44

insignificant portion of their average spread. 144 Another commenter disagreed with the
suggestion that the Pilot would have a negative impact on issuers, arguing that such position
“directly contradicts the public support by investors for the Pilot.” 145 This commenter opined
that the “fundamental forces of supply and demand that affect . . . the relative attractiveness of
individual public company stocks will be in no way impaired if . . . exchanges are precluded
from paying a rebate, or required to accept a lower access fee.” 146
Other commenters asserted that opt out would “adversely affect the quality of the data
and the credibility of the Pilot,” which could weaken the findings that could be drawn from it. 147
One commenter explained that opt out “would undercut the ability of economists to draw sharp
inferences based upon performance differences between the treated and control stocks” and that
the “non-random character of ‘opt outs’” could “disproportionately reflect firms that were
especially responsive to feedback from the listing exchange or could disproportionately reflect
less liquid stocks, which would be especially important for the access fee pilot.” 148

144

Id. at 2-3.

145

IEX Letter II, at 3. See also, e.g., Joint Pension Plan Letter, at 2 (stating that the “asset
manager / asset owner community is heavily supportive of such a pilot,” which should
“provide the necessary confidence to all public companies to be included”); ICI Letter II,
at 2 (“market structure is not a primary consideration guiding the investment decisions of
long-term investors”); Joint Asset Managers Letter, at 2; Healthy Markets Letter II, at 2.
But cf. NYSE Letter II, at 4 (stating that “many buy-side institutions” supporting the Pilot
“are willing to experiment with real-world public companies and end investors to ‘get the
data,’ even if the expected impact of limiting or eliminating rebates will be a
deterioration of the public quote”).

146

IEX Letter II, at 3-4.

147

RBC Letter I, at 6. See also, e.g., LATEC Letter, at 2; Joint Pension Plan Letter, at 2;
MFS Letter, at 3; Clearpool Letter, at 8.

148

Spatt Letter, at 3. See also, e.g., Healthy Markets Letter I, at 12; CII Letter, at 4.
45

One listed issuer, which is a large investment manager, “welcome[d] the opportunity for
[its] stock to be included in the Pilot, with the ultimate goal of improving the overall market to
be one where prices can be set by long-term investors without distortion from speculative market
participants.” 149 This issuer did not “expect that a reduction or outright removal of rebates will
have any significant or harmful effects on the quality of prices displayed in the public lit market,
interfere with genuine liquidity and price formation, or negatively impact [its] stock’s trading
volume, spread or displayed size.” 150
Finally, two commenters further argued that opt out would be inconsistent with the
existing market structure. One of these commenters observed that “[i]ssuers currently have no
say over exchanges’ policies” and that “exchanges that modify their access fees dozens of times
a year do not survey issuers or permit them to opt-out of these fee changes or creation of order
types.” 151 The other commenter opined that opt out “may set an unfortunate precedent that
would allow an issuer to pick and choose among those aspects of the National Market System
that it likes while rejecting other aspects that it may find less attractive to it, but [which] are
necessary to the smooth functioning of [the] United States public equity markets.” 152
After careful consideration, the Commission does not believe that issuers should be
permitted to opt out of participation in the Pilot. While the Commission understands issuers’
concerns, allowing issuers to opt out could undermine the representativeness of the Pilot’s
149

T. Rowe Price Letter, at 4. The issuer explained that its stock, “on average, trades about
1.5 million shares daily, with an average displayed size of 200 shares and a spread of
nearly $0.07,” with “40% of [its] average daily volume occur[ring] as displayed on
exchange volume.” Id. at 4-5.

150

Id. at 5.

151

Better Markets Letter, at 7.

152

MFS Letter, at 3.
46

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

Pilot Design
1.

Need for a Pilot

As a threshold issue, commenters disagreed about whether the Commission should
conduct any kind of pilot study of transaction fees and rebates. One commenter, for example,
characterized the proposed Pilot as “a solution in search of problem” and claimed that the
Commission “has provided no evidence that existing fee practices are harming investors or

153

See, e.g., Short Sale Position and Transaction Reporting, Study by the Staff of the
Division of Economic and Risk Analysis, June 5, 2014, at 66-67 (discussing selection
bias in the context of an “opt in” voluntary pilot design).
47

interfering with fair competition.” 154 Another commenter believed that the Pilot was
unnecessary, but for the opposite reason – namely, that there is ample evidence of the negative
effects of exchange rebate pricing models, such that the Commission should instead take
immediate action to ban them. 155
Most commenters, however, thought a Commission-led pilot was necessary and
supported the Commission’s proposal to conduct one. 156 These supportive commenters observed
that “market participants have heavily debated the effects that transaction-based fees, particularly
access fees, and rebates may have on the equity markets” and “commend[ed] the SEC for
advancing this discussion through a time-limited, empirical study.” 157 Some of those
commenters thought a Commission-led pilot was necessary because competitive pressures
154

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

155

See Larry Harris Letter, at 9-10.

156

See, e.g., Decimus Letter, at 4 (stating that the Pilot “would be valuable in generating
concrete information and more preferable to back-of-the-envelope calculations based on
questionable assumptions”); Wellington Letter, at 1 (stating that the Commission could
only “draw[] definitive conclusions on the impact of existing pricing models . . . through
an actual implementation” of the Pilot); Verret Letter I, at 4 (stating that the Commission
“appears to have considered adoption of a mandatory rule to reshape market structure,
and determined instead to take the more deliberative and less costly approach of an initial
pilot program to generate more data from which it can determine a path forward on
market structure reform”); IAC Recommendation, at 2; MFA Letter, at 2; ICI Letter I, at
1-2; RBC Letter I, at 2; Joint Asset Managers Letter, at 2; Clark-Joseph Letter, at 1;
Babelfish Letter, at 3; State Street Letter, at 2; Themis Trading Letter II, at 3; IEX Letter
I, at 2-3.

157

Fidelity Letter, at 2. See also, e.g., Brandes Letter, at 1 (expressing support for the Pilot
and the “Commission’s effort to shed light into a subject of heated debate among market
participants”); Barnard Letter, at 1 (stating that the Pilot was “important, as historically
there are many views on this topic, but a paucity of credible data from which to draw
conclusions”); Angel Letter II, at 1 (stating that “various commenters have wildly
differing perspectives on what will happen under the pilot,” which is “strong evidence as
to why the pilot is necessary”).
48

among exchanges may serve as a barrier to market-led reforms in this area. 158 The Commission
agrees with the commenters that stated that the Pilot is necessary because, as reflected in the
comments discussed above, 159 there is strong disagreement about the impact of exchange feeand-rebate pricing models but a lack of data to study the issue. The Commission believes it is
important to further investigate these impacts. 160
2.

Pilot Design

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

158

See, e.g., T. Rowe Price Letter, at 3; Clearpool Letter, at 2. The Commission notes that
Nasdaq conducted an independent access fee experiment in 2015, but the limited nature
of that experiment makes it difficult to draw conclusions from the data gathered by
Nasdaq. See Proposing Release, supra note 2, at 13011-12. See also, e.g., IEX Letter III,
at 6 (“Nasdaq’s experiment and its outcomes aren’t a perfect proxy for what is likely to
happen in the Transaction Fee Pilot. That experiment was done unilaterally and only in
highly-liquid securities.”); Larry Harris Letter, at 9 (noting that Nasdaq’s “experimental
fee reduction did not occur at all trading venues that traded the subject securities,”
demonstrating that “regulatory action is necessary to establish a common pricing standard
because market forces alone will not do it”).

159

See Section II.A.2 for a discussion of these comments.

160

See also Section II.A.2 for a discussion of these impacts.

161

See Proposing Release, supra note 2, at 13019. The Commission notes that the proposed
language in Rule 610T(b)(2)(ii)(E) has been modified slightly. As proposed, Rule
610T(b)(2)(ii)(E) was labeled as “Test Group.” As adopted, the label “Pilot Group” is
being substituted for the phrase “Test Group” to provide additional clarity.

162

See id.
49

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

Fee Cap Test
Group 1

Fee Cap Test
Group 2

No Rebate
Test Group

Control
Group

Proposed

Adopted

1,000 NMS stocks

730 NMS stocks

$0.0015 fee cap for removing &
providing displayed liquidity

$0.0010 fee cap for
removing & providing
displayed liquidity

1,000 NMS stocks
$0.0005 fee cap for removing &
providing displayed liquidity

Not adopted

1,000 NMS stocks

730 NMS stocks
(plus appended Canadian
interlisted stocks)

Rebates and Linked Pricing
Prohibited for removing &
providing displayed &
undisplayed liquidity (except for
specified market maker activity)

No change

Rule 610(c) cap applies

No change

Pilot Securities not in a Test
Group

No change

50

3.

No Overlap with Tick Size Pilot

While the Commission’s proposed Pilot design took into consideration the possibility that
the Pilot could have been adopted before the end of the Tick Size Pilot Program, the Commission
also noted that the overlap design would not be necessary if that were not the case. 163
A few commenters opined on the potential overlap between the proposed Pilot and the
Tick Size Pilot, disagreeing on whether overlap would be appropriate. 164 However, because the
Tick Size Pilot ended on September 28, 2018, there no longer is any need for the Transaction Fee
Pilot to control for potential data distortions that could have otherwise resulted from the
simultaneous operation of the two pilot programs. Accordingly, the Commission is not adopting
the proposed Tick Size Pilot overlap design.
Relatedly, some commenters discussed whether there should be a delay between the end
of the Tick Size Pilot and the start of the proposed Transaction Fee Pilot, with commenters
disagreeing on that point. For example, one commenter thought a delay would be appropriate to
allow markets to normalize before conducting a subsequent pilot 165 while another commenter
thought markets would revert to their baseline state extremely quickly after the Tick Size Pilot
ends. 166
The Tick Size Pilot concluded, but post-pilot data continues to be collected until April 2,
2019. However, the Transaction Fee Pilot is subject to a one-month implementation period
163

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

164

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

165

See Cboe Letter I, at 30.

166

See Healthy Markets Letter I, at 14.
51

followed by a six-month pre-Pilot Period. Accordingly, the core of the Transaction Fee Pilot
will not commence until after the post-pilot period for the Tick Size Pilot ends. By then, the
Commission believes that the markets will have had sufficient time to normalize and any overlap
between the Transaction Fee Pilot’s pre-Pilot Period and the Tick Size Pilot’s post-pilot period
will be minimal. In both cases, the respective pre- and post-pilot periods are collecting
benchmark data on the status quo. As such, the overlap between them should not compromise
either dataset.
Finally, two commenters recommended that the Commission analyze the Tick Size Pilot
data prior to proceeding with the Transaction Fee Pilot.167 While preliminary results from the
Tick Size Pilot have been made public, the two pilots are sufficiently dissimilar that the
Commission sees no reason for delay. The Tick Size Pilot tested a wider minimum increment
(from one cent to five cents) for smaller-capitalization stocks, whereas the Transaction Fee Pilot
will test a lower rate for the Rule 610(c) fee cap and a prohibition on exchange rebates (which
typically are less than one-third of a penny) for stocks of all market capitalizations. Accordingly,
findings from the Tick Size Pilot are not relevant to the design of the Transaction Fee Pilot.
4.

Stratified Selection of Pilot Securities

The Commission proposed to select the stocks to be included in each of the Test Groups
and the Control Group through stratified sampling in a manner that permits comparisons between
each Test Group and the Control Group. 168
One commenter expressed support for the proposed approach to stratification and noted
that it was “fundamental to the ability to undertake causal inference in this setting . . . .” 169 In
167

See Cboe Letter I, at 29; Nasdaq Letter I, at 4.

168

See Proposing Release, supra note 2, at 13019.
52

contrast, a number of public company commenters expressed concern that stratified sampling
could result in their stocks being placed in a different Test Group from other similar stocks in
their “peer group,” which could complicate comparisons of their stock’s performance against
peer-group metrics. 170 As discussed above, those commenters supported allowing companies to
“opt out” of the Pilot, which could impact the stratification. 171 Further, as discussed above, some
commenters recommended that the Commission select ETPs for the Pilot in a manner that may
avoid any potential competitive effects among similar ETPs, either by: (1) rotating all of the Pilot
Securities through the various treatment groups, (2) rotating only ETPs through the various
treatment groups, or (3) grouping ETPs with similar underlying holdings into the same treatment
group. 172
While the Commission understands the concerns of these commenters, as discussed
above in Section II.B, allowing issuers to opt out of the Pilot could undermine the
representativeness of the Pilot’s treatment groups and bias the Pilot’s results. Further, also as
discussed above in Section II.B, rotating ETPs would require the Commission to implement a
more complex and lengthy design in order to maintain sufficient statistical power, both of which
would increase the costs and complexity of the Pilot – a result viewed unfavorably by most
commenters. Finally, grouping similar ETPs also could negatively impact the stratification of
the different treatment groups, particularly if all of the similar ETPs are similar in volume, price,
and market capitalization. In turn, this could reduce the quality and usefulness of Pilot’s results

169

See Spatt Letter, at 3.

170

See, e.g., Mastercard Letter, at 2; Avangrid Letter, at 2; Energizer Letter, at 1.

171

See supra Section III.C.4.

172

See supra Section III.C.3.b.
53

by inhibiting the ability of researchers to compare treatment groups. In order to ensure that the
Pilot Securities are selected in a way that permits researchers to investigate causal connections, it
is imperative to stratify the Test Groups so that researchers can study the effects of changes in
fees and rebates within each Test Group, between Test Groups, and between a Test Group and
the Control Group. In permitting this type of analysis, the Pilot should be better able to inform
future policy considerations to improve the operation of the national market system to the benefit
of investors and issuers alike. Accordingly, the Commission is adopting the stratified sampling
construct as proposed.
5.

Number of NMS Stocks Included in Each Test Group

The Commission proposed to include 1,000 Pilot Securities in each Test Group (i.e.,
3,000 total across three Test Groups) with the remainder to be included in the Control Group in
order to be representative of the overall population of NMS stocks and provide sufficient
statistical power to identify differences between the Test Groups with respect to common stocks
and ETPs. 173
Several commenters supported including 1,000 stocks in each Test Group, believing that
including 1,000 stocks in each Test Group would facilitate analysis of transaction fees and
rebates on a broad cross section of different types of NMS stocks and generate statistically
significant conclusions. 174

173

See Proposing Release, supra note 2, at 13019-20.

174

See Brandes Letter, at 2; Themis Trading Letter I, at 3; Oppenheimer Letter, at 2; Spatt
Letter, at 2; IEX Letter I, at 5; Verret Letter I, at 4; AGF Letter, at 2; MFA Letter, at 3.
54

Many commenters, however, thought that the Pilot should include fewer securities in
each Test Group. 175 Several of these commenters believed the Pilot could obtain statistically
significant data even with fewer stocks in each Test Group. 176 Other commenters urged the
Commission to reduce the number of securities included in the Test Groups in order to reduce
costs associated with the Pilot.177 Several commenters argued that the Pilot was effectively a
large scale change to the current equity market structure and that it would be more appropriate
for a pilot program to apply to a smaller percentage of the universe of NMS stocks. 178 Further to
this point, several commenters believed that a large Pilot may be difficult to unwind, with one
commenter stating that an immediate return to current transaction fee and rebate dynamics for
stocks included in the Test Groups “could prove to be more disruptive to market participants and
overall market quality than the actual implementation of the Pilot.” 179 Some commenters also
believed the Pilot would negatively impact trading in the stocks placed in certain Test Groups,
such as by adversely impacting spreads, and accordingly recommended including fewer stocks
so as to limit potential negative consequences. 180 Of the commenters that advocated for reducing
175

See Magma Letter, at 3; FIA Letter, at 4; SIFMA Letter, at 4; Schwab Letter, at 2;
Fidelity Letter, at 8-9; Citadel Letter, at 2; State Street Letter, at 3; Citi Letter, at 5;
Clearpool Letter, at 7; TD Ameritrade Letter, at 1; STA Letter, at 3-4; STANY Letter, at
3; Nasdaq Letter I, at 10; Cboe Letter I, at 27; T. Rowe Price Letter, at 4; Mastercard
Letter, at 2; NorthWestern Letter, at 1; Energizer Letter, at 1; Era Letter, at 1; KnightSwift Letter, at 2; ASA Letter, at 4-5.

176

See Magma Letter, at 3; Schwab Letter, at 2; Fidelity Letter, at 8-9; Clearpool Letter, at
7; STA Letter, at 3-4; Cboe Letter I, at 27.

177

See SIFMA Letter, at 4; Schwab Letter, at 2; Citadel Letter, at 6; Citi Letter, at 5.

178

See Magma Letter, at 3; FIA Letter, at 4; Citi Letter, at 5; Clearpool Letter, at 7; Nasdaq
Letter I, at 10.

179

See Citadel Letter, at 6. See also SIFMA Letter, at 4; Citi Letter, at 5.

180

See STA Letter, at 3; STANY Letter, at 3; State Street Letter, at 3; TD Ameritrade Letter,
at 1, 3; Mastercard Letter, at 2.
55

the number of Pilot Securities in each Test Group, some suggested alternative amounts to be
included. Several commenters recommended including 100 stocks in each Test Group. 181 A few
others suggested that each Test Group include 500 stocks. 182 One commenter recommended “a
more tailored Pilot that includes the 225 most heavily traded names, 225 mid-cap stocks, 225
small caps and 225 ETFs would provide statistically significant data without burdening a
material portion of the market.” 183 The Commission has carefully considered the concerns
expressed by commenters regarding the size of the Pilot’s Test Groups. 184 As previously
discussed, the Commission cannot know in advance the full effects of the Pilot, whether they be
positive or negative. Indeed, commenters expressed a variety of contradicting viewpoints and
estimations about the potential impacts of the Pilot on the execution quality and market quality
of NMS stocks that would be included in the Test Groups. 185
Given this uncertainty, it is crucial that the Pilot be able to produce results that are
capable of facilitating an empirical review of the effect of the prevailing fee structures on the
equities markets. To achieve this purpose, the Pilot needs to generate a sufficient number of
observations over its one-year duration to obtain sufficient statistical power to identify
differences among the Test Groups with respect to common stocks and ETPs, thereby permitting
researchers to investigate causal connections using economic analysis capable of finding
statistical significance. Statistical power refers to the ability for statistical tests to identify

181

See FIA Letter, at 4; Schwab Letter, at 2; State Street Letter, at 3; STANY Letter, at 3;
Era Letter, at 1; Cboe Letter I, at 27.

182

See SIFMA Letter, at 4; Citi Letter, at 5; STA Letter, at 3.

183

See T. Rowe Price Letter, at 4.

184

See supra notes 175-183 and accompanying text.

185

See, e.g., supra notes 75-93 and accompanying text.
56

differences across samples when those differences are indeed significant and broadly is derived
from the number of observations during a study. In other words, statistical power can be present
when observing a limited number of subjects over a long period of time or a large number of
subjects over a shorter period of time. Because the Commission desires a shorter duration for the
Pilot, it therefore needs to have sufficient observable data points over the shorter pilot duration.
Accordingly, if the Pilot does not contain enough securities, it may be incapable of producing
statistically sound results and will not allow researchers to analyze differences in securities.
With statistical power and a sufficiently large sample size, researchers can conduct
analysis of what impact (1) reductions in fees and (2) reductions in or prohibitions on rebates
might have, if any, on stocks depending on their trading volume or market capitalization. A pilot
design that would not provide this meaningful data about the impact that billions of dollars of
exchange fees and rebates may have on the markets and market structure, would not achieve the
Commission’s goal of conducting a pilot capable of facilitating an objective empirical view to
advance that debate.
To achieve these aims, using econometric methods designed to allow researchers to
detect a 10% change with a standard confidence level of 95%, the Commission has determined
that 730 securities in each Test Group are needed to enable the Pilot to produce statistically
meaningful results capable of informing the Commission’s future policymaking efforts. The
Commission believes that a 10% change in behavior represents an economically meaningful
change that will facilitate analysis of the Pilot’s results, and therefore is an appropriate standard

57

for the Pilot. 186 The determination to include 730 securities in each Test Group accounted for
the need to obtain statistically significant results among stocks of various liquidity profiles as
well as ETPs. While the number of NMS stocks that will be included in each Test Group will be
larger than what was recommended by some commenters, the Commission believes that a
smaller number of stocks may not have sufficient statistical power given the Pilot’s proposed
duration. 187
Furthermore, in response to comments questioning why the Pilot included more securities
than did the Tick Size Pilot, the Commission notes that the Tick Size Pilot featured 400
corporate stocks for each of its Test Groups. 188 Importantly, the Tick Size Pilot did not contain
ETPs or large-cap stocks. In comparison, the Transaction Fee Pilot will contain ETPs and largecap stocks. Accordingly, in light of the significantly higher number of securities eligible for
inclusion, the Transaction Fee Pilot needs to include considerably more Pilot Securities than did
the Tick Size Pilot, while continuing to achieve the same statistical power for each of those
groups of securities.
Moreover, while several commenters either implicitly or explicitly referenced the
EMSAC recommendation to include 100 stocks in each Test Group, EMSAC’s recommendation
differs substantially from the Commission’s proposal. Notably, the EMSAC recommendation
was limited to common stocks with a market capitalization above $3 billion and did not include
186

A confidence level of 95% is a standard accepted confidence level in statistical analyses.
See, e.g., William H. Greene, Econometric Analysis 1033 (Appendix C.6) (6th ed. 2007)
(discussing standard confidence levels in academic research).

187

See also note 695 infra.

188

See, e.g., Citadel Letter, at 6; TD Ameritrade Letter, at 2; Cboe Letter I, at 27. See also
Securities Exchange Act Release No. 74892 (May 6, 2015), 80 FR 27514, 27517 (May
13, 2015) (File No. 4-657) (order approving the National Market System Plan to
Implement a Tick Size Pilot Program).
58

ETPs, mid- and small-cap stocks, or other types of NMS stocks. In order for the Pilot to permit a
broader empirical review of the impact of transaction fees and rebates on order routing,
execution quality, and market quality, it is critical that the sample size be representative of the
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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Abf1e9f51d7eae5f6. Public record. Not legal advice.