# Joint Industry Plans; Order Approving the National Market System Plan To Implement a Tick Size Pilot Program by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, for a Two-Year Period > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/fr%3A2015-11425 ## Record - **Collection:** Federal Register - **Document type:** Notice - **Published:** May 13, 2015 - **Citation:** 80 FR 27514 ## Text SECURITIES AND EXCHANGE COMMISSION [Release No. 34-74892; File No. 4-657] Joint Industry Plans; Order Approving the National Market System Plan To Implement a Tick Size Pilot Program by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, for a Two-Year Period May 6, 2015. I. Introduction On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc. (“FINRA”), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., (collectively “SROs” or “Participants”), filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 11A of the Securities Exchange Act of 1934 (“Act”), 1 and Rule 608 thereunder, 2 a proposed national market system (“NMS”) Plan to Implement a Tick Size Pilot Program on a one-year basis (“NMS plan”). 3 The Participants filed the NMS plan to comply with an order issued by the Commission on June 24, 2014 (“June 2014 Order”). 4 The NMS plan, which included the details of Participants' proposal of the Tick Size Pilot Program (“Tick Size Pilot”), was published for comment in the Federal Register on November 7, 2014. 5 The Commission received 77 comment letters in response to the NMS plan. 6 On February 26, 2015, the Commission extended the deadline for Commission action on the NMS plan and designated May 6, 2015 as the new date by which the Commission would be required to take action. 7 This order approves the NMS plan, as modified by the Commission, for a two-year period. A copy of the NMS plan, as modified by the Commission, is attached as Exhibit A hereto. 1 15 U.S.C. 78k-1. 2 17 CFR 242.608. 3 See Letter from Brendon J. Weiss, Vice President, Intercontinental Exchange, Inc., to Secretary, Commission, dated August 25, 2014. 4 See Securities Exchange Act Release No. 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014). 5 See Securities and Exchange Act Release No. 73511 (November 3, 2014), 79 FR 66423 (“Notice”). 6 See Letters from John Richardson, dated August 26, 2014 (“Richardson Letter”); Arthur T. Ling, dated August 26, 2014 (“Ling Letter”); Dan Blecha, dated August 26, 2014 (“Blecha Letter”); Tom Sosnoff, dated August 27, 2014 (“Sosnoff Letter”); Michael Choffy, dated August 28, 2014 (“Choffy Letter”); Joseph Runsdorf, dated August 29, 2014 (“Runsdorf Letter”); Tony J. Gagliano, dated September 1, 2014 (“Gagliano Letter I”); Howard L. Greenblatt, dated September 2, 2014 (“Greenblatt Letter”); Ernest Callipari, dated September 2, 2014 (“Callipari Letter”); Ali Bangura, dated September 3, 2014 (“Bangura Letter”); Tony J. Gagliano, dated September 3, 2014 (“Gagliano Letter II”); Theodore R. Lazo, Managing Director and Associate General Counsel of Securities Industry and Financial Markets Association (“SIFMA”), dated September 9, 2014 (“SIFMA Letter I”); John C. Nagel, Managing Director and Sr. Deputy General Counsel of Citadel, LLC, dated September 12, 2014 (“Citadel Letter I”); Christopher Nagy, CEO, and Dave Lauer, President, KOR Group LLC, dated September 15, 2014 (“KOR Letter I”); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel of Managed Funds Association, dated September 20, 2014 (“MFA Letter I”); John Daley, Chairman of the Board and James Toes, President & CEO of Security Traders Association, dated September 23, 2014 (“STA Letter I”); Brian A. Johnson, Executive Director for Research of Committee on Capital Markets Regulation, dated September 26, 2014 (“CMR Letter I”); Jeffrey P. Ricker, dated October 6, 2014 (“Ricker Letter”); David Adorney, Professional Equity Trader, dated November 11, 2014 (“Adorney Letter”); Richard B. Gorelick, CEO of RGM Advisors, LLC, dated November 13, 2014 (“RGM Letter”); Representative Sean P. Duffy, U.S. House of Representatives, dated November 17, 2014 (“Duffy Letter”); Joseph Galinskie, dated November 18, 2014 (“Galinskie Letter”); Tom Quaadman, Vice President, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, dated November 20, 2014 (“CCMC Letter I”); David Shields, Vice Chairman & Co-CEO, Wellington Shields & Co., dated December 2, 2014 (“Wellington Shields Letter”); Dave Weild, Chairman & CEO, IssuWorks, Inc., dated December 3, 2014 (“IssuWorks Letter”); Tim Quast, President, ModernNetworks IR, LLC, dated December 8, 2014 (“ModernNetworks Letter”); Larry Tabb, Founder & CEO, Tabb Group, dated December 10, 2014 (“Tabb Letter”); John Endean, President, American Business Conference, dated December 12, 2014 (“ABC Letter”); Scott Kupor, Managing Partner, Andreessen Horowitz and Jeffrey M. Solomon, CEO Cowen and Company; Equity Capital Formation Task Force, dated December 18, 2014 (“ECFTF Letter”); Eduardo A. Repetto, Co-Chief Executive Officer and Co-Chief Investment Officer, Dimensional Fund Advisors, dated December 18, 2014 (“DFA Letter”); Sal Arnuk and Joseph Saluzzi, Partners and Co-Founders, Themis Trading, LLC, dated December 19, 2014 (“Themis Letter”); Simon D. Yates, CEO, Two Sigma Securities, LLC, dated December 19, 2014 (“Two Sigma Letter”); Mortimer J. Buckley, Managing Director and Chief and Investment Officer, The Vanguard Group, Inc., dated December 19, 2014 (“Vanguard Letter”); Rob Flatley, CEO and Dave Weisberger, MD, Head of Market Structure Analysis, CoreOne Technologies LLC, submitted December 19, 2014 (“CoreOne Letter”); Alan F. Hill, CEO and William K. Jones, Executive Chairman, JonesTrading Institutional Services LLC, dated December 19, 2014 (“JonesTrading Letter”); R. Glenn Hubbard, Co-Chair, John L. Thornton, Co-Chair and Hal S. Scott, Director, Committee on Capital Markets Regulation, dated December 19, 2014 (“CMR Letter II”); John Daley, Chairman of the Board and James Toes, President & CEO, Security Traders Association, dated December 19, 2014 (“STA Letter II”); John McCarthy, General Counsel, KCG Holdings, Inc., dated December 19, 2014 (“KCG Letter”); Douglas A. Cifu, Chief Executive Officer, Virtu Financial, dated December 19, 2014 (“Virtu Letter”); E. Cartier Esham, Executive Vice President, Emerging Companies, Biotechnology Industry Organization, dated December 22, 2014 (“BIO Letter”); Micah Hauptman, Financial Services Counsel, Consumer Federation of America, dated December 22, 2014 (“CFA Letter”); Bobby Franklin, President & CEO, National Venture Capital Association, dated December 22, 2014 (“NVCA Letter”); Eric Swanson, General Counsel and Secretary, BATS Global Markets, Inc. dated December 22, 2014 (“BATS Letter”); Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated December 22, 2014 (“SIFMA Letter II”); Daniel G. Weaver, Ph.D., Professor of Finance, Director, Master of Financial Analysis Program, Associate Director, Whitcomb Center for Research in Financial Services, Rutgers, The State University of New Jersey, dated December 22, 2014 (“Weaver Letter”); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association, dated December 22, 2014 (“MFA Letter II”); Kurt N. Schacht, Managing Director and James C. Allen, Head, CFA Institute, dated December 22, 2014 (“CFA Institute Letter”); Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors, LLC, dated December 22, 2014 (“Wells Fargo Letter”); Daniel Keegan, Managing Director, Head of Equities for the Americas, Citigroup Global Markets Inc., dated December 22, 2014 (“Citigroup Letter”); Richie Prager, Managing Director; Hubert DeJesus, Managing Director; Supurna Vedbrat, Managing Director; Joanne Medero, Managing Director, BlackRock, Inc., dated December 22, 2014 (“BlackRock Letter”); Adam Sussman, Head of Market Structure, Liquidnet, Inc., dated December 22, 2014 (“Liquidnet Letter”); Manisha Kimmel, Managing Director, Financial Information Forum, dated December 22, 2014 (“FIF Letter”); Tom Quaadman, Vice President, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, dated December 22, 2014 (“CCMC Letter II”); Ari Burstein, Senior Counsel, Investment Company Institute, dated December 22, 2014 (“ICI Letter”); Jeff Brown, Senior Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc., dated December 22, 2014 (“Schwab Letter”); Kimberly Unger, CEO and Executive Director, Security Traders Association of New York, dated December 22, 2014 (“STANY Letter”); Scott C. Goebel, Senior Vice President & General Counsel, Fidelity Management & Research Co., dated December 22, 2014 (“Fidelity Letter”); Dennis Dick, CFA, Head, Equity Market Structure, Bright Trading LLC, dated December 22, 2014 (“Bright Trading Letter”); Raymond M. Tierney III, President and Chief Executive Officer, Gary Stone, Chief Strategy Officer, Bloomberg Tradebook LLC dated December 22, 2014 (“Bloomberg Letter”); Mao Ye, Assistant Professor of Finance, University of Illinois, Urbana-Champaign, dated December 22, 2014 (“Ye Letter”); Paul J. Jiganti, Managing Director, Market Structure and Client Advocacy and John S. Markle, Deputy General Counsel—Retail and Clearing Operations, TD Ameritrade, Inc., dated December 22, 2014 (“TD Ameritrade Letter”); James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University dated December 22, 2014 (“Angel Letter”); Christopher Nagy and Dave Lauer, KOR Group, LLC dated December 22, 2014 (“KOR Letter II”); James G. Ongena, General Counsel, Chicago Stock Exchange, Inc., dated December 22, 2014 (“CHX Letter”); Andrew Stevens, General Counsel, IMC Financial Markets, dated December 30, 2014 (“IMC Letter”); Michael Jacejko, Chief Executive Manager, Birch Bay Capital, LLC, dated December 31, 2014 (“Birch Bay Letter”); James P. Selway III, Managing Director, Head of Electronic Brokerage, ITG Inc., dated January 5, 2015 (“ITG Letter”); John C. Nagel, Managing Director & Sr. Deputy General Counsel, Citadel LLC, dated January 5, 2015 (“Citadel Letter II”); Thomas Wittman, Executive Vice President, The NASDAQ OMX Group, LLC, dated January 16, 2015 (“Nasdaq Letter”); Brendon J. Weiss, Co-Head Government Affairs, NYSE, LLC, dated January 16, 2015 (“NYSE Letter”); Senators Mark R. Warner and Pat Toomey, The United States Senate, dated January 23, 2015 (“Warner-Toomey Letter”); Daniel Zinn, General Counsel, OTC Markets Group Inc., dated February 24, 2015 (“OTC Markets Letter”); Jared Albert, dated March 10, 2015 (“Albert Letter”); Representative Juan Vargas, U.S. House of Representatives, dated March 27, 2015 (“Vargas Letter”); and Atsushi Saito, Director and Representative Executive Officer, Group CEO, Japan Exchange Group, Inc., received April 17, 2015 (“Saito Letter”). The Commission received two comment letters after the June 2014 Order was issued and before the proposed NMS plan was submitted. These comment letters are included in the comment file with the other comment letters received in response to the NMS plan. See also Letters from Shawn Leary, dated August 24, 2014 (“Leary Letter”); and Tony BenBrahim, dated August 24, 2014 (“BenBrahim Letter”). 7 See Securities and Exchange Act Release No. 74388, 80 FR 12054 (March 5, 2015). II. Background Since the inception of decimalization 8 in 2001, there has been a significant shift in the nature of trading, the structure of the markets, and the roles of market participants. In the context of decimalization, market participants and others have raised concerns that the shift to quoting and trading in the one penny minimum price variation may have had a detrimental impact on the market quality for securities of small and middle capitalization companies. For example, a few studies issued after the implementation of decimalization raised questions regarding whether decimalization has reduced incentives for underwriters to pursue public offerings of smaller companies, limited the production of sell-side research for small and middle capitalization companies and made it less attractive to become a market maker in the shares for smaller companies. 9 8 Decimalization refers to setting the tick size at penny increments. A tick is the minimum pricing increment that can be used to trade securities. Prior to 2001, securities in the U.S. equity markets were generally quoted and traded in fractional tick sizes, ranging from $1/32 or $1/64 for low-priced securities to $1/8 or $1/4 for higher-priced securities. 9 See June 2014 Order, supra note 4, for a complete discussion of the background on decimalization. In 2012, the Jumpstart Our Business Startups Act (“JOBS Act”) 10 directed the Commission to conduct a study and report to Congress on how decimalization affected the number of initial public offerings (“IPOs”), and the liquidity and trading of securities of smaller capitalization companies. 11 The JOBS Act also provided that the Commission could, by rule, designate a minimum increment for the securities of emerging growth companies 12 that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securities in any exchange or other execution venue, if the Commission determined that such securities should be quoted and traded using a minimum increment of greater than $0.01. 13 10 Jumpstart Our Business Startups Act, Pub. L. 112-106, 126 Stat. 306 (2012). 11 Section 106(b) of the JOBS Act. 15 U.S.C. 78k-1(c)(6). 12 An “emerging growth company” is defined in the Securities Act of 1933 (“Securities Act”) and the Act as an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year. See Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Act. 13 Id. The Commission submitted the staff study to Congress in July 2012 (“Decimalization Report”). 14 The Decimalization Report did not reach any firm conclusions about the impact of decimalization on the number of IPOs or the liquidity and trading of the securities of small capitalization companies. 15 However, based on the information considered in the Decimalization Report, staff recommended that “[t]he Commission should not proceed with the specific rulemaking to increase tick sizes, as provided for in Section 106(b) of the JOBS Act, but should consider additional steps that may be needed to determine whether rulemaking should be undertaken in the future.” 16 The Decimalization Report suggested a public roundtable, where recommendations could be presented on a pilot program that would generate data to allow the Commission to further assess decimalization's impact. 14 Report to Congress on Decimalization (July 2012) available at http://www.sec.gov/news/studies/2012/decimalization-072012.pdf. 15 See Decimalization Report supra note 13. See also June 2014 Order supra note 4 (describing the Decimalization Report). 16 Id. The Commission staff convened a Decimalization Roundtable, in February 2013, with broad participation from market participants, academics and others, including an issuer representative. Many panelists believed that factors other than decimalization were more significant contributors to the decline of IPOs in recent years. Although participants offered diverging views on the likely outcome of any increase in the minimum tick size, there was broad support among the panelists for the Commission to conduct a pilot program to gather further information, particularly with respect to the impact of wider tick sizes on liquidity in the securities of small capitalization companies. Some panelists, however, expressed concern about the potential costs to investors of wider minimum tick sizes. 17 17 Information about the Decimalization Roundtable, including the transcript, comment letters and list of panelists is available at http://www.sec.gov/spotlight/decimalization.shtml . In June 2014, the Commission issued the June 2014 Order, pursuant to Section 11A(a)(3)(B) of the Act, 18 directing the Participants to act jointly in developing and filing with the Commission an NMS plan to implement a pilot program that, among other things, would widen the quoting and trading increment for certain small capitalization stocks. 19 The Commission issued the June 2014 Order to further study and assess the impact of decimalization on the securities of small capitalization companies. Pursuant to the June 2014 Order, on August 25, 2014, the Participants filed the proposed NMS plan. 20 18 15 U.S.C. 78k-1(a)(3)(B). 19 See June 2014 Order supra note 4. 20 See NMS plan supra note 3. As discussed in detail throughout this order, the Commission believes that the Tick Size Pilot, as reflected in the proposed NMS plan, and subject to the modifications prescribed by the Commission, should support further examination and analysis on the impact of tick sizes on the trading and liquidity of the securities of small capitalization companies. The Commission believes that altering tick sizes could result in significant market-wide benefits and improvements to liquidity and capital formation. Yet, as discussed in detail below, these changes could also impose costs, including on investors resulting from larger spreads. Because of the potential significance of the benefits and costs, as well as the uncertainty that currently exists about the likely outcome of changing tick sizes, the Commission believes it is appropriate to test these important issues in a way that can produce robust results that informs future policy making. The Tick Size Pilot is therefore, by design, an objective, data-driven test that is designed to evaluate how a wider tick size would impact trading, liquidity, and market quality of securities of smaller capitalization companies. The Commission believes that the Tick Size Pilot, as now constructed, is necessary to provide for a test that can produce robust results that will allow the Commission to effectively test the potential benefits and costs of permanently changing tick sizes for smaller capitalization stocks. The Commission believes that the potential magnitude of the benefits that would be revealed by the Tick Size Pilot justify the costs of running these tests. The effect of wider tick sizes for small capitalization stocks on trading, liquidity, and market quality is not clear and the Tick Size Pilot will provide data to analyze any such effects. A wider tick size for small capitalization stocks may change the composition of market participants for these stocks as well as the behavior of market participants. The wider tick size may incentivize market makers to increase their market making activities in these stocks. This, in turn, may attract more investors and with increased interest in those stocks, trading activity may increase, which may also improve liquidity and market quality. There are many interconnected dimensions to trading, liquidity, and market quality. If a wider tick size leads to more active market making and attracts more investors to small capitalization stocks, we may observe positive effects on trading, liquidity, and market quality as measured by metrics such as trading volume, displayed depth, effective spreads, or execution costs for small and large trades. Improved liquidity and market quality would be desirable for any stock, but would be particularly beneficial for small capitalization stocks because these stocks tend to be difficult and/or expensive to trade, which may discourage investment. Were there to be improved liquidity, investors and issuers would benefit. Investors would benefit because it would be easier and less expensive for them to trade in these stocks. Issuers would benefit from improved liquidity and market quality in two ways. First, more trading activity and investor attention may make an issuer's stock more attractive, which may reduce the company's cost of capital as well as increase their opportunities to raise capital. Second, improved liquidity may reduce an issuer's cost of capital because stocks with higher liquidity tend to have lower cost of capital. Consequently, improved liquidity may reduce liquidity risk and translate into lower cost of capital. 21 We expect these benefits would manifest during the Pilot Period if they are in fact present. 21 See, e.g., Amihud, Y., Mendelson, H., Asset pricing and the bid-ask spread, 17 Journal of Financial Economics 223, (1986); Easley, D., Hvidkjaer, S. O'Hara, M., Is Information Risk a Determinant of Asset Returns?, 57 Journal of Finance 2185 (2002); Easley, D., O'Hara, M., Information and the Cost of Capital, 59 Journal of Finance 1553 (2004); Acharya, V., Pedersen, L., Asset Pricing with Liquidity Risk, 77 Journal of Financial Economics 375 (2005). The Commission, however, recognizes that these benefits may not manifest in the manner or to the extent anticipated. And, as noted above, we cannot know in advance the full effects, whether they be positive or negative, of a wider tick size on the market behavior of market participants in response to the Tick Size Pilot. As discussed in detail below, the Commission has seriously considered the concerns about costs that implementation of the Tick Size Pilot would create for market participants and the complexity of the Tick Size Pilot, and has tried to mitigate both where possible without undermining the objectives of the Tick Size Pilot. The Commission nevertheless believes that incurring the costs of the Tick Size Pilot is appropriate in these circumstances. The Tick Size Pilot will provide the Commission and interested parties with real-world data regarding the effect of wider tick sizes on trading, liquidity and market quality for small-capitalization companies, and this empirical data will inform analyses and potential future regulatory actions to, among other things, capture any benefits from wider tick sizes on a permanent basis. 22 22 The Commission notes that certain commenters believed that the Tick Size Pilot could provide valuable data and should be studied notwithstanding its potential costs. See Tabb Letter at 8; CFA Institute Letter at 2; CHX Letter at 17; Nasdaq Letter at 5-6; and NYSE Letter at 3. Therefore, the Commission finds that the NMS plan is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act. III. Description of the Proposed NMS Plan and the Tick Size Pilot The NMS plan filed by the Participants contained provisions to implement the Tick Size Pilot, 23 including provisions related to the administration and operation of the Tick Size Pilot, the data to be collected and made public, and the specific assessments to be conducted by the Participants. In this section, the proposed NMS plan is described, and further below there is discussion and analysis of the comments received and the NMS plan, as approved with Commission modifications. 23 See NMS plan supra note 3. A. Criteria for Pilot Securities Section V of the NMS plan sets forth five criteria for selection of NMS common stocks 24 that would be included in the Tick Size Pilot (“Pilot Securities”). The five criteria for determining the Pilot Securities are: (1) a market capitalization 25 of $5 billion or less on the last day of the Measurement Period; 26 (2) a Closing Price 27 of at least $2.00 on the last day of the Measurement Period; (3) a Closing Price on every U.S. trading day during the Measurement Period that is not less than $1.50; (4) a Consolidated Average Daily Volume (“CADV”) 28 during the Measurement Period of one million shares or less; and (5) a Measurement Period Volume-Weighted Average Price (“VWAP”) 29 of at least $2.00. Further, the Participants proposed that an NMS common stock for an issuer that had its IPO within 6 months of the start of the Pilot Period would not be eligible to be a Pilot Security. 24 The NMS plan defines NMS common stock as an NMS stock that is common stock of an operating company. See NMS plan Section (I)(Q). NMS stock means any NMS security other than an option. See 17 CFR 242.600(b)(47). NMS security means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. See 17 CFR 242.600(b)(46). 25 The NMS plan calculates market capitalization by multiplying the total number of shares outstanding on such day by the Closing Price of the security on such date. See NMS plan Section (V)(A)(1). 26 The NMS plan defines Measurement Period as the U.S. trading days during the three calendar month period ending at least 30 days prior to the effective date of the Pilot Period. See NMS plan Section (I)(N). The NMS plan defines Pilot Period as the operative period of the Tick Size Pilot, lasting one year from the date of implementation. See NMS plan Section (I)(U). As discussed further below, in response to comments and after additional consideration, the Commission has modified the market capitalization threshold to lower it to $3 billion or less. In addition, as discussed further below, in response to comments and after additional consideration, the Commission has modified the definition of Pilot Period to extend the duration of the Tick Size Pilot to two years. See infra Section V.B. 27 The NMS plan defines Closing Price as the closing auction price on the primary listing exchange or if not available, the last regular-way trade reported by the processor prior to 4:00 p.m. ET. See NMS plan Section (I)(H). The NMS plan defines processor as the single plan processor responsible for the consolidation of information for an NMS stock pursuant to Rule 603(b) of Regulation NMS. See NMS plan Section (I)(Y). 28 The NMS plan calculates CADV by adding the single-counted share volume of all reported transactions in the Pilot Security during the Measurement Period and dividing by the total number of U.S. trading days during the Measurement Period. See NMS plan Section (V)(A)(4). 29 The NMS plan calculates the Measurement Period VWAP by calculating the volume-weighted average price for each U.S. trading day during the Measurement Period, summing the daily volume-weighted average price across the Measurement Period, and dividing by the total number of U.S. trading days during the Measurement Period. See NMS plan Section (V)(A)(5). B. Assignment of Pilot Securities As proposed in the NMS plan, the Tick Size Pilot would consist of three Test Groups, with each Test Group consisting of 400 Pilot Securities. The Pilot Securities that are not placed in the Test Groups would be placed in the Control Group. The Operating Committee 30 of the NMS plan would oversee the process of assigning the Pilot Securities into the Control Group and the three Test Groups. First, the Pilot Securities would be placed into a maximum of 27 categories by means of a stratified random sampling process. Each Pilot Security would be categorized as: (1) low, medium, or high share price based on the Measurement Period VWAP; (2) low, medium, or high market capitalization based on the last day of the Measurement Period; and (3) low, medium, or high trading volume based on the CADV during the Measurement Period. Each category (share price, market capitalization, trading volume) would then be divided into three sub-categories, each containing a third of the securities in the category. This process would yield 27 categories. However, if a single category contained fewer than ten securities, such category would be combined with another category that contains at least ten securities. If two or more categories contained fewer than ten securities each, those categories would be combined, provided that the combined category contains at least ten securities. If the combined category contains fewer than ten securities, then such category would be combined with another of the 27 categories that contains at least ten securities. 30 See NMS plan Section (III)(C) on the composition of the Operating Committee. Each Participant will have one individual staff member to represent the Participant on the Operating Committee. After the categories are finalized, the Pilot Securities would then be randomly selected from each category to be included in the three Test Groups, based on the percentage of Pilot Securities in such category. Each category would be represented in all three Test Groups based on the category's relative proportion to the population of Pilot Securities. Similarly, a primary listing exchange's securities would be selected from each category and included in the three Test Groups. Each primary listing exchange would, free of charge, make publicly available on its Web site the list of Pilot Securities that are listed on such exchange and that are included in the Control Group and Test Groups. Appendix A to the NMS plan provides the specific details about the data that each exchange would make available on its Web site to identify the Pilot Securities. C. Control Group and Test Groups As noted above, the Tick Size Pilot would contain a Control Group and three Test Groups, each of which has incrementally different quoting and trading requirements. 1. Control Group Pilot Securities in the Control Group would continue to be quoted and traded at any price increment currently permitted. 2. Test Group One: Widened Quote Increment Pilot Securities in Test Group One would have a quoting increment of $0.05 but could continue to trade at any currently permitted price increment. The Participants would be required to adopt rules that would prohibit the Participants or any member of a Participant from displaying, ranking, or accepting from any person any displayable or non-displayable bids or offers, orders, or indications of interest in increments other than $0.05. Orders priced to execute based on the midpoint and orders entered in a Participant-operated retail liquidity program 31 could be ranked and accepted in increments of less than $0.05. 31 See NASDAQ OMX BX Rule 4780; BATS Y Rule 11.24; NYSE Rule 107C; NYSE MKT—Equities Rule 107C and NYSE Arca Equities Rule 7.44. 3. Test Group Two: Widened Quote and Trade Increment Pilot Securities in Test Group Two would have the same quoting increment as Test Group One ($0.05) along with the applicable quoting exceptions, but could only be traded in $0.05 minimum increments. The Participants would be required to adopt rules that prohibit trading centers operated by the Participants and members of the Participants from executing orders in any Pilot Security in Test Group Two in price increments other than $0.05. The $0.05 trading increment would apply to all trades, including brokered cross trades, absent an exception. Three exceptions to the $0.05 trading increment would be applicable. First, trading could occur at the midpoint of the National Best Bid (“NBB”) and the National Best Offer (“NBO” and together with NBB, “NBBO”), 32 or the midpoint of the best protected bid and the best protected offer. 33 Second, Retail Investor Orders 34 could be executed with price improvement of at least $0.005 better than the best protected bid or the best protected offer. Finally, Negotiated Trades 35 could trade in increments less than $0.05. 32 See 17 CFR 242.600(b)(42). 33 See 17 CFR 242.600(b)(57). 34 See NMS plan Section (I)(DD) (defining Retail Investor Order as “an agency order or a riskless principal order originating from a natural person, provided that, prior to submission, no change is made to the terms of the order with respect to price or side of market and the order does not originate from a trading algorithm or any other computerized methodology. The Participant that is the DEA of a member of a Participant operating a trading center executing a Retail Investor Order will require such trading center to sign an attestation that substantially all orders to be executed as Retail Investor Orders will qualify as such under the [NMS] [p]lan”). 35 See NMS plan Section (I)(P) (defining Negotiated Trades as “(i) a Benchmark trade, including, but not limited to, a VWAP trade or a Time-Weighted Average Price trade, provided that, if such trade is composed of two or more component trades, each component trade complies with the quoting and trading increment requirements of the [NMS] [p]lan, or with an exception to such requirements, or (ii) a Pilot Qualified Contingent Trade.”). The NMS plan defines a Benchmark trade as “the execution of an order at a price that was not based, directly or indirectly, on the quoted price of a Pilot Security at the time of execution and for which the material terms were not reasonably determinable at the time the commitment to execute the order was made.” See NMS plan Section (I)(C). The NMS plan defines Pilot Qualified Contingent Trade as “a transaction consisting of two or more component orders, executed as agent or principal, where: (1) at least one component order is in an NMS common stock; (2) all components are affected with a product or price contingency that either has been agreed to by the respective counterparties or arranged for by a broker-dealer as principal or agent; (3) the execution of one component is contingent upon the execution of all other components at or near the same time; (4) the specific relationship between the component orders ( e.g., the spread between the prices of the component orders) is determined at the time the contingent order is placed; (5) the component orders bear a derivative relationship to one another, represent different classes of shares of the same issuer, or involve the securities of participants in mergers or with intentions to merge that have been announced or since canceled; and (6) the transaction is fully hedged (without regard to any prior existing position) as a result of the other components of the contingent trade.” See NMS plan Section (I)(V). 4. Test Group Three: Widened Quote and Trade Increment With a Trade-At Prohibition Pilot Securities in Test Group Three would be subject to the same quoting and trading increments as those in Test Group Two as well as the same exceptions. However, the trading of these securities would also be subject to a trade-at prohibition. 36 The trade-at prohibition, as defined under the NMS plan, would“ (1) prevent a trading center that was not quoting from price-matching protected quotations and (2) permit a trading center that was quoting at a protected quotation to execute orders at that level, but only up to the amount of its displayed size” (“Trade-At Prohibition”). Specifically, the Participants would be required to adopt rules prohibiting trading centers operated by the Participants and members of the Participants from executing a sell order for a Pilot Security at the price of a protected bid, or from executing a buy order for a Pilot Security at the price of a protected offer, unless such executions fall within certain enumerated exceptions. 36 A “trade-at” is defined under the NMS plan as an execution by a trading center of a sell order for a Pilot Security at the price of a protected bid or the execution of a buy order for a Pilot Security at the price of a protected offer. See NMS plan Section (I)(LL). As discussed further below, after additional consideration, the Commission modified the definition of trade-at to clarify that it applies during Regular Trading Hours. See infra Section V.D.4. The NMS plan contains thirteen exceptions to the Trade-At Prohibition. These exceptions describe when a trading center would be permitted to execute an order for a Pilot Security at a price equal to a protected bid or protected offer. The first exception would be for when an order is executed by a trading center that is displaying a quotation, via either a processor or an SRO quotation feed, at a price equal to the traded-at protected quotation, but only up to the trading center's full displayed size (“Size Limitation”). A further condition to this exception proposed by the Participants would limit trading centers' ability to execute an incoming order by requiring that executions occur on the venue where the protected quote was displayed. Specifically, the Participants proposed that where the quotation is displayed through a national securities exchange, the execution at the size of the order must occur against the displayed size on such national securities exchange (“Exchange Venue Limitation”). Where the quotation is displayed through the Alternative Display Facility (“ADF”) or another facility approved by the Commission that does not provide execution functionality, the execution of the order must occur against the displayed size in accordance with the rules of the ADF or such approved facility (“ADF Venue Limitation” together with Exchange Venue Limitation, “Venue Limitation”). 37 37 As discussed further below, in response to comments and after additional consideration, the Commission has modified the NMS plan to remove the Venue Limitation. See infra Section V.D.4.d. In addition, the NMS plan provides that Block Size orders 38 and Retail Investor Orders executed with at least $0.005 price improvement would be excepted from the Trade-At Prohibition. These exceptions were also set forth in the June 2014 Order. 38 See 17 CFR 242.600(b)(9). As discussed further below, in response to comments and after additional consideration, the Commission has modified the definition of Block Size for purposes of the Tick Size Pilot. See infra Section V.D.4.e. The next exceptions (numbers 4 through 12) are based on the exceptions that are found in Rule 611 of Regulation NMS. 39 Specifically, the NMS plan provides that trading centers would be permitted to execute an order for a Pilot Security at a price equal to a protected bid or protected offer in the following situations: (1) when the trading center displaying the protected quotation that was traded-at was experiencing a failure, material delay, or malfunction of its systems or equipment; (2) when an order is executed as part of a transaction that was not a “regular way” contract; (3) when an order is executed as part of a single-priced opening, reopening, or closing transaction by the trading center; (4) when a protected bid was priced higher than a protected offer in the Pilot Security; (5) when an order is identified as an Intermarket Sweep Order; (6) when an order is executed by a trading center that simultaneously routed Trade-at Intermarket Sweep Orders 40 to execute against the full displayed size of the protected quotation that was traded-at; (7) when the order is executed as part of a Negotiated Trade; (8) when the trading center displaying the protected quotation that was traded-at, had displayed, within one second prior to execution of the transaction that constituted the trade-at, a best bid or best offer, as applicable, for the Pilot Security with a price that was inferior to the price of the trade-at transaction; and (9) when the order executed by a trading center which, at the time of order receipt, the trading center had guaranteed an execution at no worse than a specified price (“stopped order”) where: (A) the stopped order was for the account of a customer; (B) the customer agreed to the specified price on an order-by-order basis; and (C) the price of the trade-at transaction was, for a stopped buy order, equal to the NBB in the Pilot Security at the time of execution or, for a stopped sell order, equal to the NBO in the Pilot Security at the time of execution. 39 17 CFR 242.611. 40 The NMS plan defines Trade-at Intermarket Sweep Orders as “a limit order for a Pilot Security that meets the following requirements: (1) When routed to a trading center, the limit order is identified as an Intermarket Sweep Order; and (2) Simultaneously with the routing of the limit order identified as an Intermarket Sweep Order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the Pilot Security with a price that is equal to the limit price of the lit order identified as an Intermarket Sweep Order. These additional routed orders also must be marked as Intermarket Sweep Orders.” See NMS plan Section (I)(MM). Lastly, the NMS plan contains an exception for an order of a fractional share of a Pilot Security, provided that such fractional share order was not the result of breaking an order for one or more whole shares of a Pilot Security into orders for fractional shares or was not otherwise effected to evade the requirements of the Trade-At Prohibition or any other provisions of the Tick Size Pilot. D. Collection and Assessment of Tick Size Pilot Data 1. Trading Center Data The Participants would be responsible for collecting data specified in Appendix B of the NMS plan, which generally includes daily market quality statistics, data on specific orders, and data on market makers 41 (“Trading Center Data”). 42 In addition, each Participant that is the Designated Examining Authority (“DEA”) 43 of a member of a Participant operating a trading center would require such member to collect and provide to the DEA data related to daily market quality statistics and data related to specific orders consistent with the terms and conditions specified in Appendix B of the NMS plan. The Participants and each member of a Participant operating a trading center would also be required to collect such data for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. Each Participant would make available to other Participants a list of members designated as market makers on that Participant's trading center. 41 A “market maker” is defined under the NMS plan as “a dealer registered with any self-regulatory organization, in accordance with the rules thereof, as (i) a market maker or (ii) a liquidity provider with an obligation to maintain continuous, two-sided trading interest.” See NMS plan Section (I)(L). 42 See NMS plan Appendix B. 43 A DEA is defined under the NMS plan as “the self-regulatory organization responsible for (i) examining such member for compliance with the financial responsibility requirements imposed by the Exchange Act, or by Commission or self-regulatory organization rules, (ii) receiving regulatory reports from such member, (iii) examining such member for compliance with, and enforcing compliance with, specified provisions of the Exchange Act, the rules and regulations thereunder, and self-regulatory organization rules, and (iv) carrying out any other specified regulatory functions with respect to such member.” See NMS plan Section (I)(I). On a monthly basis, the Participants and the DEA for each member of a Participant operating a trading center would make the specified Trading Center Data publicly available on their Web sites for free and would report such data to the Commission on a disaggregated basis by trading center. The publicly available data would not identify the trading center that generated the data. 2. Market Maker Profitability Data 44 44 As discussed further below, in response to comments and after additional consideration, the Commission has modified the Market Maker Profitability Data requirement. See infra Section V.E.2. Each Participant that is the DEA of a market maker would require such market maker to provide the DEA the data specified in Appendix C of the NMS plan regarding daily market maker trading profits with respect to the Pilot Securities on a monthly basis (“Market Maker Profitability Data”). Each market maker would also be required to provide to its DEA the Market Maker Profitability Data for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. Moreover, on a monthly basis, the DEA would aggregate the Market Maker Profitability Data and make the aggregated data publicly available via the DEA's Web site for free, and report such data to the Commission. The publicly available data would not identify the market makers that generated the data. 3. Assessment of Tick Size Pilot Data The Participants proposed to provide to the Commission, and make publicly available, a joint assessment of the impact of the Tick Size Pilot, no later than six months after the end of the Pilot Period. 45 As proposed, the assessment would include the statistical and economic impact of an increase in the quoting increment related to: (1) market quality, (2) the number of market makers, (3) market maker participation, and (4) market transparency. 46 The assessment would also evaluate: 45 As discussed further below, in response to comments and after additional consideration, the Commission has modified the NMS plan to require the assessment to be submitted to the Commission 18-months after the implementation of the Tick Size Pilot. See infra Section V.E.3. 46 As discussed further below, in response to comments and after additional consideration, the Commission has modified the NMS plan to require the Participants to conduct an assessment on market maker profitability. See infra Section V.E.3. • whether any market capitalization, daily trading volume, or other thresholds can differentiate the results of the above assessment across stocks; • the statistical and economic impact of the above assessments for the incremental impact of the trading increment and for the joint effect of an increase in both the quoting increment and the trading increment; • the statistical and economic impact of the above assessments for the incremental impact of a Trade-At Prohibition and for the joint effect of an increase in the quoting increment, an increase in the trading increment, and a Trade-At Prohibition; and • any other economic issues that Participants believe the Commission should consider in any rulemaking that may follow. The Participants may also individually submit to the Commission, and make publicly available, an additional supplemental assessment of the impact of the Tick Size Pilot. E. Policies and Procedures Pursuant to the NMS plan, the Participants and members of Participants would be required to establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the quoting and trading increments for the Pilot Securities. Each Participant would develop appropriate policies and procedures that provide for collecting and reporting to the Commission the Trading Center Data. Each Participant that is the DEA of a member of a Participant operating a trading center would require such member to develop appropriate policies and procedures for collecting and reporting the Trading Center Data to the DEA. Each Participant that is the DEA of a member of a Participant operating a trading center would develop appropriate policies and procedures for collecting and reporting the Trading Center Data to the Commission. Further, each Participant that is the DEA of a market maker would require such market maker to develop policies and procedures for collecting the Market Maker Profitability Data and report it to the DEA. Each Participant that is the DEA of a market maker would develop appropriate policies and procedures that provide for collecting and reporting such data to the Commission on an aggregated basis. 47 The DEA would also develop policies and procedures reasonably designed to ensure the confidentiality of the non-aggregated data it receives from market makers. 47 The Market Maker Profitability Data would be aggregated by Pilot Security. F. Additional Components of the NMS Plan In addition to setting forth the details of the Tick Size Pilot, the NMS plan contains operational details including provisions related to the admission of new participants, amendments, the composition and responsibilities of the Operating Committee, and withdrawal from the NMS plan. IV. Summary of Comments As noted above, the Commission received 77 comment letters on the Tick Size Pilot contained in the proposed NMS plan. 48 Thirty-three commenters generally supported the Tick Size Pilot, 49 although almost all of these commenters suggested that certain aspects of the proposed Tick Size Pilot be modified prior to approval and implementation. 50 Several of the commenters supporting the Tick Size Pilot believed that a wider tick increment would improve the quality of trading for small capitalization securities or that it is valuable to test this hypothesis. 51 Additionally, some of these commenters believed that a wider tick increment would increase depth and liquidity. 52 For example, one commenter stated that a well-designed Tick Size Pilot would “[allow] for a true empirical test of the effects of wider spreads and limited increments in small-cap[italization] stocks [would] encourage fundamental buyers and sellers to meaningfully engage with each other.” 53 48 See supra note 6. The opinions' of the commenters are nuanced as many commenters support certain aspects of the NMS plan while opposing other aspects of the NMS plan. Eighteen comment letters were received in response to the Commission's press release announcing that the proposed NMS plan and Tick Size Pilot had been submitted. These comment letters are included in the comment file with the comment letters received in response to the Notice. The Commission notes that five of the comment letters received in response to the press release requested that the Commission provide an extended comment period. See CMR Letter I; MFA Letter I; KOR Letter I; SIFMA Letter I; and Citadel Letter I. See also CCMC Letter I. The Investor Advisory Committee (“IAC”) established by Section 911 of The Dodd-Frank Act also submitted recommendations to the Commission with respect to a tick pilot. See Recommendation of the Investor Advisory Committee Decimalization and Tick Sizes, available at: http://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-decimilization-recommendation.pdf (“IAC Recommendations”). The IAC's Recommendations were issued prior to the Commission's June 2014 Order. The Commission discussed the IAC Recommendations in the June 2014 Order. 49 See Gagliano Letter I; Callipari Letter; Gagliano Letter II; STA Letter I; Duffy Letter; Galinskie Letter; IssuWorks Letter; Tabb Letter; ABC Letter; ECFTF Letter; Themis Letter; Two Sigma Letter; STA Letter II; KCG Letter; Virtu Letter; BIO Letter; NVCA Letter; BATS Letter; SIFMA Letter II; Weaver Letter; CFA Institute Letter; Citigroup Letter; BlackRock Letter; STANY Letter; Bright Trading Letter; Bloomberg Letter; KOR Letter II; CHX Letter; IMC Letter; Nasdaq Letter; NYSE Letter; Warner-Toomey Letter; OTC Markets Letter; and Vargas Letter. 50 Four of these commenters, while supporting a pilot to test wider tick sizes, nevertheless questioned whether wider ticks would have a positive impact on liquidity or would support increased research for small capitalization companies. See Tabb Letter at 1 (“While I am a strong proponent of the Tick Size Pilot, I do not foresee positive results, such as greater research coverage, more small/mid-cap[italization] IPOs, a wider diversity of market makers, reduced impact of high-frequency traders, lower transaction costs, or better quality of equity markets.”); CFA Institute Letter at 1 (stating “skeptic[ism] that wider trading increments for small cap[italization] stocks will enhance the liquidity of those securities. . .”); KOR Letter II at 4 (stating the “idea that increased market making profitability will lead to better research/analyst coverage and encourage more IPOs is an idea that is out of touch with modern markets post-Regulation NMS”); and IMC Letter at 1 (noting reservations about the effect of wider ticks on IPOs and job growth). See also CoreOne Letter at 2 (stating that it is unlikely the Tick Size Pilot will increase the amount of research coverage for Pilot Securities). 51 See Gagliano Letter I (arguing that five cent spreads will greatly enhance participation, volume and increase market depth); Callipari Letter; ECFTF Letter at 1; STA Letter II at 2; BIO Letter at 2; NVCA Letter at 2; BATS Letter at 1; SIFMA Letter II at 1; STANY Letter at 2; Bloomberg Letter at 2; CHX Letter at 1; Nasdaq Letter at 3; and NYSE Letter at 1. 52 See Gagliano Letter I; Callipari Letter; BIO Letter at 2; NVCA Letter at 2; and NYSE Letter at 1. 53 See ECFTF Letter at 1. Conversely, twenty commenters generally opposed the Tick Size Pilot. 54 Some of these commenters were concerned that a wider tick increment would increase investor execution costs or that the Tick Size Pilot would be unduly disruptive. 55 Three commenters argued that the impact of tick sizes had already been studied. 56 One commenter noted that increasing tick sizes would impact his ability to trade efficiently. 57 Other commenters argued that wider spreads would only help market professionals at the expense of investors. 58 54 See BenBrahim Letter; Richardson Letter; Ling Letter; Blecha Letter; Sosnoff Letter; Choffy Letter; Runsdorf Letter; Greenblatt Letter; Bangura Letter; Ricker Letter; DFA Letter; Vanguard Letter; CFA Letter; MFA Letter II; Wells Fargo Letter; ICI Letter; Schwab Letter; Fidelity Letter; TD Ameritrade Letter; and Citadel Letter II. See also IAC Recommendations. 55 See Vanguard Letter at 1; CFA Letter at 4; MFA Letter II at 6 (stating more than 20% of all U.S. listed companies will be impacted by the Tick Size Pilot); Wells Fargo Letter at 4; and ICI Letter at 5. See also IAC Recommendations. 56 See Ling Letter; Blecha Letter; and Runsdorf Letter. 57 See Richardson Letter. 58 See Richardson Letter; Ling Letter; Sosnoff Letter; Choffy Letter; and Bangura Letter. See also Greenblatt Letter (stating that expanding the tick sizes will only help market makers become wealthy). Generally, commenters opposing the Tick Size Pilot were concerned about its costs to investors and the complexity of its design. 59 For example one commentator estimated “that the [Tick] Pilot could cost investors hundreds of millions of dollars.” 60 Other commenters stated the Tick Size Pilot would “make it more expensive for investors to buy and sell [P]ilot [S]ecurities.” 61 Commenters also opined that the Tick Size Pilot would increase operational risk, and heighten market complexity which would require “a whole redesign of trading systems and algorithms.” 62 Another commenter stated that, “while the purported benefits of the [Tick Size Pilot] are questionable, the costs are real and significant.” 63 59 See DFA Letter at 2 (raising concerns that U.S. companies would incur a higher cost of capital); Vanguard Letter at 4 (stating that “any program that increases the minimum quoting or trading increments will necessarily result in increased transaction costs to long-term investors”); MFA Letter II at 3 (expressing concern that the Tick Size Pilot would harm investors by creating unnecessary market complexities and systems risks); Wells Fargo Letter at 9 (expressing concerns about both costs to investors and complexity); Fidelity Letter at 3-4 (citing concerns both about increased trading costs for retail investors and complexity and implementation costs); TD Ameritrade Letter at 2; and Citadel Letter II at 5 (citing concerns about implementation costs, systems risks, and investor costs). See also IAC Recommendations. 60 See TD Ameritrade Letter at 2. 61 See BenBrahim Letter; Greenblatt Letter; Bangura Letter; Wells Fargo Letter at 2 (expressing opposition to increased tick sizes and increased transaction costs); and MFA Letter II at 3 (stating that artificially widening spreads and increasing trading costs would make it expensive for investors to buy and sell securities). 62 See MFA Letter II at 3. See also infra note 74 and accompanying text. 63 See Vanguard Letter at 4. Additionally, Tick Size Pilot opponents indicated that the underlying goals of the Tick Size Pilot were not properly defined and tenuous. 64 For example, one commenter stated that the Tick Size Pilot's “goal seems simply to find ways to drive higher profits to exchanges and some of their favored clients.” 65 64 See Vanguard Letter at 1; Wells Fargo Letter at 6; Schwab Letter at 9; and Citadel Letter II at 2. See also IAC Recommendations. 65 See Schwab Letter at 9. Seventeen commenters, while providing substantive analysis and opinion, did not specifically express support for, or, opposition to, the Tick Size Pilot. 66 While the commenters generally focused on issues related to the proposed Tick Size Pilot, some also raised tangential or alternative market-based solutions such as those relating to access fees, maker-taker fee models, payment-for-order-flow, and high frequency trading. 67 For instance, nine commenters stated that the Commission should test the elimination of exchange access fees, either independently or in conjunction with the Trade-At Prohibition; 68 two commenters suggested the Commission implement a stand-alone trade-at pilot; 69 and three commenters suggested that subpenny pricing should be explored and studied. 70 66 See Leary Letter; Adorney Letter; RGM Letter; CCMC Letter I; Wellington Shields Letter; ModernNetworks Letter (noting its agreement with the premise behind wider ticks, such as discouraging arbitrage, encouraging market making and longer holding periods); CoreOne Letter; JonesTrading Letter; CMR Letter II; Liquidnet Letter; FIF Letter; CCMC Letter II; Ye Letter; Angel Letter; Birch Bay Letter; ITG Letter; Albert Letter and Saito Letter. 67 See Wellington Shields Letter at 2 (subpenny pricing should be eliminated and quotes should have a time-in-force); Virtu Letter at 2 (recommending the Commission study and establish specific market maker obligations through an NMS plan and eliminate access fees); Liquidnet Letter at 1-2 (asserting that Commission should pass Rule 10b-18 prior to the Tick Size Pilot and should conduct a simplified version of the Trade-At Prohibition independently along with other market structure issues such as removing access fees, and eliminating maker-taker pricing); BIO Letter at 5 (suggesting other measures to assist small capitalization companies such as an increase in the qualifying cap for accelerated filers and as well as an exception from XBRL reporting requirements); CFA Institute at 6; ICI Letter at 6 (stating other market initiatives, such as maker-taker, should be addressed prior to the Tick Size Pilot); Birch Bay Letter at 1 (asserting all orders should have a minimum lifespan of at least one-second); Schwab Letter at 5 (stating that if the Commission wants to test order flow migration, it should reduce exchange access fees and liquidity rebates); Bright Trading Letter at 3 (suggesting that OTC market makers should be required to provide “meaningful” price improvement); Bloomberg Letter at 15 (suggesting that reduced access fees should be the subject of a pilot); Ye Letter at 1 (suggesting that the maker-taker fees should be analyzed); Angel Letter at 11 (suggesting that a maker-taker pilot should be conducted); and KOR Letter II at 2. 68 See Virtu Letter at 2; CFA Institute at 6; Liquidnet Letter at 2 (asserting a simplified version of the Trade-At Prohibition should be tested independently along with other market structure issues such as removing access fees, and eliminating maker-taker pricing); Schwab Letter at 5; Fidelity Letter at 5 (suggesting that a trade-at prohibition should also contemplate access fees, maker-take, internalization, but noted that these were properly excluded from the Tick Size Pilot); Bright Trading Letter at 3; Bloomberg Letter at 15; Ye Letter at 1; Angel Letter at 11; and KOR Letter II at 5 (suggesting that the Trade-At Prohibition should be coupled with access fee reform or the elimination of rebates). 69 See Vanguard Letter at 2 and ICI Letter at 4. 70 See Greenblatt Letter; RGM Letter at 1; and MFA Letter II at 3. But see Wellington Shields Letter at 5 (stating subpenny pricing causes the front running of trades); Ye Letter at 2; and ModernNetworks Letter at 3 (arguing against studying subpenny pricing). Several commenters supported the Commission's use of “data-driven” research to formulate market structure changes. 71 Additionally, some commenters believed that, while the Tick Size Pilot may not achieve the goal of improved liquidity for small- capitalization securities, it nonetheless should be tested. 72 For example, one commenter stated, “we believe it is worth the effort, time and money to test these ideas in the real world . . . as an important step in helping to improve the market for small capitalization companies in the future.” 73 71 See RGM Letter at 1; ABC Letter at 3; ECFTF Letter at 1; Two Sigma Letter at 1; KCG Letter at 6; Virtu Letter at 2; BIO Letter at 4; CFA Institute Letter at 6; BlackRock Letter at 1; STANY Letter at 2; Bloomberg Letter at 3; Angel Letter at 2; KOR Letter II at 2; IMC Letter at 2; Nasdaq Letter at 4; and OTC Markets Letter at 2. 72 See Tabb Letter at 1; Angel Letter at 1-2 (arguing that corporate issuers should set their trading increments and supporting a data-driven approach); KOR Letter II at 4; and IMC Letter at 1. 73 See CFA Institute Letter at 2. A. Costs and Complexity of the Tick Size Pilot Several commenters expressed concerns related to the costs and complexity of the Tick Size Pilot. 74 Some commenters expressed concern that trading costs of the wider tick size would be borne either by investors 75 or the brokers and institutions representing customer interest. 76 Two commenters suggested that investor costs related to the Tick Size Pilot would be at least $200 million annually. 77 Certain commenters expressed concern that the Tick Size Pilot would inflate the cost of capital for the issuers of Pilot Securities. 78 74 See Duffy Letter at 2; DFA Letter at 2; Vanguard Letter at 4; Fidelity Letter at 3-4; TD Ameritrade Letter at 2; MFA Letter II at 3; Wells Fargo Letter at 9; ITG Letter at 4-6; and Citadel Letter II at 5. 75 See BenBrahim Letter; DFA Letter at 2; Vanguard Letter at 1; KCG Letter at 2-3; Wells Fargo Letter at 5; and Citadel Letter II at 5. 76 See DFA Letter at 1; Two Sigma Letter at 2; and TD Ameritrade Letter at 2. 77 See Two Sigma Letter at 2 (estimating excess trading costs of implementing Test Group Two and Three of $200 million annually) and TD Ameritrade Letter at 2 (utilizing optimistic assumptions would be $273,149,484 annually). 78 See DFA Letter at 2 and NVCA Letter at 7. Other commenters were concerned with the costs associated with the complexity of the Tick Size Pilot. Some commenters thought that the three Test Group design of the Tick Size Pilot would drive costs upward, 79 but several commenters more directly attributed the potential costs to the complexity caused by the inclusion of Test Group Three and its Trade-At Prohibition. 80 Some commenters opined that eliminating Test Group Three would eliminate much of the complexity related to the Tick Size Pilot. 81 In particular, certain commenters stated that the complexity and costs of the Trade-At Prohibition result from the changes to technology and programming that would be necessary for effective implementation. 82 Some commenters expressed concern that the Tick Size Pilot would lead to increased operational risks. 83 However some commenters, while acknowledging that there would be costs associated with the Tick Size Pilot, believed the Commission should move forward because of the importance of testing the impact of wider tick increments on the liquidity and market quality of securities with smaller capitalization. 84 79 See DFA Letter at 2 (arguing that the Tick Size Pilot's four group design where each group has its own rules and exemptions increases both the risk and costs); MFA Letter II at 7-8 (asserting that the Tick Size Pilot “will greatly increase complexity by creating four different trading schemes that will need to be implemented by trading centers and institutional investors . . . The financial cost for such significant systems development, coding, reprogramming and testing are likely to be meaningful.”); and Wells Fargo Letter at 9 (stating “the costs and risks of the [Tick] Pilot would be lessened in a study involving only one control group and one test group without exceptions). 80 See Tabb Letter at 1; ECFTF Letter at 2; CMR Letter II at 7; KCG Letter at 14; FIF Letter at 3; and TD Ameritrade Letter at 2. 81 See Tabb Letter at 1; Two Sigma Letter at 3; Vanguard Letter at 5; MFA Letter II at 6; and Wells Fargo Letter at 8. 82 See Tabb Letter at 5-6 (stating “[t]he programing for this . . . will be challenging, significant, and require massive testing.”); CoreOne Letter at 7; Wells Fargo Letter at 8; FIF Letter at 3; and ITG Letter at 5. 83 See SIFMA Letter II at 5; Wells Fargo Letter at 3; ICI Letter at 5; and Citadel Letter II at 6 (stating “it would be unfortunate if the Commission approved a pilot that imposed such an extraordinary degree of operational risk on the markets.”). 84 See Tabb Letter at 8; CFA Institute Letter at 2; CHX Letter at 17 (this commenter provided an estimate of potential implementation costs for all three Test Groups of approximately $140,000 and suggested that such costs for all market centers could be in excess of $8.0 million); Nasdaq Letter at 5-6; and NYSE Letter at 3. Certain commenters believed that the Tick Size Pilot should be subject to a cost benefit analysis pursuant to the Commission rulemaking process. 85 Some of these commenters questioned whether the costs of the Tick Size Pilot outweighed its benefits. Others commenters posited that a cost-benefit analysis, focused on the implementation costs of the Tick Size Pilot, should be completed. 86 Other commenters suggested that an assessment of investor costs should be completed prior to the implementation of the Tick Size Pilot. 87 85 See Duffy Letter at 2; KCG Letter at 8-9; SIFMA Letter II at 7; MFA Letter II at 8; Wells Fargo Letter at 3; Citigroup Letter at 5; Schwab Letter at 8-9; STANY Letter at 9-10; Bloomberg Letter at 21-22; TD Ameritrade Letter at 4; ITG Letter at 4; Citadel Letter II at 3-4; Nasdaq Letter at 7; and OTC Markets Letter at 9. 86 See BlackRock Letter at 4; FIF Letter at 6; and Citadel Letter II at 5. 87 See Wells Fargo Letter at 9; SIFMA Letter II at 8; and Citadel Letter II at 5. B. Duration of the Tick Size Pilot Twenty-three commenters discussed whether the Pilot Period should be extended, remain as proposed, or implemented on a provisional basis. 88 Seventeen commenters opined that the Pilot Period should be longer than one-year. 89 Some of these commenters indicated that the Pilot Period should be extended to justify the associated implementation costs. 90 Others indicated that better data could be gathered with a longer Pilot Period. 91 In particular, some of these commenters opined that the data generated from a longer Pilot Period would be less likely to be skewed by short-term or aberrational events. 92 One commenter suggested that the one-year time period would make it easy to manipulate the data to produce negative outcomes. 93 Other commenters stated that additional time is necessary to allow for market participants to adjust their behavior. 94 88 See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks Letter at 3; Tabb Letter at 1; ABC Letter at 2; ECFTF Letter at 1-2; Themis Letter at 6; CoreOne Letter at 2; CMR Letter II at 2; STA Letter II at 7; BIO Letter at 7; CFA Letter at 6; NVCA Letter at 3-5; CFA Institute Letter at 3; BlackRock Letter at 6; Liquidnet Letter at 1; CCMC Letter II at 2; ICI Letter at 5; STANY Letter at 9; Angel Letter at 7; KOR Letter II at 3; CHX Letter at 6; and Warner-Toomey Letter at 1. See also IAC Recommendations. 89 See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks Letter at 3; Tabb Letter at 5-6; ABC Letter at 2; ECFTF Letter at 1-2; Themis Letter at 6; CoreOne Letter at 2; CMR Letter II at 2; BIO Letter at 3; NVCA Letter at 3-5; CFA Institute Letter at 3; Liquidnet Letter at 1; STANY Letter at 9; KOR Letter II at 3; Warner-Toomey Letter at 1; and Vargas Letter at 1. 90 See Duffy Letter at 1; IssuWorks Letter at 3; ABC Letter at 3; NVCA Letter at 3; Liquidnet Letter at 3; STANY Letter at 9; Warner-Toomey Letter at 1; and Vargas Letter at 1. See also Tabb Letter at 8 (while not suggesting a longer duration, asserting that the one-year duration, which would require extensive technology development, may not be the best use of industry resources). 91 See ECFTF Letter at 1 (arguing that “[a] significantly longer time period is required to gather meaningful data around whether the changes to the market structure are having the desired effects”); CoreOne Letter at 2 (stating “it remains unclear if the [Tick] Pilot could generate meaningful data . . . given the [Tick] Pilot's length among other things.”); NVCA Letter at 4; and STANY Letter at 9. 92 See ECFTF Letter at 1-2; CMR Letter II at 2; NVCA Letter at 4-5; and Vargas Letter at 1. 93 See Duffy Letter at 1. 94 See Duffy Letter at 2; ECFTF Letter at 1-2; Themis Letter at 6; CMR Letter II at 2; BIO Letter at 3; SIFMA Letter II at 5-6; CFA Institute Letter at 3; and KOR Letter II at 3. Some commenters also indicated that the relatively short Pilot Period could have a negative impact on participation. Several commenters indicated that due to, among other things, the complexity and cost relative to the short duration of the Pilot Period, some market participants would avoid trading Pilot Securities during the Tick Size Pilot. 95 A number of commenters expressed concern that if market participants avoided trading Pilot Securities the assessment of the Tick Size Pilot would be frustrated by skewed data. 96 95 See IssuWorks Letter at 4; ECFTF Letter at 2; CMR Letter II at 7; STA Letter II at 11; NVCA Letter at 5; BATS Letter at 4; SIFMA Letter II at 6-7; FIF Letter at 6; ICI Letter at 6; Schwab Letter at 5; STANY Letter at 9; Fidelity Letter at 4; Bloomberg Letter at 13; TD Ameritrade Letter at 3; CHX Letter at 7; Citadel Letter II at 6; Warner-Toomey Letter at 4; and Vargas Letter at 1. 96 See IssuWorks Letter at 4; CoreOne Letter at 7; BATS Letter at 5; SIFMA Letter II at 6; Warner-Toomey Letter at 1; and Vargas Letter at 1. The recommended duration for the Tick Size Pilot varied among commenters advocating for a longer Pilot Period. Four commenters stated that the Pilot Period should be extended to five-years, 97 while other commenters suggested either a two- 98 or three-year duration. 99 Some commenters opined that the Pilot Period should be longer, but did not provide a specific time period. 100 Instead of a specific time period, others suggested a range of eighteen months to five years. 101 97 See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks Letter at 3; and Themis Letter at 6. 98 See KOR Letter II at 3. 99 See ECFTF Letter at 1-2 and Liquidnet Letter at 1. See also Vargas Letter at 1 (advocating for a longer Tick Size Pilot and stating that many experts suggested a three-year duration.). 100 See Tabb Letter at 1; ABC Letter at 2; CMR Letter II at 2 (believing the Tick Size Pilot should be extended by one to two years); and CFA Institute Letter at 3. 101 See CMR Letter II at 2; BIO Letter at 3 (stating a range of three to five years); NVCA Letter at 3-5 (stating the Pilot should last greater than three-years); and STANY Letter at 9 (indicating a Pilot duration of eighteen months to five-years). Six commenters stated that the Pilot Period of the Tick Size Pilot should be one-year as proposed. 102 One commenter, who advocated for a Tick Size Pilot with a one-year Pilot Period, asserted that sufficient data to analyze the effects of wider ticks could be generated within that timeframe. 103 Another commenter stated that there would need to be greater confidence in the benefits of Tick Size Pilot in order to justify a longer Pilot Period. 104 102 See CCMC Letter II at 2; STA Letter II at 7; CFA Letter at 6; BlackRock Letter at 6; ICI Letter at 5; and CHX Letter at 6. 103 See CFA Letter at 6. 104 See BlackRock Letter at 6. See also IAC Recommendations. Among the commenters advocating for a one-year Pilot Period, there was variance on whether the Tick Size Pilot should be cut off immediately after one-year 105 or remain in operation while the results are assessed. 106 One commenter stated that the Tick Size Pilot should be assessed following the first six months of the Pilot Period but that the Tick Size Pilot should still only operate for the one-year Pilot Period. 107 Five commenters offered that the Pilot Period should initially operate for one-year with the possibility of an extension if such action is supported by the data. 108 Five commenters stated that the Tick Size Pilot should continue during the final assessment of the data in order to mitigate unnecessary changes in the market. 109 Another commenter stated that the Pilot Period should be at least one-year to gather preliminary results and, if deemed appropriate, extended for a “full economic cycle” thereafter to determine its impact on capital formation. 110 105 See CCMC Letter II at 2 (asserting the Pilot should end completely following a year). See also BlackRock Letter at 6 (asserting that the Tick Size Pilot should have a “finite duration and clear end date”). 106 See STA Letter II at 7; FIF Letter at 6 (advocating for a preliminary assessment during the Tick Size Pilot to avoid unnecessary disruption); STANY Letter at 9 (noting that ending the Tick Size Pilot and possibly reintroducing it after the assessment would result in unnecessary risks and costs); KOR Letter II at 3; and CHX Letter at 6. 107 See STA Letter II at 7. 108 See STA Letter II at 7; ICI Letter at 5 (asserting that the Tick Size Pilot could only be extended for one-year if necessary); Angel Letter at 7; KOR Letter II at 3; and CHX Letter at 6. 109 See supra note 106 and accompanying text. 110 See Angel Letter at 7. C. Criteria for Pilot Securities The Commission received many comments with respect to the selection criteria for Pilot Securities. The commenters raised concerns about the proposed selection criteria, especially the market capitalization threshold, and suggested other criteria to be considered. 111 111 One commenter stated that the proposed Measurement Period should be extended to the previous twelve months to verify whether any unique circumstances created any unintentional biases. See CFA Institute Letter at 4. See also FIF Letter at 1 (suggesting that the Measurement Period should be redefined to conclude seven months before the effective date of the Tick Size Pilot). Another commenter argued that consideration be given to securities that are priced under $5.00 per share. See IssuWorks Letter at 4. 1. Market Capitalization of Pilot Securities Sixteen commenters argued that a $5 billion market capitalization threshold is too high. 112 Commenters argued that the market capitalization threshold should be decreased because the $5 billion threshold would capture securities not traditionally considered small capitalization securities, which are the focus of the Tick Size Pilot. 113 Two commenters believed that the $5 billion market capitalization threshold would include stocks that do not have the liquidity and market quality concerns that the Tick Size Pilot seeks to address. 114 Various commenters recommended that the market capitalization threshold for Pilot Securities be lowered from $5 billion to a range of $250 million to $2 billion. 115 112 See ECFTF Letter at 2; Themis Letter at 3; Vanguard Letter at 6; CMR Letter II at 5; CFA Letter at 3; NVCA Letter at 6; BATS Letter at 2-3; SIFMA Letter II at 8; MFA Letter II at 5-6; Wells Fargo Letter at 8; ICI Letter at 4; Schwab at 10-11; STANY Letter at 7; Fidelity Letter at 3; Warner-Toomey Letter at 2; and OTC Markets Letter at 3-4. 113 See MFA Letter II at 4; Wells Fargo Letter at 8; ICI Letter at 4; and Warner-Toomey Letter at 2 (stating “re-examine . . . [the capitalization threshold] to remain consistent with goals of the Pilot”). Commenters stated the directive from Congress in the JOBS Act and also echoed by the Commission in the June 2014 Order was to address concerns of small capitalization securities. See MFA Letter II at 5-6 and KCG Letter at 10. One commenter also argued that small capitalization stocks would benefit the most from the Tick Size Pilot. See ECFTF Letter at 2. 114 See Vanguard Letter at 6 and STA Letter II at 5. 115 See ECFTF Letter at 2 (recommending lowering the threshold to $750 million); Themis Letter at 3 (recommending lowering the threshold to $2 billion); Vanguard Letter at 6 (recommending lowering the threshold to $500 million); CMR Letter II at 5 (recommending lowering the threshold to $750 million); CFA Letter at 3 (recommending lowering the threshold to $2 billion); NVCA Letter at 6 (recommending lowering the threshold to less than $1 billion); BATS Letter at 2-3 (recommending lowering the threshold to less than $1 billion); SIFMA Letter II at 8 (recommending lowering the threshold to less than $1 billion); MFA Letter II at 6 (recommending lowering the threshold to $750 million); Wells Fargo Letter at 8 (recommending lowering the threshold to $1 billion); STANY Letter at 7 (recommending lowering the threshold to $750 million); Fidelity Letter at 3 (recommending lowering the threshold to $750 million to $1 billion); and OTC Markets Letter at 3-4 (recommending lowering the threshold to $250 million). 2. Other Comments on the Selection Criteria Some commenters stated that the current volume threshold of CADV of one million shares should be altered. For example, one commenter suggested that the volume threshold should range from 300,000 shares to 500,000 shares for illiquid securities. 116 Another commenter stated that the volume threshold should be based upon the daily dollar trading value to focus on small capitalization securities. 117 One commenter opined that the volume threshold should be based upon the volume relative to the public float. 118 116 See CFA Letter at 3. 117 See NVCA Letter at 6 (stating an appropriate average daily dollar trading value for small capitalization stocks is less than $10 million). 118 See Virtu Letter at 2. 3. Suggestions for Additional Selection Criteria A number of commenters recommended that additional selection criteria should be required and recommended additional thresholds for the selection of Pilot Securities. Nine commenters opined that an average weighted daily spread of five cents or greater should be a qualifying factor to avoid artificially widening the spread and increasing transaction costs for investors. 119 Other commenters stated that securities with an average spread of less than five cents would not benefit from the Tick Size Pilot because they are already very liquid. 120 Finally, two commenters suggested that including the daily turnover of a security would be a useful qualifying criterion to help determine liquidity. 121 119 See CoreOne Letter at 3 (advocating for using the average displayed spread for the Measurement Period); Two Sigma Letter at 2 (stating the securities meeting this criteria are approximately 25% of the NMS common stocks and would therefore be a large enough universe while minimizing the risk of increasing transaction costs to investors); CFA Letter at 3; MFA Letter II at 7 (asserting that the spread on some qualifying securities could increase by 500%); CFA Institute Letter at 4; Wells Fargo Letter at 9; Schwab Letter at 10-11; and OTC Markets Letter at 3-4. See also KCG Letter at 10 (arguing that artificially wider spreads will increase transaction costs). 120 See CFA Letter at 3 (stating that “securities with $0.01 spreads are already highly liquid and actively traded”); MFA Letter II at 7; and Schwab Letter at 10-11. 121 See CMR Letter II at 3-4 and STA Letter II at 4-5. 4. Securities Excluded from the Tick Size Pilot Two commenters raised the possibility of regulatory arbitrage and asserted that cross-listed securities from Canada should not be eligible for the Tick Size Pilot. 122 Another commenter suggested that any security that trades below $1.00 during the Measurement Period should be eliminated from consideration as a Pilot Security. Further, the commenter stated that if a Pilot Security during the Pilot Period trades below $1.00 then its data should be removed from the Tick Size Pilot. 123 Two commenters supported the exclusion of ETFs. 124 122 See STA Letter II at 9 and SIFMA Letter II at 10. 123 See CHX Letter at 2. 124 See CFA Institute at 4 (stating that the exclusion recognizes their different shareholder base) and ICI Letter at 4. D. Control Group, Test Groups, and Trade-At Prohibition A number of commenters discussed the design of the Tick Size Pilot. Two commenters opined that there were too many Pilot Securities included in each Test Group. 125 Some commenters indicated there were too many test groups, which would make the Tick Size Pilot complex to implement and difficult to assess. 126 One commenter supported the Tick Size Pilot design opining that it represented “logical steps” by comparing the trading environments of the test groups, and adding that “[i]f there is an incremental effect that each change has on various quality of markets metrics, it should be apparent from the [Tick] Pilot data.” 127 Another commenter supported the inclusion of all three Test Groups in order to “deepen [the] understanding of the various factors impacting liquidity in [today's] fragmented market.” 128 125 See STA Letter II at 5-6 and BATS Letter at 3 (arguing that the number of Pilot Securities per Test Group should be reduced to 100 securities). But see CFA Institute at 4 (asserting that 400 securities per Test Group are appropriate for “more robust analysis”). 126 See STA Letter II at 5 (arguing that the Tick Size Pilot should have only one test group); KCG Letter at 3 (asserting the Tick Size Pilot should include only Test Group One, but generally supports Test Groups One and Two); MFA Letter II at 6 (arguing that the Tick Size Pilot's “broader scope will likely frustrate the Commission's ability to assess the impact of increased tick sizes on liquidity for small-cap[italization] stocks”). See also supra note 81 and accompanying text (advocating for the elimination of Test Group Three). See also infra note 136 and accompanying text (asserting Test Group One should be eliminated). 127 See CHX Letter at 11. 128 See NYSE Letter at 3. Commenters suggested testing tick sizes other than the proposed $0.05 increment. Some commenters suggested that various tick size increments, both larger 129 and smaller 130 than the proposed $0.05 increment, be concurrently tested. Other commenters suggested that subpenny increments should be tested. 131 One commenter believed the $0.05 trade increment should apply to the opening and closing auctions and asked for this issue to be directly addressed in the Tick Size Pilot. 132 Conversely, another commenter suggested that the opening and closing auctions should be exempt from the Tick Size Pilot. 133 129 See IssuWorks Letter at 3 (advocating to study $0.10 or larger trade increments); CoreOne Letter at 3 (suggesting testing $0.02 and $0.10 trade increments); and OTC Markets Letter at 4 (stating the Commission should review trade increments of $0.10 and $0.25). 130 See CoreOne Letter at 3. 131 See Greenblatt Letter; RGM Letter at 2 (suggesting the Commission look into subpenny trade increments); and MFA Letter II at 3 (asserting that the Commission should test half-penny increments for highly liquid securities). 132 See FIF Letter at 2. 133 See Citigroup Letter at 6. One commenter asserted that, in order to avoid logistical and operational problems of rejecting non-conforming orders for brokers and customers, the Tick Size Pilot should permit orders that are received but not priced in $0.05 increments to be re-priced for display purposes to a permissible $0.05 increment. 134 Another commenter requested clarification on the handling of orders and quotes that are not in a proper tick increment. 135 134 See ITG Letter at 6-7 (noting that for purposes of order display and regulatory compliance, “price-sliding” is permissible in the context of Rule 201 of Regulation SHO). 135 See FIF Letter at 2. 1. Test Group One: Widened Quote Increment One commenter suggested that Test Group One should be eliminated in order to reduce the Tick Size Pilot's complexity. 136 Four commenters theorized that Test Group One “probably will drive more volume to the dark pools” because the trade increment is less than $0.05. 137 For example, one commenter stated, “[w]ith no controls around trading increments, we will see a deterioration in market quality as more trading moves off-exchange, and lit market making is further disadvantaged.” 138 One commenter suggested that market participants should be permitted in Test Group One to accept or rank orders in penny increments because exchanges and agency ATSs would be at a competitive disadvantage vis-à-vis broker-owned proprietary execution systems that could trade, accept and rank orders at otherwise impermissible increments. 139 One commenter stated that Test Group One should be eliminated because “we should not be engaging in experiments that actively increase undisplayed liquidity.” 140 136 See KOR Letter II at 3. 137 See Wellington Shields Letter at 4 (arguing that market participants may be hesitant to display liquidity in instances where the quoting increment is changed without corresponding changes to the minimum trading increment); Tabb Letter at 3 (forecasting that off-exchange volume to rise to between 60-70% from its current range of lower to mid-40%); CFA Letter at 4; and KOR Letter II at 3 (stating that “as constructed, [Trade Group One] will simply divert flow from lit markets to dark pools and internalizers.”). 138 See KOR Letter II at 3. 139 See BATS Letter at 3. 140 See CFA Letter at 4. 2. Test Group Two: Widened Quote and Trade Increment The comments on Test Group Two were mainly directed at the exception for Retail Investor Orders, which is also applicable to Test Group Three. Two commenters argued that the definition of Retail Investor Order should be broadened so that it would be less burdensome to implement and applicable to more individuals. 141 Five commenters stated that an attestation should not be required, as it would be unwieldy for trading centers to surveil and attest that substantially all trades entered into the system originated from an individual. 142 141 See Wells Fargo Letter at 5 and FIF Letter at 2. 142 See Tabb Letter at 5; Two Sigma Letter at 2; KCG Letter at 9 (noting that the definition of Retail Investor Order was too complex and ambiguous and would lead to many of the largest retail firms to not sign the required attestations); STANY Letter at 6; and TD Ameritrade at 5. Other commenters requested clarification of the Retail Investor Order definition. 143 One commenter questioned whether the definition of Retail Investor Order in the Tick Size Pilot was consistent with that of the Retail Liquidity Programs at various exchanges. 144 Another commenter suggested that the Retail Investor Order definition should be based on the “individual customer” account type definition used by FINRA's OATS. 145 143 See Two Sigma Letter at 2; KCG Letter at 9; STANY Letter at 6; Fidelity Letter at 7 (seeking clarification on whether there is a restriction on who the contra party may be for a Retail Investor Order); and TD Ameritrade Letter at 5-6. 144 See TD Ameritrade Letter at 7-8. 145 FINRA's Order Audit Trail System (“OATS”) is a FINRA owned automated reporting system that captures order information in NMS stocks and OTC equity securities that is required for all FINRA members. See FINRA Rule 7410(k). OATS defines an individual customer account type as “an account that does not meet the definition of FINRA Rule 4512(c) and is also not a proprietary account.” See FIF Letter at 2. Other commenters supported the Tick Size Pilot's proposed exception for Retail Investor Orders. 146 Two other commenters thought the exception for Retail Investor Orders should apply generally to all orders, including institutional orders. 147 One commenter opined that the exception should be broadened to alleviate the implementation burden. 148 146 See Virtu Letter at 2 (supporting the mid-point, retail, block size, and single-priced transactions exceptions in the Tick Size Pilot) and CHX Letter at 13. 147 See SIFMA Letter II at 9 and Citadel Letter II at 8-9. 148 See SIFMA Letter II at 9. Seven commenters opposed the Retail Investor Order exception because the minimum price improvement required by the exception was not large enough. 149 Some of these commenters were concerned that the relatively low level of required price improvement needed to qualify for the exception would encourage internalization. 150 Some of these commenters also believed that the wider spread warranted a more significant amount of price improvement relative to the spread. 151 149 See Galinskie Letter at 2; CFA Letter at 5; Weaver Letter at 2; CFA Institute Letter at 6; STANY Letter at 6; IMC Letter at 2; and Birch Bay Letter at 1. 150 See IMC Letter at 2 and Birch Bay Letter at 1 (asserting that the exception would also undermine the Trade-At Prohibition of Test Group 3). See also Wells Fargo Letter at note 19 (asserting that the number of exceptions, especially the retail price improvement exception, would render the data inconclusive). 151 See Galinskie Letter at 2 (arguing for “meaningful” price improvement); CFA Letter at 5; IMC Letter at 2 (advocating for price improvement of fifty-percent of the tick size); and Birch Bay Letter at 1 (arguing that price improvement should be a full five-cent improvement). Some commenters opposed the exception for Retail Investor Orders for other reasons. 152 For instance, one commenter believed that all Tick Size Pilot pricing should be in $0.05 increments to effectively attract liquidity and market makers and thus the Retail Investor Order exception could undermine the validity of the Tick Size Pilot. 153 Another commenter argued that in light of the highly desirable nature of retail order flow, the elimination of the exception would encourage more displayed liquidity. 154 Another commenter was concerned that the Retail Investor Order exception would cause price competition to be prioritized, and negatively impact the Tick Size Pilot because of its view that markets that compete mostly on price are generally unable to compete on the value provided by, for instance, research, sales, and capital commitment. 155 This commenter stated that the tick size must have “integrity” in order to attract investor interest, and did not think, among other things, that the Retail Investor Order exception made “economic sense.” 156 152 See Wellington Shields Letter at 4; IssuWorks Letter at 5; and KOR Letter II at 4. See also Galinskie Letter at 2 (arguing that subpenny trading should be eliminated across all markets). 153 See Wellington Shields Letter at 4 (arguing that the midpoint exception should be eliminated because it provides price improvement to the liquidity taker but prevents public order interaction with a liquidity provider, which the commenter suggests is not necessarily a market benefit.). See also Bright Trading Letter at 2 (opining that the Retail Order exception will increase the toxicity of the order flow, which will result in market makers widening their quote spreads or not quoting at all). 154 See KOR Letter II at 4. This commenter also opined that the retail price improvement exception would increase payment-for-order-flow stating, “With tick sizes at a penny, internalizers had little leeway in how much they could pay for orders, as they are generally only profiting at a fraction of the spread. By blowing out spreads but excluding retail trades at the midpoint, the result will be a dramatic increase in PFOF rates.” 155 This commenter believes that pure price competition would not attract more liquidity. See IssuWorks Letter at 5. 156 See IssuWorks Letter at 5. 3. Test Group Three: Widened Quote and Trade Increment With a Trade-At Prohibition The Commission received many comments on Test Group Three, and in particular, on the Trade-At Prohibition. Twenty-seven commenters opposed the Trade-At Prohibition. 157 These commenters generally believed that the Trade-At Prohibition was overly complex 158 and would be costly to implement and operate, 159 and could induce market participants to opt-out of quoting and trading in Test Group Three Pilot Securities. 160 Some of these commenters opined that the Tick Size Pilot data could be distorted if a number of market participants were to forego quoting and trading in the Test Group Three Pilot Securities because of the Trade-At Prohibition. 161 Other commenters argued that the Trade-At Prohibition would increase costs for investors. 162 One commenter pointed to Australian and Canadian rules 163 as evidence that market quality would be adversely affected and as a justification to not implement trade-at domestically. 164 Finally, three commenters supported testing the Trade-At Prohibition and encouraged the Commission to simultaneously reduce the market access fee cap. 165 157 See STA Letter I at 3; Tabb Letter at 5-6; ECFTF Letter at 2; Two Sigma Letter at 2-3; Vanguard Letter at 5 (stating that while it is opposed to including the Trade-At Prohibition in the Tick Size Pilot, it supports a trade-at prohibition for the overall market if it is coupled with the elimination of maker-taker pricing); CoreOne Letter at 7; JonesTrading Letter at 1 (stating that Trade-At Prohibition is not related to the purpose of the Tick Size Pilot); CMR Letter II 5-8; STA Letter II at 6; KCG Letter at 11-17; NVCA Letter at 7; BATS Letter at 4-6; SIFMA Letter II at 4; MFA Letter II at 7-8; Wells Fargo Letter at 5-6; Citigroup Letter at 2; BlackRock Letter 2-3; Liquidnet Letter at 2; ICI Letter at 3-4; Schwab Letter at 4; STANY Letter at 5-6; Fidelity Letter at 5; Bloomberg Letter at 16; TD Ameritrade Letter 2-4; KOR Letter II at 4-5; ITG Letter at 4-5; Citadel Letter II at 6; and OTC Markets Letter at 7-9. 158 See Tabb Letter at 5 (noting that the Trade-At Prohibition would introduce significant market structure complexity); ECFTF Letter at 2 (stating the belief that Trade-At Prohibition introduces an unnecessary layer of complexity); STA Letter II at 6; ICI Letter at 4; ITG Letter at 3 (noting that the Trade-At Prohibition introduces unnecessary levels of complexity and associated unintended consequences); and Citadel Letter II at 6-7. 159 See MFA Letter II at 7 (expressing concerns that Test Group Three would exponentially increase the complexity and cost of the Tick Size Pilot) and Citigroup Letter at 4 (noting that overwhelming majority of the cost of the Tick Size Pilot can be attributed to the Trade-At Prohibition). 160 See CoreOne Letter at 7 (noting that an unintended consequence of Trade-At Prohibition is that a number of market participants will elect to trade using third parties or not trade at all in Test Group Three in order to avoid the cost of implementation). 161 See Two Sigma Letter at 3 and CoreOne Letter at 7 (noting that opting-out would potentially compromise the validity of the results and cast doubt on whether the results could be extrapolated to a broader based, final rule). 162 See CMR Letter II at 3 (noting that the inclusion of a Trade-At Prohibition without also addressing related issues like exchange access fees and backup systems could harm investors and increase the likelihood of extreme adverse market events); Schwab Letter at 2 (noting concerns that the Trade-At Prohibition will have on execution quality and cost for retail investors); and Citadel Letter II at 5. 163 See Australian Securities and Investment Commission Market Integrity Rule 4.1.1 and Investment Industry Regulatory Organization of Canada Universal Market Integrity Notice 12-0130. 164 See BlackRock Letter at 2. But see CFA Institute Letter at 2-3 (asserting that despite the negative market quality effects of trade-at rules internationally, the NMS plan should be implemented domestically as it could lead to valuable information). 165 See Virtu Letter at 2; CFA Institute Letter at 6; and Bright Trading Letter at 3. See also KOR Letter II at 5. Ten commenters that opposed the Trade-At Prohibition nevertheless recommended modifications related to the provision should the Commission approve the Tick Size Pilot with the Trade-At Prohibition. 166 These other commenters' recommendations included, among other things, changing the scope of the Trade-At Prohibition, 167 and changing the retail price improvement exception. 168 166 See KCG Letter at 11-17; NVCA Letter at 7; BATS Letter at 5-6 (noting that Trade-At Prohibition should only apply to protected NBBO, not protected quotes and executing against nondisplayed orders when the market is crossed); SIFMA Letter II at 4; BlackRock Letter at 2-3; Liquidnet Letter at 2 (noting that the thirteen exceptions are too complex); STANY Letter at 5-6; Bloomberg Letter at 15 (opining that there are less burdensome alternatives to the proposed Trade-At Prohibition, including reduced access fees, permitting issuers enter into contracts with market makers to set their own spreads, and implementing a trade-at prohibition that is more consistent with the June 2014 Order); KOR Letter II at 4-5; and Citadel Letter II at 7. 167 See BATS Letter at 5 (noting that Trade-At Prohibition should only apply to protected NBBO, not protected quotes); SIFMA Letter II at 7 (noting that broker-dealers should be able to internalize without any size limitation if they are quoting at the NBBO); BlackRock Letter at 2 (stating that non-displayed liquidity at NBBO should be allowed to execute); KOR Letter II at 5 (supporting a simplified Trade-At Prohibition independently); and Citadel Letter II at 7 (noting that the Trade-At Prohibition should not prohibit a trading center from executing more than displayed size). 168 See KCG Letter at 9 (stating the proposed Retail Investor Order definition is too complex); STANY Letter at 6 (stating that the price improvement of the Retail Investor Order exception needs to be greater and the attestation should be amended); KOR Letter II at 4 (stating that the Retail Investor Order exception would offset the purpose of the Trade-At Prohibition to promote the execution of displayed liquidity and should be eliminated); and Citadel Letter II at 8-9 (noting that all orders should have price improvement exception and exchange retail programs should not receive special treatment). Fourteen commenters supported testing the Trade-At Prohibition. 169 Five commenters supported the Trade-At Prohibition as proposed. 170 Certain commenters expressed their belief that the Trade-At Prohibition could enhance displayed liquidity 171 and provide valuable information to the Commission. 172 Several commenters argued that the Trade-At Prohibition should apply to all securities not just Pilot Securities. 173 One commenter suggested that interested parties should not prejudge the efficacy of the Trade-At Prohibition and stated that “studying the impact of tick increments and display priority will benefit emerging growth companies regardless of whether the [Tick Size Pilot] leads to the permanent adoption of five-cent tick increments, national display priority, a Trade-At rule, or any other rule.” 174 Another commenter, while skeptical about the benefits of the Trade-At Prohibition, supported its inclusion in the Tick Size Pilot in order to “gather hard evidence to help make the case . . . whether trade-at is a good idea.” 175 Several commenters believed that the Trade-At Prohibition would support the price discovery mechanism and mitigate the migration of displayed interest to off-exchange trading venues. 176 Many of these commenters argued that the Trade-At Prohibition should be included in the Tick Size Pilot in order to mitigate this potential migration of trading. 177 169 See Adorney Letter; Wellington Shields Letter at 5; Themis Letter at 2 (expressing concerns for the exceptions to Trade-At Prohibition as overly complex); Virtu Letter at 2; BIO Letter at 4; CFA Letter at 5-6; CFA Institute Letter at 5 (stating the Tick Size Pilot as well as the Trade-At Prohibition would be a “useful exercise”); Bright Trading Letter at 2; Angel Letter at 10-11; CHX Letter at 17; IMC Letter at 2; Birch Bay Letter at 1 (stating strong support for the Trade-At Prohibition to curtail internalization); Nasdaq Letter at 4; and NYSE Letter at 3. 170 See Adorney Letter; Wellington Shields Letter at 3; BIO Letter at 4; CHX Letter at 17; IMC Letter at 1; and Nasdaq Letter at 4. 171 See Wellington Shields Letter at 5; CHX Letter at 17; and IMC Letter at 2. 172 See BIO Letter at 4. 173 See Adorney Letter (“every time an order is executed away in a dark pool at the same price (or some cruel di minimis price like $15.997), it is 100% trading ahead of potential orders . . .”) and Vanguard Letter at 2. 174 See Nasdaq Letter at 4. 175 See Angel Letter at 10-11. 176 See CHX Letter at 17 (expressing concern that “if left unchecked migration could rise to a level where the price discovery mechanism provided by `lit' venues could be compromised.”); IMC Letter at 2; Nasdaq Letter at 5; and NYSE Letter at 3 (acknowledging speculation that larger ticks could lead to more internalization and harm liquidity, but believes the outcome is uncertain and it is important for the data to decide). 177 See CHX Letter at 17; IMC Letter at 2; and NYSE Letter at 3. a. Protected Quotations Standard Several commenters discussed the use of the protected quotation standard rather than the NBBO for the Trade-At Prohibition. Some commenters were concerned that using the protected quotation standard would protect less competitive prices and undermine price competition 178 or would be too onerous. 179 While other commenters favored using the protected quotation standard as a means to encourage posting lit quotations. 180 Two commenters requested that the protected quotation standard be clarified. 181 178 See CMR Letter II at 6. 179 See CMR Letter a 6; BATS Letter at 5 (stating that use of protected quotes at the NBBO properly balances the goal of rewarding those who set lit prices while also preserving trading center competition); and Citigroup Letter at 2. 180 See CFA Institute Letter 3 and CHX Letter at 18 (stating the protected quotation standard “supports price discovery” and is analogous to Rule 611 of Regulation NMS that would make it “simple to understand and implement”). 181 See FIF Letter at 3 (requesting clarification on what quotes would be subject to the Trade-At Prohibition—protected quotations or NBBO) and Bloomberg Letter at 21 (inquiring whether a matching engine could use the protected quotation standard for routing while using the NBBO standard for matching). b. SRO Quotation Feed One commenter supported the use of an SRO Quotation Feed to post and execute trades at the protected quote. 182 This commenter stated that this feature would assist trading centers which cannot publish their own protected quotation. 182 See CHX Letter at 18. c. Size Limitation Several commenters discussed the Tick Size Pilot's Size Limitation. 183 Commenters specifically took issue with the restriction prohibiting a trading center from immediately accessing its hidden, reserve interest that is at a protected price. 184 Several commenters were concerned the Size Limitation would inhibit execution quality and create risks of information leakage. 185 Other commenters were concerned that the Size Limitation would add implementation complexity, among other things, due to additional routing obligations. 186 Two commenters supported the Size Limitation arguing that without it the Trade-At Prohibition would do very little to promote displayed liquidity. 187 183 See Tabb Letter at 5; CMR Letter II at 6; STA Letter II at 10; KCG Letter at 15 (stating that the Size Limitation is beyond the scope of the Commission's June 2014 Order); BATS Letter at 5-6; SIFMA Letter II at 7; Citigroup Letter at 2; BlackRock Letter at 3; Bloomberg Letter at 13; CHX Letter at 19; Citadel Letter II at 7; and NYSE Letter at 3. 184 See STA Letter II at 10 (noting that the change in execution logic is highly complex and recommends that hidden orders be provided an exemption to satisfy incoming orders); SIFMA Letter II at 7 (stating that broker-dealers should be allowed to internalize order flow without a limitation on size if they are displaying a quote at the price of the NBB or NBO and execution quality of large orders primarily from institutions could be harmed); Bloomberg Letter at 13 (expressing lack of support for trading with all display before trading with reserve); and Citadel Letter II at 7 (noting that there is substantial un-displayed liquidity at exchanges through iceberg orders and other non-displayed orders, and tapping this additional liquidity is very important to institutional and retail investors). 185 See Tabb Letter at 5 (noting that execution certainty would be reduced); CMR Letter II at 6 (noting that information leakage risk would increase as investors with large orders would have to simultaneously execute against the BBO at multiple venues, thereby exposing the orders to significant signaling risk and market impact); BATS Letter at 5-6 (noting that not allowing execution of non-displayed order at a price equal to a protected quotation may disincent trading centers from quoting in the lit markets); SIFMA Letter II at 7 (stating that broker-dealers should be allowed to internalize order flow without a limitation on size if they are displaying a quote at the price of the NBB or NBO and execution quality of large orders primarily from institutions could be harmed); and BlackRock Letter at 3 (stating that the Size Limitation creates excessive delay in execution and sub-optimally broadcasts order flow in illiquid names to multiple venues when there might have been sufficient reserve or non-displayed interest to accommodate the order). 186 See CMR Letter II at 6; STA Letter II at 10 (noting that the change in execution logic is highly complex and recommends that hidden orders be provided an exemption to satisfy incoming orders); Citigroup Letter at 2 (noting that the Size Limitation and Venue Limitation are more onerous than any version of trade-at and there is no real benefit to price discovery and to displayed order); and BlackRock Letter at 3. 187 See CHX Letter at 19 (stating that without the Size Limitation, the Trade-At Prohibition would do little if anything to promote displayed liquidity and that it would reinforce the price discovery mechanism) and NYSE Letter at 3. d. Venue Limitation Commenters generally opposed the Venue Limitation because it would restrict market makers' execution of incoming orders to lit exchanges. 188 Commenters opined that the Venue Limitation offered little, if any, market quality enhancement, and was anti-competitive. 189 One commenter stated; “[T]here is no real benefit to price discovery and no real benefit to the displayed order; therefore, there is no incentive for market participants to display additional liquidity. It is simply a way to subsidize the for-profit exchanges by forcing more orders to be routed to them.” 190 Two of the Participants, however, asserted that the Venue Limitation was an analog to the Size Limitation and is necessary to gauge the market impact of wider tick sizes. 191 188 See CMR Letter II at 7 (noting that the Venue Limitation would increase message traffic between exchanges and other trading centers, which may cause additional failures of systems); KCG Letter at 16; SIFMA Letter II at 7 (stating that broker-dealers should be allowed to internalize order flow without a limitation on size if they are displaying a quote at the price of the NBB or NBO); Citigroup Letter at 2; Citadel Letter II at 7; and OTC Markets Letter at 8. 189 See KCG Letter at 16 (stating that the Venue Limitation is beyond the scope of the Commission's June 2014 Order and “anti-competitive on its face”); Citigroup Letter at 2 (noting that the Size Limitation and Venue Limitation are more onerous than any version of trade-at and there is no real benefit to price discovery and to displayed order); Citadel Letter II at 7 (stating that market makers should not be forced to route all of their orders to the exchanges who would then reap the full benefit of their unnecessarily high, but permitted, “take” fees); and OTC Markets Letter at 8 (stating that the Venue Limitation violates the most basic principles of competition and capitalism, under which a variety of venues should be able to compete to offer the best package of price and services to investors). 190 See Citigroup Letter at 2. 191 See CHX Letter at 20 (stating that the Venue Limitation is necessary for the same reason as the Size Limitation) and NYSE Letter at 3 (supporting the Venue Limitation to protect displayed quotes, strengthen the incentive for market makers to quote aggressively, and allow the ability to analyze the impact of a protected quote requirement on a wider tick size). e. Block Size Orders Several commenters suggested that the Block Size definition be altered to more accurately reflect block size transactions of small capitalization securities. 192 Two commenters recommended that the Block Size exception should be included in all Test Groups to help maintain institutional trading in Pilot Securities, 193 while another commenter stated that block trades should have the same execution increments as Retail Investor Orders. 194 192 See SIFMA Letter II at 7 (stating that the block size definition should be decreased); BlackRock Letter at 3-4 (noting that “[n]early a third of equities eligible for the [Tick] [P]ilot have average daily trading volumes which are lower than 50,000 shares. A block of 10,000 shares would be incommensurate with the volume profile for these stocks as it represents a substantial percentage of the daily trading volume.''); and Fidelity Letter at 7. 193 See JonesTrading Letter at 2 (asserting that the Negotiated Trade Exception should also apply to al Test Groups to preserve institutional anonymity) and Citadel Letter II at 8 (advocating for the exemption to preserve executive quality). 194 See Liquidnet Letter at 2 (noting that block execution is important to institutional investors and that block orders should be allowed to execute at half-penny increments). f. Other Test Group Three Exceptions Seven commenters, while supporting the Trade-At Prohibition, recommended that its exceptions be modified. 195 Two commenters opined that the Trade-At Prohibition should not contain exceptions similar to Rule 611 of Regulation NMS because the Trade-At Prohibition would then replicate the complexity of Regulation NMS. 196 Other commenters opined that the Retail Investor Order exception should be modified or eliminated. 197 One commenter stated that the fractional shares exception to the Trade-At Prohibition was reasonable because fractional shares cannot be displayed and this exception would have a minimal effect on the market. 198 195 See Themis Letter at 4-5; CFA Letter; CFA Institute Letter; Bright Trading Letter; IMC Letter; Birch Bay Letter; and NYSE Letter (supporting certain limited exceptions to the Trade-At Prohibition in circumstances where the end customer is benefited by the exception). See also IssuWorks Letter at 5 (while not expressing support or opposition to the Trade-At Prohibition, the commenter suggested that odd-lot trades should be subject to the Trade-At Prohibition). But see CHX Letter at 18 (supporting the exceptions as proposed). 196 See Themis Letter at 4-5 and CFA Letter at 5-6 (arguing that the exceptions should be eliminated and the price improvement for retail investors should be increased). But see FIF Letter at 3 (while not expressing support or opposition to the Trade-At Prohibition, the commenter stated that it approved of mirroring the Regulation NMS exceptions). 197 See CFA Letter at 5; CFA Institute Letter at 5-6 (objecting to the retail price improvement amount as not sufficient to prevent market participants from stepping in front of displayed limit orders); Bright Trading Letter at 2 (objecting strongly to the retail exception because retail order flow would be more valuable on the exchanges); IMC Letter at 2 (noting that $0.005 hardly qualifies as meaningful price improvement and recommends at least half of the applicable tick); and Birch Bay Letter at 1 (believing that price improvement should be the full five cent tick increment for retail orders). 198 See CHX Letter at 20. g. Odd Lots Finally, several commenters made suggestions regarding odd lots. One commenter suggested that odd lots should be subject to the Trade-At Prohibition because current trading practices create a large number of odd lot trades that would circumvent the Tick Size Pilot. 199 Another commenter, however, suggested that odd lot orders be excepted from the Trade-At Prohibition, as odd lots historically are often excluded from regulatory requirements. 200 One commenter requested clarity on the treatment of odd lots. 201 199 See IssuWorks Letter at 5 (citing O'Hara, Yao, and Ye paper, What's Not There, The Odd-Lot Bias in TAQ Data, that asserted 19% of trades are missing from the consolidated tape). 200 See SIFMA Letter at 9 (asserting that larger orders divided up to create odd lots should not qualify for the exemption). 201 See BATS Letter at 6. E. Collection and Assessment of Tick Size Pilot Data 1. Trading Center Data Several commenters stated that the Tick Size Pilot should leverage existing reporting requirements to ease the implementation burden. 202 Commenters suggested that existing data, such as data available through MIDAS, 203 Rule 605, 204 the SIPs, 205 and OATS, 206 could be used to lessen the burden of collection. 207 One commenter stated the collected data should focus only on data that allows for centralized comparisons and analysis. 208 This commenter also suggested that only data relevant to increased liquidity of Pilot Securities should be collected. 209 Some commenters believed certain additional data metrics should be included to better facilitate the assessment of the Tick Size Pilot. 210 202 See CoreOne Letter at 6; STA Letter II at 3 (recommending a widely used quantitative market metrics to measure improvements and degradations in overall liquidity available); FIF Letter 3-4; SIFMA Letter II at 8; STANY Letter at 8-9; Nasdaq Letter at 6-7; and NYSE Letter at 2-3. 203 Market Information Data and Analytics System (“MIDAS”) collects and processes data from the consolidated tapes as well as from separate proprietary feeds made individually available by each equity exchange. See http://www.sec.gov/marketstructure/midas.html . 204 Rule 605, Disclosure of Order Execution Information (“Rule 605”) is a trading center monthly reporting requirement regarding covered orders in NMS stocks. See 17 CFR 242.605. 205 Securities Information Processor (“SIP”) is any person engaged in the business of collecting, processing, or preparing for distribution information with respect to transactions or quotations. See 15 U.S.C. 78c(22). 206 See supra note 145 and accompanying text. 207 See CoreOne Letter at 6; STA Letter II at 4 (advocating for additional categories of data that can be obtained through MIDAS); SIFMA Letter II at 8; STANY Letter at 8-9; CHX Letter at 2; Nasdaq Letter at 6-7; and NYSE Letter at 2-3. 208 See FIF Letter at 3. 209 See FIF Letter at 3-4 (suggesting sixteen specific data requirements that would be relevant to assessing liquidity). 210 See Bloomberg Letter at 17 (suggesting the NMS plan data include order type usage statistics, off-exchange trading information, and research coverage metrics); Weaver Letter at 2 (requiring brokers to report the number of shares internalized). See also IAC Recommendations. Several commenters supported the public availability of data for potential analysis by academics and other interested parties. 211 211 See BIO Letter at 4 (stating an interest in reviewing the Tick Size Pilot results on an industry-by-industry basis); CFA Institute Letter at 6 (asserting that “[p]ublic release ensures accountability and peer review of the data by enabling independent researchers to look for unique and potentially valuable bits of information within the data.”); Bloomberg Letter at 17; and KOR Letter II at 5-6 (urging the Commission to provide free and open access to Tick Size Pilot data to ensure broadened analysis from varied perspectives). Two commenters suggested that the data should be available in a downloadable format. See CFA Letter at 6; and FIF Letter at 2. 2. Market Maker Profitability Data Thirteen commenters discussed whether the Market Maker Profitability Data should be collected. 212 Ten commenters opposed collecting the Market Maker Profitability Data 213 because they believe gathering such data would be costly. 214 One commenter noted that profitability information is highly confidential and proprietary. 215 This commenter stated that profitability information is not currently disclosed except in a public company context, and requiring market makers to disclose their profitability to competitors ( i.e., the exchanges) is anti-competitive. This commenter posited that market makers may opt-out of trading in Pilot Securities rather than disclose the profitability information. 212 See Duffy Letter at 2; CoreOne Letter at 2 (noting that it is going to be very difficult to measure the impact on research coverage from market maker profitability); STA Letter II at 10; KCG Letter at 18; CFA Letter at 7; SIFMA Letter II at 9; Citigroup Letter at 4-5; FIF Letter at 5-6; STANY Letter at 8; TD Ameritrade Letter at 5; Angel Letter at 8; CHX Letter at 21-22; and NYSE Letter at 2. 213 See Duffy Letter at 2; STA Letter II at 10; KCG Letter at 18; SIFMA Letter II at 9; Citigroup Letter at 4-5; FIF Letter at 5-6; STANY Letter at 8; TD Ameritrade Letter at 5; CHX Letter at 21-22; and NYSE Letter at 2. 214 See SIFMA Letter II at 8 (arguing the collection of market maker profitability unnecessarily increases the burden on market makers) and FIF Letter at 5-6 (asserting that the collection of market maker profitability would involve significant implementation). See also STANY Letter at 8 and NYSE Letter at 2 (stating eliminating the collection of market maker profitability would reduce the cost of the Tick Size Pilot). 215 See STANY L [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2015-11425. Public record. Not legal advice.