Market Data Infrastructure

Federal RegisterMar 24, 2020

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

[Release No. 34-88216; File No. S7-03-20]

RIN 3235-AM61

Market Data Infrastructure

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission” or “SEC”) is proposing to amend 17 CFR 242, Rules 600 and 603 and to adopt new Rule 614 of Regulation National Market System (“Regulation NMS”) under the Securities Exchange Act of 1934 (“Exchange Act”) to update the national market system for the collection, consolidation, and dissemination of information with respect to quotations for and transactions in national market system (“NMS”) stocks (“NMS information”). Specifically, the Commission proposes to expand the content of NMS information that is required to be collected, consolidated, and disseminated as part of the national market system under Regulation NMS and proposes to amend the method by which such NMS information is collected, calculated, and disseminated by introducing a decentralized consolidation model where competing consolidators replace the exclusive securities information processors.

DATES:

Comments should be received on or before May 26, 2020.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

http://www.sec.gov/rules/proposed.shtml

); or

• Send an email to

rule-comments@sec.gov

. Please include File Number S7-03-20 on the subject line.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-03-20. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's internet website (

http://www.sec.gov/rules/proposed.shtml

). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any materials will be made available on the Commission's website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov

to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Kelly Riley, Senior Special Counsel, at (202) 551-6772; Ted Uliassi, Senior Special Counsel, at (202) 551-6095; Elizabeth C. Badawy, Senior Accountant, at (202) 551-5612; Leigh Duffy, Special Counsel, at (202) 551-5928; Yvonne Fraticelli, Special Counsel, at (202) 551-5654; Steve Kuan, Special Counsel, at (202) 551-5624; or Joshua Nimmo, Attorney-Advisor, at (202) 551-5452, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing to expand the content of NMS information that is required to be collected, consolidated, and disseminated as part of the national market system under Regulation NMS by proposing several new defined terms under Rule 600 of Regulation NMS, including “consolidated market data,” “core data,” “regulatory data,” “administrative data,” and “exchange-specific program data.” To implement the decentralized consolidation model, the Commission is proposing to amend Rule 603 under Regulation NMS to remove the requirement that all consolidated information for individual NMS stocks be disseminated through a single plan processor and to require each national securities exchange and national securities association to make available its NMS information in the same manner and using the same methods, including all methods of access and the same format, as the exchange or association makes available any quotation or transaction information for NMS stocks to any person. In addition, the Commission is proposing to add new Rule 614 and a new Form CC to govern the registration and responsibilities of competing consolidators. Further, the Commission is proposing that the effective national market system plan(s) for NMS stocks be amended to reflect the decentralized consolidation model. Finally, the Commission is proposing to amend Regulation SCI to expand the definition of “SCI entities” to include competing consolidators.

In particular, the Commission is proposing: (1) Amendments to Rule 600 [17 CFR 242.600] to add new definitions of “administrative data,” “auction information,” “competing consolidator,” “consolidated market data,” “core data,” “depth of book data,” “exchange-specific program data,” “primary listing exchange,” “regulatory data,” “round lot,” and “self-aggregator;” (2) amendments to Rule 603 [17 CFR 242.603] to require national securities exchanges and national securities associations to make available NMS information to competing consolidators and self-aggregators and to remove the requirement that all consolidated information for individual NMS stocks be disseminated through a single plan processor; (3) adoption of Rule 614 [17 CFR 242.614] and Form CC to require registration of competing consolidators; (4) that the participants to the effective national market system plan(s) relating to NMS stocks amend such plan(s) to reflect the definition of “consolidated market data” and the implementation of a decentralized consolidation model; (5) amendments to Rule 1000 [17 CFR 242.1000] to include competing consolidators in the definition of “SCI entities;” and (6) conforming changes and updating cross-references in Rule 201(a)(3) [17 CFR 242.201(a)(3)], Rule 201(b)(1)(ii) [17 CFR 242.201(b)(1)(ii)], Rule 201(b)(3) [17 CFR 242.201(b)(3)], Rule 600(b)(43) [17 CFR 242.600(b)(43)], Rule 600(b)(61) [17 CFR 242.600(b)(61)], and Rule 602 [17 CFR 242.602].

Table of Contents

I. Introduction

II. Current Market Data Infrastructure under Regulation NMS and the Equity Data Plans

A. Consolidated Market Data and Proprietary Data

B. NMS Regulatory Framework

C. Other Regulatory Data

1. Regulation SHO

2. Limit-Up Limit-Down Plan

3. Market-Wide Circuit Breakers

4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders

III. Proposed Enhancements to NMS Information

A. Introduction

B. Proposed Definition of “Consolidated Market Data”

C. Proposed Definition of “Core Data”

1. Round Lot Size

2. Depth of Book Data

3. Auction Information

D. Proposed Definition of “Regulatory Data”

1. Regulation SHO

2. Limit Up-Limit Down Plan

3. Market-Wide Circuit Breakers

4. Other Regulatory Data

E. Proposed Definition of “Administrative Data”

F. Proposed Definition of “Exchange-Specific Program Data”

IV. Need for and Proposed Enhancements to Provision of Consolidated Market Data

A. Existing Centralized Consolidation Model

B. Proposed Decentralized Consolidation Model

1. Access to Data

2. Competing Consolidators

3. Self-Aggregators

4. Amendment to the Effective National Market System Plan(s) for NMS Stocks

5. Effects on the National Market System Plan Governing the Consolidated Audit Trail

6. Transition Period

C. Alternatives to the Centralized Consolidation Model

1. Distributed SIP Alternative

2. Single SIP Alternative

V. Paperwork Reduction Act

A. Summary of Collection of Information

1. Registration Requirements and Form CC

2. Competing Consolidator Duties and Data Collection

3. Recordkeeping

4. Reports and Reviews

5. Amendment to the Effective National Market System Plan(s) for NMS Stocks

6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations

B. Proposed Use of Information

1. Registration Requirements and Form CC

2. Competing Consolidator Duties and Data Collection

3. Recordkeeping

4. Reports and Reviews

5. Amendment to the Effective National Market System Plan(s) for NMS Stocks

6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations

C. Respondents

D. Total Annual Reporting and Recordkeeping Burden

1. Registration Requirements and Form CC

2. Competing Consolidator Duties and Data Collection

3. Recordkeeping

4. Reports and Reviews

5. Amendment to the Effective National Market System Plan(s) for NMS Stocks

6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations

E. Collection of Information is Mandatory

F. Confidentiality

1. Registration Requirements and Form CC

2. Competing Consolidator Duties and Data Collection and Maintenance

3. Recordkeeping

4. Reports and Reviews

5. Amendment to the Effective National Market System Plan(s) for NMS Stocks

6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations

G. Revisions to Current Regulation SCI Burden Estimates

H. Request for Comments

VI. Economic Analysis

A. Introduction and Market Failures

1. Introduction

2. Market Failures

B. Baseline

1. Current Regulatory Process for Equity Data Plans and SIP Data

2. Current Process for Collecting, Consolidating, and Disseminating Market Data

3. Competition Baseline

4. Request for Comments on Baseline

C. Economic Effects of the Rule

1. Core Data and Consolidated Market Data

2. Decentralized Consolidation Model

3. Economic Effects of Form CC

4. Economic Effects From the Interaction of Changes to Core Data and the Decentralized Consolidation Model

5. Request for Comments on the Economic Effects of the Proposed Rule

D. Impact on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

4. Request for Comments on Impact on Efficiency, Competition, and Capital Formation

E. Alternatives

1. Introduce Decentralized Consolidation Model With Additional Changes in Core Data Definition

2. Introduce Changes in Core Data and Introduce a Distributed SIP Model

3. Require Competing Consolidators' Fees be Subject to the Commission's Approval

4. Do Not Extend Regulation SCI to Include Competing Consolidators

5. Require Competing Consolidators to Submit Form CC in the EDGAR System Using the Inline XBRL Format

6. Require Competing Consolidators to Submit Monthly Disclosures in the EDGAR System Using the Inline XBRL Format

7. Prescribing the Format of NMS Information

8. Request for Comments on Alternatives

F. Request for Comments on the Economic Analysis

VII. Consideration of Impact on the Economy

VIII. Regulatory Flexibility Certification

IX. Statutory Authority

I. Introduction

The widespread availability of NMS information

has been an essential element in the success of the U.S. securities markets. Congress recognized the importance of market information to the U.S. securities markets with the enactment of Section 11A of the Exchange Act. Section 11A(a)(2) of the Exchange Act

directs the Commission, having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority under the Exchange Act to facilitate the establishment of a national market system for securities in accordance with the Congressional findings and objectives set forth in Section 11A(a)(1) of the Exchange Act.

Among the findings and objectives in Section 11A(a)(1) are that “[n]ew data processing and communications techniques create the opportunity for more efficient and effective market operations”

and “[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities . . . ”

See infra

Section II.A for a discussion of the NMS information that is consolidated and disseminated in the U.S. securities markets.

15 U.S.C. 78k-1(a)(2).

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

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

15 U.S.C. 78k-1(a)(1)(C). The Senate Report for the enactment of Section 11A stated that “it is critical for those who trade to have access to accurate, up-to-the-second information as to the prices at which transactions in particular securities are taking place (

i.e.,

last sale reports) and the prices at which other traders have expressed their willingness to buy or sell (

i.e.,

quotations).” S. Rep. No. 94-75 at 8 (1975) (“Senate Report”). The Senate Report continued that “[f]or this reason, communications systems designed to provide automated dissemination of last sale and quotation information with respect to securities will form the heart of the national market system.”

Id.

at 6.

As discussed below, the Commission exercised its authority under Section 11A of the Exchange Act through the adoption of a series of rules that have been incorporated into Regulation NMS. Those rules address both the content of, and the means by which, NMS information is collected, consolidated, and disseminated.

In particular, Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission to prescribe rules, as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act, that “assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information.”

Among other

things, the Commission required the self-regulatory organizations (“SROs”) to act jointly pursuant to NMS plans

to disseminate, through a single plan processor, a consolidated national best bid and national best offer, along with last sale data, for each NMS stock.

While the Commission has periodically revised certain of its NMS rules with the goal of ensuring that the regulatory framework continues to fulfill the goals of Section 11A of the Exchange Act,

the Commission has not significantly updated the rules that govern the content and distribution of NMS information since their initial implementation in the late 1970s.

See

17 CFR 242.601-603;

infra

Section II.B.

See

15 U.S.C. 78k-1(c)(1)(B); Senate Report,

supra

note 5, at 189 (“Examples of the types of subjects as to which the SEC would have the

authority to promulgate rules under these provisions include: The hours of operation of any type or quotation system, trading halts, what and how information is displayed and qualifications for the securities to be included on any tape or within any quotation system.”).

On January 8, 2020, the Commission issued a notice of proposed order directing the SROs to submit a new, single NMS plan for NMS stocks (“New Consolidated Data Plan”).

See

Securities Exchange Act Release No. 87906 (Jan. 8, 2020), 85 FR 2164 (Jan. 14, 2020) (“Proposed Governance Order”). The existing NMS plans for NMS stocks are: (1) The Consolidated Trade Association (“CTA”) Plan; (2) the Consolidated Quotation (“CQ”) Plan; and (3) the Nasdaq Unlisted Trading Privileges (“Nasdaq UTP”) Plan (collectively the “Equity Data Plans”).

See infra

note 13 and Section II.A. The Commission is proposing provisions in new Rule 614 that would require the participants to amend the effective national market system plan(s) for NMS stocks.

See infra

Section IV.B.4. If adopted, the proposed amendments would apply to any effective national market system plan for NMS stocks. In response to the Proposed Governance Order, the NYSE submitted a comment letter that also discussed a number of market structure issues that are addressed in this release (

e.g.,

expanding SIP data content and modernizing SIP data delivery such as through a potential competing consolidator model).

See

Letter from Elizabeth K. King, Chief Regulatory Officer, ICE, and General Counsel and Corporate Secretary, NYSE, to Vanessa Countryman, Secretary, Commission, 5 (Feb. 5, 2020) (“NYSE Governance Letter”). As with various other comments referenced herein, including, without limitation, comments received in connection with the Roundtable on Market Data and Market Access,

see infra

note 17, the NYSE Governance Letter was not provided with reference to the specific proposals discussed in this release. To the extent that the NYSE or other commenters wish to modify or supplement their prior comments to reflect the particulars of the proposals discussed herein, the Commission welcomes such comments.

See

Exchange Act Rule 11Aa3-1 (renumbered and renamed as Exchange Act Rule 601, Dissemination of transaction reports and last sale data with respect to transactions in NMS stocks); Exchange Act Rule 11Ac1-1 (renumbered and renamed as Exchange Act Rule 602, Dissemination of quotations in NMS securities); Exchange Act Rule 11Ac1-2 (renumbered and renamed as Exchange Act Rule 603, Distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks.).

See, e.g.,

Securities Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (“Regulation NMS Adopting Release”); 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (adopting amendments to Rule 606 to require additional disclosures by broker-dealers to customers regarding the handling of their orders).

The widespread availability of timely market information promotes fair and efficient markets and facilitates the ability of brokers and dealers to provide best execution to their customers.

The structure of the equity markets has changed dramatically since the Commission adopted the rules now known as Regulation NMS in 2005 and approved the three existing Equity Data Plans under Rule 608

of Regulation NMS.

In 2005, a substantial amount of trading was conducted on relatively slow manual markets, and for any given stock, concentrated on its listing exchange. Today, the U.S. equity markets have evolved into high-speed, latency-sensitive electronic markets where trading is dispersed among a wide range of competing market centers

and even small degrees of latency affect trading strategies.

Sophisticated order routing algorithms dependent on low-latency, high-quality market information are widely used to execute securities transactions.

Despite the evolution of latency-sensitive markets, the provision of NMS information that is centrally consolidated and disseminated by the Equity Data Plans is meaningfully slower than certain proprietary market data products distributed by the exchanges.

Today, the exchanges sell

proprietary data products that are fast, low-latency products designed for automated trading systems and include content, such as depth of book

and order imbalance information for opening and closing auctions (“proprietary DOB products”) that are not provided under the Equity Data Plans.

The Commission believes that the content and operating model under which NMS information is collected, consolidated, and disseminated have not kept pace with technological and market developments and are no longer satisfying the needs of many investors.

Section 11A(a)(1) of the Exchange Act, 15 U.S.C. 78k-1(a)(1).

See also

Senate Report

supra

note 5, at 8; Securities Exchange Act Release No. 42208 (Dec. 9, 1999), 64 FR 70613, 70614 (Dec. 17, 1999) (“Market Information Concept Release”); Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3593, 3600 (Jan. 21, 2010) (“Equity Market Structure Concept Release”).

17 CFR 242.608.

The Equity Data Plans are effective national market system plans as defined in Rule 600(b)(22) for NMS stocks.

See

Second Restatement of the Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Aa3-1 under the Securities Exchange Act of 1934, composite as of Dec. 6, 2019,

available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTA_Plan_Composite_as_of_December_6_2019.pdf

; Restatement of Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Ac1-1 under the Securities Exchange Act of 1934, composite as of Dec. 6, 2019,

available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CQ_Plan_Composite_as_of_December_6_2019.pdf

; Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis,

available at http://www.utpplan.com/DOC/Nasdaq-UTPPlan_after_46th_Amendment-Excluding_21st_36th_38th_42nd_44th_45th_Amendments.pdf

; Proposed Governance Order,

supra

note 8.

Rule 600(b)(38) defines a market center as “any exchange market maker, OTC market maker, alternative trading system, national securities exchange, or national securities association.” 17 CFR 242.600(b)(38).

See

Eric Budish, et al., Will the Market Fix the Market? A Theory of Stock Exchange Competition and Innovation, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019-72 (May 2019),

available at

SSRN:

https://ssrn.com/abstract=3391461

; Andriy Shkilko and Konstantin Sokolov, Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs (Apr. 2019),

available at https://ssrn.com/abstract=2848562

; Equity Market Structure Concept Release,

supra

note 11 (“NYSE-listed stocks were traded primarily on the floor of the NYSE in a manual fashion until October 2006. At that time, NYSE began to offer fully automated access to its displayed quotations.”). In contrast to NYSE, stocks on the Nasdaq Stock Market LLC (“Nasdaq”) traded in a highly automated fashion at many different trading centers following the introduction of SuperMontage in 2002.

See

Securities Exchange Act Release No. 46429 (Aug. 29, 2002), 67 FR 56862 (Sept. 5, 2002); Steven Quirk, Senior Vice President, Trader Group, TD Ameritrade, Testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, Hearing on “Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets” (June 17, 2014),

available at https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Quirk%20-%20TD%20Ameritrade%20(June%2017%202014).pdf%20

(citing statistics that average execution speed has improved by 90% since 2004—from 7 seconds to 0.7 seconds in 2014). Today, trading speed is measured in microseconds and is moving towards nanoseconds.

See, e.g.,

Vera Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall Street Journal (Aug. 8, 2016),

available at https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173

; Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech Upgrade, Wall Street Journal (Aug. 5, 2019),

available at https://www.wsj.com/articles/nyse-aims-to-speed-up-trading-with-core-tech-upgrade-11565002800

See, e.g.,

Equity Market Structure Concept Release,

supra

note 11; Eric Budish, et al.,

supra

note 15; Andrew Morgan, The impact of high frequency trading on algorithms and smart order routing, Algorithmic Trading & Smart Order Routing, 3d. ed. (2009),

available at https://pdfs.semanticscholar.org/ba0b/5e952b27cc48513825cb7e4f6d15803e6973.pdf

See infra

Section II.A. In addition, as discussed more fully below, on October 25-26, 2018, the Division of Trading and Markets hosted roundtables to gather information on market data and market access.

See generally

Equity Market Structure Roundtables, Oct. 25-26, 2018: Roundtable on Market Data and Market Access,

https://www.sec.gov/spotlight/equity-market-structure-roundtables

(“Roundtable”). Transcripts for both days of the Roundtable are

available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102518-transcript.pdf

(“Roundtable Day One Transcript”) and

https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102618-transcript.pdf

(“Roundtable Day Two Transcript”). Panelists at the Roundtable noted that the geographical delays inherent in the nature of a centralized processor results in significant latencies between the Equity Data Plans' feeds and proprietary data feeds that cannot be eliminated in the current infrastructure. Roundtable Day One Transcript at 145 (Simon Emrich, Norges Bank Investment Management) (“And part of that, the most interesting part of the delay for me is really the location of the consolidator, the geographical delay that's introduced, and the data connection element to the consolidator. Right? So from our perspective, the latency of the consolidator itself, the consolidation

engine, the improvements that we've made are remarkable over the years. But it just doesn't measure the physical reality of the brokers that we're using.”); 148 (Michael Blaugrund, NYSE) (“[T]he method of transmission of that information and the timing of the aggregation of that information into a consolidated feed plays a role. As I think we all acknowledge, the aggregation time has improved dramatically. As we've seen that decline, it highlights the fact that the geographic latency becomes a more meaningful portion of the overall time line.”).

See also

Ivy Schmerken, Speeding Up the SIP Isn't Enough, Say Market Pros at Baruch Conference, InformationWeek: Wall Street & Technology (Oct. 17, 2014),

available at http://www.wallstreetandtech.com/infrastructure/speeding-up-the-sip-isnt-enough-say-market-pros-at-baruch-conference/d/d-id/1316724.html

(“Since the SIP is slower than proprietary data feeds that firms can obtain directly from exchanges, critics have said that the SIP enables `latency arbitrage' between high-speed traders using fast data and those trading off of stale quotes from the consolidated feed.”).

“Depth of book,” or “DOB,” refers to open buy and sell orders resting on a limit order book at prices away from the top of book (

i.e.,

orders to buy at prices that are below the best bid and orders to sell that are higher than the best offer).

See, e.g.,

Nasdaq, Data Products,

available at http://www.nasdaqtrader.com/Trader.aspx?id=DPSpecs

(last accessed Jan. 7, 2020) (describing low-latency DOB data products); NYSE, Real-Time Data,

available at https://www.nyse.com/market-data/real-time

(last accessed Jan. 7, 2020) (describing low-latency DOB data products); Cboe, Market Data Services: U.S. Equities,

available at https://markets.cboe.com/us/equities/market_data_services/

(last accessed Jan. 7, 2020) (describing low-latency DOB data products). Particularly when aggregated, proprietary DOB market data products provide a consolidated view of the market with greater content and lower latency. The exchanges also sell other data products that are limited in content, such as an exchange's top of book (“TOB”) quotation information and transaction information, that are designed largely for the non-automated segment of the market (

e.g.,

retail investors and wealth managers) that is less sensitive to latency (“proprietary TOB products”). Examples of such proprietary TOB products include NYSE BBO (

https://www.nyse.com/market-data/real-time/bbo

), NASDAQ Basic (

https://business.nasdaq.com/intel/GIS/nasdaq-basic.html

), and Cboe One Feed (

https://markets.cboe.com/us/equities/market_data_services/cboe_one

). NYSE BBO provides TOB data. Nasdaq Basic and Cboe One's Summary Feed provide TOB and last sale information. Nasdaq Basic also provides Nasdaq Opening and Closing Prices and other information, including Emergency Market Condition event messages, System Status, and trading halt information. Cboe One, however, also offers a Premium Feed that includes DOB data. Each of these products is sold separately by the relevant exchange group.

See

Letter from Matthew J. Billings, Managing Director, Market Data Strategy, TD Ameritrade, 5-8 (Oct. 24, 2018) (“TD Ameritrade Letter”),

available at https://www.sec.gov/comments/4-729/4729-4560068-176205.pdf

(stating that the lower cost of exchange TOB products, coupled with costs associated with the process to differentiate between retail professionals and non-professionals imposed by the Equity Data Plans, and associated audit risk, favors retail broker-dealer use of exchange TOB products).

Today, the dissemination of NMS information relies upon a centralized consolidation model, where the SROs provide certain NMS information for each NMS stock to an exclusive processor (“exclusive SIP”).

The exclusive SIP then consolidates this NMS information and makes it available to market participants.

Market participants also may independently consolidate NMS information by purchasing individual exchange proprietary market data products

and consolidating that information for their own use, or obtain NMS information that has been consolidated by a vendor that provides a data aggregation service. As discussed further below, proprietary DOB products collected through this decentralized consolidation model typically contain enhanced information compared to the market information provided through the Equity Data Plans, such as information about all orders on an individual exchange's order book.

Market participants also are able to consolidate and use the data obtained in this manner more quickly than market participants relying on NMS information provided through the Equity Data Plans.

An “exclusive processor” is defined in Section 3(a)(22)(B) of the Exchange Act as “any [SIP] or [SRO] which, directly or indirectly, engages on an exclusive basis on behalf of any national securities exchange or registered securities association, or any national securities exchange or registered securities association which engages on an exclusive basis on its own behalf, in collecting, processing, or preparing for distribution or publication any information with respect to (i) transactions or quotations on or effected or made by means of any facility of such exchange or (ii) quotations distributed or published by means of any electronic system operated or controlled by such association.” 15 U.S.C. 78c(a)(22)(B). A securities information processor (“SIP”) is defined in Section 3(a)(22)(A) of the Exchange Act as “any person engaged in the business of (i) collecting, processing, or preparing for distribution or publication, or assisting, participating in, or coordinating the distribution or publication of, information with respect to transactions in or quotations for any security (other than an exempted security) or (ii) distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) on a current and continuing basis, information with respect to such transactions or quotations.” 15 U.S.C. 78c(a)(22)(A).

See infra

note 42 and accompanying text.

See

Rule 603(b) of Regulation NMS. Rule 603(b) provides that all information for an individual NMS stock must be disseminated through a single plan processor. 17 CFR 242.603(b).

See

Rule 600(b)(59), which defines a plan processor as “any self-regulatory organization or securities information processor acting as an exclusive processor in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system plan.” 17 CFR 242.600(b)(59).

See infra

Section II.A (discussing proprietary DOB and proprietary TOB).

See supra

note 19.

As noted above, Section 11A of the Exchange Act specifically highlights the importance of making information with respect to quotations for and transactions in securities available to brokers, dealers, and investors in a prompt, accurate, reliable, and fair manner and directs the Commission to act in accordance with this finding. Accordingly, the Commission proposes to amend Regulation NMS to better achieve the goal of assuring “the availability to brokers, dealers and investors of information with respect to quotations for and transactions in securities”

that is prompt, accurate, reliable, and fair.

The Commission preliminarily believes that the proposals described herein would promote fair and efficient markets and would facilitate the best execution of investor orders, and reduce information asymmetries between market participants who currently rely on market data provided through the exclusive SIPs and those who purchase the proprietary market data products offered by the national securities exchanges.

Section 11A(a)(1)(C)(iii), 15 U.S.C. 78k-1(a)(1)(C)(iii).

Section 11A(c)(1)(B), 15 U.S.C. 78k-1(c)(1)(B). Section 11A(c)(1)(B) provides the Commission with the authority to prescribe rules and regulations as necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of the Exchange Act to “assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information.”

Id.

See

Section 11A(a)(1)(C), 15 U.S.C. 78k-1(a)(1)(C) (stating that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure “fair competition among brokers and dealers,” “the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities,” and “the practicability of brokers executing investors' orders in the best market”).

The proposed amendments include two key parts, and the Commission preliminarily believes that the proposals are complementary, but can be independently justified. First, the amendments would update the content of the information with respect to quotations for and transactions in NMS stocks that must be made available under Regulation NMS. In particular, the Commission proposes to expand the NMS information that is required to be collected, consolidated, and

disseminated under Regulation NMS to include: (1) Information about orders in sizes smaller than the current round lot size for certain higher priced stocks;

(2) information about certain orders that are outside of the best bid and best offer (

i.e.,

certain depth of book data); and (3) information about orders that are participating in opening, closing, and other auctions. The Commission preliminarily believes that enhancing the content of NMS information in this manner should help ensure that all market participants have ready access to that market information in order to facilitate participation in today's markets.

See

proposed Rule 600(b)(81) (defining “round lot” as 100 shares, 20 shares, 10 shares, 2 shares, or 1 share depending upon the prior calendar month's average closing price for each NMS stock).

Second, the amendments introduce a decentralized consolidation model whereby competing consolidators would assume responsibility for the collection, consolidation, and dissemination functions currently performed by the exclusive SIPs.

To facilitate this decentralized consolidation model, the Commission proposes that each SRO would be required to make all of its market data that is necessary to generate consolidated market data (as proposed to be defined) directly available to two new categories of entities: (1) Competing consolidators and (2) self-aggregators. Competing consolidators would be either SROs or SIPs registered with the Commission pursuant to proposed Rule 614, and would be responsible for collecting, consolidating, and disseminating consolidated market data to the public. Self-aggregators would be brokers or dealers that elect to collect and generate consolidated market data for their own internal use.

The Commission is proposing to include competing consolidators in the definition of “SCI entities;” therefore, competing consolidators would be subject to the requirements of Regulation SCI.

See

Rule 1000(a) of Regulation SCI, 17 CFR 242.1000(a).

See

Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (“Regulation SCI Adopting Release”).

See also

Consolidated Tape System (CTS) Participant Input Binary Specification, 60,

available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_INPUT_SPECIFICATION.pdf,

and Consolidated Quotation System (CQS) Participant Input Binary Specification, 42,

available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CQS_BINARY_INPUT_SPECIFICATION.pdf

(both depicting that the participants of those plans use ICE Data Services' Secure Financial Transaction Infrastructure (“SFTI”) network to transmit data to those exclusive SIPs). SFTI provides connectivity to the individual ICE and NYSE Group markets including NYSE and NYSE Arca equities. SFTI also provides connectivity to the data center for the CTA and CQ Plans in Mahwah.

In addition to the provision of SIP data pursuant to the Equity Data Plans, the national securities exchanges separately sell their individual proprietary market data products, which include the SIP data elements as well as a variety of additional data elements.

As noted above, the proprietary DOB products are generally characterized as fast, low-latency products designed for automated trading systems that include additional content.

In addition to SIP data, proprietary DOB products typically include odd-lot quotations; orders at prices above and below the best prices (

i.e.,

depth of book data); and information about orders participating in auctions, including auction order imbalances.

In adopting Regulation NMS in 2005, the Commission determined not to require that DOB information be included in core data, reasoning that investors who needed DOB information would be able to obtain such information from markets or third-party vendors.

See

Regulation NMS Adopting Release,

supra

note 10, at 37567. In making that determination, the Commission stated that this would be “a competition-driven outcome [that] would benefit investors and the markets in general.”

See id.

at 37530.

In contrast, proprietary TOB products are generally limited in content, such as the exchange's top of book quotation information and transaction information and are designed largely for the non-automated segment of the market (

e.g.,

retail or non-professional investors and wealth managers that access market data visually).

But see

CBOE One Feed Specification, CBOE,

available at https://cdn.cboe.com/resources/membership/Cboe_US_Equities_Cboe_One_Feed_Specification.pdf

(highlighting that CBOE offers a non-automated product with a five-level depth of book option).

See, e.g.,

Nasdaq TotalView and NYSE Integrated.

In addition to proprietary DOB products, the exchanges offer a variety of connectivity options, such as co-location at primary data centers, fiber optic connectivity, wireless connectivity, and point-of-presence connectivity at third-party data centers.

Typically, the data for proprietary DOB products is transmitted directly from each exchange to the data center of the subscriber, where the subscriber's broker-dealer or vendor (or the subscriber itself) privately may consolidate such data with the proprietary data of the other exchanges. Furthermore, for many market participants, proprietary data is transmitted using wireless connectivity (often provided by the exchanges), such as microwave or laser technology,

that allows faster data transmission than the fiber optic cables that are typically used by the exclusive SIPs for the purposes of transmitting SIP data. The exchanges charge fees for these proprietary data products,

as well as for each of their connectivity options for co-location (

e.g.,

physical ports, cross-connects, and field programmable gate array (“FPGA”) services) and for communications services providing connectivity between data centers (

e.g.,

microwave and fiber optics). In the context of the Division of Trading and Markets' Roundtable on Market Data and Market Access in October 2018, some market participants commented that, in their view, they need the more content-rich proprietary data feeds and low latency connectivity to provide best execution to their clients

and to competitively participate in the markets.

The exchanges have an inherent competitive advantage in the provision of connectivity services within exchange facilities, while connectivity options made available elsewhere, such as point-of-presence connectivity at third-party data centers, are fully competitive.

See, e.g.,

Nasdaq, Trade Management Services: Wireless Connectivity Suite,

available at http://n.nasdaq.com/WirelessConnectivitySuite

(last accessed Dec. 16, 2019); ICE Global Network, New Jersey Metro,

available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro

(last accessed Dec. 16, 2019).

See, e.g.,

Letter to Vanessa Countryman, Secretary, Commission, from Robert Toomey, Managing Director and Associate General Counsel, SIFMA, 1-2 (Jan. 13, 2020) (stating that exchange market data products are “complementary” and result in “not only supra-competitive prices, but supra-monopoly prices”).

See, e.g.,

Roundtable Day One Transcript at 27 (Doug Cifu, Virtu Financial).

See also

Sections III.C.1(c), III.C.2(c), and III.C.3(b).

B. NMS Regulatory Framework

The Commission exercised its authority under Section 11A of the Exchange Act to facilitate the collection, consolidation, and dissemination of NMS information primarily by adopting five rules under Regulation NMS.

See also supra

Section I (discussing Section 11A of the Exchange Act).

Rule 601 of Regulation NMS governs the dissemination of transaction reports

and last sale data

with respect to transactions in NMS stocks. In particular, Rule 601 requires each national securities exchange and association to file a transaction reporting plan with the Commission that, among other things, must specify the manner of collecting, processing, sequencing, making available, and disseminating transaction reports and last sale data.

Rule 600(b)(84) defines a transaction report as “a report containing the price and volume associated with a transaction involving the purchase or sale of one or more round lots of a security.” 17 CFR 242.600(b)(84).

Rule 600(b)(34) defines last sale data as “any price or volume data associated with a transaction.” 17 CFR 242.600(b)(34).

17 CFR 242.601(a)(2).

Rule 602 of Regulation NMS governs the dissemination of quotations in NMS securities. Specifically, under Rule 602 each national securities exchange and association is required to collect, process, and make available certain quotation data to vendors,

including the best bid, best offer,

quotation sizes,

and aggregate quotation sizes.

Rule 600(b)(87) defines a vendor as “any securities information processor engaged in the business of disseminating transaction reports, last sale data, or quotations with respect to NMS securities to brokers, dealers, or investors on a real-time or other current and continuing basis, whether through an electronic communications network, moving ticker, or interrogation device.” 17 CFR 242.600(b)(87).

Rule 600(b)(8) defines best bid and best offer as “the highest priced bid and the lowest priced offer.” 17 CFR 242.600(b)(8).

Under Rule 600(b)(67), quotation size, “when used with respect to a responsible broker's or dealer's bid or offer for an NMS security, means: (i) [T]he number of shares (or units of trading) of that security which such responsible broker or dealer has specified, for purposes of dissemination to vendors, that it is willing to buy at the bid price or sell at the offer price comprising its bid or offer, as either principle or agent; or (ii) [i]n the event such responsible broker or dealer has not so specified, a normal unit of trading for that NMS security.” 17 CFR 242.600(b)(67).

Rule 600(b)(2) defines aggregate quotation size as “the sum of the quotation sizes of all responsible brokers or dealers who have communicated on any national securities exchange bids or offers for an NMS security at the same price.” 17 CFR 242.600(b)(2).

Rule 603 of Regulation NMS governs the distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks. Specifically, Rule 603(a)(1) requires any exclusive processor,

or any broker or dealer with respect to information for which it is the exclusive source, that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor

to do so on terms that are fair and reasonable. Rule 603(a)(2) requires any national securities exchange, national securities association, broker, or dealer that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor, broker, dealer, or other persons to do so on terms that are not unreasonably discriminatory.

See supra

note 20.

Id.

See

17 CFR 242.603(a)(2). Proprietary data cannot be made available sooner than current core data is transmitted to the exclusive SIPs.

See

Regulation NMS Adopting Release,

supra

note 10, at 37567 (“[I]ndependently distributed data could not be made available on a more timely basis than core data is made available to a Network processor. Stated another way, adopted Rule 603(a) prohibits an SRO or broker-dealer from transmitting data to a vendor or user any sooner than it transmits the data to a Network processor.”).

Rule 603(b) requires each national securities exchange and association to act jointly pursuant to one or more NMS plans to disseminate consolidated information, including an NBBO,

on quotations for and transactions in NMS stocks.

Further, the rule states that such plan or plans shall provide for the dissemination of all consolidated information for an individual NMS stock through a single plan processor.

Rule 600(b)(43) defines national best bid and national best offer (“NBBO”) as “with respect to quotations for an NMS security, the best bid and best offer for such security that are calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan . . .” 17 CFR 242.600(b)(43).

17 CFR 242.603(b).

Rule 608 of Regulation NMS governs the procedures for the filing and Commission approval of NMS plans and plan amendments. The Commission approved the Equity Data Plans under Rule 608. Finally, Rule 609 of Regulation NMS governs the registration of exclusive SIPs.

C. Other Regulatory Data

As noted above, certain regulatory data is required—pursuant to Commission and exchange rules and NMS plans—to be generated by primary listing exchanges and the exclusive SIPs and included in the current SIP data. The availability of this data is critical to allowing market participants to understand when and where permissible trading may occur.

1. Regulation SHO

Rule 201(b)(1)(i) of Regulation SHO

requires a trading center

to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security

at a price that is less than or equal to the current national best bid,

if the price of that covered security decreases by 10% or more from the covered security's closing price, as determined by the listing market

for the covered security as of the end of regular trading hours

on the prior day (the “Short Sale Circuit Breaker”). The rule requires that the trading center impose the Short Sale Circuit Breaker for the remainder of the day and the following day when a national best bid for the covered security is calculated and disseminated on a current and continuing basis by a “plan processor”

pursuant to an effective national market system plan.

17 CFR 242.201(b)(1)(i).

Rule 201(a)(9) states the term trading center shall have the same meaning as in 242.600(b)(82). 17 CFR 242.201(a)(9).

Rule 201(a)(1) states the term covered security shall mean any NMS stock as defined in 242.600(b)(48). 17 CFR 242.201(a)(1).

Rule 201(a)(4) states the term national best bid shall have the same meaning as in 242.600(b)(43). 17 CFR 242.201(a)(4).

Rule 201(a)(3) states the term listing market shall have the same meaning as the term “listing market” as defined in the effective transaction reporting plan for the covered security. Rule 201(a)(2) states the term effective transaction reporting plan for a covered security shall have the same meaning as in 242.600(b)(23). 17 CFR 242.201(a)(2)-(3).

Rule 201(a)(7) states the term regular trading hours shall have the same meaning as in 242.600(b)(68). 17 CFR 242.201(a)(7).

Rule 201(a)(6) states the term plan processor shall have the same meaning as in 242.600(b)(59). 17 CFR 242.201(a)(6).

Rule 201(c) provides an exception for a broker-dealer that has adopted and enforces its own such policies and procedures. More specifically, if such broker-dealer identifies a short sale order as being at a price above the current national best bid at the time of submission, such broker-dealer may mark the order as “short exempt.” However, such broker-dealer must establish, maintain, and enforce written policies and procedures reasonably designed to prevent incorrect identification of orders for purposes of the “short exempt” exception. Policies and procedures designed to create the appearance of technical compliance with Rule 201 but which otherwise are designed to circumvent, or assist others in circumventing, the Rule, would not be compliant. For example, any arrangement between market participants in which the execution price appears to be compliant with the Short Sale Circuit Breaker, but also includes a post-trade payment (

i.e.,

fee, commission, or other payment) that effectively renders the execution price non-compliant with the Short Sale Circuit Breaker, would not be consistent with the Rule's requirements. Further, in the Adopting Release for Rule 201, the Commission stated that, “any conduct

by trading centers, or other market participants, that facilitates short sales in violation of Rule 201 could also lead to liability for aiding and abetting or causing a violation of Regulation SHO, as well as potential liability under the anti-fraud and anti-manipulation provisions of the Federal securities laws, including Sections 9(a), 10(b), and 15(c) of the Exchange Act, and Rule 10b-5 thereunder.” Securities Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232, 11260 (Mar. 10, 2010).

Rule 201(b)(3) of Regulation SHO provides that the determination regarding whether the Short Sale Circuit Breaker has been triggered shall be made by the listing market for the covered security, and, if the Short Sale Circuit Breaker has been triggered, the listing market shall immediately notify the “single plan processor” (

i.e.,

the exclusive SIP responsible for consolidation of information for the covered security pursuant to Section 242.603(b)). The exclusive SIP must then disseminate this information.

2. Limit-Up Limit-Down Plan

The LULD Plan

sets forth procedures that provide for market-wide limit up-limit down (“LULD”) requirements to prevent trades in individual NMS stocks from occurring outside of specified price bands and reduce the negative impacts of extraordinary volatility in NMS stocks caused by momentary gaps in liquidity or erroneous trades. These price bands are coupled with the provision of trading pauses to accommodate more fundamental price moves.

See

Securities Exchange Act Release Nos. 85623,

supra

note 38; 67091,

supra

note 38.

Under the LULD Plan, the applicable exclusive SIP for an NMS stock is required to perform certain key functions, including: (1) Calculating the applicable price bands,

(2) disseminating flags identifying quotes that are not executable,

(3) disseminating flags identifying quotes that are in a “limit state,”

(4) disseminating trading pause messages received from the primary listing exchanges,

and (5) disseminating reopening auction information from the primary listing exchanges.

During regular trading hours for an NMS stock, the exclusive SIP for that stock uses a reference price, which it also calculates, to calculate and disseminate to the public a lower and upper price band. The reference price for each NMS stock equals the arithmetic mean price of eligible reported transactions for the NMS stock over the immediately preceding five-minute period (

see

LULD Plan Section V(A)(1)) and must remain in effect for at least 30 seconds.

See

LULD Plan Section V(A)(2). The exclusive SIP calculates a pro-forma reference price on a continuous basis during regular trading hours, and when that price has moved by 1% or more from the reference price currently in effect, the pro-forma reference price becomes the reference price, and the plan processor disseminates new price bands based on the new reference price.

See

LULD Plan Section V(A)(2). The price bands for an NMS stock are calculated by applying the appropriate percentage parameter for the stock, specified by the LULD Plan, to the stock's reference price, with the lower price band as a percentage parameter below the reference price and the upper price band as a percentage parameter above the reference price.

See

LULD Plan Section V(A)(1).

When a national best bid is below the lower price band or a national best offer is above the upper price band for an NMS stock, the exclusive SIP is required to disseminate the national best bid or national best offer with an appropriate flag identifying it as non-executable.

See

LULD Plan Section VI(A)(2).

When a national best bid is equal to the lower price band or a national best offer is equal to the upper price band for an NMS stock, the exclusive SIP is required to distribute the national best bid or national best offer with an appropriate flag identifying it as a “Limit State Quotation.”

See id.;

LULD Plan Section VI(B)(2).

If trading for an NMS stock does not exit a limit state within 15 seconds of entry during regular trading hours, then the primary listing exchange is required to declare a trading pause in that NMS stock and notify the exclusive SIP.

See

LULD Plan Section VII(A)(1). The exclusive SIP is required to disseminate trading pause information to the public.

See

LULD Plan Section VII(A)(3).

Five minutes after declaring a trading pause for an NMS stock, if the primary listing exchange has not declared a regulatory halt, the primary listing exchange is required to attempt to reopen trading using its established reopening procedures. The exclusive SIP publishes the following information that the primary listing exchange provides to the exclusive SIP in connection with such reopening: Auction reference price; auction collars; and number of extensions to the reopening auction.

See

LULD Plan Section VII(B)(1). In addition, the applicable exclusive SIP for an NMS stock is required to receive and disseminate to the public information from primary listing exchanges regarding their inability to reopen trading due to a systems or technology issue. Specifically, the primary listing exchange is required to notify the exclusive SIP if it is unable to reopen trading in an NMS stock due to a systems or technology issue and if it has not declared a regulatory halt. The exclusive SIP is required to disseminate this information to the public.

See

LULD Plan Section VII(B)(2).

3. Market-Wide Circuit Breakers

All of the equity exchanges and FINRA have adopted uniform rules, on a pilot basis, relating to MWCBs.

The purpose of an MWCB is to address extraordinary market-wide volatility by halting trading across the markets when price declines reach certain specified levels.

These levels are reached when the S&P 500 Index declines a specified percentage from the prior day's closing price. Currently, there are three thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level 3). A Level 1 or Level 2 market decline after 9:30 a.m. ET and before 3:25 p.m. ET would halt the equity and options markets for 15 minutes, while Level 1 and 2 declines at or after 3:25 p.m. ET would not halt trading. A Level 3 market decline at any time during the trading day would halt equity and options trading until the primary listing exchange opens the next trading day.

See supra

note 39.

Id.

The primary listing exchanges and the exclusive SIPs work together to implement the MWCB rules. The CTA/CQ SIP monitors the S&P 500 Index throughout the trading day and would send a message to the primary listing exchanges and the Nasdaq UTP SIP in the event a Level 1, Level 2, or Level 3 circuit breaker was triggered. Upon receipt of such a message, the applicable primary listing exchange would impose a regulatory halt by sending the appropriate message to the applicable exclusive SIP, which would then disseminate the regulatory halt message to market participants. Trade resumption messages would be generated at the appropriate time by the primary listing exchange and similarly disseminated to market participants through the applicable exclusive SIP.

4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders

As discussed further below, while Regulation NMS only requires NMS stock quotation and transaction data in round lots to be reported to the exclusive SIPs, SRO rules and the Equity Data Plans include some odd-lot information in the SIP data.

Pursuant to exchange rules, odd-lot quotations that, when aggregated, equal or exceed a round lot are reported to the exclusive SIPs as round lots.

Moreover, the Equity Data Plans were amended in 2013 to include odd-lot transaction reports in the SIP data.

See infra

Section III.C.1.

See infra

notes 159-160 and accompanying text.

See infra

notes 160-161 and accompanying text.

III. Proposed Enhancements to NMS Information

A. Introduction

The Commission is proposing to expand the content of the NMS information that would be required to be collected, consolidated, and disseminated under the rules of the national market system to better meet the needs of today's investors and other market participants. Specifically, the Commission proposes to amend Regulation NMS by introducing, in Rule 600, new defined terms for “consolidated market data,” “core data,” “regulatory data,” “administrative data,” “exchange-specific program data,” “round lot,” “depth of book data,” and “auction information” and by amending the current definitions of “national best bid and national best offer” and “protected

bid or protected offer.” The Commission preliminarily believes that these amendments will enhance the availability and usefulness of the NMS information that is required to be provided under the rules of the national market system for a wide variety of market participants. The Commission also preliminarily believes that expanding the content of NMS information would help to reduce information asymmetries between market participants who rely upon current SIP data and those who purchase proprietary data feeds from the national securities exchanges.

See supra

note 26.

The Commission's objectives in expanding and modernizing the content of NMS information that would be collected, consolidated, and disseminated under the rules of the national market system reflect that different market participants and different trading applications have different needs for NMS information. For example, the needs of some retail investors that visually consume NMS information (

e.g.,

humans looking at quotes on a screen) differ from those of institutional trading systems that electronically consume NMS information (

e.g.,

algorithmic trading systems or smart order routers (“SORs”).

This proposal to expand and modernize the content of NMS information is not intended solely to meet the needs of a narrow segment of the NMS information market; rather, the proposal is intended to address the needs of a broad cross-section of market participants.

The Commission intends for the NMS information to promote both fair and efficient markets, be useful to a broad cross-section of market participants, reduce information asymmetries, and facilitate best execution.

SORs employ the use of algorithms (

e.g.,

by broker-dealers on behalf of a client) designed to optimally send parts of an order (child orders) to various market centers (

e.g.,

exchange and ATSs) so as to optimally access market liquidity while minimizing execution costs.

This proposal is also not designed to expand the content of NMS information to meet all needs of all market participants; the proprietary data market, which includes information that is not included in the proposed definition of core data, is expected to continue to fulfill additional needs beyond those that are met by the proposed definition of core data.

While this proposal is intended to facilitate best execution, the Commission is not specifying minimum data elements needed to achieve best execution.

B. Proposed Definition of “Consolidated Market Data”

The Commission is proposing to amend Rule 600(b) to add a definition of “consolidated market data” that would include information that is currently disseminated by the exclusive SIPs as well as additional new information. Specifically, under proposed Rule 600(b)(19), consolidated market data would be defined as the following data, consolidated across all national securities exchanges and national securities associations: (1) Core data; (2) regulatory data; (3) administrative data; (4) exchange-specific program data; and (5) additional regulatory, administrative, or exchange-specific program data elements defined as such pursuant to the effective national market system plan or plans required under Rule 603(b).

As discussed below, the Commission proposes to add definitions of the terms “core data,” “regulatory data,” “administrative data,” and “exchange-specific program data.” The proposed definition of core data would include those data elements that are currently considered core data

as well as reflect additional information that would be required to be collected, consolidated, and disseminated under Regulation NMS, including certain depth of book, odd-lot, and auction information, which would improve the usefulness of core data for market participants. The proposed definition of regulatory data would specify certain regulatory messages that must be provided under Regulation NMS, which would facilitate compliance with Commission, NMS plan, or SRO requirements. The proposed definition of administrative data would refer to the administrative or technical messages that are currently required by the Equity Data Plans, or their technical specifications, and would facilitate the efficient utilization of proposed consolidated market data. The proposed definition of “exchange-specific program data” would include information currently included in SIP data related to retail liquidity programs that certain exchanges have established, as well as information related to new programs that individual exchanges may develop in the future,

but only if the effective national market system plan or plans required under Rule 603(b) are amended to include data elements related to any such new programs in consolidated market data.

See supra

note 37 and accompanying text.

Any new exchange programs would have to be filed with the Commission pursuant to Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), and Rule 19b-4 thereunder, 17 CFR 240.19b-4.

See infra

Section III.F.

Finally, the Commission proposes to include a provision that would allow for additional regulatory, administrative, or exchange-specific program data elements

to be included within “consolidated market data” pursuant to amendments to the effective national market system plan(s).

The Commission preliminarily believes that this provision would help to ensure that additional information in these specific categories may be proposed to be included in consolidated market data in the future in response to market and regulatory developments and that such additional information would be required to be made available by the SROs to competing consolidators and self-aggregators, and as a result, competing consolidators would be required to, among other things, calculate and generate consolidated market data that includes this additional information. The Commission preliminarily believes that new administrative, regulatory, and exchange-specific program data elements may emerge from time to time, and that the proposed definition of consolidated market data should provide flexibility for such data elements to be included by NMS plan amendment. This provision would also maintain the current practice whereby SIP data of this type can be expanded through the NMS plan amendment process.

Amendments to the proposed definition of core data would only be able to be made by the Commission. To the extent that there are changes in the national market system, such as, in the provision of trading services, that suggest that the definition of core data should be updated, the Commission could exercise its authority to propose amendments to the proposed definition.

See, e.g.,

Section 11A(c)(1)(B) of the Exchange Act which provides that the Commission shall prescribe rules as necessary or appropriate in the public interest, for the protection of investors or otherwise to assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to NMS information and the fairness and usefulness of the form and content of such information.

Pursuant to Rule 608(a)(1), any two or more SROs, acting jointly, may propose an amendment to an NMS plan. 17 CFR 242.608(a)(1). The Equity Data Plans also have provisions regarding the proposal of amendments to the Plans, which currently require a vote of the Plans' operating committee.

See

CTA Plan,

supra

note 13, at Section IV(b)(i); CQ Plan

supra

note 13, at Section IV.(c)(i) of the CQ Plan; Nasdaq UTP Plan,

supra

note 13, at Sections IV.C.1.a. and XVI.

National market system plans and amendments thereto must be filed with, and typically are not effective unless they are approved by, the Commission under Rule 608 of Regulation NMS.

Pursuant to Rule 608(b), the Commission would publish for comment an amendment to add new consolidated market data elements, and thereafter, the Commission would evaluate any such proposed amendment and approve it if the Commission finds the amendment is “necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the [Exchange] Act.”

A proposed NMS plan amendment may be put into effect upon filing if designated by the sponsors as: “(i) Establishing or changing a fee or other charge collected on behalf of all of the sponsors and/or participants in connection with access to, or use of, any facility contemplated by the plan or amendment (including changes in any provision with respect to distribution of any net proceeds from such fees or other charges to the sponsors and/or participants); (ii) Concerned solely with the

administration of the plan, or involving the governing or constituent documents relating to any person (other than a self-regulatory organization) authorized to implement or administer such plan on behalf of its sponsors; or (iii) Involving solely technical or ministerial matters.” 17 CFR 242.608(b)(3). As stated above, the Commission has proposed amendments to this provision. Effective on Filing Proposal,

supra

note 37 (proposing to rescind the provision of Rule 608 that allows a proposed amendment to an effective national market system plan(s) to become effective upon filing if the proposed amendment establishes or changes a fee or other charge).

17 CFR 242.608(b)(2).

The Commission preliminarily believes that the proposed definition of consolidated market data, as well as the other definitions included therein, would, by expanding the NMS information that is required to be provided under the rules of the national market system, support more informed trading and investment decisions by market participants in today's markets and facilitate the best execution of customer orders by the full range of broker-dealers.

In addition, the proposed definition would be referenced in the amendments to Rule 603(b) and proposed Rule 614, both of which propose to implement the decentralized consolidation model.

As discussed below, the Commission is not requiring broker-dealers to subscribe to or utilize every component of proposed consolidated market data to meet their regulatory obligations.

See infra

notes 306-309 and accompanying text.

See infra

Sections IV.B.1 and IV.B.2(e)(ii).

The Commission requests comment on the proposed definition of consolidated market data under proposed Rule 600(b)(19). Throughout this release, we request comment from the points of view of all interested parties. With regard to any comments, we note that such comments are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments.

In particular, the Commission solicits comment on the following:

1. Do commenters believe that the Commission should adopt a definition of consolidated market data? Why or why not? Should the Commission take an alternative approach? Why or why not?

2. Does the proposed definition of consolidated market data capture the market data that would be useful to market participants for trading and regulatory compliance purposes? Please explain. Does the proposed definition of consolidated market data include any market data that should not be included? Please explain. The Commission is seeking input from commenters on whether the proposed definition of consolidated market data should include additional market data or whether the definition should otherwise be modified.

3. Should the definition of consolidated market data be set forth in an effective national market system plan(s) instead of, or in addition to, Rule 600(b)? Please explain. Do commenters have views on the most appropriate process through which the content of proposed consolidated market data should be expanded or modified? Do commenters believe that the proposed definition of consolidated market data should include a provision stating that additional regulatory, administrative, or exchange-specific program data elements can be defined pursuant to the effective national market system plan or plans required under Section 242.603(b)? Please explain. Should the proposed definition of core data be able to be amended through the effective national market system plan process (for example, should the term “core data” be included in proposed Rule 600(b)(19)(v))? Why or why not? Do commenters believe that any data elements should not require an amendment to the effective national market system plan(s) to be added to consolidated market data? Please explain and describe what process would be appropriate for adding any such data elements.

C. Proposed Definition of “Core Data”

Regulation NMS does not currently define core data. Rather, today, core data generally refers to the price, size, and exchange of the last sale; each exchange's highest bid and lowest offer (“BBO”) and the number of shares available at those prices; and the NBBO.

100

See supra

note 37 and accompanying text.

The core data that is provided today by the exclusive SIPs is of considerable utility to some market participants for certain purposes.

101

However, it is of limited use to other market participants for other purposes (

e.g.,

as the primary data source for automated trading systems) because of its limited content. The Commission preliminarily believes that the content of current core data has not kept pace with market developments. For example, decimalization in 2001 improved prices and narrowed spreads but also reduced the size of the top of book liquidity that is displayed and disseminated as part of current core data.

102

Further, individual odd-lot quotations, especially for stocks with share prices that have risen substantially,

103

have become more important to market participants as odd-lot quotations can represent significant amounts of liquidity that are not reflected in current core data.

104

Finally, an increasing proportion of total trading volume is executed during opening and closing auctions, which are significant liquidity events every trading day, but important information about auctions is not included within current core data provided by the exclusive SIPs.

105

101

For example, current core data includes the NBBO, which is useful to market participants for informational purposes and to inform trading and investment decisions.

See, e.g.,

Roundtable Day One Transcript at 57 (Doug Cifu, Virtu Financial) (“. . . the SIP is an eyeball product.”); Roundtable Day One Transcript at 65 (Mehmet Kinak, T. Rowe Price) (“So the SIP for us is kind of what we look at. Obviously, investment decisions are probably made by eyeballs and looking at the SIP itself from either our Bloomberg or FactSet terminals.”). It is also used as a back-up for automated trading systems that otherwise rely on proprietary data feeds from the exchanges and to support less sophisticated automated trading systems.

See, e.g.,

Roundtable Day One Transcript at 140 (Mark Skalabrin, Redline Trading Solutions) (“the SIP . . . has been relegated to a backup feed, really. It's a fail-over to the real feed you need to do the job.”).

102

See infra

notes 276-279.

103

See infra

note 162.

104

As explained below, odd-lot quotations are only reflected in SIP data to the extent that they are aggregated into round lots pursuant to exchange rules.

See infra

notes 157-158 and accompanying text.

105

See infra

notes 330-332.

Because the content of current core data does not reflect these important market developments,

106

many market participants state that they are unable to rely solely on SIP data to trade competitively and provide best execution to customer orders in today's markets.

107

The Commission preliminarily believes that the data that is required to be collected, consolidated, and disseminated under the rules of the national market system is no longer fulfilling the goals of Section 11A of the

Exchange Act.

108

The Commission is proposing a definition of core data that would incorporate the information that is currently provided in SIP data as well as additional information, including quotation data for smaller-sized orders for higher-priced stocks, certain depth of book data, and additional auction information.

109

As explained below, the Commission preliminarily believes that each of the new elements of core data, as proposed, would enhance the usefulness of the content of the NMS information that is collected, consolidated, and disseminated under the rules of the national market system.

110

106

As discussed below, the existing centralized consolidation model for collecting, consolidating, and disseminating SIP data also has not kept pace with the needs of today's investors and market participants.

See infra

Section IV.A.

107

See

several of the Roundtable comments summarized below in Sections III.C.1, III.C.2, and III.C.3.

108

See supra

notes 2-5 and accompanying text.

109

See infra

Sections III.C.1-III.C.3 for detailed discussions of the proposed definitions of “round lot,” “depth of book data,” and “auction information.”

110

Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-1(c)(1)(B).

The Commission is proposing to define core data in Rule 600(b) to include all of the elements that currently are referred to as core data,

111

as well as the following data elements that are not currently provided by the exclusive SIPs: (1) Quotation data for smaller-sized orders for higher-priced stocks (pursuant to a new definition of “round lot”), (2) data on certain quotations below the best bid or above the best offer (pursuant to a new definition of “depth of book data”), and (3) information about orders participating in auctions (pursuant to a new definition of “auction information”). As discussed below, certain OTCBB and corporate bond and index data that are currently provided by the exclusive SIPs would not be included in the proposed definition of core data.

112

Further, as noted above, the proposed term core data is reflected in the proposed definition of consolidated market data, which is referenced in proposed Rule 603(b) and proposed Rule 614.

113

111

See supra

note 37 and accompanying text.

112

See infra

notes 122-127 and accompanying text.

113

As explained below, pursuant to Rule 603(b), as proposed to be amended, national securities exchanges and associations would be required to make available to competing consolidators and self-aggregators, as proposed to be defined, all data necessary to generate consolidated market data.

See infra

Section IV.B.1. Competing consolidators would be required to calculate and generate consolidated market data and make it available to subscribers.

See

proposed Rule 614(d).

Specifically, under proposed Rule 600(b)(20), core data would be defined as the following information with respect to quotations for and transactions in NMS stocks: (1) Quotation sizes; (2) aggregate quotation sizes; (3) best bid and best offer; (4) national best bid and national best offer; (5) protected bid and protected offer; (6) transaction reports; (7) last sale data; (8) odd-lot transaction data disseminated pursuant to the effective national market system plan or plans required under Rule 603(b) as of [date of Commission approval of this proposal]; (9) depth of book data; and (10) auction information. For purposes of the calculation and dissemination of core data by competing consolidators, and the calculation of core data by self-aggregators, the best bid and best offer, national best bid and national best offer, and depth of book data would include odd-lots that when aggregated are equal to or greater than a round lot, with such aggregation occurring across multiple prices and disseminated at the least aggressive price.

114

Protected quotations, however, would only include odd-lots at a single price that when aggregated are equal to or greater than 100 shares.

115

114

See infra

notes 157-158 and accompanying text (discussing odd-lot aggregation).

115

Id.

A protected quotation is defined as “a protected bid or a protected offer.”

See

Rule 600(b)(62) of Regulation NMS, 17 CFR 242.600(b)(62). A protected bid or protected offer is defined as “a quotation in an NMS stock that: (i) [i]s displayed by an automated trading center; (ii) [i]s disseminated pursuant to an effective national market system plan; and (iii) [i]s an automated quotation that is the best bid or best offer of a national securities exchange, the best bid or best offer of The Nasdaq Stock Market, Inc., or the best bid or best offer of a national securities association other than the best bid or best offer of The Nasdaq Stock Market, Inc.”

See

Rule 600(b)(61) of Regulation NMS, 17 CFR 242.600(b)(61).

Some of the components of the proposed definition of core data—namely, quotation sizes, aggregate quotation sizes, BBO, NBBO, protected quotations, transaction reports, last sale data, and odd-lot transaction data

116

—are already defined in Regulation NMS or are currently included in SIP data.

117

The Commission preliminarily believes that these data elements continue to be necessary and useful for informed market participation. This baseline information about the best quotations and recent transactions across the national market system provides the foundation of transparency and price discovery in the U.S. securities markets, and the Commission preliminarily believes investors and other market participants need it today to make informed trading and investment decisions.

118

Therefore, the Commission preliminarily believes that these data elements should be included in the definition of core data as proposed.

116

See infra

notes 159-161 and accompanying text (discussing the addition of odd-lot transaction data to SIP data through NMS plan amendments approved in 2013).

117

As discussed below, some of these proposed data elements—namely, the BBO and NBBO—will be derived from smaller sized quotations as a result of the Commission's proposed definition of round lot, and the Commission is proposing amendments to the definitions of protected bid and protected offer and national best bid and offer to accommodate its proposed amendments to expand consolidated market data and implement a decentralized consolidation model with competing consolidators and self-aggregators.

In addition, today, the exclusive SIPs collect, consolidate, and disseminate protected quotations, which in almost all cases, are the best bid or best offer of a trading center. Accordingly, the NBBO today reflects protected quotations. As discussed below, the Commission is proposing to amend the definition of “protected bid or protected offer” to require that protected bids and protected offers be at least 100 shares. In addition, the Commission is proposing a new round lot size definition, which would be less than 100 shares for higher-priced NMS stocks.

See infra

Section III.C.1(d)(i). Accordingly, if adopted, there would be an increase in instances where the best bid or best offer and the NBBO would not be protected quotations.

See infra

Section III.C.1(d)(ii).

118

See supra

note 101.

As discussed in detail below, the Commission is proposing to include certain depth of book data and auction information in the proposed definition of core data. Because of the dispersion of liquidity to prices away from the best bids and best offers

119

and the increasing proportion of orders that are executed during auctions,

120

the Commission preliminarily believes that market participants need depth of book data and auction information to fully participate in the markets and the information would facilitate best execution.

121

The Commission preliminarily believes that the proposed depth of book data and auction information would enhance the usefulness of proposed core data.

119

See infra

notes 276-279 and accompanying text.

120

See infra

notes 330, 348 and accompanying text.

121

See infra

Sections III.C.2(d) and III.C.3(c).

As discussed above, SIP data currently includes certain data that would not be included in the definition of core data under the Commission's proposed definition.

122

Currently, Nasdaq UTP Plan Level 1 subscribers can obtain OTCBB quotation and transaction feeds for unlisted stocks.

123

Similarly, the CTA Plan permits the dissemination of “concurrent use” data relating to corporate bonds and indexes.

124

This information would not be included in the proposed definitions of core data or consolidated market data. OTCBB stocks, corporate bonds, and

indices are not NMS securities as defined in Regulation NMS

125

and, therefore, the Regulation NMS rules related to the collection, consolidation, and dissemination of information regarding NMS securities, and the NMS plan(s) required under Rule 603(b) for NMS stocks,

126

do not apply. Accordingly, this information is not included in the proposed definition of core data.

127

122

In addition, because this data does not fall under the proposed definitions of regulatory data or administrative data, it would not be part of proposed “consolidated market data” either.

123

See

Nasdaq UTP DataFeed Approval Request,

available at http://www.utpplan.com/datafeed_approval

(last accessed Sept. 8, 2019);

supra

note 41.

124

See

CTA Plan,

supra

note 13, at Section XIII;

supra

note 41.

125

“NMS security” is defined as “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.” 17 CFR 242.600(b)(47). “Effective transaction reporting plan” is defined as “any transaction reporting plan approved by the Commission pursuant to § 242.601.” 17 CFR 242.600(b)(23). Rule 601 requires a transaction reporting plan to be filed and approved pursuant to Rule 608 and to specify “[t]he listed equity and Nasdaq securities or classes of such securities for which transaction reports shall be required by the plan.” 17 CFR 242.601(a)(2). Therefore, OTCBB securities are not NMS securities.

126

“NMS stock” is defined as “any NMS security other than an option.” 17 CFR 242.600(b)(48).

See also

17 CFR 242.600(b)(47) (defining NMS security).

127

One commenter suggested that this “extraneous” data should be removed from the exclusive SIPs.

See

Nasdaq, Total Markets: A Blueprint for a Better Tomorrow, 18 (“Nasdaq Total Markets Report”),

available at https://www.nasdaq.com/docs/Nasdaq_TotalMarkets_2019_2.pdf.

However, the Commission's proposed definitions of core data and consolidated market data would not prohibit the independent provision of other types of market data by the SROs, and, as discussed below, under the decentralized consolidation model, competing consolidators would be permitted to collect data from the SROs and offer data products to subscribers that go beyond what is proposed to be defined as core data or consolidated market data. Therefore, the exclusion of OTCBB and concurrent use data from the proposed definitions of core data and consolidated market data does not preclude the provision of this data to market participants who wish to receive it.

Finally, the proposed definition of core data requires that the BBO, NBBO, and the proposed depth of book data include odd-lots that when aggregated are equal to or greater than a round lot, and that such aggregation would occur across multiple prices and be disseminated at the least aggressive price of all such aggregated odd-lots. Several national securities exchanges today have rules that provide for a similar odd-lot aggregation procedure for purposes of providing quotation data to the exclusive SIPs.

128

Although not currently required by Regulation NMS, odd-lot aggregation increases the amount of quotation data that is included in SIP data and provides transparency into trading interest would not otherwise have been represented in such data. The Commission preliminarily believes that this information is important and should uniformly be included in the proposed core data disseminated to investors and market participants.

129

In addition, for similar reasons, the Commission proposes to include odd-lots that, when aggregated, form a round lot for purposes of the new proposed definition of depth of book data.

130

128

See infra

note 157 and accompanying text.

129

As discussed below, SROs may make the data necessary to generate consolidated market data available to competing consolidators and self-aggregators through their existing proprietary data products.

See infra

Section IV.B.1. Accordingly, any odd-lot quotations that are aggregated in an SRO's existing proprietary data products would be required to be aggregated in a manner consistent with the method set forth in the proposed definition of core data.

See also

proposed Rule 603(b). However, self-aggregators would only be required to aggregate odd-lots as prescribed in Rule 600(b)(20) to the extent that generating a particular component of proposed core data is necessary for that self-aggregator to comply with applicable regulatory requirements. For example, to the extent that a self-aggregator's activities require the self-aggregator to generate the NBBO, the self-aggregator shall do so as described in Rule 600(b)(20).

130

Today, odd-lots are only aggregated into round lots for purposes of providing an exchange's best bids and offers to the exclusive SIPs.

See infra

note 157.

The Commission preliminarily believes, however, that the proposed definition of core data should require a different procedure with respect to the aggregation of odd-lots for purposes of protected quotations.

131

For the reasons discussed below, the scope of Rule 611 would not be extended to protected quotations of less than 100 shares.

132

The Commission preliminarily believes that aggregating odd-lots across multiple price points for purposes of determining protected quotations would effectively extend trade-through protection to quotes of less than 100 shares at different prices.

133

Therefore, the proposed definition of core data provides that, for purposes of the calculation and dissemination of proposed core data by competing consolidators, and the calculation of proposed core data by self-aggregators, protected quotations would only include odd-lots at a single price that, when aggregated, are equal to or greater than 100 shares. However, the Commission is seeking comment on whether and how odd-lots should be aggregated and the specific proposed core data elements to which such aggregation should apply.

131

See supra

note 115 for the definition of “protected quotation.” Odd-lot quotations are not protected quotations under Rule 611. However, as explained below, many exchanges, pursuant to their own rules, aggregate odd-lots across multiple price points into round lots for purposes of providing protected quotations to the exclusive SIPs.

See infra

notes 157-158 and accompanying text. Although not required by Rule 611 or contemplated upon adoption of Regulation NMS, this has become the prevailing practice. The odd-lot aggregation methodology set forth in the Commission's proposed definition of core data would modify this practice.

See infra

Section VI.C.1(c)(i).

132

See infra

Section III.C.1(d)(ii).

133

See infra

Section III.C.1(d)(ii) for a discussion of the proposed changes to protected bid and protected offer.

The Commission requests comment on the proposed amendment to Rule 600(b)(20) to introduce a definition of core data. In particular, the Commission solicits comment on the following:

4. Do commenters believe Rule 600 should be amended to include a definition of core data? Why or why not?

5. Do commenters believe that the Commission's proposed definition of core data captures the key components of information with respect to quotations for and transactions in NMS stocks that are useful for participating in today's markets? Are there any other useful market data elements that should be included in the proposed definition? Does the proposed definition include any elements that are not useful for trading? Please explain.

6. Do commenters believe that there is sufficient demand for OTCBB, concurrent use, or other data currently provided by the exclusive SIPs that would not fall within the proposed definition of core data such that an independent market for the provision of this data would develop? Why or why not? Would the SROs or other entities that currently disseminate this data through the exclusive SIPs provide it through other means (

i.e.,

to competing consolidators or directly to interested market participants)? Please explain.

7. The Commission is proposing to include protected quotations in the proposed definition of core data. Do commenters believe that there is a need for a “national protected best bid or offer” analogous to the NBBO that would represent a snapshot of the single best protected bid and single best protected offer from among all the protected bids and offers of each SRO? Would this be a useful metric for competing consolidators to calculate and disseminate for market participants for either routing or regulatory compliance (

e.g.,

the order execution disclosures required under Rule 605) purposes? Would firms that intend to self-aggregate produce such a metric on their own? Please explain.

1. Round Lot Size

Today, SIP data includes quotation information in round lots and transaction information in both round lots and odd-lots. Market participants interested in quotation data for individual odd-lot orders must purchase it from exchange proprietary feeds. As share prices for many widely-held stocks have risen, individual odd-lot orders now often represent economically significant trading opportunities at prices that are better than the prices of displayed and disseminated round lots.

134

Accordingly, information about individual odd-lot orders has gained increased importance with investors and market participants, and some have suggested that odd-lot orders should be included in SIP data.

135

134

See infra

note 166 and accompanying text, and

infra

text accompanying notes 166-170 for staff analysis of odd-lot activity for the top 500 securities by dollar volume.

135

See infra

notes 170-177.

The Commission is proposing to include certain information about quotations that are currently defined as odd-lots

136

in proposed core data by introducing a tiered definition of the term “round lot.” As proposed, the definition of round lot would assign different round lot sizes to individual NMS stocks depending upon their stock price. The Commission preliminarily believes this would improve the usefulness of proposed consolidated market data, promote fair competition,

137

and, like the addition of odd-lot transaction data to SIP data, would provide important information to investors and other market participants that would enhance transparency and price discovery.

138

Moreover, since odd-lot quotes often represent opportunities to trade at prices that are superior to the prices disseminated by the Equity Data Plans,

139

the inclusion of more of these quotes in proposed core data would facilitate the best execution analyses of broker-dealers who do not subscribe to proprietary data feeds that include all odd-lot information.

140

Further, it would facilitate the ability of investors to use proposed core data to verify that their broker-dealers are providing best execution by providing investors with additional information on the pricing of smaller-sized orders.

136

Rule 600(b)(51) defines odd-lot as “an order for the purchase or sale of an NMS stock in an amount less than a round lot.”

137

See

15 U.S.C. 78k-1(a)(1)(C)(ii) (“The Congress finds that . . . [i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets.”).

138

See infra

notes 159-160 and accompanying text.

139

See infra

notes 166-170 and accompanying text.

140

Statements made by market participants suggest that a significant number of broker-dealers do not subscribe to all proprietary market data products.

See

Roundtable Day One Transcript at 178 (James Brooks, ICE Data Services) (“[R]oughly half of the global investment banks take the most comprehensive New York Stock Exchange order-by-order feed, the other half do not.”); Roundtable Day One Transcript at 181 (Michael Friedman, Trillium Management) (“[T]he big fish . . . are the major consumers of depth-of-book data. I think there was some evidence . . . that there were only 50 to 100 firms, period who buy all of the depth-of-book feeds.”).

(a) Regulatory Background

Round lot, though not defined in the Exchange Act or Regulation NMS, typically refers to orders or quotes for 100 shares or multiples thereof. Exchange rules typically define a round lot as 100 shares, but they also allow the exchange discretion to define it otherwise.

141

The technical specifications for the Equity Data Plans provide similar definitions. For example, the CTA Plan defines round lot as “[t]ypically 100 shares of stock or any number of shares that is a multiple of 100 (

i.e.,

100, 600, 1,600, etc.).”

142

The exclusive SIP feeds also disseminate quotation and transaction information for stocks that have a round lot size of 10 or 1.

143

141

See, e.g.,

NYSE Rule 55 (“Securities traded on the Exchange shall be quoted in round lots (generally 100 shares), except that in the case of certain stocks designated by the Exchange the round lot shall be such lesser number of shares as may be determined by the Exchange, with respect to each stock so designated.”); Nasdaq Rule 5005(a)(39) (“`Round Lot' or `Normal Unit of Trading' means 100 shares of a security unless, with respect to a particular security, Nasdaq determines that a normal unit of trading shall constitute other than 100 shares.”). According to NYSE Trade and Quote (“TAQ”) Data, as of August 2019, twelve stocks, all of which are listed on NYSE or NYSE American, had a round lot size other than 100. Ten stocks had a round lot of ten and two stocks had a round lot of one.

142

Consolidated Tape System, Multicast Output Binary Specification, 85 (May 8, 2018),

available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf.

The technical specifications for the Nasdaq UTP Plan note that “[f]or most NASDAQ issues, the round lot size is 100 shares.” UTP Data Feed Services Specification, 22,

available at http://www.utpplan.com/DOC/UtpBinaryOutputSpec.pdf

(last accessed Jan. 7, 2020).

143

See supra

note 141.

Regulation NMS defines “odd-lot” as “an order for the purchase or sale of an NMS stock in an amount less than a round lot.”

144

Exchange definitions of odd-lot are similar, as is the definition of odd-lot in the technical specifications for the CTA Plan.

145

144

17 CFR 242.600(b)(51).

145

See, e.g.,

Cboe BZX Rule 11.10 (“One hundred (100) shares shall constitute a `round lot,' any amount less than 100 shares shall constitute an `odd lot,' and any amount greater than 100 shares that is not a multiple of a round lot shall constitute a `mixed lot.' ”); Consolidated Tape System, Multicast Output Binary Specification, 84 (May 8, 2018),

available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf

(defining “odd lot” as “[a]n order amount for a security that is less than the normal unit of trading for that particular asset. Odd lots are considered to be anything less than the standard units of trade of 1, 10 or 100 shares.”).

Despite the absence of a round lot definition, other key defined terms in Regulation NMS—such as “bid or offer,” “best bid and best offer,” and “quotation”—refer, directly or indirectly, to round lot. The effect of these references to round lot is that odd-lot quotation information is not currently collected or disseminated under Regulation NMS.

146

For example, Rule 601 refers to “transaction reports,”

147

the definition of which refers to round lot.

148

Rule 602 refers to “bids” and “offers,”

149

the definition of which also refer to round lot.

150

Rule 603 refers to a “national best bid and national best offer,”

151

which ultimately refers back to round lot.

152

Rules 610 (access to quotations)

153

and 611 (order protection rule)

154

do not apply to odd-lot orders. Rule 604 (display of customer limit orders) also refers to bids and offers

155

and specifically excludes odd-lot orders.

156

146

The Commission's proposal to add a definition of round lot will result in the inclusion of additional quotation data for smaller-sized orders in proposed core data, and, as discussed below in Section III.C.1(d)(i), will also affect the firm quote requirements of Rule 602(b), the customer limit order display requirements of Rule 604, the order execution disclosures required under Rule 605, the requirements under Rule 610(c) regarding fees for accessing quotations, and the Short Sale Circuit Breaker requirements of Rule 201. As discussed below in Section III.C.1(d)(ii), the Commission is also proposing certain amendments to the definition of “protected bid or protected offer” so that the scope of the order protection requirements of Rule 611 and the locked and crossed market prevention requirements of Rule 610(c) are not extended to the proposed smaller round lot sizes.

147

See

Rule 601, 17 CFR 242.601.

148

See

Rule 600(b)(84), 17 CFR 242.600(b)(84).

149

See

Rule 602, 17 CFR 242.602.

150

See

Rule 600(b)(9), 17 CFR 242.600(b)(9).

151

See

Rule 603, 17 CFR 242.603.

152

See

Rule 600(b)(43), 17 CFR 242.600(b)(43); Rule 600(b)(9), 17 CFR 242.600(b)(9).

153

See

Rule 610, 17 CFR 242.610.

154

See

Rule 611, 17 CFR 242.611.

155

See

Rule 604, 17 CFR 242.604.

156

See

Rule 604(b)(3), 17 CFR 242.604(b)(3).

Several exchanges, however, pursuant to their own rules, aggregate odd-lot orders into round lots and report such aggregated odd-lot orders as quotation information to the exclusive SIPs. Exchange rules specify how the

aggregation process works in different terms and with different levels of specificity,

157

but many exchanges aggregate odd-lots across multiple prices and provide them to the exclusive SIPs at the least aggressive price if the combined odd-lot interest is equal to or greater than a round lot.

158

157

See, e.g.,

NYSE Rule 7.36 (“The best-ranked non-marketable displayed Limit Order(s) to buy and the best ranked non-marketable displayed Limit Order(s) to sell in the Exchange Book and the aggregate displayed size of such orders associated with such prices will be collected and made available to quotation vendors for dissemination pursuant to the requirements of Rule 602 of Regulation NMS under the Exchange Act. If non-marketable odd-lot sized orders at multiple price levels can be aggregated to equal at least a round lot, such odd-lot sized orders will be displayed as the best ranked displayed orders to sell (buy) at the least aggressive price at which such odd-lot sized orders can be aggregated to equal at least a round lot.”); Nasdaq Rule 4756 (“Pursuant to Rule 602 of Regulation NMS under the Exchange Act, Nasdaq will transmit for display to the appropriate network processor for each System Security: (i) The highest price to buy wherein the aggregate size of all displayed buy interest in the System greater than or equal to that price is one round lot or greater; (ii) the aggregate size of all displayed buy interest in the System greater than or equal to the price in (i), rounded down to the nearest round lot; (iii) the lowest price to sell wherein the aggregate size of all displayed sell interest in the System less than or equal to that price is one round lot or greater; and (iv) the aggregate size of all displayed sell interest in the System less than or equal to the price in (iii), rounded down to the nearest round lot.”); Cboe BZX Rule 11.9(c)(2) (“Odd Lot Orders are only eligible to be Protected Quotations if aggregated to form a round lot.”);

supra

Section III.C for a discussion of odd-lot aggregation. As noted above, the proposed definition of core data sets forth a methodology for odd-lot aggregation for the components of core data. Any odd-lot quotations that are aggregated in an SRO's existing proprietary data products would be required to be aggregated in a manner consistent with the method set forth in the proposed definition of core data.

See supra

note 129.

158

See id.

For example, if there are three sell orders on an exchange for a particular NMS stock—30 shares at $10.08, 20 shares at $10.09, and 50 shares at $10.10—the exchange will post 100 shares at $10.10 as a protected round lot quote to the exclusive SIP.

See infra

Section VI.C.1(c)(i).

In 2013, the participants to the Equity Data Plans filed proposed amendments to the Plans to add odd-lot transactions to SIP data.

159

In support of the proposed amendments, the participants to the Equity Data Plans noted that “odd-lot transactions account for a not insignificant percentage of trading volume, [and] the Participants have determined that including odd-lot transactions on the consolidated tape . . . would add post-trade transparency to the marketplace.”

160

In approving the amendments, the Commission agreed that “odd-lot transactions comprise a noteworthy percentage of total trading volume,” and stated that “including odd-lot transactions on the consolidated tape will enhance post-trade transparency, as well as price discovery, and consequently would further the goals of the [Exchange] Act,” and that “information about odd-lot transactions would provide important information to investors and other market participants and therefore represents a positive development in the provision of market data.”

161

159

Odd-lot transaction data that is required to be collected, consolidated, and disseminated pursuant to the Equity Data Plans would be included in the proposed definition of consolidated market data pursuant to proposed Rule 600(b)(20)(viii).

160

Securities Exchange Act Release Nos. 70793 (Oct. 31, 2013), 78 FR 66788 (Nov. 6, 2013) (order approving Amendment No. 30 to the UTP Plan to require odd-lot transactions to be reported to consolidated tape); 70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 2013) (order approving Eighteenth Substantive Amendment to the Second Restatement of the CTA Plan to require odd-lot transactions to be reported to consolidated tape).

161

Id.

at 66789-66790.

(b) Market Evolution

In recent years, the share prices of some of the most widely-held stocks have increased substantially.

162

As a result of higher share prices, odd-lot orders in many securities have a high dollar, or notional, value. Because SIP data does not currently include odd-lot quotation information except to the extent that cumulative odd-lot interest equals or exceeds a round lot, the best quote reflected in proprietary data products, especially for many high-priced stocks, may be an odd-lot order that is at a price that is better than the best bid or best offer that is disseminated by the exclusive SIPs. Indeed, as discussed below, an analysis of odd-lot transaction data and comments made in connection with the Roundtable indicate that odd-lot orders are frequently priced better than the quotation prices that are disseminated by the exclusive SIPs, yet these orders are not seen by investors or market participants that rely solely on SIP data.

163

162

For example, between 2004 and 2019, the average price of a stock in the Dow Jones Industrial Average nearly quadrupled.

163

See

Roundtable Day Two Transcript at 66 (Paul O'Donnell, Morgan Stanley) (“We all know that, for high-price stocks, there is a market inside the NBBO”); Roundtable Day One Transcript at 116 (Michael Blaugrund, NYSE) (recommending the inclusion in core data of odd-lots priced better than the BBO); Healthy Markets Association Letter II; staff odd-lot analysis,

infra

(observing that 43% of odd-lot transactions in September of 2019 occurred at prices better than the NBBO).

The importance of increasing the transparency of odd-lot quotation information is supported by odd-lot quotation and transaction data. First, odd-lot transactions make up a significant proportion of transaction volume in NMS stocks, including exchange-traded products (“ETPs”). Based on data from the SEC's MIDAS analytics tool,

164

the daily exchange odd-lot rate (

i.e.,

the number of exchange odd-lot trades as a proportion of the number of all exchange trades) for all corporate stocks ranged from approximately 29% to 42% of trades and the daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of trades in 2018. More recently, in June 2019, the daily exchange odd-lot rate for all corporate stocks exceeded 50% several times (and exceeded 65% several times for the top decile by price) and reached almost 30% for all ETPs in the same period.

165

Exchange odd-lot volume as a proportion of total exchange-traded volume also rose in June 2019, reaching approximately 15% for all corporate stocks (and over 30% for the top decile by price) and approximately 4% for all ETPs.

166

164

Staff accessed consolidated data from the Equity Data Plans and exchange depth of book data, both of which staff receive through the SEC's MIDAS platform.

See

Market Data Analytics System (“MIDAS”),

available at https://www.sec.gov/marketstructure/midas.html.

This data is commercially available.

165

Id. See also

Alexander Osipovich, Tiny `Odd-Lot' Trades Reach Record Share of U.S. Stock Market, Wall Street Journal (Oct. 23, 2019) (“The share of trades in odd-lot sizes hit a record 48.9% on Oct. 7 and has stayed above 40% ever since, according to the NYSE data, which cover all U.S. equity trades, not just those on the Big Board.”).

166

See supra

note 164.

Staff examined odd-lot trade and message volume, duration on the inside,

167

order-book distribution, and quoted spreads for the top 500 securities by dollar volume during the week of September 10-14, 2018, using the exclusive SIP trades, exclusive SIP quotes, off-exchange data from FINRA's TRFs, and all of the exchanges' proprietary data feeds. Staff found that a significant portion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, high-priced securities.

168

167

Duration on the inside is the percent of the day the aggregate size at the best price (bid, offer, or both) is less than 100 shares based on the exchange proprietary data feeds.

168

For example, staff observed that over 86% of the trades that occurred in the two largest securities by market capitalization that have share prices greater than $1,000 occurred in odd-lot share amounts.

Staff compared the bid-ask spread when using exclusive SIP quotation information (which is in round lots) vs. quotation information in the proprietary feeds (which includes odd-lots). On average, the measure of bid-ask spread, an important metric in understanding market liquidity and quote competition, widens (

i.e.,

degrades) significantly when calculated using only round lots relative to the odd-lot quotations displayed on proprietary feeds. In addition, as average stock share prices

rose, bid-ask spreads based only on round lots generally widened by a greater amount than did spreads based on round lots and odd-lots. During the period staff analyzed, for the 500 most frequently traded securities by dollar volume, the average bid-ask spread of the 50 securities with the highest share prices decreased (improved or tightened) by $.05970 when calculated using the proprietary feeds relative to the exclusive SIP feed. Bid-ask spreads for the 50 securities with the lowest share prices showed less improvement when using the proprietary feeds relative to the exclusive SIP feed, decreasing (or tightening) on average by $.00017.

Staff also evaluated the frequency of trades in odd-lot sizes for the top 500 securities by dollar volume and found that frequently traded, high priced securities are likely to have a substantial portion of executions occur in odd-lot sizes. More than 25 percent of the on-exchange share volume of the 50 securities with the highest share prices occurred in odd-lot sizes. In comparison, less than 2% of the on-exchange share volume of the 50 securities with the lowest share prices occurred in odd-lot sizes.

In addition, as noted above,

169

statements made by Roundtable panelists and commenters suggest that odd-lot orders can reflect prices that are better than the quotation prices that are disseminated by the exclusive SIPs. These observations are consistent with staff observations of odd-lot transaction pricing reflected in recent trading data. During the month of September 2019, a substantial proportion of odd-lot trades occurred at prices that are better than the prevailing NBBO. Specifically, approximately 51% of all trades executed on exchange and approximately 14% of all volume executed on exchange in corporate stocks (3,930 unique symbols) occurred in odd-lot sizes (

i.e.,

less than 100 shares), and 43% of those odd-lot transactions (representing approximately 39% of all odd-lot volume) occurred at a price better than the NBBO.

169

See supra

note 163.

In connection with the Roundtable, one commenter presented data showing increased odd-lot trading and quoting rates over the last several years, as well as the existence of quotes on proprietary feeds that are at prices better than the NBBO disseminated by the exclusive SIPs.

170

Several panelists at the Roundtable were supportive of adding odd-lot quotation information to SIP data.

171

One panelist who supported adding odd-lot orders to SIP data noted that the application of order protection under Rule 611 to odd-lot quotes would need to be considered and added that he would likely be in favor of applying Rule 611 to odd-lot quotes.

172

Finally, one panelist emphasized the importance of odd-lot quotation data to market participants, stating that content that exists only in the proprietary feeds—such as odd-lots—is needed to make effective decisions in trading applications and to fill client orders effectively.

173

170

Letter to Brent J. Fields, Secretary, Commission, from Tyler Gellasch, Executive Director, Healthy Markets Association, 5-11 (Mar. 5, 2019) (“Healthy Markets Association Letter II”).

See also

Letter to Brent J. Fields, Secretary, Commission, from Rich Steiner, Head of Client Advocacy and Market Innovation, RBC Capital Markets, LLC (Oct. 25, 2019) (“RBC Letter”) (stating that internal research suggested exclusive SIPs should display odd-lot quotes).

171

See

Roundtable Day One Transcript at 98-99 (Stacey Cunningham, NYSE); Roundtable Day One Transcript at 116-17 (Michael Blaugrund, NYSE); Roundtable Day Two Transcript at 72 (Michael Blaugrund, NYSE) (recommending expanding consolidated market data to include odd-lot orders priced better than the BBO); Roundtable Day One Transcript at 157-59 (Oliver Albers, Nasdaq) (stating that over 50% of the notional value of Nasdaq-listed names is in high priced stocks); Roundtable Day One Transcript at 226-27 (Chris Isaacson, Cboe); Roundtable Day Two Transcript at 73 (Prof. Robert Bartlett, UC Berkeley) (stating that including odd-lots in the trade data has been incredibly useful and including it in the quote data would be also helpful).

172

See

Roundtable Day One Transcript at 226-27 (Chris Isaacson, Cboe). In addition, another panelist suggested that revisiting Rule 611 for odd-lots has merit.

See

Roundtable Day One Transcript at 231-32 (Vlad Khandros, UBS).

See also

Robert Battalio, et al., Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks, The Journal of Trading (Winter 2017),

available at

https://jot.pm-research.com/content/iijtrade/12/1/35.full.pdf

(“[T]he exclusion of odd lot orders from the protected NBBO quote produces cases in which trades fill at prices worse than available opposite-side trading interests.”).

173

See

Roundtable Day One Transcript at 127-28 (Mark Skalabrin, Redline Trading Solutions).

In addition, several comment letters submitted in connection with the Roundtable supported adding odd-lot quotation information to SIP data or otherwise highlighted negative consequences of its exclusion from SIP data.

174

One commenter stated that the Commission should consider rulemaking to expand SIP data to include odd-lot information during which the Commission could gather data and determine whether odd-lots are valuable for price discovery for all securities.

175

Commenters asserted that having to purchase “relatively basic data such as odd-lots” through exchange proprietary offerings goes against one of the main purposes of the national market system: Enabling investors' orders to be executed without the participation of a dealer.

176

Another commenter provided data showing that proprietary feeds that include odd-lot quotes reflect superior pricing compared to the SIP data disseminated by the Equity Data Plans and indicated its support for adding odd-lot quotes to SIP data.

177

Similarly, another commenter stated that as stock prices overall have risen and average trade sizes have fallen, odd-lots are becoming more important in the trading process, and the commenter presented data showing that stock price has a meaningful impact on odd-lot frequency and trade size and that high-priced stocks frequently trade in smaller quantities.

178

174

See

Letter to Brent J. Fields, Secretary, Commission, from NYSE Group, 6, 13 (Oct. 24, 2018) (“NYSE Group Letter”) (stating that “[o]dd-lot quoting, particularly in high-priced securities, has become more prevalent in today's markets and its exclusion from SIP feeds seems anachronistic”; recommending that core data be expanded to include “the best bid and offer of any quantity”; and stating that “Main Street would benefit if the prices disseminated by the SIPs included odd-lot quotes”); Letter to Vanessa Countryman, Acting Secretary, Commission, from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA (Sept. 18, 2019) (“SIFMA Letter II”); Letter to Brent J. Fields, Secretary, Commission, from Richard H. Baker, President and CEO, Global Head of Government Affairs Managed Funds Association and Jirí Król, Deputy CEO, Global Head of Government Affairs, AIMA, 3-4 (Dec. 20, 2018) (“MFA and AIMA Letter”); Healthy Markets Association Letter II.

175

See

SIFMA Letter II at 3.

176

See

MFA and AIMA Letter at 3-4.

177

See

Healthy Markets Association Letter II.

178

See

RBC Letter at 1-2 (highlighting that approximately 50% of all odd-lot trades in stocks priced between $50 and $250 are in 20 shares or less).

Some Roundtable panelists, however, pointed out complications that might arise from the addition of more odd-lot information to the SIP data. One panelist stated that an issue with adding odd-lot quotations to the Equity Data Plans is that they are not protected quotations under Rule 611, so, in the view of the panelist, there would be uncertainty as to whether a broker-dealer has to access odd-lot quotations to meet regulatory obligations. This panelist added that there will need to be clarity as to how odd-lots are reported to the exclusive SIPs and represented in the consolidated tapes (

e.g.,

whether 50 shares at $10 and 100 shares at $10 will be shown separately or as 150 shares at $10).

179

Another panelist stated that caution should be exercised in adding odd-lots to SIP data to avoid

overwhelming market participants with information. This panelist suggested that a “price level metric,” such as including odd-lot orders with a value in excess of a specified price, might make sense.

180

179

See

Roundtable Day One Transcript at 159-60 (Adam Inzirillo, BAML) (stating that the different display options could result in a change from current practices).

180

See

Roundtable Day One Transcript at 160-61 (Matt Billings, TD Ameritrade).

On October 2, 2019, the Equity Data Plans published an “initial proposal” for public comment regarding the addition of odd-lot quotes to the Equity Data Plans for dissemination by the respective exclusive SIPs.

181

Under this proposal, the addition of odd-lot quotes would not change how the NBBO is calculated, nor would such quotes be “protected quotations”

182

under Regulation NMS. Rather, the odd-lot quote data would be “ancillary” data available to exclusive SIP customers.

183

Each exchange would send its top of book odd-lot quotes to the exclusive SIPs in the same form in which it currently sends its top of book round lot quotes.

184

An “odd-lot best bid and offer” would be calculated in the same manner as the round lot NBBO, but would not be disseminated when it is worse than the NBBO.

185

181

See

CTA Plan and UTP Plan, Odd Lots Initial Proposal (“SIP Odd Lot Initial Proposals”),

available at http://www.utpplan.com/DOC/Odd_Lots_Proposal.pdf, https://ctaplan.com/publicdocs/CTA_Odd_Lots_Proposal.pdf;

CTA Plan and UTP Plan Operating Committees, SIP Operating Committees Seek Comment on Proposal to Add Odd Lot Quotes to SIP Data Feeds (Oct. 2, 2019) (“SIP Odd Lots Proposal Press Release”),

available at https://www.globenewswire.com/news-release/2019/10/02/1924016/0/en/SIP-Operating-Committees-Seek-Comment-on-Proposal-to-Add-Odd-Lot-Quotes-to-SIP-Data-Feeds.html;

Letter from Robert Books, Chairman, UTP and CTA Operating Committees, to industry members and investors, 1 (Jan. 6, 2020) (“CTA and UTP Annual Letter”),

available at https://forefrontcomms.com/wp-content/uploads/2020/01/2020-Annual-Letter_FINAL_.pdf.

The SIP Odd Lot Initial Proposals are the subject of continuing consideration by the operating committees. Comments are

available at https://www.ctaplan.com/oddlots.

182

See supra

note 115.

183

See

SIP Odd Lot Initial Proposals,

supra

note 181, at 1.

184

See id.

185

See id.

Additionally, on January 21, 2020, Cboe Global Markets, Inc. (“Cboe”) published a report detailing its recommendations for U.S. equity market structure.

186

In the report, Cboe recommended that top of book odd-lot quotations be included in the exclusive SIP feeds.

187

Furthermore, Cboe recommended redefining round lot with lower numbers for higher priced securities.

188

186

Cboe, Cboe's Vision: Equity Market Structure Reform (Jan. 21, 2020) (“Cboe Report”),

available at http://www.cboe.com/aboutcboe/government-relations/pdf/cboes-vision-equity-market-structure-reform-2020.pdf.

187

See id.

at 3.

188

See id.

at 2-3.

(d) Commission Discussion and Proposal

(i) Proposed Definition of Round Lot

Data on odd-lot trading and quoting activity evaluated by staff,

189

and the remarks and comments of market participants, suggest that SIP data omits a substantial amount of economically significant trading interest. Furthermore, bid-ask spreads calculated using round lot orders do not include some odd-lot quotations that may be at prices better than round lot orders, particularly for higher priced securities.

190

The Commission is concerned that information about significant trading interest in odd-lot orders is only available to market participants who have purchased proprietary market data products from exchanges and remains unavailable to those that rely solely on SIP data. This creates a potentially significant information asymmetry between SIP data and proprietary data.

191

Further, the Commission is concerned about the view expressed by some market participants that achieving best execution may be difficult for broker-dealers that rely solely on SIP data.

189

See supra

Section III.C.1(b) (discussing staff odd-lot analysis).

190

Id.

191

Specifically, larger or better resourced broker-dealers may be more capable of paying the fees for multiple proprietary data feeds to obtain odd-lot quotations from several markets and consolidating these feeds to create a more complete picture of the market.

See infra

Sections VI.B.2(c), VI.B.3(a), and VI.B.3(b). In addition, the proposed definition of round lot would help ensure that market participants, including retail investors, would receive information on smaller-sized orders in higher-priced stocks in a context in which a trading or order routing decision can be implemented and would receive more informative order execution quality information.

See infra

Section III.C.1(d)(i) (discussing the effect of the proposed definition of round lot on Rules 603(c) and 605).

The Commission preliminarily believes that, to address these and other concerns, certain odd-lot quotation data should be required to be disseminated as part of proposed core data so that it is made more readily available to investors and market participants. The Commission is proposing that this be accomplished by defining the term “round lot” to include certain orders that currently are defined as “odd-lots.” Given the prevalence of odd-lot quoting and trading, particularly in higher-priced stocks, the absence of odd-lot quotation data significantly reduces the comprehensiveness and usefulness of SIP data.

The Commission preliminarily believes that the inclusion of odd-lot quotations in proposed core data should be reasonably calibrated. The Commission is preliminarily concerned that including all odd-lot quotations could, as some Roundtable commenters suggested,

192

burden systems, increase complexity, and degrade the usefulness of information in a manner that may not be warranted by the relative benefits of the additional information to investors and market participants.

193

192

See supra

note 180 and accompanying text.

193

See infra

note 195. Further, attempting to access orders of insignificant notional value—the share price multiplied by the number of shares in the order—could result in a situation where the benefit associated with accessing additional liquidity may be offset by the cost associated with signaling to other market participants the presence of a large incoming order.

See

Securities Exchange Act Release No. 78309 (July 13, 2016), 81 FR 49432, 49440 (July 27, 2016) (“[S]ophisticated market participants closely monitor order and execution activity throughout the markets, looking for patterns that signal the existence of a large institutional order, so that they can use that information to their trading advantage . . . Indeed, institutional customers have expressed concern that excessive routing of their orders may increase the risk of information leakage without a commensurate benefit to execution quality.”). By limiting the quotation information that is added to the proposed core data to orders of $1,000 dollars notional value or more, as explained below, the proposed definition of round lot will increase transparency into smaller-sized orders while reducing the likelihood of information leakage.

Accordingly, under proposed Rule 600(b)(81) of Regulation NMS, a “round lot” would be defined as: (1) For any NMS stock for which the prior calendar month's average closing price on the primary listing exchange

194

was $50.00 or less per share, an order for the purchase or sale of an NMS stock of 100 shares; (2) for any NMS stock for which the prior calendar month's average closing price on the primary listing exchange was $50.01 to $100.00 per share, an order for the purchase or sale of an NMS stock of 20 shares; (3) for any NMS stock for which the prior calendar month's average closing price on the primary listing exchange was $100.01 to $500.00 per share, an order for the purchase or sale of an NMS stock of 10 shares; (4) for any NMS stock for which the prior calendar month's average closing price on the primary listing exchange was $500.01 to $1,000.00 per share, an order for the purchase or sale of an NMS stock of 2 shares; and (5) for any NMS stock for which the prior calendar month's average closing price on the primary listing exchange was $1,000.01 or more per share, an order

for the purchase or sale of an NMS stock of 1 share.

194

The IPO price would be used in lieu of the prior calendar month's average closing price on the primary listing exchange for newly issued stocks.

See

proposed Rule 600(b)(81).

Table 1, below, shows the number of NMS stocks that would be in each proposed round lot tier based on monthly average closing prices in September of 2019, as well as the percent of overall average daily volume (“ADV”) and notional value (“$ADV”) of each price group:

Table 1

Stock price group

Number of

stocks in

stock price

group

Percent of

ADV, by price

group

(%)

Percent of

$ADV, by

price group

(%)

$0.00-$50.00

7,188

75.02

31.70

$50.01-$100.00

1,094

13.64

21.06

$100.01-$500.00

575

11.20

43.40

$500.01-$1,000.00

0.05

0.64

$1,000.01 +

0.09

3.19

The Commission's proposed definition of round lot attempts to balance the benefits of adding more quotation data regarding smaller-sized orders to proposed core data against the concerns raised by some Roundtable panelists and commenters that adding all odd-lot quotes to proposed core data could increase its complexity and undermine its usefulness.

195

The proposed definition, in effect, limits the quotation data that would be added to proposed core data to quotations that represent a notional value of at least $1,000, which the Commission preliminarily believes to be meaningful order size for today's market participants.

196

195

The proposed definition of round lot only includes a subset of all odd-lot quotation data, namely, orders with a notional value of at least $1,000. This would limit the number of data messages that would be provided to market participants when compared to providing all odd-lot quotation data. The Commission preliminarily believes that the proposed definition would address concerns regarding additional complexity and degradation of the usefulness of the data.

See infra

Section VI.C.1(b)(i).

196

See infra

Section VI.C.1.

A round lot is a standard unit of trading that traditionally has reflected an order of meaningful size to market participants. Given the per share price increases of certain securities, and the large number of orders in sub-100 share sizes in today's market,

197

the Commission preliminarily believes that the current round lot size of 100 shares no longer captures many orders of meaningful size. The number of shares in an order, on its own, has become a less accurate way of distinguishing orders of meaningful size from those of de minimis size. For example, a 100-share order for an $11 stock and a 10 share order for a $110 stock both have a notional value of $1,100, but, under exchange rules and NMS plans, only the former may be a round lot currently. The Commission preliminarily believes that defining round lots based on a dollar value would better reflect orders of meaningful size.

198

197

See supra

notes 163-169 and accompanying text.

198

Commenters to the SIP Odd Lot Initial Proposals have suggested defining round lots based on share price.

See

Letter to SIP Operating Committees from Hubert De Jesus, Managing Director, Global Head of Market Structure and Electronic Trading, Blackrock, and Joanne Medero, Managing Director, Global Public Policy Group, Blackrock, regarding Odd Lots Proposal, 2 (Dec. 3, 2019),

available at https://www.theice.com/publicdocs/BlackRock_Odd_Lot_Proposal_December_3_2019.pdf

(“The sizing of round lots provides an intuitive mechanism for expanding odd lot coverage because its designation as the normal unit of trading is embedded in exchange rulebooks and market regulations. . . . BlackRock believes that a data-driven redefinition of round lots to scale lot size relative to security price would improve transparency and promote fairer and more efficient markets.”); Letter from Benjamin Connault, Economist, IEX Group, Inc., and Lucy Malcolm, Associate General Counsel, IEX Group, Inc., to Operating Committees, regarding Odd Lots Proposal and Round Lot Proposal, 2 (Nov. 18, 2019),

available at

https://www.theice.com/publicdocs/IEX_Letter_re-CTA-UTP_Odd-Lots_Proposal_20191118.pdf

(“IEX strongly supports reducing the round lot size for higher-priced securities.”).

Furthermore, higher odd-lot trading rates are associated with higher-priced stocks,

199

and, according to data provided in connection with the Roundtable, odd-lot transaction sizes go down as share price goes up.

200

The proposed tiered, price-based round lot definition is intended to reflect these market dynamics. More specifically, a significant odd-lot transaction market—measured by odd-lot trade frequency—emerges at approximately a $50 share price, and 50% of the odd-lots traded in stocks priced between $50 and $250 are 20 shares or less.

201

This corresponds, approximately, with the proposed 20 share round lot category for stocks priced between $50.01 and $100.00 per share. Moreover, according to data provided in connection with the Roundtable, 20, 10, 2, and 1 share odd-lot trade sizes are among the most common, with approximately 2.8%, 5.1%, 5.3%, and 11.7%, of odd-lot executions, respectively.

202

The proposed definition of round lot is intended to broadly reflect these key data points in the context of a relatively simple, intuitive framework for establishing round lot sizes and associated price thresholds.

199

See supra

Section III.C.1(b) (stating that the daily exchange odd-lot rate for the top decile of corporate stocks by price exceeds the rate for all corporate stocks).

200

See

RBC Letter at 5.

201

Id.

202

Deutsche Bank, Global Equities, There's More to Odd Lots than High-Priced Stocks (June 25, 2019).

Moreover, a significant portion of the odd-lot transactions that occur at a price better than the NBBO

203

would be captured by the proposed definition of round lot. Specifically, of the odd-lot transactions executing at a price better than the NBBO during all of the trading days in September 2019, approximately 38% of such transactions and 61% of the odd-lot volume were in sizes that would be round lots under proposed Rule 600(b)(81). For example, for those stocks with an average prior calendar month's closing price on the primary listing exchange equal to or greater than $500.01 and less than $1,000, approximately 77% of all trades (99% of volume) in sizes less than 100 shares that occurred at a price better than the prevailing NBBO had a transaction size of 2 shares or more. Table 2 and Table 3, below, show the portion of odd-lot trades and volume, respectively, executed a price better than the prevailing NBBO that would be defined as round lots under the proposal:

203

See supra

Section III.C.1(b).

Table 2

Stock price group

Proposed round lot definition

Portion of all trades less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal

(%)

$0.00-$50.00

100 shares

$50.01-$100.00

20 shares

$100.01-$500.00

10 shares

$500.01-$1000.00

2 shares

$1,000.01 or more

1 share

100

Table 3

Stock price group

Proposed round lot definition

Portion of all volume transacted in a quantity less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal

(%)

$0.00-$50.00

100 Shares

$50.01-$100.00

20 Shares

$100.01-$500.00

10 Shares

$500.01-$1000.00

2 Shares

$1,000.01 or more

1 Share

100

The proposed definition of round lot requires the round lot size of an NMS stock to be based on the prior calendar month's average closing price on the primary listing exchange for that stock (or the IPO price if the prior calendar month's average closing price on the primary listing exchange is not available).

204

The Commission preliminarily believes that the prior calendar month's average closing price on the primary listing exchange is a reasonable metric to assess an NMS stock's share price for purposes of determining the applicable round lot size. The daily closing price is a widely followed indicator of a stock's value that is often used to measure performance over time.

205

Moreover, using a monthly average (rather than,

e.g.,

each trading day's closing price or a weekly average), would help ensure that round lot sizes are based on current pricing information, while preventing short-term price fluctuations from impacting the round lot size, thereby avoiding unnecessary complexity and cost.

204

Specifically, the prior calendar month's average closing price on the primary listing exchange would be the mean of the daily closing prices on the primary listing exchange for all trading days in the prior calendar month. For each NMS stock, the prior calendar month's average closing price on the primary listing exchange would only need to be computed at the beginning of each calendar month and would be in effect for the rest of the month (

i.e.,

it would not be a “rolling” average requiring computation more frequently than once per calendar month).

205

See

Christopher Ting, Which Daily Price Is Less Noisy?, Financial Management 35, no. 3 (2006): 81-95 (describing daily closing price as a popular reference price, including for fund managers to compute net asset values).

The proposed definition of round lot would impact other terms that are currently defined in Regulation NMS, as well as the proposed definition of core data (and its included terms), so that quotation information in the proposed round lot sizes would be included in the proposed definition of core data. Specifically, the definition of “bid or offer”

206

is based on round lots, and the definition of “bid or offer” is reflected in the definition of “best bid and best offer.”

207

Similarly, the definition of “best bid and best offer” is reflected in the definition of “national best bid and national best offer.”

208

Therefore, the addition of the proposed definition of round lot would impact the calculation of the NBBO by requiring that it be calculated based upon the BBOs in the new round lot sizes. In addition, the proposed definition of depth of book data refers to “quotation size,” which refers to “bid or offer,” so the quotation data at the price levels that are proposed to be included in depth of book data would include quotations in the new proposed round lot sizes.

209

206

See

17 CFR 242.600(b)(9).

207

See

17 CFR 242.600(b)(8).

208

See

17 CFR 242.600(b)(43).

209

Similarly, since “transaction report” is defined as “a report containing the price and volume associated with a transaction involving the purchase or sale of one or more round lots of a security,” core data, as proposed, would include transaction reports based on the new proposed round lot sizes. The Equity Data Plans already collect and disseminate all odd-lot transaction reports and last sale data.

See supra

notes 160-161 and accompanying text. Accordingly, under proposed Rule 600(b)(19)(iv), which incorporates data elements required by the NMS plan(s) into the proposed consolidated market data, the SROs would continue to be required to provide all odd-lot transaction reports and last sale data as part of the proposed consolidated market data.

The proposed definition of “round lot” would also affect Rules 602, 603, 604, 605, 606, and 610 of Regulation NMS. Rule 602 governs the dissemination of quotations in NMS securities. Specifically, Rule 602(a), among other things, requires SROs to have procedures to collect and make available certain quotation information from their members and make available their best bids and offers to vendors. As a result of the proposed definition of “round lot,” the SROs would be required to collect and make available quotations in the smaller round lot sizes depending on the price of the NMS stock. The Commission preliminarily believes the bids and offers collected and made available under Rule 602(a) should be in the proposed round lot sizes. As discussed above, the Commission preliminarily believes that the proposed round lot sizes represent orders of meaningful size to market participants and should be collected, consolidated, and disseminated in proposed core data. To effectively implement this, exchanges must be required to collect and make available

quotations in these sizes under Rule 602(a).

In addition, Rule 602(b) provides that each “responsible broker or dealer” shall communicate to its SROs its best bids and offers and quotation sizes for a “subject security.”

210

Thereafter, each responsible broker or dealer is obligated to execute an order to buy or sell a subject security, other than an odd-lot order, that is presented to that responsible broker or dealer at a price at least as favorable to such buyer or seller as the responsible broker's or dealer's “published bid or published offer.”

211

In other words, the responsible broker or dealer must be firm for its “published bid or published offer.”

212

As a result of the proposed definition of round lot, responsible brokers or dealers will be required to communicate bids and offers in the proposed round lot sizes and be firm for such bids and offers. The Commission preliminarily believes that the proposed round lot definition should apply to the obligations of responsible brokers or dealers under Rule 602(b). As explained above, the Commission preliminarily believes that the proposed round lot sizes better reflect orders of meaningful size in today's markets. The Commission also preliminarily believes that the objectives of Rule 602(b) of ensuring that broker-dealers disseminate their best quotes, and are firm for such quotes, would be furthered by applying the proposed definition of round lots such that those obligations would apply to quotes of meaningful size.

210

“Subject security” means “(i) With respect to a national securities exchange: (A) Any exchange-traded security other than a security for which the executed volume of such exchange, during the most recent calendar quarter, comprised one percent or less of the aggregate trading volume for such security as reported pursuant to an effective transaction reporting plan or effective national market system plan; and (B) Any other NMS security for which such exchange has in effect an election, pursuant to 242.602(a)(5)(i), to collect, process, and make available to a vendor bids, offers, quotation sizes, and aggregate quotation sizes communicated on such exchange; and (ii) With respect to a member of a national securities association: (A) Any exchange-traded security for which such member acts in the capacity of an OTC market maker unless the executed volume of such member, during the most recent calendar quarter, comprised one percent or less of the aggregate trading volume for such security as reported pursuant to an effective transaction reporting plan or effective national market system plan; and (B) Any other NMS security for which such member acts in the capacity of an OTC market maker and has in effect an election, pursuant to 242.602(a)(5)(ii), to communicate to its association bids, offers, and quotation sizes for the purpose of making such bids, offers, and quotation sizes available to a vendor.” 17 CFR 242.600(b)(77).

211

See

Rule 602(b)(2), 17 CFR 242.602(b)(2); Regulation NMS Adopting Release,

supra

note 10, at 37538. “Published bid and published offer means the bid or offer of a responsible broker or dealer for an NMS security communicated by it to its national securities exchange or association pursuant to § 242.602 and displayed by a vendor on a terminal or other display device at the time an order is presented for execution to such responsible broker or dealer.” 17 CFR 242.600(b)(64).

212

17 CFR 242.602(b)(2).

See also

Rule 600(b)(64) which defines “published bid and published offer.” 17 CFR 242.600(b)(64).

Rule 603(c) governs the display of information with respect to quotations for and transactions in NMS stocks. Specifically, Rule 603(c)(1) states that no securities information processor, broker, or dealer shall provide, in a context in which a trading or order routing decision can be implemented, a display of any information with respect to quotations for or transactions in an NMS stock without also providing, in an equivalent manner, a consolidated display—

i.e.,

the NBBO and consolidated last sale information

213

—for such stock.

214

As a result of the proposed definition of “round lot,” a securities information processor, broker, or dealer would be required to provide a consolidated display that reflects smaller-sized orders in higher-priced stocks. As discussed above, the Commission preliminarily believes that the proposed round lot sizes represent orders of meaningful size to market participants. The Commission also preliminarily believes that the objective of Rule 603(c) of ensuring that market participants receive basic quotation and transaction information in a context in which a trading or order routing decision can be implemented would be furthered to the extent that such information is based on orders of meaningful size such as round lots as proposed to be defined in this pro

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