Volume-Based Exchange Transaction Pricing for NMS Stocks

Federal RegisterNov 6, 2023

Ask Donna

What actually matters in this document.

Text

SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 232 and 240

[Release No. 34-98766; File No. S7-18-23]

RIN 3235-AN29

Volume-Based Exchange Transaction Pricing for NMS Stocks

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

The Securities and Exchange Commission (“Commission”) is proposing a new rule under the Securities Exchange Act of 1934 (“Exchange Act”) to prohibit national securities exchanges from offering volume-based transaction pricing in connection with the execution of agency-related orders in certain stocks. If exchanges offer such pricing for their members' proprietary orders, the proposal would require the exchanges to adopt rules and written policies and procedures related to compliance with the prohibition, as well as disclose, on a monthly basis, certain information including the total number of members that qualified for each volume tier during the month.

DATES:

Comments should be received on or before January 5, 2024.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment form (

https://www.sec.gov/rules/2023/10/feetiers

); or

• Send an email to

rule-comments@sec.gov.

Please include file number S7-18-23 on the subject line.

Paper Comments

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

All submissions should refer to file number S7-18-23. This file number should be included on the subject line if email is used. To help the Commission process and review your comments more efficiently, please use only one method of submission. The Commission will post all comments on the Commission's website (

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

). Comments are also available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission's Public Reference Room. Do not include personal information in submissions; you should submit only information that you wish to make available publicly. We may redact in part or withhold entirely from publication submitted material that is obscene or subject to copyright.

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.

A summary of the proposal of not more than 100 words is posted on the Commission's website (

https://www.sec.gov/rules/2023/10/feetiers

FOR FURTHER INFORMATION CONTACT:

Richard Holley III, Assistant Director, Yvonne Fraticelli, Special Counsel, Terri Evans, Special Counsel, or Julia Zhang, Special Counsel, at (202) 551-5500, Office of Market Supervision, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing to add new 17 CFR 240.6b-1 (Rule 6b-1 under the Exchange Act) and amend 17 CFR 232.101 (Rule 101 of Regulation S-T) and 17 CFR 232.405 (Rule 405 of Regulation S-T).

Table of Contents

I. Introduction

A. Background

B. Volume-Based Exchange Transaction Pricing

C. Commission Concerns

1. Competition Among Members

2. Conflicts of Interest

3. Exchange Competition

II. Description of Proposed Rule

A. Overview of Proposed Rule

B. Prohibition on Volume-Based Exchange Transaction Pricing for Agency-Related Volume

C. Anti-Evasion

D. Transparency for Volume-Based Pricing on Member Proprietary Orders

III. Paperwork Reduction Act

A. Summary of Collections of Information

1. Rule 6b-1(a)—Prohibition on Volume-Based Pricing for Agency-Related Volume

2. Rule 6b-1(b)(1)—Rules To Prevent Evasion

3. Rule 6b-1(b)(2)—Policies and Procedures To Prevent Evasion

4. Rule 6b-1(c)—Transparency for Volume-Based Pricing on Member Proprietary Orders

B. Proposed Use of Information

1. Rule 6b-1(a)—Prohibition on Volume-Based Pricing for Agency-Related Volume

2. Rule 6b-1(b)(1)—Rules To Prevent Evasion

3. Rule 6b-1(b)(2)—Policies and Procedures To Prevent Evasion

4. Rule 6b-1(c)—Transparency for Volume-Based Pricing on Member Proprietary Orders

C. Respondents

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Rule 6b-1(a)—Prohibition on Volume-Based Pricing for Agency-Related Volume

2. Rule 6b-1(b)(1)—Rules To Prevent Evasion

3. Rule 6b-1(b)(2)—Policies and Procedures To Prevent Evasion

4. Rule 6b-1(c)—Transparency for Volume-Based Pricing on Member Proprietary Orders

E. Collection of Information Is Mandatory

F. Confidentiality of Responses to Collection of Information

G. Retention Period for Recordkeeping Requirements

H. Request for Comments

IV. Economic Analysis

A. Introduction

B. Baseline

1. Exchange Pricing

2. Volume-Based Tiers and Order Routing Incentives

3. Routing Incentives and Potential Conflicts of Interest

4. The Market To Provide Exchange Access

5. Lack of Tier Transparency

C. Economic Effects

1. Effect of the Proposed Ban on Volume-Based Tiers for Non-Principal Orders

2. Effects of Proposed Requirement of Rules and Policies and Procedures To Prevent Evasion

3. Effects of the Transparency Provisions

D. Effect on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

E. Reasonable Alternatives

1. Ban Volume-Based Pricing for All Orders

2. Ban Volume-Based Pricing for All Orders Except Registered Market Makers

3. Proceed With Transparency Provisions for All Orders Without Tiers Prohibition

4. Banning the Linking of Volume-Based Tiers for Closing Auctions To Consolidated Volume

5. Require Disclosures of Volume-Based Pricing in Proprietary Volume in NMS Stocks To Be Posted on Exchange Websites or Submitted Through a Different System

6. Require a Different Structured Data Language for the Disclosures of Volume-Based Pricing in Proprietary Volume in NMS Stocks

7. Remove Structured Data Language Requirement for Disclosures of Volume-Based Pricing in Proprietary Volume in NMS Stocks

F. Request for Comment

V. Regulatory Flexibility Act Certification

VI. Consideration of Impact on the Economy

Statutory Authority

I. Introduction

A. Background

National securities exchanges (“exchanges”) that trade NMS stocks

maintain pricing schedules that set forth the transaction pricing they apply to their broker-dealer members

that execute orders on their trading platforms.

As self-regulatory organizations under the Exchange Act, exchanges are subject to unique principles and processes that do not apply to other businesses.

For example, all proposed rules of an exchange,

including exchange transaction pricing proposals, must be filed with the Commission.

In addition, pricing schedules must be publicly posted on the exchange's website.

See

17 CFR 242.600(b)(55) (defining “NMS stock”).

Exchange rules limit their membership to registered brokers or dealers.

See, e.g.,

Cboe BZX Exchange, Inc. (“Cboe BZX”) Rule 2.3.

This release uses the term “price” or “pricing” to refer to the fees (charges incurred for an execution), rebates (refundable credits in connection with an execution), and other incentives (

e.g.,

discounts or caps that are not refundable credits but are credited to the member's billing account) that exchanges assess to their members for transactions on the exchange. Rebates are refundable because they can exceed the fees (transaction fees and other fees) that members incur.

See, e.g.,

Remarks of Chris Concannon, Cboe Global Markets, before the SEC Roundtable on Market Data Products, Market Access Services, and Their Associated Fees, Oct. 25, 2018, Transcript at 74-75, available at

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

(“Five out of the top 10 get a check from us after the costs of their connectivity and market data. So we are cutting them a check monthly after their costs.”) (“Remarks of Chris Concannon”).

See, e.g.

15 U.S.C. 78f and 78s.

See

15 U.S.C. 78c(a)(27) (defining “rules”) and 17 CFR 240.19b-4(c) (providing further information on the phrase “stated policies, practices, and interpretations”).

See

15 U.S.C. 78s(b). Exchange pricing proposals are effective immediately upon filing with the Commission because the Exchange Act does not require advance notice or Commission approval before an exchange may implement a pricing change. 15 U.S.C. 78s(b)(3)(A)(ii). Within 60 days after the date of filing of an immediately effective proposal, the Commission may summarily temporarily suspend the proposal if it appears to the Commission that a suspension is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act.

See

15 U.S.C. 78s(b)(3)(C). If the Commission suspends the proposal, the Commission will institute proceedings under section 19(b)(2)(B) (15 U.S.C. 78s(b)(2)(B)) of the Exchange Act to determine whether the proposal should be approved or disapproved.

See

15 U.S.C. 78s(b)(3)(C). At the conclusion of the proceedings, the Commission shall approve a proposal if it finds that it is consistent with the requirements of the Exchange Act, or it shall disapprove the proposal if it does not make such a finding.

See

15 U.S.C. 78s(b)(2)(C). If the Commission does not suspend an immediately effective filing on or before the sixtieth day after the filing date, the Exchange Act does not deem the proposal to have been approved by the Commission.

See

15 U.S.C. 78s(b)(2)(D) (providing when a proposed rule change shall be deemed to have been approved by the Commission).

See

17 CFR 240.19b-4(m).

The Exchange Act further requires that exchange pricing proposals, among other things, provide for the “equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities”

that “are not designed to permit unfair discrimination between customers, issuers, brokers, or dealers”

and “do not impose any burden on competition not necessary or appropriate in furtherance of the purposes of” the Exchange Act.

With respect to the requirement that the rules of an exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act, the Senate Banking, Housing and Urban Affairs Committee report that accompanied the 1975 amendments to the Exchange Act stated that “this paragraph is designed to make clear that a balance must be struck between regulatory objectives and competition, and that unless an interference with competition is justified in terms of the achievement of a statutory objective, it cannot stand.”

15 U.S.C. 78f(b)(4).

15 U.S.C. 78f(b)(5).

15 U.S.C. 78f(b)(8).

Securities Acts Amendments of 1975, Report of the Senate Comm. on Banking, Housing and Urban Affairs to Accompany S.249, S. Rep. No. 94-75, 94th Cong., 1st Sess. 11 (1975), at 96 (“Senate Report”).

Section 11A of the Exchange Act

directs the Commission to facilitate the establishment of a national market system in accordance with specified Congressional findings. Among the Congressional findings are assuring (i) fair competition among brokers and dealers and among exchange markets, and (ii) the practicability of brokers executing investors' orders in the best market.

Rather than setting forth minimum components of the national market system, the Exchange Act grants the Commission broad authority to oversee the implementation, operation, and regulation of the national market system consistent with Congressionally determined goals and objectives.

15 U.S.C. 78k-1.

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

See

Senate Report,

supra

note 11, at 8-9.

B. Volume-Based Exchange Transaction Pricing

As part of its ongoing efforts to assess whether aspects of the national market system continue to meet the statutory goals and objectives as markets and market participants evolve, the Commission is considering the impact of volume-based exchange transaction pricing in NMS stocks. Many exchanges use increasingly complex transaction pricing schedules that feature differentiated incentives (

e.g.,

lower fees or higher rebates) that depend on member volume.

These exchanges

offer members lower fees or higher rebates as the number of shares the member executes on the exchange reaches successively higher predefined volume-based levels (“tiers”). The transaction volume that qualifies a member for a better fee or rebate tier typically is measured as a fraction of total consolidated market volume, rather than a fixed value. Such tiers are commonly based on a member achieving a designated average daily volume on the exchange that equals or exceeds a certain percentage of

total

market volume in a given month (

e.g.,

an average daily volume on the exchange that equals or exceeds 0.10% of the total consolidated market volume).

Each member's tier is calculated by the exchange as of the end of a month and reset thereafter on a monthly basis.

The large number of available tiers, and possible combinations of some tiers,

greatly complicate exchange pricing schedules and that complexity can make it more difficult for the public to understand and meaningfully comment on exchange pricing proposals.

Exchange transaction pricing for NMS stocks is characterized by three different pricing models: (1) maker-taker (where the liquidity providing “maker” receives a rebate from the exchange and the “taker” that executes against that resting order pays a fee to the exchange); (2) taker-maker or inverted (where liquidity takers are offered a rebate and liquidity providers are assessed a fee); and (3) flat (where an exchange does not offer rebates and instead charges a fee to neither side of a trade, one side of a trade, or both sides of a trade). In rebate pricing models, the exchange's transaction revenue (“net capture”) is the difference between the fee it collects on one side of the trade and the rebate it pays out on the other side of the trade. As of Mar. 2023, nine exchanges had a maker-taker pricing model.

See

Cboe BZX pricing schedule, available at

https://www.cboe.com/us/equities/membership/fee_schedule/bzx/;

Cboe EDGX Exchange, Inc. (“Cboe EDGX”) pricing schedule, available at

https://www.cboe.com/us/equities/membership/fee_schedule/edgx/;

Nasdaq PHLX, LLC (“Phlx (PSX)”) pricing schedule, available at

https://listingcenter.nasdaq.com/rulebook/phlx/rules/phlx-equity-7;

The Nasdaq Stock Market LLC (“Nasdaq”) pricing schedule, available at

http://nasdaqtrader.com/Trader.aspx?id=PriceListTrading2#rebates;

NYSE Arca, Inc. (“NYSE Arca”) pricing schedule, available at

https://www.nyse.com/publicdocs/nyse/markets/nyse-arca/NYSE_Arca_Marketplace_Fees.pdf;

NYSE American LLC (“NYSE American”) pricing schedule, available at

https://www.nyse.com/publicdocs/nyse/markets/nyse-american/NYSE_America_Equities_Price_List.pdf;

New York Stock Exchange, LLC (“NYSE”) pricing schedule, available at

https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf;

MEMX, LLC pricing schedule, available at

https://info.memxtrading.com/fee-schedule/;

and MIAX PEARL, LLC (“MIAX Pearl”) equities pricing schedule, available at

https://www.miaxoptions.com/sites/default/files/fee_schedule-files/MIAX_Pearl_Equities_Fee_Schedule_01012023_1.pdf.

As of Mar. 2023, four exchanges had a taker-maker pricing model.

See

Cboe BYX Exchange, Inc. (“Cboe BYX”) pricing schedule, available at

https://www.cboe.com/us/equities/membership/fee_schedule/byx/;

Cboe EDGA Exchange, Inc. (“Cboe EDGA”) pricing schedule, available at

https://www.cboe.com/us/equities/membership/fee_schedule/edga/;

and NYSE National, Inc. (“NYSE National”) pricing schedule, available at

https://www.nyse.com/publicdocs/nyse/regulation/nyse/NYSE_National_Schedule_of_Fees.pdf.

Nasdaq BX, Inc. (“BX”) also uses the taker-maker pricing model but charges a $0.0007 fee if a member fails to reach any liquidity removing rebate tier.

See

BX pricing schedule, available at

http://www.nasdaqtrader.com/trader.aspx?id=bx_pricing.

As of Mar. 2023, Investors Exchange LLC (“IEX”) and NYSE Chicago, Inc. (“NYSE Chicago”) offer a flat pricing model.

See

IEX pricing schedule, available at

https://www.iexexchange.io/resources/trading/fee-schedule#transaction-fees

and NYSE Chicago pricing schedule, available at

https://www.nyse.com/publicdocs/nyse/NYSE_Chicago_Fee_Schedule.pdf.

As of Sept. 1, 2023, IEX began offering a rebate of $0.0004 per share on displayed orders that add liquidity for executions at or above $1. Another exchange, Long-Term Stock Exchange,

Inc., (“LTSE”) does not charge fees to transact.

See https://ltse.com/trading/market-overview.

Tier criteria typically reference a member's average total daily traded share volume on the exchange during the month as a percentage of the average

total

daily market volume in stocks reported by one or more of the consolidated tapes (“Tapes”) during the month pursuant to effective national market system plans that govern the collection, consolidation, processing, and dissemination of certain national market system information.

See, e.g.,

Nasdaq pricing schedule,

supra

note 15. There currently are three such effective national market system plans. They are: (1) the Consolidated Tape Association Plan (“CTA Plan”); (2) the Consolidated Quotation Plan (“CQ Plan”); and (3) the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis (“UTP Plan”) (together, the “Equities Data Plans”). The Equities Data Plans disseminate SIP data over three separate networks: (1) Tape A for securities listed on NYSE; (2) Tape B for securities listed on exchanges other than NYSE and Nasdaq; and (3) Tape C for securities listed on Nasdaq. The CTA Plan governs the collection, consolidation, processing, and dissemination of last sale information for Tape A and Tape B securities. The CQ Plan governs the collection, consolidation, processing, and dissemination of quotation information for Tape A and Tape B securities. Finally, the UTP Plan governs the collection, consolidation, processing, and dissemination of last sale and quotation information for Tape C securities.

See also

Securities Exchange Act Release No. 98271 (Sept. 1, 2023), 88 FR 61630 (Sept. 7, 2023) (File No. 4-757) (Order directing the exchanges and the Financial Industry Regulatory Authority (“FINRA”) to file a national market system plan regarding consolidated equity market data).

Currently, as exchanges assess transaction pricing to their members on a monthly basis in arrears, exchanges apply the highest tier a member achieves during a month to all of the member's executions during that month (

e.g.,

if a member qualifies for Tier 2 in June (out of 4 tiers), all of its June volume will be assessed at the Tier 2 rate, including volume transacted at the lower Tiers 4 and 3 earlier in the month). Separately, the Commission has proposed to require exchanges to make the amounts of all fees and rebates determinable at the time of execution, which would require volume-based exchange transaction pricing to be applied prospectively rather than retroactively to the start of a month.

See

Securities Exchange Act Release No. 96494 (Dec. 14, 2022), 87 FR 80266, 80270 (Dec. 29, 2022) (File No. S7-30-22) (“Access Fee Proposal”). The Commission encourages commenters to review the Access Fee Proposal to determine whether it might affect their comments on this release. As exchanges compete to attract liquidity, frequent pricing changes (typically effective and/or operative on the first business day of a month) are common.

See, e.g., id.

at 87 FR at 80311 (stating that between Jan. 2018 and June 2022, market participants interacting with all exchanges had to adjust to an average of 155 fee changes per year across all exchanges).

See infra

Table 2 (showing the number of available tiers at each exchange in March 2023, ranging from 0 to 93). Some exchanges offer additive incentives, including “step-up” rebates, that can be earned in addition to a standard tiered incentive.

See, e.g.,

Cboe BZX Fee Schedule's Step-Up Tiers, available at

https://www.cboe.com/us/equities/membership/fee_schedule/bzx/. See also infra

Tables 1 and 2.

See

Letter to Brent Fields, Secretary, Commission, from Rich Steiner, RBC Capital Markets (Oct. 16, 2018) (“RBC Letter”) at 8 (comment letter on File No. S7-05-18) (“Our analysis identifies at least 1,023 pricing paths across the exchanges. Over one-third, or 381, of these paths consist of rebates. These 1,023 pricing paths are themselves determined by at least 3,762 pricing variables.”).

Volume-based exchange transaction pricing raises competitive concerns among exchange members as well as among exchanges. With respect to members competing for customers,

members with lower exchange volume do not qualify for the more favorable volume-based exchange transaction pricing tiers available to high-volume members. Accordingly, lower-volume members may find it difficult to compete for customer order flow because they are unable to pass through to customers the favorable exchange transaction pricing or lower commissions that are available to higher-volume members.

Similar competitive concerns also may be present for members as a result of volume-based exchange transaction pricing when they trade proprietarily using principal orders where no customers are involved.

A “customer” of a member is anyone using the services of the member to access the exchange, including another exchange member, a non-member broker-dealer, an institution, or any other person.

See

Letter from Tyler Gellasch, President and CEO, Healthy Markets Association, to Gary Gensler, Chair, Commission, dated Nov. 16, 2022 at 4 (“Healthy Markets Letter”), available at

https://healthymarkets.org/wp-content/uploads/2022/12/HMA-Ltr-re-Volume-Based-Pricing-11-16-22-1.pdf

(stating that to “the extent that different competitors fall into different pricing tiers, it will directly impact the competitive balance between those firms”). The letter also includes suggestions for potential reforms to exchange routing incentives and transaction pricing fees.

See id.

at 4.

As a result of volume-based exchange transaction pricing, lower-volume members may seek to route some or all of their orders through high-volume members to qualify for better exchange pricing.

As that happens, the lower-volume members that are otherwise competing with the high-volume members become customers of their high-volume competitors. This dynamic can lead to order flow becoming increasingly concentrated among a small number of high-volume members, who then qualify for even higher tiers (

i.e.,

tiers that feature lower fees or higher rebates) as a result of that flow, which further impacts the ability of lower-volume members to compete with them in a self-reinforcing cycle.

This concentration impacts customers by reducing the number of exchange members capable of offering them competitive exchange transaction pricing. Further, lower-volume exchange members provide a subsidy for the high-volume members when exchanges use the higher fees and lower rebates of the lower-volume members to fund the lower fees and higher rebates the exchange offers to high-volume members.

Accordingly, the Commission is concerned that volume-based exchange transaction pricing may have the effect of ensuring that high-volume members retain a persistent competitive advantage over lower-volume exchange members.

See, e.g.,

Securities Exchange Act Release No. 63241 (Nov. 3, 2010), 75 FR 69792 at 69793 (Nov. 15, 2010) (“Rule 15c3-5 Adopting Release”) (discussing that certain market participants may find the wide range of access arrangements, including sponsored and/or direct market access, beneficial and that such arrangements may “reduce trading costs by lowering operational costs, commissions, and exchange fees”).

See infra

section IV.B.4 (The Market to Provide Exchange Access).

See id.

See 15 U.S.C. 78f(b)(4) (requiring that the rules of an exchange provide for the equitable allocation of reasonable dues, fees, and other charges among its members); (b)(5) (requiring that the rules of an exchange, among other things, not be designed to permit unfair discrimination); (b)(8) (requiring that the rules of an exchange not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act); and 15 U.S.C. 78k-1(a)(1)(C) (finding it 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, and among exchange markets).

In addition, volume-based transaction pricing tiers may provide incentives to members of more than one exchange to route orders to one particular exchange in order to qualify for that exchange's tiers and achieve lower fees and higher

rebates as a result.

With respect to customer orders, an economic incentive to route customer orders to a particular exchange to achieve volume tiers on that specific exchange can present a conflict of interest between members and customers when members do not fully pass-through exchange transaction fees and rebates to their customers and instead retain for themselves the benefits of tiered exchange transaction pricing.

Membership can overlap across the exchanges. For example, as of Feb. 21, 2023, MIAX Pearl Equities Exchange had 49 members and NYSE had 143 members.

See https://www.miaxoptions.com/exchange-members/pearl-equities

and

https://www.nyse.com/markets/nyse/membership.

Forty-two of those MIAX Pearl Equities Exchange's members were also members of NYSE.

The Commission understands that full pass-through of exchange transaction pricing by members to their customers is less common.

Volume-based exchange transaction pricing also can impact competition among exchanges. For example, when a primary listing exchange bases pricing in its closing auction on the volume that a member executes on the exchange during regular trading hours, members that prefer (or whose customers prefer) the primary listing exchange's closing auction are incentivized to route orders to the exchange during the regular hours trading session in order to obtain more favorable pricing in the closing auction, which could negatively affect the ability of other exchanges to compete for that volume during regular trading hours.

See, e.g.,

NYSE pricing schedule,

supra

note 15 (offering incremental per share discounts on market-at-the-close orders depending on a member's average daily trading volume that added liquidity to NYSE during the billing month as a percentage of CADV). According to NYSE, the proposed discounts were designed “to align incentives among both trading on the close and intraday trading on the Exchange.”

See

Securities Exchange Act Release No. 94543 (Mar. 19, 2022), 87 FR 19544 at 19543 (Apr. 4, 2022). The NYSE further stated “that other marketplaces provide discounts based on intraday adding volume, and that aligning incentives for lower pricing at the close with additional intraday volume is thus neither novel nor an unreasonable stance in a competitive marketplace.”

Id.

at 19546.

As discussed below, the proposed rule would prohibit exchanges from offering volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks.

This prohibition is designed to remove a competitive impediment between higher-volume and lower-volume members when they compete for customer business, and also to mitigate the conflict of interest between members and customers presented by volume-based exchange transaction pricing tiers when members are routing customer orders to an exchange for execution. Because the prohibition in proposed Rule 6b-1 would be limited to agency and riskless principal orders, exchanges would continue to have the ability to provide tiered transaction pricing for member proprietary volume, and therefore this proposed prohibition does not seek to address any potential concerns associated with the routing of proprietary orders.

While the proposed rule addresses only NMS stocks, the Commission is requesting comment below on whether the proposal should be applied to options.

With respect to proprietary volume, the proposed rule would enhance transparency of tiered exchange transaction pricing for such volume by requiring exchanges to disclose the number of members that qualify for each of their pricing tiers. This information is intended to facilitate the Commission's review of proposed pricing changes and provide the public with additional relevant information for assessing and providing informed comment on exchange pricing proposals, including assessing exchange statements about the number of members that may qualify for a proposed tier, assessing the actual effect of a pricing change, and assessing whether a tier meets the applicable statutory standards.

See supra

notes 8-10 and accompanying text (discussing the Exchange Act principles applicable to exchange pricing proposals).

C. Commission Concerns

As introduced above and further discussed below, the Commission has several concerns about volume-based exchange transaction pricing. First, the Commission is concerned about the impact of volume-based exchange transaction pricing, as tiered pricing has expanded and evolved, on competition among exchange members, such as when broker-dealers are competing for customers. Second, the Commission is concerned that the desire to qualify for volume-based transaction pricing tiers exacerbates a conflict of interest between members and their customers when members route customers' orders for execution because the member can economically benefit from its routing decision. Specifically, tiered transaction pricing exacerbates that conflict because the benefit to the member increases as the number of orders it executes on the exchange increases, and for the highest tier it meets during a month, the member receives that higher rebate or lower fee on all of its orders that it executed on that exchange during the month. Finally, the Commission is concerned that tiered pricing may impose a burden on exchange competition, especially when exchanges base pricing for an auction, trading session, or special program on volume submitted during regular trading hours outside that auction, trading session, or program.

As discussed above, the Commission is able to summarily temporarily suspend individual exchange proposed rule changes related to transaction pricing shortly after they are filed.

This post hoc filing-by-filing approach, however, does not address similar pricing across other exchanges. The Commission is proposing this rule as a cross-exchange approach intended to facilitate investor protection and the public interest while enhancing competition among members and among exchanges.

See supra

note 6.

See also

15 U.S.C. 78s(b)(3)(C).

1. Competition Among Members

Some exchange pricing schedules have evolved to the point of offering exceptionally specific pricing tiers, where some observers have questioned whether certain tiers may be available to only a limited number of members.

The Commission is concerned that exchanges' tiered transaction pricing may confer an inappropriate benefit on a small group of members to the detriment of other members by offering the best prices (

i.e.,

the lowest fees and highest rebates) only to the exchange's highest volume members.

In turn, this advantage may significantly limit the ability of lower-volume members to compete with higher-volume members for the order flow volume necessary to reach higher tiers.

See

John Ramsay, Chief Market Policy Officer, IEX,

Why Exchange Rebate Tiers are Anti-Competitive

(June 5, 2023), available at

https://www.iex.io/article/why-exchange-rebate-tiers-are-anti-competitive

(“Ramsay Article”) (stating that some “exchanges offer specialized `bespoke' volume tiers with formulas that are so specific, they can appear to be specifically designed to benefit one or a few firms, and it is widely assumed that some are” (citation omitted) and that “tailored-tier rates seems to have the effect, if not the purpose, of allowing the highest-volume firms that already have a competitive edge to keep it”).

See id.

See also

infra

Table 2.

See supra

note 26 and accompanying text.

See also

infra

section IV.B.1.b, Volume-Based Pricing Tiers.

By design, volume-based exchange transaction pricing involves an exchange assessing different fees and offering different rebates and other incentives to different members for executions of orders with identical terms (symbol, price, size, side, order type, etc.). The range in fees and rebates can vary considerably, as shown below in Table 1. While the transaction price for each execution is small in absolute dollar terms, the percentage difference between what different members are

assessed can be large, and the cumulative effect may quickly add up across the billions of shares executed each trading day. To show the range of individual tiered transaction fees that apply to different members engaged in the same activity, Table 1 shows the primary pricing model for each equities exchange and presents a general summary of the number and dollar range of each exchange's basic volume-based transaction tiers applicable during regular trading hours.

The fees and rebates shown in Table 1 are derived from the exchanges' Mar. 2023 pricing schedules.

See supra

note 15. Table 1 shows only the generally available core pricing tiers, meaning it excludes fees and rebates applicable to special activities that may not apply to every member: orders not executed on the exchange (

i.e.,

routed to an away exchange); executions resulting from an auction or specific order types (

e.g.,

closing auctions or retail liquidity program order types or non-displayed order types); incentives for specific purposes (

e.g.,

setting the best bid or offer price); registered market-maker incentives; non-rebate incentives; and cross-asset tiers (options versus equities). Table 1 also excludes fees and rebates tied to increased volume compared to a specific date because those additive rebates are not generally available pricing tiers. Moreover, the dollar ranges in Table 1 do not net together additive fees or rebates and count them as a separate tier (

e.g.,

where a base rebate could be combined with a step-up additive rebate) because those are in addition to other tiers and the exchanges do not identify them as separate named tiers. Further, the number of categories is a count of those separately listed fees or rebates used in determining the range of an exchange's basic fees or rebates for purposes of Table 1.

Table 1—Summary of Transaction-Based Pricing Schedules for Displayed/Regular Orders on Equities Exchanges During Regular Trading Hours as of Mar. 2023

Fees and rebates for transactions at or above $1.00 on Tapes A, B & C *

Exchange

Pricing model

Fees (# of categories)

Rebates (# of categories)

Cboe BZX

Maker-Taker

$0.0030 (Tapes A, B & C—1 each)

($0.0016)-($0.0031) (Tapes A, B & C—7 each).

Cboe BYX

Taker-Maker

$0.0012-$0.0020 (Tapes A, B & C—6 each)

($0.0002)-($0.0015) (Tapes A, B & C—2 each).

Cboe EDGA

Taker-Maker

$0.0015-$0.0030 (Tapes A, B & C—4 each)

($0.0016)-($0.0022) (Tapes A, B & C—3 each).

Cboe EDGX

Maker-Taker

$0.00275-$0.0030 (Tapes A, B & C—2 each)

($0.0016)-($0.0029) (Tapes A, B & C—4 each).

Taker-Maker/Flat

$0.0012-$0.0030 (Tapes A, B & C—5 each)

($0.0004)-($0.0018) ** (Tapes A, B & C—5 each).

Phlx (PSX)

Maker-Taker

$0.0030 (Tapes A, B & C—1 each)

($0.0020)-($0.0032) (Tapes A, B & C—2 each).

Nasdaq

Maker-Taker

$0.0030 (Tapes A, B & C—1 each)

($0.0013)-($0.00305) (Tapes A, B & C—11 each).

NYSE Arca

Maker-Taker

$0.0029-$0.0030 (Tape A—1, Tapes B & C—2 each)

($0.0016)-($0.0034) (Tape A—7, Tapes B & C—10 each).

NYSE American

Maker-Taker

$0.0026-$0.0030 (Tapes A, B & C—3 each)

($0.0020)-($0.0026) (Tapes A, B & C—3 each).

NYSE

Maker-Taker

$0.0026-$0.0030 (Tapes A & B—1 each, Tape C—3)

($0.0012)-($0.0031) (Tape A—2, Tape B—4 & Tape C—5).

NYSE National

Taker-Maker

$0.0020-$0.0029 (Tapes A, B & C—5 each)

$0.000-($0.0030) (Tapes A, B & C—5 each).

NYSE Chicago

Flat

$0.0010 (Tapes A, B & C—1 each)

$0.00 (0).

IEX

Flat

$0.0009 (Tapes A, B & C—1 each)

$0.000 (0).

MEMX

Maker-Taker

$0.0029-$0.0030 (Tapes A, B & C—3 each)

($0.0018)—($0.00335) (Tapes A, B & C—5 each).

MIAX Pearl

Maker-Taker

$0.00275-$0.00295 (Tapes A, B & C—3 each)

($0.0029)-($0.0036) (Tapes A, B & C—4 each).

LTSE

Free

$0.0000 (0)

$0.0000 (0).

* Table 1 reflects that, as of Mar. 2023, some exchanges apply fees and rebates according to the market data Tape on which a security is disseminated, which is based on the security's primary listing exchange. Tape A is for securities listed on NYSE, Tape B is for securities listed on exchanges other than NYSE and Nasdaq, and Tape C is for securities listed on Nasdaq.

** BX charges a $0.0007 fee for Tapes A, B and C if a member fails to reach any liquidity removing rebate tier.

Volume-based exchange transaction pricing is more complicated and varied than what is presented in Table 1. For example, many exchanges also offer additional step-up tiers that increase the amount of rebates offered, as well as specific tiering programs for registered market-maker activity, selected order types that an exchange seeks to incentivize, or special programs like retail liquidity programs. Fees also may vary depending on whether an order is displayable or non-displayed or is executed in the opening or closing auction. To show the complexity of volume-based exchange transaction pricing, Table 2 identifies the number of volume-based pricing levels each exchange offers.

Table 2 counts separately listed fee or rebate levels that are based on the achievement of a specified volume level and assessed on a per share basis. Additive rebates or other incentives were only counted once and not added together and counted separately with each applicable base price. Different Tapes with differing fees or rebates were counted separately, but Tapes with the same fee or rebate were not counted separately. Different fees for separate order types that reference the same volume level were counted separately. Base fees and rebates that are not based on volume were not counted.

Table 2—Count of Transaction Pricing Levels That Are Based on Volume for Executions at or Above $1 as of Mar. 2023

Exchange

Volume-based

pricing

levels

NYSE

Nasdaq

NYSE Arca

Cboe BZX

Cboe EDGX

MEMX

Cboe BYX

NYSE National

NYSE American

Cboe EDGA

MIAX Pearl

Phlx (PSX)

IEX

LTSE

NYSE Chicago

Unless the terms of the pricing tier provide otherwise, a member's customer volume and its proprietary orders typically are combined for purposes of determining whether the member qualifies for a volume tier. Once a member attains a volume tier, the pricing advantage it receives from reaching that volume tier may turn into a competitive advantage in two ways.

First, the member can use the advantaged pricing it receives to benefit its proprietary trading business (

i.e.,

it may pay lower fees or receive higher rebates on that business compared to other members that do not qualify for the favorable pricing tier). Second, the member may be able to attract additional order flow from customers because it can offer customers the same lower fees and higher rebates either directly through pass-through exchange transaction pricing or indirectly through lower commissions. This would allow the member to further increase and consolidate customer order flow, which in turn would help the member reach and maintain higher tiers. The gap in transaction pricing between base fees and rebates and top-tier fees and rebates can make it more difficult for new and lower-volume members to compete, putting both their proprietary and customer business at a competitive disadvantage.

See

Healthy Markets Letter,

supra

note 21, at 5-6 (stating that pricing tiers “offer cheaper trading for larger firms with greater order volumes [which] puts smaller firms at a competitive disadvantage on order and execution prices” and further stating that as a consequence, “several larger trading firms will then use their lower rates to attract greater order flow—consolidating order flow at the largest trading firms” and as “order flow has aggregated to the largest firms, this has increased their ability to garner for themselves even better rates; further expanding the gap between themselves and smaller firms”).

Members at the best exchange pricing tiers can further widen the competitive gap by using their tiered pricing advantage to sell sponsored access

and direct market access

services to customers (including other member and non-member broker-dealers with whom they compete as well as any other customer that wants direct access to an exchange), through which the customer (including other broker-dealers) uses the sponsoring member's systems and connectivity to access an exchange. The sponsoring member benefits by being able to count the volume from its sponsored customers toward its own volume tiers, which can benefit the sponsored customers if they receive better pass-through pricing or lower commissions as a result, as well as the sponsoring member's proprietary trading business that also receives that better transaction pricing.

In turn, if the sponsored customer receives pass-through pricing from the sponsoring member, the sponsored customer may be able to share in part of the sponsoring member's advantaged pricing (subject to the fees or mark-up it pays to the sponsoring member for the services), which can result in the sponsored customer paying lower exchange fees or earning higher exchange rebates than if it executed transactions on the exchange directly.

These private arrangements between a sponsoring member and its sponsored customer, however, work to further entrench the competitive advantage that exchange pricing tiers provide to high-volume members because, as the Commission understands, sponsoring members typically do not pass along the entirety of their transaction pricing advantage to their sponsored broker-dealer customers (thereby maintaining the sponsoring members' exchange transaction pricing advantage). As a result, the sponsoring members' broker-dealer customers depend on using the services of their competitors—the sponsoring members—to access any advantaged exchange transaction pricing their competitors are able to obtain through these access arrangements, which the sponsored broker-dealer customers could not obtain on their own. The extent to which any such pass-through transaction pricing is provided to sponsored customers is uncertain because these arrangements are not disclosed.

Sponsored access generally refers to an arrangement whereby a member permits a customer to route orders directly to an exchange using technology supplied by the customer that bypasses the member's trading system but not its market access checks.

See

Rule 15c3-5 Adopting Release,

supra

note 22, at 69793 (describing sponsored access as “referring to an arrangement whereby a broker-dealer permits customers to enter orders into a trading center that bypass the broker-dealer's trading system and are routed directly to a trading center . . .”).

Generally, direct market access refers to an arrangement whereby a member permits a customer to use its trading systems to send orders directly to a trading center.

See id.

at 69793 (describing direct market access as an “arrangement whereby a broker-dealer permits customers to enter orders into a trading center but such orders flow through the broker-dealer's trading systems prior to reaching the trading center”).

See, e.g.,

id.

at 69793 n. 11 (stating that “[e]xchange members may use access arrangements as a means to aggregate order flow from multiple market participants under one MPID to achieve higher transaction volume and thereby qualify for more favorable pricing tiers”).

See id.

at 69793 (discussing, in part, how direct market access or sponsored access arrangements may help to reduce certain costs such as exchange fees).

See also

infra

section IV.B.4.

See infra

section IV.B.4.b.

2. Conflicts of Interest

With respect to agency brokerage activity, where the member transacts on an exchange for purposes of filling an order for another person, the Commission is concerned that volume-based exchange transaction pricing exacerbates a conflict of interest between the member and its customer.

Specifically, when the member executes an agency order, it faces an economic incentive to route the order to one particular exchange over others to achieve volume tier requirements on that exchange that could result in reduced fees or increased rebates (and, in both cases, the member would retain some or all of the benefit for itself if it does not pass through that better exchange transaction pricing to its customer).

While some rules may seek to address conflicts of interest in the context of agency brokerage activity, this proposal seeks to mitigate the conflict specific to volume-based exchange transaction pricing at its source through the proposed prohibition.

See, e.g.,

Securities Exchange Act Release No. 96496 (Dec. 14, 2022), 88 FR 5440 (Jan. 27, 2023) (“Regulation Best Execution Proposing Release”). The Commission encourages commenters to review the Regulation Best Execution Proposing Release to determine whether it might affect their comments on this release.

Customers could benefit from exchange tiered pricing if members pass some or all of the savings through to the customers either directly or in the form of lower commissions or other subsidies.

See also

Access Fee Proposal,

supra

note 17 (proposing, among other things, revisions to the access fee cap in 17 CFR 242.610 (Rule 610 of Regulation NMS)). The Commission encourages commenters to review the Access Fee Proposal to determine whether it might affect their comments on this release.

While exchange fees and rebates in general may contribute to a conflict of interest between a member and its customer when routing orders, volume-based fees and rebates can exacerbate that conflict because they present an additional economic incentive to

members when selecting an exchange for routing: the member's desire to reach volume tiers on an exchange to achieve preferential pricing. Specifically, volume-based pricing may incentivize members to route customer order flow to certain exchanges for the purpose of meeting tier qualification, which has the potential to be costly to customers if it comes at the expense of execution quality. Moreover, this incentive may be particularly enticing for members because customer volume can accrue towards the member's total volume level, giving it the ability to achieve more favorable tiered pricing for all of its order flow, including proprietary orders that the member sends to the exchange for its own account. The fact that volume-based exchange transaction pricing applies to both agency-related and proprietary order flow even further exacerbates the conflict of interest between a member and its customer because the routing decisions a member makes with respect to its agency-related order flow can also benefit its unrelated proprietary business. Finally, it may be challenging for customers to understand and assess the impact that tiered exchange pricing may have on broker-dealer routing decisions due to the complexity of the exchanges' tiered pricing schedules, which makes it difficult for customers to provide a check against any conflicts of interest.

Accordingly, the economic incentive presented by tiered exchange transaction pricing may affect members' order routing decisions, exacerbating a conflict of interest that can potentially harm investors with inferior executions when members route customer orders to exchanges.

See

Healthy Markets Letter,

supra

note 21, at 4 (“The inherent conflict of interest created by different pricing tiers may also impact how brokers treat their own customers in a way that isn't quite as transparent as simply chasing the higher rebate or lower fee venue. For example, a broker with a less-sophisticated customer may send orders to a venue so that the firm would reach a certain tier threshold, despite the broker's awareness that executions on that venue may result in inferior execution outcomes to investors. However, the same broker, if faced with the same order from a more-sophisticated customer, may not.”).

See also

Recommendation of the SEC Investor Advisory Committee Regarding Exchange Rebate Tier Disclosure (Jan. 24, 2020), available at

https://www.sec.gov/spotlight/investor-advisory-committee-2012/exchange-rebate-tier-disclosure.pdf.

In the recommendation, the Investor Advisory Committee stated that “[t]he lack of public disclosure concerning the structure of rebates for executing brokers” exacerbates “a principle-agency conflict in the receipt of rebates for orders executed on behalf of clients but not shared with clients.”

See infra

section IV.B.3.

3. Exchange Competition

An exchange's volume-based transaction pricing schedule is designed to entice members to route orders to that exchange over other exchanges by lowering fees or increasing rebates as volume-based transaction tiers are met. Pricing tiers that are based on total consolidated volume may create additional incentives for members to route to certain exchanges, particularly towards the end of each month as members seek to achieve tier targets to qualify for a better pricing tier on that exchange. This dynamic may harm the ability of other exchanges to compete for order flow during that time.

Further, certain forms of exchange transaction pricing tiers can raise unique issues and concerns. For example, if a primary listing exchange for a stock were to base its closing auction pricing on the volume a member executes during regular trading hours outside of the auction, members that send customer orders in that stock to the primary listing exchange's closing auction may be incentivized to also route to the exchange during regular hours to qualify for tiered pricing in the closing auction.

In this scenario, the exchange is leveraging its role as the primary listing exchange for a stock, in addition to the closing auction it provides for that stock, to use members' desire to achieve tiered pricing in the closing auction as an incentive for those members to also route to the exchange during the regular trading session.

See also

infra

section IV.B.1.c.

Accordingly, the Commission is concerned about the potential for exchanges to use some forms of volume-based exchange transaction pricing to insulate certain portions of member volume from competition while at the same time over-emphasizing competition based on fee tiering, which can constrain innovation among exchanges in other areas and impose a burden on competition among exchanges that may be inconsistent with the goals of a national market system.

II. Description of Proposed Rule

A. Overview of Proposed Rule

The Commission is proposing a rule designed to address its specific concerns with volume-based exchange transaction pricing schedules.

Proposed Rule 6b-1 has three components. First, the proposed rule would prohibit equities exchanges from offering volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks (“agency-related volume”).

The proposed rule would not prohibit exchanges from offering volume-based exchange transaction pricing for member proprietary volume where the member is trading solely for its own account and not in connection with filling an order for a customer.

The proposed rule would provide a consistent approach to these issues, which the Commission could not achieve through piecemeal suspensions of individual exchange pricing filings.

See

proposed Rule 6b-1(a).

See infra

section IV.E.1 and 2 (proposing alternatives that would prohibit exchanges from offering volume-based exchange transaction pricing for member proprietary volume).

Second, the proposed rule contains an anti-evasion clause that would require equities exchanges that have volume-based transaction pricing for member proprietary volume to adopt rules to require members to engage in practices that facilitate the exchange's ability to comply with the prohibition on volume-based exchange transaction pricing in connection with the execution of agency-related volume.

The proposed rule also would require exchanges to establish, maintain, and enforce written policies and procedures that are reasonably designed to detect and deter members from receiving volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks.

This requirement would help to promote an exchange's compliance with the proposed rule by ensuring that an exchange develops mechanisms that would prevent its members from inappropriately receiving volume-based

exchange transaction pricing for agency-related orders.

See

proposed Rule 6b-1(b)(1). Exchanges would have flexibility under the proposed rule as to what rules to adopt. For example, an exchange may allow members to designate that certain of their ports or sessions handle exclusively agency-related orders or exclusively proprietary orders as a means to facilitate the exchange's ability to comply with the prohibition. If the member does not use separate ports in that manner, the exchange could require members to indicate for billing purposes which orders are agency-related and ineligible for tiered pricing if the exchange does not already have a mechanism to distinguish those orders. Or, if a member does not conduct an agency business and only trades proprietarily or does not trade proprietarily and only trades on an agency basis, an exchange may not need to require anything additional from that member for purposes of this proposed rule.

See

proposed Rule 6b-1(b)(2). For example, if an exchange allows members to designate that certain of their ports or sessions handle exclusively agency-related orders or exclusively proprietary orders as a means to facilitate the exchange's ability to comply with the prohibition, an exchange might adopt a policy and procedure to review the ports and sessions designated by members to make sure that members are not, for example, submitting agency-related orders though a port or session the member has designated as solely for proprietary orders.

See, e.g.,

section 6(b)(1) of the Exchange Act, 15 U.S.C. 78f(b)(1) (requiring an exchange to be so organized and have the capacity “to be able to carry out the purposes of [the Exchange Act] and to comply, and . . . to enforce compliance by its members and persons associated with its members with the provisions of [the Exchange Act], the rules and regulations thereunder, and the rules of the exchange”).

Third, the proposed rule would require equities exchanges that have volume-based transaction pricing for member proprietary volume to submit electronically to the Commission disclosures of the number of members that qualify for their volume-based transaction pricing.

Specifically, such exchanges would be required to submit electronic, machine-readable structured data tables of their volume-based transaction pricing tiers and the number of members that qualify for each tier in an Interactive Data File in accordance with 17 CFR 232.405 (Rule 405 of Regulation S-T),

and the public would be able to access those disclosures through the Commission's EDGAR system.

Additional public transparency regarding the number of members that qualify for each pricing tier for their proprietary volume would help the Commission, members, and the public understand how the benefits of volume-based pricing are distributed and the potential impact on members, which should facilitate and inform members', the public's, and other exchanges' efforts to submit comment letters on volume-based exchange transaction pricing proposals to further inform the Commission as it considers those proposals. For example, information on the number of members that have qualified for a newly adopted pricing tier would allow the Commission and interested parties to assess exchange statements regarding the number of members that the exchange estimated should qualify for a proposed new tier or amended tier. In addition, such information would provide a data point for the Commission to consider in determining whether a proposed tier meets the applicable statutory standards and whether the Commission should temporarily suspend the newly adopted pricing tier.

See

proposed Rule 6b-1(c). Consistent with the proposed disclosure requirement, the Commission also is proposing to amend 17 CFR 232.101 (Rule 101 of Regulation S-T) to add the disclosure required under proposed Rule 6b-1(c) as a filing that must be submitted electronically.

See

proposed 17 CFR 232.405(b)(6). Rule 405 of Regulation S-T applies to the submission of Interactive Data Files. The Commission is proposing conforming changes in Rule 405 of Regulation S-T to reflect the inclusion of proposed Rule 6b-1(c). Such files must be submitted using Inline XBRL.

See

proposed 17 CFR 232.405(a)(3). The Commission also is proposing conforming changes to Rule 101 of Regulation S-T to reflect the inclusion of proposed Rule 6b-1.

See

proposed 17 CFR 232.101.

As discussed below in section II.D, Request for Comments, the Commission is soliciting comment on other potential metrics for the disclosures, including the volume of shares at each tier and the dollar amount of fees, rebates, or other incentives at each tier.

B. Prohibition on Volume-Based Exchange Transaction Pricing for Agency-Related Volume

The Commission is concerned about the impact of exchange tiered transaction pricing on competition among an exchange's members. As discussed above, volume-based exchange transaction pricing can frustrate and impede the ability of new and lower-volume members to compete with high-volume members, including for customer order flow, which can reduce the number of members that are able to offer customers the highest-tiers of exchange transaction pricing.

For example, if a member that qualifies for the best pricing tier can offer a customer pass-through of its $0.0015 take fee for executing on Exchange A, but a member that does not qualify for a tier can only offer a customer pass-through of its $0.0030 take fee on that same exchange for execution of the same customer order, the lower-volume member faces a distinct and measurable disadvantage even though both are members of Exchange A. The Commission also is concerned that volume-based exchange transaction pricing that applies to agency-related volume exacerbates a conflict of interest between members and their customers when members face an economic incentive to earn increasingly lower fees or higher rebates or other incentives from an exchange in connection with the execution of more customer orders on that exchange.

See supra

sections I.B (Volume-Based Exchange Transaction Pricing), and I.C.1 (Competition Among Members).

See supra

section I.C.2 (Conflicts of Interest).

Accordingly, to address the Commission's concerns with member competition, as well as the conflict of interest between members and their customers, the prohibition on volume-based exchange transaction pricing in proposed Rule 6b-1(a) would apply to agency-related volume. Specifically, the proposed rule would prohibit exchanges from offering volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks.

To comply with the prohibition, an exchange that offers volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks would need to file a proposed rule change on Form 19b-4 to remove any such pricing from its pricing schedule.

The proposed prohibition would apply broadly to all executions where a member is executing an agency or riskless principal order in an NMS stock for the purpose of filling a customer order and is not trading for its own account. For purposes of the proposed rule, customers could include, for example, other members, non-member broker-dealers, institutions, an affiliate of the member, natural persons, or any person that uses the member to access an exchange, including through direct market access or sponsored access services.

The proposed rule would define riskless principal to mean “a transaction in which, after having received an order to buy from a customer, the broker or dealer purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from a customer, the broker or dealer sold the security to another person to offset a contemporaneous purchase from such customer.” That definition is consistent with other Commission definitions of the term.

See, e.g.,

17 CFR 240.3a5-1(b) (exempting banks from the definition of “dealer” under the Exchange Act when acting in a riskless principal capacity when certain conditions are met, which states that “[f]or purposes of this section, the term riskless principal transaction means a transaction in which, after having received an order to buy from a customer, the bank purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from a customer, the bank sold the security to another person to offset a contemporaneous purchase from such customer.”); 17 CFR 240.3a5-2 (exemption from the definition of “dealer” for banks effecting transactions in securities issued pursuant to Regulation S); 17 CFR 255.6(c)(2) (other permitted proprietary trading activities); 17 CFR 240.31(a)(14) (Section 31 transaction fees); 17 CFR 230.144A(a)(5) (private resales of securities to institutions); and 17 CFR 230.144 (persons deemed not to be engaged in a distribution and therefore not underwriters) (defining the term “riskless principal transaction” generally without reference to price, but further providing in 17 CFR 230.144(f)(1)(iii) the possible manners of sale, one of which is a riskless principal transaction where the offsetting trades are executed at the same price). Generally, the exchanges use the terms “agency” and “riskless principal” in their rules without defining them because the terms are widely and commonly understood. For example, Cboe BZX refers to the terms “agency” and “riskless principal” 12 times each in its rulebook (covering equities and options rules), but does not separately define either term, except with respect to retail orders under its Retail Order Attribution Program.

See

Cboe BZX Rule 11.25(a)(2) (retail order attribution program, referring to a “riskless principal order that meets the criteria of FINRA Rule 5320.03”). Moreover, each of the exchange rules that implement the Consolidated Audit Trail, which requires the capture of the capacity of the member executing the order, whether principal, agency, or riskless principal, uses those terms in an identical manner

without defining them.

See, e.g.,

Nasdaq General 7, Section 3(a)(1)(E)(iv); BZX Rule 4.7(a)(1)(E)(iv).

See also

Limited Liability Company Agreement of Consolidated Audit Trail, LLC, Article VI, Section 6.3(d)(v)(D). Those terms also are not defined within the CAT NMS Plan.

Like agency orders, riskless principal orders are one way for a member to fill a customer's order. Riskless principal orders involve contemporaneous buys and sells that are “riskless” to the member, in that the member does not take on the market risk of price moves in the stock because it buys or sells to promptly transfer the position to a customer rather than retain the position for any significant length of time in its own account.

Some rules, in contexts other than exchange transaction pricing, include definitions of the term “riskless principal” that require the price of both legs of the riskless principal trade be at the same price.

In addition, FINRA has a definition of riskless principal that specifies that the member's principal trade and the customer fill occur at the “same price.”

See, e.g.,

17 CFR 242.201(a)(8) (concerning “short exempt” order marking for certain riskless principal orders) and 17 CFR 240.10b-18 (purchases of certain equity securities by the issuer and others).

See, e.g.,

FINRA Rule 5320.03 (excluding riskless principal transactions from FINRA's Prohibition Against Trading Ahead of Customer Orders) and FINRA Rule 6380B(d)(3)(B) (concerning reporting to the FINRA/NYSE Trade Reporting Facility). The FINRA rule prohibiting trading ahead of customer orders generally prohibits members from trading for their own account at a price that would satisfy the customer order, subject to an exception for riskless principal orders. Exchanges have incorporated FINRA's rule by reference or have adopted similar rules.

See, e.g.,

FINRA Rule 5320.03 and BZX Rule 12.6.03.

The definition of riskless principal in proposed Rule 6b-1 does not require the principal leg and customer leg to occur at the same price. Proposed Rule 6b-1 uses a broader definition of riskless principal to achieve the purposes of the proposed rule and to limit the ability of members to easily circumvent the proposed rule's prohibition by an economically insignificant amount. For example, if the proposed rule contained a “same price” requirement in the definition of riskless principal, a member might attempt to circumvent the prohibition by providing an economically insignificant different price on the customer leg—one that varied by the smallest fraction of a penny possible—to avoid classifying the transaction as “riskless principal.” If proposed Rule 6b-1 excluded such a transaction from its definition of riskless principal, the member would qualify for volume-based exchange transaction pricing on the principal leg of the transaction even though the transaction had the defining characteristics of a riskless principal trade because the member did not take on the market risk of price moves in the stock and promptly transferred the position to the customer. A definition that includes the concept of “same price” therefore would not achieve the Commission's goals of prohibiting volume-based exchange transaction pricing for agency-related volume.

Because orders executed in the capacity of agent and riskless principal both are done to fill a customer order, the conflict of interest exacerbated by exchange tiered transaction pricing is equally present for both: the member faces conflicting economic incentives when choosing the exchange execution venue, and the customer bears any costs associated with an execution that results from that decision. The Commission therefore proposes to treat riskless principal orders the same as agency orders for purposes of proposed Rule 6b-1(a).

Finally, because proposed Rule 6b-1(a) would prohibit exchanges from offering volume-based transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks, which represent a member's agency-related volume, it would prohibit exchanges from counting that agency-related volume towards any volume-based transaction tiers applicable to the member's proprietary volume. For example, if a member is engaged in proprietary trading (

e.g.,

as a registered market maker on the exchange) and also has a separate division or affiliate that is engaged in a customer brokerage business (

e.g.,

as an executing broker for non-member brokers), an exchange could not count the member's agency-related volume towards any volume-based transaction tiers the member qualifies for on its proprietary volume. Similarly, because the proposal would prohibit volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks, it would prohibit exchanges from basing transaction pricing in an auction on agency-related volume executed within or outside the auction. In either case, an exchange could count only the member's proprietary volume to determine the pricing tier for the member's proprietary trades.

Prohibiting volume-based exchange transaction pricing for agency-related orders is intended to promote competition among members for customer business. It also is intended to mitigate the conflict of interest between members and customers that is exacerbated by exchange tiered pricing where the member economically benefits from its choice of exchange execution venue for customer orders. The proposed rule would eliminate one incentive—reaching a volume tier—for a member to route a customer order to a particular exchange when doing so might not be in the customer's interest.

Request for Comments

The Commission generally requests comment from the public on all aspects of proposed Rule 6b-1(a), including its objectives and its terms to achieve those objectives. More specific requests for comment are set forth below. As much as possible, commenters are requested to provide empirical data in support of any arguments or analyses and to offer explanations for their views.

1. Do commenters believe that volume-based exchange transaction pricing impacts competition among members when competing for customers on an agency basis? Do sponsored access and direct market access arrangements contribute to these competitive effects when exchange members compete for customers? Why or why not? Does volume-based exchange transaction pricing impact competition among members when trading proprietarily? If there is an impact, is the impact greater for members when they are competing for customers or when they are trading proprietarily, or is the impact equivalent?

2. Do commenters believe that volume-based exchange transaction pricing exacerbates the conflict of interest between members and customers when members are routing customer orders, because of the member's desire to qualify for volume-based transaction tiers? Would complete pass through of exchange pricing to the member's customer eliminate that conflict? Why or why not? To what extent do members completely or partially pass through all exchange pricing to their customer? Do customers prefer pass through exchange transaction pricing or broker commissions, and for what reasons? Is the Commission's understanding correct that full and partial pass-through of exchange transaction pricing by members to their customers is less common? For sponsored access and direct market access arrangements, how common is pass-through of exchange transaction fees? What types of pass-through arrangements are most common and how much does the sponsoring member typically retain as compensation?

3. To what extent does volume-based exchange transaction pricing impact competition among exchanges, and/or between exchanges and off-exchange venues, such as alternative trading systems (“ATSs”) and wholesaler broker-dealers?

4. To what extent is volume-based exchange transaction pricing used by exchanges to attract specific types of members or customers of members, such as proprietary traders, registered market makers, or agency customers? Among agency customers, are any particular types of customers particularly attracted by volume-based exchange transaction pricing, such as long-term investors, short-term traders, investment advisers, and institutional investors?

5. To what extent is the ability of an exchange to attract order flow from specific types of members or customers through volume-based exchange transaction pricing or other forms of targeted pricing necessary to support competition between exchanges and off-exchange venues? For example, if exchanges lack the ability to offer such pricing on agency-related order flow, could that potentially make off-exchange venues relatively more attractive as a destination for that flow? If so, should the Commission address such a competitive disparity? For example, should the Commission expand the scope of the prohibition on volume-based transaction pricing for agency-related volume in certain stocks to off-exchange venues such as ATSs?

6. How consistently do individual exchange members hit specific tiers over time? How do members respond to volume-based exchange transaction pricing changes and how do those member responses differ across different exchanges?

7. How does using volume-based exchange transaction pricing as a means of compensating liquidity providers compare to other fee and non-fee methods of attracting those liquidity providers? Do exchange-registered market makers react differently from other members that provide liquidity to exchange transaction pricing? Does volume-based exchange transaction pricing affect liquidity taking orders differently from liquidity providing orders?

8. Would the proposed prohibition on volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks address the concerns the Commission identified about member competition and conflicts of interests between members and customers? Why or why not?

9. Is the proposed definition of riskless principal in proposed Rule 6b-1(a) appropriate? Why or why not? If the definition included a “same price” requirement, do commenters agree that the Commission would not be able to achieve its objectives for the proposed rule? Why or why not?

10. Do exchanges have rules and policies and procedures in place that require members to mark their orders for transaction billing purposes in a manner that would readily allow exchanges to comply with the proposed prohibition, or would those rules and policies and procedures need to be revised to accommodate the proposed prohibition?

11. Should the Commission also prohibit volume-based exchange transaction pricing for member proprietary volume (

i.e.,

should the Commission prohibit exchanges from offering volume-based transaction pricing for all volume in NMS stocks)?

Why or why not? Would doing so obviate the need for the anti-evasion provisions in proposed Rule 6b-1(b) and the proposed disclosures in proposed Rule 6b-1(c) since tiered pricing would no longer be permitted? Would a broader prohibition that includes both agency-related and proprietary orders address the Commission's concerns, discussed above in section I.C, about competition among members and competition among exchanges, as well as the conflict of interest between members and customers with respect to agency-related order flow? How would a broader prohibition affect exchange fees and rebates compared to what they offer today? Would exchanges be able to extend their best fee and rebate pricing to all members? Why or why not? If not, and if the purpose of tiered transaction pricing is to attract more order flow from members, why would exchanges not be able to offer the best pricing to all members to attract the greatest possible volume?

See infra

section IV.E.1.

12. If the Commission extends the prohibition on volume-based exchange transaction pricing to member proprietary volume, should displayed liquidity-adding orders from an exchange's registered market makers in their registered or appointed symbols not be subject to the prohibition in order to provide exchanges with a means to incentivize displayed quotes from their registered market makers? In other words, should the Commission prohibit exchanges from offering volume-based transaction pricing for all volume in NMS stocks, but subject to a carve-out only for displayed liquidity providing orders from exchange registered market makers in their registered or appointed symbols?

Should such an exception be limited to registered exchange market makers that are subject to minimum quantitative and qualitative quotation requirements that meet or exceed the highest such standards in place among national securities exchanges to avoid conferring a benefit without meaningful corresponding obligations that protect investors? Would continuing to allow volume-based exchange transaction pricing for displayed liquidity-adding orders from such exchange registered market-makers in their registered or appointed symbols be an appropriate benefit to encourage members to become and remain registered market makers and to provide publicly displayed quotes, consistent with their quoting obligations? Would tiered pricing encourage greater quoted depth or narrower quoted spreads, or both, for displayed quotes? If the Commission adopted a broader prohibition on volume-based transaction pricing with a carve-out for registered market makers, would the anti-evasion provisions in proposed Rule 6b-1(b) and the transparency disclosures in proposed Rule 6b-1(c) be less relevant in circumstances where the only reportable activity would be the activity of registered market makers who are subject to exchange market making rules?

See infra

section IV.E.2.

13. Instead of prohibiting volume-based exchange transaction pricing, should the Commission instead allow exchanges to offer volume-based pricing to attract order flow, but require the volume tiers to be based on total aggregate volume submitted to the exchange, with the associated tiered pricing applied to all members uniformly? For example, an exchange could establish a volume-based pricing tier that considers cumulative exchange-level liquidity-adding activity, where all liquidity-adding volume executions from all members is combined to count towards the tier, and, after a tier threshold is reached, the enhanced rebate would be available to all members equally. Would this alternative address the Commission's concerns regarding competition among members? Would it impose a burden on competition among exchanges and a conflict of interest between members and customers when routing customer orders because of the incentives to reach tiers? Would that burden and conflict be greater than, or less than, under the current tiering structure? Would this alternative obviate the need for the anti-

evasion provisions in proposed Rule 6b-1(b) and the transparency disclosures in proposed Rule 6b-1(c)?

14. If exchanges continue to offer volume-based transaction pricing for member proprietary orders, should the Commission prohibit an exchange from basing tiers on total consolidated volume (“TCV”), or another metric that is based on volume transacted on other exchanges and off-exchange, and instead limit volume-based transaction tiers to volume that occurs solely on the exchange as a means of promoting competition among exchanges? Do tiers based on TCV constrain competition among exchanges by seeking primarily to preserve relative exchange market share? Why or why not? Even if tiers were not permitted to be based on TCV, could exchanges effectively circumvent such a prohibition by replicating a similar approach using absolute numbers and updating them on a monthly basis based on future estimates of total consolidated market volume? Why or why not?

15. If exchanges continue to offer volume-based transaction pricing for member proprietary orders, should the Commission prohibit exchanges from basing tiers in an auction, trading session, or special program or order types (

e.g.,

retail liquidity program) on volume done outside that auction, trading session, or program or order type? For example, should the Commission prohibit exchanges from basing tiers in the closing auction on volume transacted during regular trading hours in order to prevent an exchange from leveraging its closing auction in a manner that harms the ability of other exchanges to compete with it in the regular hours trading session? Do these types of arrangements impact competition among exchanges and among members? Why or why not?

16. Should the Commission prohibit volume-based exchange transaction pricing for agency-related orders also for listed options? Why or why not? Would extending the prohibition to listed options implicate the same costs and benefits that would apply to a prohibition on volume-based exchange transaction pricing for NMS stocks, or are there unique aspects of the listed options markets that would apply different costs or result in different benefits? What would those differences be?

17. If the Commission also prohibits volume-based exchange transaction pricing for member proprietary volume in NMS stocks, should listed options also be included within the broader prohibition? If the Commission were to adopt a broader prohibition on all volume-based exchange transaction pricing and apply it to all NMS securities (including NMS stocks and listed options), should it carve-out displayed liquidity-adding orders from an exchange's registered market makers in their assigned options classes and series from such a prohibition? Should there be any particular minimum quantitative and qualitative quoting requirements to qualify for the carve-out? Would such a carve-out for listed options be an appropriate benefit to encourage members to become and remain registered market makers and undertake registered market making obligations in the same way that it would for NMS stocks? Does tiered pricing encourage greater quoted depth or narrower quoted spreads, or both, for listed options in a similar manner to NMS stocks? If the Commission were to allow exchanges to offer volume-based transaction pricing but require that tiers be aggregated across all members and the associated pricing be applicable to all members uniformly, should that condition apply to listed options as well as NMS stocks?

18. Instead of prohibiting volume-based exchange transaction pricing for agency and riskless principal orders, should the Commission instead prohibit exchanges from offering tiers that are reasonably achievable by only one or a few members based on those members' order flow? Why or why not? If such a prohibition were adopted, would it be appropriate, for example, to prohibit tiers for which fewer than 50% of an exchange's members could have met the tier criteria during the prior month? Would assuring that exchanges set tier criteria at levels for which at least 50% of the exchange's members are capable of meeting based on order flow they route help assure that such tiered pricing meets the applicable statutory standards because at least a majority of members would be eligible to receive it? Would such a prohibition increase competition among members for customers while providing exchanges with the ability to offer tiered pricing at levels that incentivize members to contribute additional liquidity to the exchange? Alternatively, would it be appropriate, for example, to prohibit tiers for which only one, two, three, or four members are capable of qualifying to prevent tiers that are only achievable by only a few members and help assure that tiers meet the applicable statutory standards? Should any of the above prohibitions also be applied to proprietary orders for the account of a member? Why or why not? Should such a prohibition also apply to listed options? Why or why not?

C. Anti-Evasion

The prohibition in proposed Rule 6b-1(a) is intended in part to address the conflict of interest between members and customers that is exacerbated by volume-based exchange transaction pricing schedules when members route customer orders to an exchange, as well as address burdens on competition that volume-based exchange transaction pricing can impose on members competing for customer business. In light of the combination of these conflicts and potential competitive advantages, the Commission is concerned that members may have a financial incentive to mischaracterize their agency-related orders to continue to qualify for volume-based pricing.

To mitigate this incentive to mischaracterize order capacities, proposed Rule 6b-1(b)(1) would require an equities exchange that offers volume-based transaction pricing for member proprietary orders to have a rule to require its members to engage in practices that facilitate the exchange's ability to comply with the prohibition on volume-based exchange transaction pricing in connection with the execution of agency-related volume.

The proposed rule would provide exchanges with flexibility to adopt a rule that is tailored to its needs, systems, and members. For example, an exchange rule could require members to identify, for transaction pricing and billing purposes, their proprietary orders for their own account and submit or mark them in a distinct manner from all other orders. Similarly, an exchange could adopt or enhance any existing rule that requires members to properly label orders or identify which types of orders are submitted through specific ports or sessions to ensure the accuracy of order marking and ensure that members do not mislabel or misdirect orders specifically for transaction billing purposes.

Proposed Rule 6b-1(b)(1) would support proposed Rule 6b-1(a)'s prohibition on volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks.

If an exchange does not offer volume-based transaction pricing, then it would not be required to adopt such a rule.

Many exchanges already have rules requiring members to accurately mark their orders.

See, e.g.,

Nasdaq General 3, Rule 1032(a)(6) (requiring members to “input [ ] accurate information into the System. . . .”).

Second, proposed Rule 6b-1(b)(2) would require the exchange to establish,

maintain, and enforce written policies and procedures reasonably designed to detect and deter members from receiving volume-based pricing in connection with the execution of agency-related volume. While exchanges generally already establish, maintain, and enforce written policies to detect and deter non-compliance with their rules and the Federal securities laws and rules to ensure compliance with their obligations under the Exchange Act,

the Commission is adding a specific and complementary requirement in proposed Rule 6b-1 to help ensure exchange compliance with the proposed rule. Proposed Rule 6b-1(a) would apply specifically to exchange pricing schedules and how exchanges assess and collect fees and offer rebates and other incentives to members. For example, exchanges could develop written policies and procedures to audit member activity to ensure the proper marking of orders and review trading records to ensure that the exchange is not unintentionally offering tiered transaction pricing on agency-related volume. Proposed Rule 6b-1(b)(2) would complement existing exchange rules requiring the accurate marking of orders and thereby facilitate the ability of exchanges to comply with proposed Rule 6b-1(a).

See, e.g.,

15 U.S.C. 78s(g)(1).

Request for Comments

The Commission generally requests comment from the public on all aspects of proposed Rule 6b-1(b), including its objectives and its terms to achieve those objectives. More specific requests for comment are set forth below. As much as possible, commenters are requested to provide empirical data in support of any arguments or analyses and to offer explanations for their views.

19. Is the anti-evasion clause in proposed Rule 6b-1(b) appropriately designed to ensure exchange compliance with the proposed prohibition on volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders? Why or why not? To what extent are practices or systems already in place that could facilitate members accurately marking orders so that exchanges can distinguish proprietary and agency orders for transaction billing purposes?

D. Transparency for Volume-Based Pricing on Member Proprietary Orders

Proposed Rule 6b-1(c) would add a new public disclosure requirement for exchanges that offer volume-based transaction pricing in connection with the execution of proprietary orders in NMS stocks for the account of a member.

For purposes of proposed Rule 6b-1(c), proprietary orders are those where the member is trading solely for its own account and not in connection with filling an order for a customer. Proprietary orders are principal capacity orders and are not agency or riskless principal capacity orders.

Exchanges that do not offer any volume-based transaction pricing would not be required to submit the disclosures required under proposed Rule 6b-1(c).

Disclosing information about the manner in which an exchange's tiered transaction pricing applies across its membership would enhance public transparency regarding the application of an exchange's tiered pricing structure for member proprietary volume. In turn, the increased transparency would enhance the ability of members, other exchanges, and the public in considering and commenting on whether proposed volume-based pricing changes applicable to member proprietary volume provide for the “equitable allocation of reasonable dues, fees, and other charges”

that are “not designed to permit unfair discrimination” between broker-dealers

and that do not “impose any burden on competition not necessary or appropriate in furtherance of the purposes”

of the Exchange Act. For example, monthly disclosures would provide timely information during the 60 day suspension period of an exchange's proposed pricing change that would allow the public to see the impact of a new or revised pricing tier during the first month it was in effect. The Commission and the public could use that information to assess exchange statements about the number of members that the exchange expected to qualify for a proposed tier, and commenters could use that information to provide comment as to whether a tier change meets the applicable statutory standards.

15 U.S.C. 78f(b)(4).

15 U.S.C. 78f(b)(5).

15 U.S.C. 78f(b)(8).

The Commission also believes that the public disclosure of such information would be consistent with section 11A of the Exchange Act in that it could assist in assuring “fair competition among brokers and dealers, [and] among exchange markets” and “the practicability of brokers executing investors' orders in the best market.”

For example, the proposed disclosures would allow interested parties to see how many members have qualified for an exchange's pricing tiers, and how members have responded to tiered pricing changes (

e.g.,

by looking at month-to-month disclosures to see how many members moved up to a new or revised tier to qualify for a more generous pricing incentive). That information could be useful in helping the Commission and public commenters assess whether pricing tier changes are reasonable, equitably allocated, not unfairly discriminatory, and do not impose a burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.

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

Under the proposed rule, an exchange would not have to identify its members by name in the proposed transparency disclosures.

Specifically, proposed Rule 6b-1(c) would require equities exchanges to submit electronically to the Commission, within five calendar days after the end of each calendar month, the information described below. Given that exchanges assess transaction prices to their members on a monthly basis according to their respective pricing tiers, the Commission believes that such information should be readily available to exchanges, since they are already familiar with the pricing tier for which each member qualifies. Further, submitting the disclosures within five calendar days after the end of each calendar month would help ensure that the information is available in a timely manner for the Commission and the public's consideration after an exchange implements a new pricing change to show the impact of the pricing change during the first month that it was billed to members. This timing would allow time for the Commission and the public to review this data before the expiration of the period within which the Commission is able to summarily temporarily suspend a proposed rule change.

See supra

note 6 and accompanying text (discussing suspensions).

The content of the disclosures is intended to show a high-level and anonymized summary of the volume-based transaction tiers applicable to the execution of proprietary orders in NMS stocks for the account of a member and how many members qualify for each tier. Monthly tables would show, for example, the potential impact of any recent tiered transaction pricing change for member proprietary orders during the month that it was first in effect following the exchange's proposed rule change as well as how members qualify over time for pricing tiers that do not change. While the Commission reviews each proposed rule change, the actual

effect of a pricing change cannot be known in advance or guaranteed. The information in the proposed disclosures is intended to provide the Commission and the public with insight into the application of an exchange's volume-based transaction pricing schedule, which would allow interested persons to better assess an exchange's volume tiers, particularly where the highest rebate or lowest tiers on an exchange are occupied by only one or a few members. Therefore, having more timely and readily available information with respect to the actual effect of an exchange transaction pricing change would be useful to the Commission in determining whether to summarily temporarily suspend a proposed rule change before the deadline to summarily temporarily suspend expires. Further, the Commission also believes such information would be useful to the public in assessing the impact of the proposed rule change and further informing their comments on a proposed pricing change.

First, proposed Rule 6b-1(c)(1) would require every exchange that offers volume-based transaction fees, rebates, or other incentives in connection with the execution of proprietary orders in NMS stocks to submit electronically to the Commission each calendar month, within five calendar days after the end of the month, the number of members that executed proprietary orders in NMS stocks on the exchange for the member's account. The proposed rule would require monthly submissions because exchange fees are typically effective at the beginning of a calendar month and revised as frequently as monthly.

The Commission believes that this information could be used to better understand the impact of an exchange's volume-based transaction pricing structure across its members. Specifically, this number would provide the baseline denominator against which one could calculate percentages of members that met a specific tier.

Seeing the total number of members with proprietary orders during a month would thus provide the baseline against which the number of members qualifying for any one tier in that month could be understood.

See supra

note 17 and accompanying text. Further, as discussed above, monthly disclosure would also provide the Commission with timely information to consider whether to temporarily suspend a proposed rule change within the statutory deadline of 60 days beginning on the date of filing of such proposed rule change.

See

15 U.S.C. 78s(b)(3)(C).

See infra

section II.D., Request for Comments (requesting comment on other benchmarks).

Second, proposed Rule 6b-1(c)(2) would require every exchange that offers volume-based transaction fees, rebates, or other incentives in connection with the execution of proprietary orders in NMS stocks to disclose a structured data table for each volume-based transaction fee, rebate, and other incentive that includes information to promote transparency regarding how that tier applies among the exchange's membership. Exchanges would be required to submit electronically to the Commission each calendar month, within five calendar days after the end of the month, the following information for each month:

A label to identify the “base” fee and rebate.

Showing the base fee or rebate allows the reader of the table to compare and evaluate each tiered pricing level against what the exchange otherwise would assess to its members in the absence of volume-based pricing.

The inclusion of the base fee and rebate information in structured data format also would allow data analysis and computations to be performed, which would facilitate comparisons over time and across exchanges.

The base fee would be the highest fee that the exchange assesses to members by default if no incentives apply. Similarly, the base rebate would be the lowest rebate that the exchange provides to members if no incentives apply.

A label to identify each pricing tier.

For example, “Liquidity Providing Rebate Tier 1,” “Step-up Rebate Tier 1,” or “Removing Tier 2.” The label used in the disclosure would be required to correspond to the label the exchange uses in its pricing schedule so that the public can easily locate the tier on the exchange's pricing schedule. Providing a label in structured data format also would allow for data analysis using those labels to identify each pricing tier. Results from such analysis would then be easily referenced against the exchange's pricing schedule.

The amount of the fee, rebate, or other incentive.

This information would allow the reader of the table to understand what pricing applies to each pricing tier without having to consult the exchange's pricing schedule. In addition, the inclusion of the pricing amount in a structured data format would allow data analysis and computations to be performed, which would facilitate comparisons over time and across exchanges.

An explanation of the tier requirements.

Including this explanation would allow the reader of the table to understand the requirements for achieving each tier without having to consult the exchange's pricing schedule. In addition, having this information in structured data format would allow data analysis and computations to be performed, which would facilitate comparisons over time and across exchanges.

The total number of members that qualified for the base fee, base rebate, or each tier during the month.

This disclosure would provide important transparency into the application of volume-based exchange transaction pricing and how the prices apply among an exchange's membership. Among other things, it could provide members with insight as to the tiers that other members with whom they compete qualify, which could be useful in considering whether an exchange's pricing is imposing a burden on the member's ability to compete with those other members. It also may provide insight into how an exchange's fees and rebates are distributed among members and whether those fees that fund the rebates the exchange offers, as well as fund part of the exchange's operations, constitute an equitable allocation among members. It also would provide data against which exchange representations made as part of or in connection with proposed pricing changes could be verified.

Proposed Rule 6b-1(c) would require that the information be provided in an easily understandable table format, using structured data specified by the Commission.

Exchanges would be required to retain those records and information pursuant to 17 CFR 240.17a-1 (Rule 17a-1).

See

proposed Rule 6b-1(c)(3). Under proposed Rule 6b-1(c)(3), exchanges would be required to provide information using Interactive Data File in accordance with Rule 405 of Regulation S-T.

17 CFR 240.17a-1. Generally, Rule 17a-1(b) requires national securities exchanges to retain specified documents for a period of not less than five years, the first two years in an easily accessible place.

Request for Comments

The Commission generally requests comment from the public on all aspects of proposed Rule 6b-(c), including its objectives and its terms to achieve those objectives. More specific requests for comment are set forth below. As much as possible, commenters are requested to provide empirical data in support of any arguments or analyses and to offer explanations for their views.

20. Is the definition of proprietary order described in section II.D. appropriate? If the definition described in section II.D. is not appropriate, what definition should the Commission use for purposes of Rule 6b-1? Should the Commission include the definition

described in section II.D (or another definition) in Rule 6b-1, or is the term commonly understood without needing to be defined in the rule?

21. Does the proposed 5 calendar day deadline for exchanges to submit the transparency disclosures after the end of each calendar month under proposed Rule 6b-1(c) provide exchanges with sufficient time to prepare and submit the disclosures? If an exchange files a proposed rule change related to transaction pricing that becomes effective on the first day of a month, does the proposed 5 calendar day deadline after the end of that month provide sufficient time for the Commission and commenters to consider the disclosures before the expiration of the 60-day statutory deadline to summarily temporarily suspend the proposed rule change at issue? If 5 calendar days is not sufficient for exchanges to submit the transparency disclosures, would a 7 or 10 calendar day deadline provide sufficient time? If an exchange files a proposed rule change related to transaction pricing that becomes effective on the first day of a month, would a 7 or 10 calendar day deadline after the end of that month provide sufficient time for the Commission and commenters to consider the disclosures before the expiration of the 60-day statutory deadline to summarily temporarily suspend the proposed rule change at issue?

22. Should the transparency disclosures under proposed Rule 6b-1(c) also require exchanges to report the number of their registered market makers on the exchange during a month if an exchange offers volume-based transaction pricing tiers solely applicable to its market makers, in order to allow the public to see how many registered market makers qualify for exchange tiered pricing that is applicable only to such members? Would that information be useful to calculate percentages for the volume-based transaction tiers that apply specifically to market makers (

e.g.,

to be able to calculate that 10% of registered market makers qualified for the market-maker liquidity providing rebate Tier 2)? Would that information be helpful to better understand the impact of exchange tiered transaction pricing on competition between registered market maker members and members that trade proprietarily but not as registered market makers?

23. Should the transparency disclosure under proposed Rule 6b-1(c) also require exchanges to separately report the number of members that participated during the month in any program that has its own volume-based transaction pricing in order to be able to compute percentages specific to the program? For example, tiers specific to Tape A, B, and C, to stocks under $1, to a retail liquidity program, or to the closing auction. Would that more granular level of information be useful to commenters in commenting on specific individual pricing proposals that affect such programs? For example, if an exchange has tiers for Tape B and reports only ten members that qualified for them in a month, would it be useful to know that only 12 out of forty members transacted in Tape B stocks on the exchange that month so that percentages can be calculated out of eligible entities rather than all members? Why or why not?

24. Should the transparency disclosure under proposed Rule 6b-1(c) also require exchanges to report the following:

a. the applicable trading session (

e.g.,

pre-market, opening auction, regular hours, closing auction, post-market) to allow readers of the tables to more quickly identify with certainty which tiers apply to which trading session and allow researchers to be able to use electronic means to parse that data;

b. the applicable securities (

e.g.,

Tape A, B, or C; sub-$1, exchange traded funds, etc.) to allow readers of the tables to more quickly identify with certainty which tiers apply to which securities and allow researchers to be able to use electronic means to parse that data;

c. whether the fee, rebate, or other incentive is applicable to adding or removing liquidity to allow readers of the tables to more quickly identify with certainty which tiers apply to which types of activity and allow researchers to be able to use electronic means to parse that data;

d. the number of MPIDs qualifying for the price level during the month to provide a different metric to assess how many members qualify for each pricing tier;

e. the cumulative volume of shares qualifying for the tier during the month to provide more context to understand the amount of volume that qualifies at each pricing tier, which the number of members alone would not capture, and to allow comparison with the exchange's overall volume;

f. the cumulative dollar amount of fees, rebates, or other incentives (as applicable) at the tier during the month to better understand the financial impact of each pricing tier, both on members and on the exchange, and allow comparison of that impact between tiers; and

g. the average transaction fee paid and rebate received by members during the month.

25. Would additional columns allow easier sorting and analysis of the tables by machine or otherwise? If so, please explain.

26. Should the transparency disclosures under proposed Rule 6b-1(c) require exchanges to report every net price combination for any volume-based fee, rebate, or other incentive, including all additive or creditable pricing (

e.g.,

a liquidity providing rebate of $0.0028 plus a step-up tier of $0.0003 would be reported as its own pricing tier of $0.0031)? Would doing so be helpful to show whether volume-based transaction tiers are customized to a specific member?

27. Should the transparency disclosures under proposed Rule 6b-1(c) be posted on an exchange's website in addition to, or instead of, being submitted electronically to the Commission? Why or why not?

28. Are there uses beyond those identified in this release for the transparency disclosures? For example, would having volume-based exchange transaction fees in a structured data format help members as well as other market participants and academics parse the pricing schedules across exchanges and track changes over time? Would the transparency disclosures affect routing preferences among members trading proprietarily? Would members use the disclosures to comment on exchange proposed rule change filings or advocate for exchanges to change their transaction pricing if they have more transparency of the tiers for which their competitors qualify? Would that transparency provide a useful datapoint to assess whether volume-based exchange transaction pricing proposals meet the applicable statutory standards? Why or why not?

29. Would the proposed disclosure provision raise any issues related to disclosures of proprietary trading information or other confidentiality concerns, especially if the disclosures were read in conjunction with broker-dealer Rule 605/606 reports?

30. Do exchanges enter into arrangements with members about transaction pricing for proprietary and/or agency-related orders that result in or are connected to an exchange proposal to adopt or amend a specific volume-based transaction pricing tier? If so, what types of terms and conditions might such an arrangement include? To what extent are these arrangements memorialized in writing? How many such arrangements, if any, do exchanges enter into each year? If such

arrangements exist but are not commonly memorialized in writing, should the Commission add a provision to proposed Rule 6b-1 to require exchanges to “document any arrangement, whether written or oral, concerning volume-based transaction pricing, including the parties to the arrangement, all qualitative and quantitative terms concerning the arrangement, and the date and terms of any changes to the arrangement”?

III. Paperwork Reduction Act

Certain provisions of proposed Rule 6b-1 contain “collection of information requirements” within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).

The Commission is submitting these collections of information to the Office of Management and Budget (“OMB”) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid control number.

The title of the new collection of information is “Volume-Based Exchange Transaction Pricing for NMS Stocks.”

44 U.S.C. 3501

et seq.

44 U.S.C. 3507; 5 CFR 1320.11.

5 CFR 1320.11(l).

A. Summary of Collections of Information

The proposed rule includes collection of information requirements within the meaning of the PRA.

1. Rule 6b-1(a)—Prohibition on Volume-Based Pricing for Agency-Related Volume

As discussed above, proposed Rule 6b-1(a) provides that equities exchanges shall not offer volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks. This prohibition would require equities exchanges that currently offer volume-based transaction pricing for agency-related orders to file a proposed rule change with the Commission to update their price lists.

2. Rule 6b-1(b)(1)—Rules To Prevent Evasion

Proposed Rule 6b-1(b)(1) would require an equities exchange that offers volume-based transaction pricing in connection with the execution of proprietary orders in NMS stocks for the account of a member to adopt a rule to require its members to engage in practices that facilitate the exchange's ability to comply with the prohibition in proposed Rule 6b-1(a).

3. Rule 6b-1(b)(2)—Policies and Procedures To Prevent Evasion

Proposed Rule 6b-1(b)(2) would require an equities exchange that offers volume-based transaction pricing in connection with the execution of proprietary orders in NMS stocks for the account of a member to establish, maintain, and enforce written policies and procedures reasonably designed to detect and deter members from receiving volume-based pricing in connection with the execution of agency or riskless principal orders in NMS stocks.

4. Rule 6b-1(c)—Transparency for Volume-Based Pricing on Member Proprietary Orders

Proposed Rule 6b-1(c) would require an equities exchange that offers volume-based transaction fees, rebates, or other incentives in connection with the execution of proprietary orders in NMS stocks for the account of a member to submit electronically to the Commission information regarding those fees, rebates, or other incentives, including how many members qualify for such fees, rebates, or other incentives on a monthly basis.

B. Proposed Use of Information

1. Rule 6b-1(a)—Prohibition on Volume-Based Pricing for Agency-Related Volume

The collection of information associated with Rule 6b-1(a) would be exchange rule filings with the Commission to eliminate volume-based pricing for agency-related orders from their pricing schedules. The collection of information would bring the exchanges into compliance with Rule 6b-1(a), which would foster competition among broker-dealers and mitigate conflicts of interest for agency-related volume.

2. Rule 6b-1(b)(1)—Rules To Prevent Evasion

Proposed Rule 6b-1(b)(1) would assist exchanges in complying with proposed Rule 6b-1(a) by requiring exchanges to impose rules that require members to engage in practices, such as accurate order marking, to better enable the exchange to assess its pricing in compliance with the proposed rule.

3. Rule 6b-1(b)(2)—Policies and Procedures To Prevent Evasion

Proposed Rule 6b-1(b)(2) would assist national securities exchanges in complying with proposed Rule 6b-1(a) by requiring them to adopt policies and procedures reasonably designed to detect and deter members from receiving volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks.

4. Rule 6b-1(c)—Transparency for Volume-Based Pricing on Member Proprietary Orders

The disclosure of information about how an exchange's volume-based transaction pricing for member proprietary orders applies across its membership would enhance the transparency of an exchange's tiered pricing structure. In turn, the increased transparency would enhance the ability of members, other exchanges, and the public in considering and commenting on proposed volume-based pricing changes applicable to member proprietary volume.

C. Respondents

The respondents to these collections of information would be national securities exchanges that offer volume-based transaction fees, rebates, or other incentives in connection with the execution of orders in NMS stocks. Currently, while there are 16 national securities exchanges that trade NMS stocks, only 13 offer volume-based transaction pricing. Therefore, there are 13 estimated respondents.

D. Total Initial and Annual Reporting and Recordkeeping Burdens

1. Rule 6b-1(a)—Prohibition on Volume-Based Pricing for Agency-Related Volume

As discussed above, proposed Rule 6b-1(a) would require equities exchanges that currently offer volume-based transaction pricing to file a rule change with the Commission to update their price list, if necessary, to eliminate any existing volume-based pricing that would not comply with the proposed rule. This would be a one-time initial burden, and exchanges should not incur an ongoing burden once they have updated their rules. However, the PRA burden associated with the collection of information resulting from exchange rule filings that would be required pursuant to proposed Rule 6b-1(a) would be covered by the existing PRA burden estimates for Rule 19b-4 because those changes would be filed on Form 19b-4.

See

SEC File No. 270-38, OMB Control No. 3235-0045 (June 21, 2023), available at

https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202304-3235-017.

2. Rule 6b-1(b)(1)—Rules To Prevent Evasion

Proposed Rule 6b-1(b)(1) would require an equities exchange that offers volume-based transaction pricing to have rules to require its members to engage in practices that facilitate the exchange's ability to comply with the prohibition in proposed Rule 6b-1(a). Similar to the burden for Rule 6b-1(a), this would be a one-time initial burden, although an exchange may decide to amend the rule it adopts pursuant to proposed Rule 6b-1(b)(1) from time to time. However, the PRA burden associated with the collection of information resulting from exchange rule filings that would be required pursuant to proposed Rule 6b-1(b)(1) would also be covered by the existing PRA burden estimates for Rule 19b-4 because those changes would be filed on Form 19b-4.

The Commission encourages comments on this point.

See id.

3. Rule 6b-1(b)(2)—Policies and Procedures To Prevent Evasion

Proposed Rule 6b-1(b)(2) would require exchanges to establish, maintain, and enforce written policies and procedures to detect and deter members from receiving volume-based exchange transaction pricing in connection with the execution of agency or riskless principal orders in NMS stocks. Exchanges would incur an initial burden and an annual ongoing burden associated with proposed Rule 6b-1(b)(2). The Commission believes that many exchanges generally already have rules and policies and procedures in place to ensure that members are correctly marking their orders, though those policies and procedures may need to be updated to ensure compliance with the proposed rule in the context of exchange transaction pricing.

Exchanges, at a minimum, would be required to review their existing policies and procedures. Certain exchanges may need to supplement or revise their policies and procedures to ensure that they are reasonably designed to deter and detect members from receiving tiered pricing on orders for which tiered pricing is prohibited. Although the exact nature and extent of compliance with proposed Rule 6b-1(b)(2) would likely differ based on the existing policies and procedures of each respondent, the Commission estimates that the one-time, initial burden to update or adopt any additional written policies and procedures required under proposed Rule 6b-1(b)(2) would be approximately 50 hours per exchange or 650 burden hours across 13 exchanges that have volume-based transaction pricing.

The Commission derived the total estimated burdens from the following estimates: (Attorney at 30 hours) + (Compliance Counsel at 10 hours) + (Chief Compliance Officer at 5 hours) + (General Counsel at 5 hours) = 50 burden hours. 50 burden hours per exchange × 13 respondents = 650 total burden hours. The Commission's estimate is informed by the estimated filing burden for Form 19b-4 (34 hours).

See

Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Form 19b-4 (Apr. 18, 2023), available at

https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202304-3235-017.

The Commission believes that the policies and procedures required under proposed Rule 6b-1(b)(2) may require more effort to prepare than the proposed rule change required under proposed Rule 6b-1(b)(1).

The 13 equities exchanges that have volume-based transaction pricing would incur annual ongoing burden hours to maintain and review their policies and procedures adopted under proposed Rule 6b-1(b)(2) to ensure their effectiveness. Those exchanges also would need to review for compliance pursuant to their policies and procedures. The Commission estimates that each exchange would likely spend an average of 25 hours per year on an ongoing basis, for a total of 325 hours across all 13 exchanges.

The Commission derived the total estimated burdens from the following estimates: (Compliance Attorney at 12 hours) + (Compliance Manager at 8 hours) + (Business analyst at 5 hours) = 25 burden hours. 25 burden hours per exchange × 13 respondents = 325 total burden hours. The ongoing burden hours associated with proposed Rule 6b-1(b)(2) is estimated to be lower than the initial burdens because the Commission expects it to be less burdensome to maintain and review existing policies and procedures than to establish new ones.

4. Rule 6b-1(c)—Transparency for Volume-Based Pricing on Member Proprietary Orders

Proposed Rule 6b-1(c) would require exchanges that offer volume-based transaction pricing for the execution of proprietary orders in NMS stocks for the account of a member to submit electronically to the Commission aggregated information regarding how many members qualify for those pricing tiers. These submissions would be accessible to the public via the EDGAR system and would reflect each exchange's particular pricing structure. The exchanges would likely incur an initial burden and an annual ongoing burden associated with Rule 6b-1(c). Exchanges have ready access to all of the underlying information and data necessary to comply with proposed Rule 6b-1(c) because the disclosures are summaries of the pricing schedules that exchanges maintain and the exchanges know the number of members that qualify for a particular pricing tier because they calculate the fees, rebates, and other incentives applicable to their members on a monthly basis. Consequently, the proposed rule would not require exchanges to acquire or record an entirely new and unfamiliar set of information. The exchanges, however, would be required to present the required information and data in a new structured data format and submit such information electronically to the Commission on a monthly basis.

Exchange pricing schedules are publicly available and identify all of the exchange's volume-based transaction fees, rebates, and other incentives. To comply with proposed Rule 6b-1(c)(2), the exchange would have to identify each volume-based transaction fee, rebate, and other incentive, and: (i) use a label to identify the base fee or rebate, (ii) use a label to identify each pricing tier that corresponds to the label used in the exchange's pricing schedule, (iii) identify the amount of the fee, rebate, or other incentive, (iv) provide an explanation of the tier requirement, and (v) provide the total number of members that qualified for the base fee, base rebate, or each tier during the month. Parts (i) through (iv) would require the exchange to take information from its publicly accessible pricing schedule and put it into the required structured data format. The information required for part (v) would be readily available to the exchange since it assesses transaction prices to its members on a monthly basis in accordance with its pricing schedule and thus knows which members qualify for which tiers though exchanges currently are not required to publicly disclose a tally of that information by tier.

Furthermore, proposed Rule 6b-1(c)(1) requires the exchange to identify the number of members that executed proprietary orders in NMS stocks for the member's account on the exchange during the month. Exchanges do not currently publicly disclose a tally of this information. However, exchanges generally have ready access to trading information of their members that would reveal this information and exchanges generally know which of their members are engaged in an agency business, which are engaged in proprietary trading, and which are engaged in both because exchanges broadly know about what lines of business their members are engaged in as part of their membership registration. Accordingly, the burden on exchanges to calculate the number of members engaged in proprietary trading would be low.

The Commission estimates that each exchange would incur 58 initial burden

hours for the creation of new tables to ensure that data responsive to the proposed disclosure requirements is correctly collected and formatted, and to set up automated programs where appropriate, or 754 total initial burden hours across 13 exchanges.

The Commission does not believe the information required to be aggregated and included in disclosures made pursuant to proposed Rule 6b-1(c) would require respondents to acquire new hardware or systems to process the information required in the reports. Rather, the exchanges' initial burden would consist of creating and formatting a table that would be responsive to the requirements of proposed Rule 6b-1(c). As described above, this would require the exchanges to convert a portion of the information available on their publicly accessible pricing schedules into a structured data format. Once created, these tables should not change unless the exchanges create new pricing tiers or change the requirements or dollar amounts of existing tiers. The Commission solicits comment on the accuracy of these estimates.

The Commission derived the total estimated burdens from the following estimates: (Sr. Programmer at 25 hours) + (Sr. Systems Analyst at 10 hours) + (Compliance Manager at 10 hours) + (Compliance Attorney at 8 hours) + (Director of Compliance at 5 hour) = 58 burden hours. 58 burden hours per exchange × 13 respondents = 754 total burden hours.

Furthermore, because exchanges are not currently subject to EDGAR filing requirements, equities exchanges would incur a one-time compliance burden of submitting Form ID in order to be able to submit the disclosures electronically to the Commission through EDGAR. Respondents would apply for access to EDGAR using Form ID and receive access codes to submit documents through the EDGAR system. The Commission estimates that each filer that currently does not have access to EDGAR would incur an initial, one-time burden of 0.30 hours to complete and submit a Form ID.

However, the PRA burden associated with completing and submitting a Form ID would be covered by the existing PRA burden estimates for Form ID.

Form ID (OMB control number 3235-0328) must be completed and filed with the Commission by all individuals, companies, and other organizations who seek access to file electronically on EDGAR. Accordingly, a filer that does not already have access to EDGAR must submit a Form ID, along with the notarized signature of an authorized individual, to obtain an EDGAR identification number and access codes to file on EDGAR.

See

Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Form ID (Dec. 20, 2021), available at

https://www.reginfo.gov/public/do/PRAViewDocument?ref_nbr=202112-3235-003

(stating that it takes 0.3 hours to prepare Form ID).

See id.

The 13 equities exchanges that have volume-based transaction pricing also would incur annual ongoing burden hours to aggregate and disseminate the information required under proposed Rule 6b-1(c). Proposed Rule 6b-1(c) would require exchanges to submit electronically updated information each month. An exchange generally would not need to update the disclosure information required under proposed Rule 6b-1(c)(2)(i)-(iv) unless the exchange amends its pricing schedule, in which case the exchange would need to make targeted changes to these disclosures in accordance with the changes it makes to its pricing schedule. The Commission expects that the disclosures required by proposed Rule 6b-1(c)(1) and Rule 6b-1(c)(2)(v) would possibly change and could need to be updated as frequently as each month. The Commission believes the exchanges would use automated programs to meet the ongoing monthly reporting obligation under proposed Rule 6b-1(c) but each report may require staff to verify the accuracy of the information. The Commission estimates that each exchange would incur 8 burden hours per monthly report for a total of 96 ongoing burden hours on an annual basis.

Therefore, the Commission estimates 1,248 total ongoing annual burden hours across 13 exchanges.

The Commission derived the total estimated burdens from the following estimates: (Compliance Attorney at 6 hours) + (Compliance Manager at 2 hours) = 8 burden hours per monthly filing. 8 burden hours × 12 months = 96 annual burden hours per respondent.

96 annual burden hours per exchange × 13 respondents = 1,248 total burden hours per year.

Table 3—PRA Summary Table

Rule

Number of

respondents

Initial burden hours per

respondent

Total initial burden hours

Ongoing

burden hours per

respondent on annual

basis

Total ongoing burden hours on annual basis

Rule 6b-1(b)(2)

650

325

Rule 6b-1(c)

754

1,248

Total

108

1,404

121

1,573

E. Collection of Information Is Mandatory

The collection of information discussed above would be a mandatory collection of information.

F. Confidentiality of Responses to Collection of Information

The collection of information under proposed Rule 6b-1(a) and 6b-1(b)(1) would not be confidential because exchange proposed rule changes filed with the Commission are public information. Similarly, the collection of information under proposed Rule 6b-1(c) also would not be confidential. Rather, each exchange would be required to submit electronically to the Commission the information required under proposed Rule 6b-1(c) and this information would be made publicly available. The collection of information under proposed Rule 6b-1(b)(2) concerning the written policies and procedures would contain information about an exchange's regulatory program because those materials would provide details on how the exchange enforces compliance with its rules, specifically how the exchange detects and deters members from receiving volume-based transaction pricing in connection with the execution of agency and riskless principal orders in NMS stocks. Accordingly, where the Commission requests that an exchange produce those documents, an exchange can request confidential treatment of the information. If such confidential treatment request is made, the Commission anticipates that it will keep the information confidential subject to applicable law.

G. Retention Period for Recordkeeping Requirements

National securities exchanges would be required to retain records and information pursuant to Rule 17a-1 under the Exchange Act

for a period of five years.

17 CFR 240.17a-1.

H. Request for Comments

The Commission requests comment on whether the estimates for burden hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (1) evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility; (2) evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information; (3) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.

Persons submitting comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File Number S7-18-23. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File Number S7-18-23 and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 20549-2736. As OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication.

IV. Economic Analysis

A. Introduction

The Commission is mindful of the economic effects, including the benefits and costs, of the proposed rule. Section 3(f) of the Exchange Act provides that when engaging in rulemaking that requires the Commission to consider or determine whether an action is necessary or appropriate in the public interest, to also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.

Section 23(a)(2) of the Exchange Act also requires the Commission to consider the effect that the proposed rule would have on competition, and it prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the Exchange Act.

The analysis below addresses the likely economic effects of the proposed rule, including the anticipated benefits and costs of the amendments and their likely effects on efficiency, competition, and capital formation. The Commission also discusses the potential economic effects of certain alternatives to the approaches taken in this proposal.

See

15 U.S.C. 78c(f).

See

15 U.S.C. 78w(a)(2).

The Commission is proposing to prohibit volume-based transaction fees, rebates, or other incentives in connection with the execution of agency or riskless principal orders in NMS stocks, as well as the disclosure of, among other things, the number of exchange members that qualify for different transaction pricing tiers.

The proliferation of tiered transaction pricing schedules across many exchanges has resulted in a complex system of transaction-based fees, which, along with a lack of transparency regarding how many members qualify for the various pricing tiers, makes it difficult for market participants to assess the tiered transaction pricing schedules' impact on the fees and rebates ultimately realized across exchange members. Further, it may be the case that some tiers only have a single market participant that ultimately qualifies for that tier in a given month. This lack of transparency presents a challenge to other exchange members, exchanges, and interested parties to assess for themselves whether an exchange's proposed transaction price schedule meets the applicable statutory standards, so that they can comment on such a proposed fee rule. It is also possible that the general complexity of the tiers inhibits the ability of all market participants to understand the price of exchange services and understand the impact of the particular price schedules implemented. By prohibiting the application of volume-based pricing for agency-related orders the proposed rule would help simplify pricing for agency-related order flow whilst the proposed disclosure provisions will help promote transparency for principal order flow, for which volume-based transaction pricing will continue to be permitted.

While exchanges compete, in part, on the basis of their price schedules, volume-based transaction pricing may reduce competition among executing brokers, which could increase costs for investors. With volume-based transaction pricing, rebates go up and fees go down as a broker-dealer's volume increases, meaning that such pricing gives higher-volume broker-dealers lower trading costs. As a result, smaller firms, such as new entrants, face higher trading costs relative to high-volume incumbent broker-dealers, potentially reducing competition and raising costs for investors.

The implementation of volume-based transaction fee and rebate pricing introduce additional incentives to concentrate order flow on a given exchange. Volume-based tiers may encourage the concentration of a member's order flow on the exchange by offering more favorable pricing to a member who executes greater trading volume on their platform. Not only does volume-based transaction price tiering incentivize the concentration of order flow, it also indirectly increases the opportunity cost of routing orders to a competing venue, because by doing so the exchange member lowers the likelihood that it will qualify for a better pricing tier. This concentration also directly reduces the ability of an exchange not offering rebates to compete with those that do. Rebates themselves are a less transparent means of incentivizing liquidity as compared with bid-ask spreads. Thus, the proliferation of volume-based tiers may reduce efficiency by making a non-rebate-focused model difficult to sustain.

The application of volume-based pricing to non-principal order flow adds to the conflict of interest between a broker and its customer as broker-dealers may be incentivized to execute customer orders in a manner that would not be consistent with the broker-dealer's duty of best execution (to execute customer trades at the most favorable terms reasonably available under the circumstances).

Tier qualification is based on the exchange member's total monthly trading volume

and upon qualification the pricing of that tier applies to the entirety of the member's trading volume on the exchange. Diverting order flow to other trading venues may risk the member losing out on higher rebates or lower fees for a whole swath of their order flow. Volume-based pricing tiers thereby generate the potential for exchange members to concentrate customer order flow onto particular exchanges in order to increase the likelihood of tier qualification possibly contrary to the interests of individual customers.

The Commission has previously described a non-exhaustive list of factors that may be relevant to a broker-dealers' best execution analysis.

See

Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 at 37538 (June 29, 2005).

Exchanges, particularly those with the largest market share, are unlikely to unilaterally reduce the use of transaction pricing tiers or address the advantages that the application of these pricing tiers to agency-related volume creates for high-volume broker-dealers.

An exchange may perceive that unilaterally excluding agency trading volume from volume-based transaction pricing tiers would reduce one incentive for members to concentrate agency orders on their exchange, risking that their members instead direct that order flow to competing exchanges with volume-based pricing tiers. Because of this incentive to concentrate order flow, an exchange that unilaterally eliminated volume-based transaction pricing tiers for agency-related order flow could experience a loss of trading volume, especially if competing venues continue to reward agency-related order flow concentration. If all existing exchanges moved to exclude agency-related volume from volume-based transaction pricing tiers, the potential gains from a single exchange (or new entrant) deviating and charging volume-based prices could be very high, reducing the likelihood that such an effort would be successful without the aid of a regulatory prohibition. In this case the exchanges, particularly those with members with high-volume agency order flow, may also lose activity as the reduced incentive to concentrate order flow may result in broker-dealers routing order-flow to other venues.

Agency-related order flow represents a substantial share of trading volume, comprising 56% of trading volume across the equities exchanges in Jan. 2023.

See

infra Table 4.

Exchanges are required to file changes to their price schedules with the Commission and publish their pricing schedules online. However, when filing such proposed rule changes and publishing such pricing schedules, they typically refrain from disclosing the number of members that qualify for their different tiers, information which would be useful to market participants. Knowledge of this would aid exchange members, other exchanges, and the public in considering and commenting on whether proposed volume-based pricing changes are equitable and not unfairly discriminatory. The Commission does not believe that the exchanges themselves can be expected to rectify the lack of tier transparency because doing so may reveal valuable information to their competitors as well as risk potential reputational costs.

Along with the proposed prohibition of volume-based pricing for agency-related order flow the Commission is proposing to require exchanges to disclose the number of members which qualify for each pricing tier. Given the proposed prohibition of volume-based tiers for agency order flow the proposed disclosures would relate to tiers that would only apply to principal order flow. The Commission expects that the proposed disclosures would provide important information to interested parties to provide comment on future proposed changes to an exchange's pricing schedule. Observing the distribution of principal volume tier qualification and its variation over time would allow interested parties to better assess if pricing tiers had been narrowly tailored for the benefit of some members and could be judged to be unfair. The disclosure of more information on how many members qualify for each principal pricing tier would add costs and could lead to reputational damage to an exchange if the exchange's pricing structure is publicly perceived to be unfair.

See

section IV.C.3.b.ii for a discussion of the potential reputational costs that the disclosure of tier qualification numbers may have.

B. Baseline

1. Exchange Pricing

As discussed above in section I.B, many stock exchanges utilize a transaction pricing model that involves charging one party to a trade a per-share fee while offering the other party a per-share rebate. While exchange transaction pricing structures vary, with some exchanges charging both sides a fee or no fee at all, most of the on-exchange volume goes to exchanges which provide a rebate to the resting limit order and charge the fee to the marketable order. This type of fee structure is referred to as “maker-taker” pricing. Exchanges may employ maker-taker fees as a means of attracting competitively priced liquidity to post on an exchange, which, in turn, helps attract trading to the exchange.

Many exchanges incorporate volume-based transaction tiers into their pricing schedules, meaning that they offer improved pricing terms to members that execute more trading volume on the exchange, typically as a percent of total consolidated volume. These pricing tiers provide an incentive for exchange members to concentrate their order flow on a subset of exchanges, rather than route their orders more broadly across all competing exchanges, so as to increase their chances of qualifying for a higher tier on a specific exchange. In turn, this also helps to secure an exchange's share of the market, and in some cases may affect competition among exchanges.

a. Transaction Fees and Rebates

Exchanges generally seek to increase the amount of trading that occurs on their respective venue. Exchanges generate revenue, in part, from trade executions

by charging transaction fees net of any rebate they pay out, subject to a fee cap.

Because some market participants are sensitive to the level of fees and rebates, exchange fee schedules would affect an exchange's market share. Given that most exchanges set their access fees at or near the access fee cap it is particularly the variation in the rebates they offer which is more likely to influence an exchange's market share.

Exchanges also generate significant revenue from selling access to the data generated by the exchange as well by charging fees for connectivity.

See

17 CFR 242.610 (Rule 610(c)), which prohibits trading centers from imposing a fee exceeding $0.0030 to access a quote in stock priced at or greater than $1.00. This level is commonly referred to as 30 mils with 1 mil defined as $0.0001. For quotes priced less than $1.00 the fee cap is at 0.3% of the quotation price.

For instance, an exchange stated in a proposed rule change that “[t]he Exchange first notes that it operates in a highly competitive market in which market participants can readily direct order flow to competing venues if they deem fee levels at a particular venue to be excessive or incentives to be insufficient.”

See

Securities Exchange Act Release No. 94252 (Feb. 15, 2022) 87 FR 9780 at 9781 (Feb. 22, 2022) (SR-CboeBZX-2022-008).

A major component of the market to provide trade executions is the competition among exchanges in attracting competitively priced liquidity as a means of capturing more order flow.

100

Competitive quotes increase the likelihood that marketable orders will flow to an exchange which result in trades.

101

Exchanges aim to attract

competitively priced quotes because, holding other considerations constant, it is generally in market participants' interest to route their order to the venue with the best prices insofar as doing so would be consistent with the duty of best execution that broker-dealers have with regard to customer orders. In addition to these incentives, the Order Protection Rule also contributes to the competition for order flow by requiring that, with specified exceptions,

102

orders must execute at prices that are equal to or superior to the prevailing national best bid and offer (NBBO).

100

Exchanges also compete with off-exchange trading venues such as ATSs and wholesaler broker-dealers to attract transactions.

101

Exchanges can try to attract such quotes by paying rebates on limit orders. By offering to pay the market participant who sends a limit order to an exchange a rebate should the limit be hit, the exchange may be able to increase to total number limit orders sent to it. This may increase likelihood

that the exchange ends up with the best-priced limit order in a given symbol.

102

See

17 CFR 242.611 (Rule 611). The rule requires trading centers to “establish, maintain, and enforce written policies and procedures that are reasonably designed to prevent trade-throughs on that trading center of protected quotations in NMS stocks” (a trade-through occurs when one trading center executes an order at a price that is inferior to the price of a protected quotation). The prevention of trade-throughs means that marketable orders are more likely to be executed on trading venues with competitively priced quotations at the NBBO.

The competitive environment that has emerged from the desire to attract competitively priced liquidity contributes to the predominance of maker-taker pricing across exchanges.

103

In January 2023, 9 of the 16 exchanges employed maker-taker pricing and the trading volume on those 9 exchanges make up 89% of trading volume which occurred on the exchanges.

104

As discussed above in section I.B., exchanges typically adopt one of three different forms of transaction pricing models, including maker-taker, inverted, or flat.

105

The “maker-taker” pricing model encourages liquidity provision by paying rebates to limit orders (

i.e.,

the “makers”) that the exchange funds by charging fees on marketable orders.

103

See supra

note 15.

104

See

Table 4.

105

See supra

section I.B (describing the different exchange pricing models).

Outside of the maker-taker pricing model, other exchanges have adopted inverted or flat pricing models. These exchanges collectively represent a smaller portion of the overall market share. As reported in Table 4, inverted pricing venues, which charge a fee to passive limit orders and pay a rebate to marketable orders, accounted for only 6% of traded share volume in January 2023. Flat venues accounted for roughly 5% of traded share volume in January 2023.

It is likely that the lack of an incentive to post limit orders in the form of a transaction rebate contributes to the limited share of these non-maker-taker venues. Conditional on the quoted price on different exchanges being the same, a trader would be expected to prefer routing its marketable order to either an inverted or free venue over a maker-taker venue to avoid the access fee and potentially earn a rebate instead. However, a market observer has stated that the occurrence of equivalently priced quotes at the NBBO between maker-taker exchanges and non-maker-taker exchanges is an infrequent occurrence.

106

The infrequency of this occurrence may be due, in part, to the lack of rebates for limit orders on these non-maker-taker exchanges.

106

For a discussion of how long different exchanges spend quoting at the NBBO,

see

Phil Mackintosh, Three Charts That Show the Importance of a Competitive Bid/Offer NBBO (Dec. 4, 2018), available at

https://www.nasdaq.com/articles/three-charts-that-show-the-importance-of-a-competitive-bid-offer-nbbo-2018-12-04.

Three exchange groups together make up a large majority of the market share in the exchange landscape with the Nasdaq group (Nasdaq, BX, Phlx (PSX)) making up 30% of the market by trading volume, the Intercontinental Exchange group (NYSE, NYSE American, NYSE Arca, NYSE Chicago, NYSE National) making up 34% and Cboe Global Markets (Cboe BZX, Cboe BYX, Cboe EDGA, Cboe EDGX) making up 24%.

Table 4—Exchange Trading Volume and Share by Liquidity Type, Jan. 2023

[The following table breaks apart the total buy and sell executed order flow from all exchange members using a sample of CAT data for the month of Jan 2023. Exchange members are identified as the set of unique CRD IDs in CAT which have directly routed orders to any of the national equities exchanges in the month. Exchange member CRDs are also verified in the CAT Industry Member Identifier List daily reference data. For each exchange the number of shares executed under the CAT allowable trade capacities of Agency, Principal, and Riskless Principal are reported. Trade capacity in CAT is defined by the exchange member for its side of a trade and represents the capacity in which the exchange member acted at trade time. Trades with the sale condition codes-M—Market Center Official Close, -Q—Market Center Official Open, -V—Contingent Trade, -7—Qualified Contingent Trade (QCT), -8—Placeholder for 611 Exempt, and -9—Corrected Consolidated Close (per listing market) were excluded. The share of total trading volume across all exchanges for orders of a specific capacity are reported under the trading volume. The fourth column, “Total” reports the total trading volume for each exchange with the exchange's volume-based exchange market share reported below.]

Exchange

Agency

Principal

Riskless

principal

Total

Nasdaq

(Maker-Taker)

42,381,231,425

32.04%

26,084,186,949

24.37%

256,443,292

13.90%

68,721,861,666

28.50%

NYSE

(Maker-Taker)

23,578,087,344

17.82%

15,663,850,087

14.64%

145,114,774

7.86%

39,387,052,205

16.33%

NYSE Arca

(Maker-Taker)

19,581,312,954

14.80%

19,600,669,528

18.31%

129,269,046

7.00%

39,311,251,528

16.30%

Cboe EDGX

(Maker-Taker)

13,478,973,097

10.19%

12,512,933,159

11.69%

677,345,568

36.70%

26,669,251,824

11.06%

Cboe BZX

(Maker-Taker)

9,612,667,056

7.27%

10,242,339,878

9.57%

367,462

0.02%

19,855,374,396

8.23%

MEMX (Maker-Taker)

6,308,673,864

4.77%

6,746,470,107

6.30%

186,541,931

10.11%

13,241,685,902

5.49%

IEX

(Flat)

6,860,652,435

5.19%

3,905,276,620

3.65%

7,011,129

0.38%

10,772,940,184

4.47%

Cboe EDGA

(Inverted)

3,401,951,122

2.57%

2,289,187,280

2.14%

109,407,328

5.93%

5,800,545,730

2.41%

Cboe BYX

(Inverted)

1,950,854,778

1.47%

2,582,413,642

2.41%

131,506,520

7.13%

4,664,774,940

1.93%

MIAX Pearl (Maker-Taker)

1,803,716,409

1.36%

2,527,733,474

2.36%

153,910,919

8.34%

4,485,360,802

1.86%

NYSE National

(Inverted)

827,209,968

0.63%

1,489,403,927

1.39%

1,340,645

0.07%

2,317,954,540

0.96%

Phlx (PSX)

(Maker-Taker)

877,534,988

0.66%

1,342,954,596

1.25%

53,580

0.00%

2,220,543,164

0.92%

(Inverted)

713,708,890

0.54%

965,538,116

0.90%

32,818,578

1.78%

1,712,065,584

0.71%

NYSE American

(Maker-Taker)

712,130,625

0.54%

818,767,495

0.77%

14,185,250

0.77%

1,545,083,370

0.64%

NYSE Chicago

(Flat)

177,946,002

0.13%

254,499,006

0.24%

120,789

0.01%

432,565,797

0.18%

LTSE

(Free)

10,749,491

0.01%

1,411,063

0.00%

12,160,554

0.01%

Total

132,277,400,448

100.00%

107,027,634,927

100.00%

1,845,436,811

100.00%

241,150,472,186

54.85%

44.38%

0.77%

Part of NYSE/ICE Exchange group of exchanges.

Part of the Nasdaq group of exchanges.

Part of the Cboe group of exchanges.

The Commission estimates revenues generated from net transaction fees for the different exchange groups using volume-weighted average net capture rates which were made publicly available either through 10-Q filings or published online; the reported net capture rates are averages for all the different transactions occurring across the various equities exchanges in each exchange group.

107

The Commission estimates that one exchange group had revenue generated from net transaction fees in its US equities exchanges of approximately $37,347,258 in January 2023,

108

another exchange group had revenue of $46,498,861,

109

and a third exchange group had revenue of $10,828,089.

110

107

The Commission is making the assumption that the reported average net capture rates collected from public disclosure hold for the trading volume reported in Table 4. The publicly sourced data regarding average net capture rates for the exchanges which are publicly-traded issuers include the period of analysis, January 2023, as the disclosures pertain to Q1 2023.

See infra

notes 126, 127, 128.

108

The revenue numbers are calculated as the sum of the total trading volume for the venues in an exchange group reported in Table 4 by their average net capture rate. Intercontinental Exchange, the parent firm of NYSE, reports on page 38 of its Form 10-Q filing for the three months ending Mar. 31, 2023 that its net capture for U.S. equities transactions was approximately 4.5 mils in Q1 2023.

109

Nasdaq did not report its net capture in its Form 10-K filing, however, Nasdaq provides information on its investor relations web page which indicates that the average net capture across all Nasdaq platforms for U.S. equities transactions in Q1 2023 was 6.4 mils.

See

Nasdaq 2023/2022 Monthly Volumes, NASDAQ, available at

https://ir.nasdaq.com/static-files/465d2157-c476-4546-a9f7-8d7ad0c9be77.

110

Cboe reports in its Form 10-Q filing for the three months ending Mar 31, 2023, that its net capture for U.S. equities transactions was approximately 1.9 mils for Q1 2023.

The four exchanges outside of those three exchange groups made up the remaining 11.81% of the market in January 2023. One exchange is a free exchange, meaning that it does not charge access fees (nor does it pay out transaction rebates) and hence does not generate revenue from transaction net capture fees.

111

Another exchange charges a flat fee of $0.0009 per share to both liquidity providers and liquidity takers leading to net capture of $0.0018 and an estimated transactions revenue of $19,391,292 for January 2023.

112

The remaining two exchanges are not publicly-traded issuers and do not publicly disclose their net capture rates. The Commission understands based on Staff conversations with industry members that the net capture for non-auction trading in stocks is likely close to $0.0002 per share and uses this assumed net capture rate when estimating the transaction revenues for these exchanges.

113

Using the assumed net capture of $0.0002, or 2 mils, the Commission estimates the January 2023 transaction revenues for these two exchanges to be $2,648,337 and $897,072 respectively.

114

111

The exchange, LTSE does not charge fees to transact.

See supra

note 15.

112

See

IEX pricing schedule,

supra

note 15

113

The assumption that the remaining two exchanges (MEMX & MIAX Pearl) earn an estimated 2 mils net capture per transaction is in line with prior Commission discussions and would put them in line with the net capture rate reported by the Cboe group.

See supra

note 110.

114

See supra

note 98 defining the term “mil”.

The maker-taker transaction pricing model and higher rebates play an important role in attracting competitively priced quotes and capturing market share, as suggested by the market share statistics of Table 4.

There are important factors which serve to limit the liquidity of lower volume exchanges; these exchanges are not the primary listing market for any securities as they are newer, and they also tend to be more specialized or structured to facilitate specific trading strategies.

The idea that the maker-taker transaction pricing model and rebates offered play an important role in exchange market share is also supported by the results of an experiment run by one maker-taker exchange, Nasdaq, in which it reduced both its fees and rebates. T

This text is long and has been trimmed here. Open the source document for the complete record.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.