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

Federal RegisterOct 8, 2024

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-101070; File No. S7-30-22]

RIN 3235-AN23

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

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

The Securities and Exchange Commission (“Commission” or “SEC”) is adopting amendments to certain rules of Regulation National Market System (“Regulation NMS”) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) to amend the minimum pricing increments for the quoting of certain NMS stocks, reduce the access fee caps, and enhance the transparency of better priced orders.

DATES:

Effective Date:

December 9, 2024.

Compliance dates:

See section VI., titled “Compliance Dates,” for further information on transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT:

Kelly Riley, Senior Special Counsel, Johnna Dumler, Special Counsel, Steve Kuan, Special Counsel, Marc McKayle, Special Counsel, Leigh Roth, Special Counsel, and Alba Baze, Attorney-Advisor, at (202) 551-5500, Office of Market Supervision, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to the following rules under Regulation NMS:

Commission

reference

CFR citation

(17 CFR)

Rule 600(b)(69)

§ 242.600(b)(69)

Rule 600(b)(89)

§ 242.600(b)(89)

Rule 600(b)(93)

§ 242.600(b)(93)

Rule 603

§ 242.603

Rule 610

§ 242.610

Rule 612

§ 242.612

I. Introduction

A. Rule 612 Minimum Pricing Increments

1. Background

2. Proposed and Adopted Amendments

B. Rule 610 Fees for Access to Quotations and Transparency of Fees

1. Background

2. Proposed and Adopted Amendments

C. Transparency of Better Priced Orders

1. Background

2. Proposed and Adopted Amendments

D. Overarching Comments on the Proposing Release

II. Equity Market Structure Initiatives and the Regulation NMS Proposal

III. Final Rule 612 of Regulation NMS—Minimum Pricing Increment

A. Issues Raised in the Existing Market Structure Related to Tick Sizes

B. Proposal To Amend Rule 612

C. Final Rule—Minimum Pricing Increments for Orders Priced Equal to or Greater Than $1.00 per Share

1. General Comments and Discussion

2. Specific Comments on the Proposed Minimum Pricing Increments

3. Comments on the Number of Proposed Increments

4. Comments on Small- and Mid-Sized Stocks

5. Comments on Market Resiliency

6. Comments on Proposed Criteria for Assigning Minimum Pricing Increments

7. Rule 612(a)—Definitions

8. Rule 612(b)(1)—Semiannual Operative Dates

9. Rule 612(c)—New NMS Stocks

10. Rule 600(b)(89)—Regulatory Data

D. Minimum Pricing Increment for Trades

IV. Final Rule 610 of Regulation NMS—Fees for Access to Quotations

A. Background

B. Issues Raised in the Existing Market Structure and the Need for the Amendments

1. Amendments to Rule 612

2. Exchange Fee Models

C. Proposal To Amend 610(c)

D. Final Rule 610(c)

1. Comments on Proposed Rule 610(c)

E. Final Rule 610(d) Requiring That All Exchange Fees and Rebates Be Determinable at the Time of an Execution

1. General Comments

V. Final Rule—Transparency of Better Priced Orders

A. Background

B. Final Rule—Round Lots

1. Round Lot Definition

2. Proposed Acceleration of Round Lot Definition

3. Comments and Response

C. Final Rule—Odd-Lot Information

1. Proposed Acceleration of Odd-Lot Information Definition

2. Proposed Amendment to Odd-Lot Information Definition for Best Odd-Lot Orders

D. Display of Round Lots and Odd-Lot Information

1. Comments and Response

E. MDI Rules Implementation

VI. Compliance Dates

A. Final Rule 612 Compliance Date

B. Final Rule 610 Compliance Date

C. Final Compliance Date for Round Lot and Odd-Lot Information

VII. Economic Analysis

A. Introduction

B. Broad Economic Considerations

1. Liquidity and Spread

2. Economics of Minimum Pricing Increments

3. Economics of Access Fees

C. Baseline

1. Tick Sizes

2. Access Fees

3. Round Lots, Odd-Lots, and Market Data Infrastructure

4. Affected Entities and Markets

5. Amendments to Rule 605

D. Benefits, Costs, and Other Economic Effects

1. Modification of Rule 612 To Create a Half-Penny Tick

2. Lower Access Fee Cap

3. Exchange Fees and Rebates Determinable at the Time of Execution

4. Acceleration and Implementation of the MDI Rules and Addition of Information About Best Odd-Lot Orders

5. Compliance Costs

6. Interactions With Recently Adopted Rules

E. Effect on Efficiency, Competition, and Capital Formation

1. Efficiency

2. Competition

3. Capital Formation

F. Reasonable Alternatives

1. Tick Size Alternatives

2. Access Fee Alternatives

VIII. Paperwork Reduction Act

A. Summary of Collection of Information

B. Proposed Use of Information

C. Respondents

D. Total Annual Reporting and Recordkeeping Burden

1. Initial Burden Hours and Costs

2. Ongoing Burden Hours and Costs

E. Collection of Information Is Mandatory

F. Confidentiality

G. Revisions to Current MDI Rules Burden Estimates

IX. Regulatory Flexibility Act

A. Amendments to Rule 612—Final Regulatory Flexibility Analysis

1. Reasons for the Action

2. Small Entities Subject to the Rule

3. Reporting, Recordkeeping, and Other Compliance Requirements

4. Significant Alternatives

B. Amendments to Rule 610

C. Amendments to Rule 603 and Definitions Odd-Lot Information and Regulatory Data Under Rule 600

D. Certification

X. Other Matters

Statutory Authority and Text of Rule Amendments

I. Introduction

Consistent with Congress's directive almost 50 years ago to facilitate the establishment of a national market system,

the Commission is amending certain of its rules to respond to market developments since those rules were adopted, so that those rules continue to benefit investors and the markets. Specifically, the Commission is taking the following actions to continue to fulfill Congress's directive and advance the objectives of investor protection and the maintenance of fair and orderly markets:

See

Public Law 94-29 (S.249), June 4, 1975, Securities Acts Amendments of 1975 (“1975 Amendments”).

See also

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

•

Reduce Transaction Costs for Investors by Reducing Minimum Pricing Increments.

The amendments will relax

existing restrictions on market-wide minimum pricing increments (“tick sizes”), thus reducing transaction costs for investors and relaxing a constraint on price discovery for certain stocks.

The reduced tick size will benefit investors and market participants by: (i) allowing stocks to be priced more efficiently and competitively, therefore lowering costs for investors to trade in those stocks; and (ii) improving liquidity, competition, and price efficiency in the markets.

•

Improve Market Quality for Investors by Reducing Access Fee Caps and Increasing Transparency.

The amendments will reduce the maximum fees that trading centers (

e.g.,

securities exchanges) are allowed to charge investors for execution against protected quotations (“access fee caps”). The amendments will also address the lack of transparency around the cost of a transaction at the time of a trade execution by requiring exchange fees and rebates to be determinable at the time of the execution.

The amendments will benefit investors and market participants by: (i) providing for access fee caps that accommodate the change in tick sizes; (ii) providing quotations that are more accurate and reflective of market forces; (iii) mitigating potential conflicts of interest between broker-dealers and their customers, where a broker-dealer is incentivized to route to the exchange offering the most favorable fees or rebates, which can lead to potentially worse execution quality for customers; (iv) reducing the complexity associated with the fees and rebates models; and (v) increasing the transparency of transaction fees and rebates.

•

Improve Transparency to Investors about Better Priced Orders.

The amendments will increase price transparency by accelerating the implementation of previously adopted definitions of “round lot” and “odd-lot information” and by adding a data element for the best odd-lot orders to buy and sell (“BOLO”) to the definition of “odd-lot information.”

These amendments will improve information available to investors and other market participants about better priced orders in smaller sizes that are available in the market.

In 1975, Congress explicitly granted the Commission “broad authority to oversee the implementation, operation, and regulation of the national market system” and the “clear responsibility to assure that the system develops and operates in accordance with Congressionally determined goals and objectives.”

The 1975 Amendments and section 11A of the Exchange Act set forth Congress's findings regarding the nation's securities markets and direct the Commission to facilitate the establishment of a national market system in accordance with specified Congressional findings and objectives.

Senate Report on Securities Act Amendments of 1975, S. Rep. No. 94-75 at 8-9.

In particular, Congress found that it is in the public interest and appropriate for the protection of investors and maintenance of fair and orderly markets to assure five objectives: (1) economically efficient execution of transactions; (2) fair competition among brokers and dealers and among exchange markets, and between markets other than exchange markets; (3) the availability to brokers, dealers and investors of information with respect to quotations for and transactions in securities; (4) the practicability of brokers executing investors' orders in the best market; and (5) an opportunity, consistent with items (1) and (4), for investors' orders to be executed without the participation of a dealer.

See

15 U.S.C. 78k-1(a)(1)(C). Congress also found that new data processing and communications techniques could create the opportunity for more efficient and effective market operations, and that “[t]he linking of all markets for qualified securities through communication and data processing facilities will foster efficiency, enhance competition, increase the information available to brokers, dealers, and investors, facilitate the offsetting of investors' orders and contribute to the best execution of such orders.”

See

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

Since 1975, the Commission has regulated the national market system, adhering to the objectives of efficient, competitive, fair, and orderly markets that are in the public interest and protect investors, which are essential to meeting the investment needs of the public and reducing the cost of capital for listed companies.

The national market system is premised on promoting fair competition among markets, while at the same time assuring that all of these markets are linked together, through facilities and rules, in a unified system that promotes interaction among the orders of buyers and sellers in a particular NMS stock.

See

Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37497 (June 29, 2005) (“Regulation NMS Adopting Release”). In the nearly fifty years since the enactment of section 11A, the Commission has monitored the national market system and its operation and has periodically reviewed certain of its rules to address issues that have arisen in the markets with the goal of ensuring that the regulatory framework continues to fulfill the goals of section 11A. In each such case, the Commission has been guided by the objectives embodied in section 11A. The Commission also formed the Equity Market Structure Advisory Committee (“EMSAC”) in 2015 to provide diverse perspectives on the structure and operations of the U.S. equities markets, as well as advice and recommendations on matters related to equity market structure. The archives of these meetings are

available at https://www.sec.gov/spotlight/emsac/emsac-archives.htm

(“EMSAC Archives”).

See

Regulation NMS Adopting Release,

supra

note 4, at 37498. “NMS stock” is defined under Regulation NMS as any NMS security other than an option. 17 CFR 242.600(b)(65). An “NMS security” is defined as any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. 17 CFR 242.600(b)(64).

In 2005, the Commission adopted Regulation NMS to modernize and strengthen the regulatory structure of U.S. equity markets, including requirements pursuant to which quotations and orders for NMS stocks, and the markets on which they trade, can compete. These requirements support the public interest and the protection of investors and help to ensure fair and orderly markets for the execution of orders in NMS stocks. Among other things, Regulation NMS provides explicit requirements for the tick sizes of quotations and orders,

the means for market participants to access quotations in the national market system, including a cap on the highest permitted level of fees a trading center may charge for access to the best quotations of a trading center,

and how information about quotations and trades is made widely available to investors, among others.

See

Rule 612 of Regulation NMS; 17 CFR 242.612.

See

Rule 610 of Regulation NMS; 17 CFR 242.610.

See

Rules 601, 602, and 603 of Regulation NMS; 17 CFR 242.601, 17 CFR 242.602, 17 CFR 242.603.

Nearly two decades later, the technology and economics of trading have evolved significantly. Transaction volume in listed equities doubled in the last five years and tripled in the last seventeen.

Electronic trading now dominates equity markets, with latency measured in microseconds. These changes call for improvements to assure an efficient and transparent price discovery process, in order to continue to fulfill Congress's directive and advance the objectives of investor protection and the maintenance of fair and orderly markets. However, some parts of Regulation NMS have not been revised since their 2005 adoption. Thus, the Commission is adopting the below described amendments to certain rules under Regulation NMS.

The following

subsections provide an overview of the amendments and the rationales for each.

See

Cboe, “Historical Market Volume Data,”

available at https://www.cboe.com/us/equities/market_statistics/historical_market_volume/

The Commission has amended several aspects of Regulation NMS to address and reflect changes in the markets since its adoption. For example, in 2018, the Commission adopted new order handling disclosure requirements in Rule 606 in response to changes in equity market structure and order handling and routing practices.

See

Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018). In 2020, the Commission adopted rules to update the national market system for the collection, consolidation, and dissemination of equity market data in the national market system to keep pace with technological developments concerning the use of market data.

See

Securities

Exchange Act Release No. 90610 (Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (“MDI Adopting Release”). More recently, responding to changes in market conditions caused by technological advancements and the increased participation of individual investors in the equity markets, the Commission adopted amendments to Rule 605 under Regulation NMS to update the disclosure of order execution quality statistics reports.

See

Securities Exchange Act Release No. 99679 (Mar. 6, 2024), 89 FR 26428, 26429 (Apr. 15, 2024) (“Rule 605 Amendments”) (adopting amendments to rule 605 under Regulation NMS to update reports on execution quality).

See generally

Securities Exchange Act Release No. 96494 (Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022) (“Proposing Release” or “Regulation NMS Proposal”).

A. Rule 612 Minimum Pricing Increments

1. Background

One way that investors can buy or sell a stock is through the use of limit orders, which are a type of order that specifies the price (“limit price”) at which the investor is willing to buy or sell a security.

Limit orders serve a critical market function by helping to set prices at which market participants are willing to trade, revealing the supply and demand for a security, and providing liquidity to the market. As such, limit orders play a key role in price discovery and allow investors to participate in the price-setting process.

Whether a limit order can be executed immediately depends on the limit price in relation to the current market price. For example, a buy order with a limit price of $10.00 means the investor would like to buy as soon as possible, but only when the current market price is at $10.00 or less. By contrast, a “market order” is a type of order by which the investor specifies that it wishes to buy or sell a security at the current market price, regardless of what the market price is.

See generally,

Securities Exchange Act Release No. 96495 (Dec. 14, 2022), 88 FR 128, 132-33 (Jan. 3, 2023); Regulation NMS Adopting Release,

supra

note 4, at 37505 n.53.

Limit orders may be “marketable” meaning that its specified price allows an immediate execution because it matches a contra-side order, or they may be “non-marketable” meaning that its specified price does not allow for an immediate execution and therefore it must wait until a contra-side order comes in to trade with it. Non-marketable limit orders that are submitted to an exchange are placed on the order book and, if displayable, the price and size will be displayed in the national market system if it is the best priced order to buy or sell for such exchange. The Commission has recognized displayed limit orders as “a critically important element of efficient price discovery.”

See

Regulation NMS Adopting Release,

supra

note 4, at 37517.

Recognizing the value of limit orders, the Commission adopted Rule 612 under Regulation NMS, which requires that the prices of quotations and orders in the national market system be reflected in a specified minimum pricing increment, also known as the “tick size.” Rule 612 required, for quotations and orders of NMS stocks priced at or greater than $1.00 per share, the minimum pricing increment to be $0.01.

As a result, subject to certain exceptions,

the quotations and orders of such NMS stocks are priced in penny increments: $10.00, $10.01, $10.02, for example.

See

preexisting 17 CFR 242.612(a). For quotations and orders of NMS stocks priced less than $1.00 per share, Rule 612 required the minimum pricing increment to be $0.0001.

See

preexisting 17 CFR 242.612(b). However, most exchanges require stocks listed on their exchanges to maintain a price greater than $1.00 per share, and consequently $0.01 is the prevailing tick size for most quotes and orders for NMS stocks.

See infra

section VII.C.1.a.

See infra

section VII.C.1.a. (discussing retail programs).

The Commission adopted Rule 612 and minimum pricing increments to address the concern that a market participant could gain priority over existing limit orders by posting an economically insignificant price improvement.

For example, consider a market participant that posts a limit order to buy an NMS stock at $10.00 per share. Without minimum pricing increments, a second market participant could “step ahead” (also known as “pennying”) of the first market participant by posting a bid to buy at a price that is higher by an infinitesimally small amount, such as $10.000001.

This behavior disincentivizes market participants from posting a limit order in the first place because another market participant could always gain priority over that first price by posting a limit order that is better by an economically insignificant amount.

This may lead to a decline in limit orders, harm liquidity, and make it more costly to trade.

This hypothetical scenario illustrates the need for a minimum pricing increment that is not too small.

When Rule 612 was adopted, the Commission stated that “[g]reater use of limit orders will increase price discovery and market depth and liquidity” and that “if orders lose execution priority because competing orders step ahead for an economically insignificant amount, liquidity could diminish.”

See

Regulation NMS Adopting Release,

supra

note 4, at 37505, 37553. The Commission was concerned that stepping ahead of displayed limit orders by insignificant amounts would deter the submission and display of limit orders, which would negatively impact price discovery and market depth and liquidity.

See id.

at 37553.

See also

infra

section VII.A (discussing the importance of minimum pricing increments).

But with the minimum pricing increment of a penny, that same market participant would be required to post a bid of $10.01 instead.

See infra

sections VII.A, VII.B.2, and VII.D.1.

See infra

sections VII.A, VII.B.2, and VII.D.1.b.i for additional analysis of pennying.

Too big of a minimum pricing increment is also problematic since it would reduce the quality of price discovery by precluding price competition for providing liquidity.

More specifically, too large a tick size can increase transaction costs for investors by artificially widening the “bid-ask spread”—the difference between the bid (highest price a buyer is willing to pay) and the ask (the lowest price a seller is willing to accept) prices.

For example, consider a hypothetical scenario where a liquidity provider is willing to bid $10.121 to buy a stock and offer $10.124 to sell the stock. If the tick size were $0.005, the resulting bid and offer from this liquidity provider would be $10.120 and $10.125, respectively, with a spread of $0.005. If the tick size were $0.01, the corresponding bid and offer would be $10.120 and $10.130, with a spread of $0.01.

In other words, but for the requirement under Rule 612 that sets the tick size to be $0.01 for quotes and orders in NMS stocks priced at or above $1.00, a smaller tick size would have narrowed spreads in some instances and allowed prices to better reflect the underlying economics for certain NMS stocks. As explained below, up to 74.3% of the share volume transacted in NMS stocks in 2023 may have bid-ask spreads that are constrained by the current minimum pricing increments.

These widened bid-ask spreads increase transaction costs for investors.

Conversely, a smaller tick size that allows for narrower bid-ask spreads would benefit investors by reducing transaction costs.

See infra

section VII.B.2.

See infra

section VII.B.2;

see also

17 CFR 242.600(b)(16).

See infra

section VII.B.2 (providing a similar example showing how a minimum pricing increment could double the width of a bid-ask spread).

See infra

section VII.C.1.b (discussing percentage of share volume likely to be tick-constrained).

See also

infra

section VII.B.2 (discussing the definition of “tick-constrained”).

See infra

section VII.B.2.

See infra

section VII.B.2.

The minimum pricing increments in Rule 612 were adopted in 2005, when the Commission adopted Regulation NMS, and it was an adjustment in a long series of adjustments to the minimum pricing increments over time. For many decades, the U.S. equity markets used fractions of a dollar as minimum pricing increments (

e.g.,

1/8

1/16

, and

1/32

of a dollar).

Prior to 1997, the minimum

pricing increment on the New York Stock Exchange LLC (“NYSE”) for stocks above $1.00 per share was

1/8

of a dollar (or 12.5 cents).

In 1997, NYSE and the Nasdaq Stock Market LLC (“Nasdaq”) revised their rules to use the minimum pricing increment of 1/16 of a dollar (6.25 cents).

In January 2000, the Commission mandated decimal pricing (

i.e.,

moving from fractional increments to penny increments) in certain securities,

and by April 2001, the market had fully converted to decimal pricing.

See

Staff Report to Congress on Decimalization, Commission (July 2012) (“Staff Decimalization Report”),

available at

https://www.sec.gov/files/decimalization-072012.pdf

, at 4. Staff reports, Investor Bulletins, and other staff documents (included those cited herein) represent the views of Commission staff and are not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved the content of these staff documents, and, like all staff documents, they have no legal force or effect, do not alter or

amend the applicable law, and create no new or additional obligations for any person.

See

Self-Regulatory Organizations; New York Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to Trading Differentials for Equity Securities, 62 FR 42847, 42848 n.5 (Aug. 8, 1997).

See also

Division of Market Regulation, Market 2000: An Examination of Current Equity Market Developments (1994),

available at

https://www.sec.gov/divisions/marketreg/market2000.pdf

, at 37-38, fn. 43 (describing NYSE's tick size of

1/8

of a dollar in 1994).

See

Staff Decimalization Report,

supra

note 26, at 4-5.

See

Securities Exchange Act Release No. 42360 (Jan. 28, 2000), 65 FR 5003 (Feb. 2, 2000).

See

Staff Decimalization Report,

supra

note 26, at 5-6.

Up to this point, minimum pricing increments for NMS stocks were set by the individual trading venues. But in 2004, as part of Regulation NMS and pursuant to the authority under the 1975 Amendments, the Commission proposed Rule 612 to implement market-wide uniform minimum pricing increments for quoting in NMS stocks.

The Commission stated that, while the benefits of decimal pricing had justified the costs, there was a potential for costs to investors and the markets to surpass the benefits if the minimum pricing increment decreased beyond a certain level, and the proposed rule was designed to address the scenario where market participants attempt to step ahead of competing limit orders at the smallest economic increment possible.

Thus, the Commission adopted Rule 612 in 2005, which established the minimum pricing increments of $0.01 for quotations and orders of NMS stocks priced at, or greater than, $1.00 per share, and $0.0001 for quotations and orders of NMS stocks priced under $1.00 per share. The Commission stated that, at the time, it did not believe that the potential benefits of marginally better prices offered by allowing sub-penny quoting in securities were likely to justify the costs of permitting such quotes.

See

Securities Exchange Act Release No. 49325 (Feb. 26, 2004), 69 FR 11126, 11171 (Mar. 9, 2004) (“2004 Regulation NMS Proposing Release”) (“the Commission is proposing a rule that would prohibit every national securities exchange, national securities association, ATS (including ECNs), vendor, broker or dealer from ranking, displaying, or accepting from any person a bid or offer, an order, or an indication of interest in any NMS stock in an increment less than $0.01.”).

See

Regulation NMS Adopting Release,

supra

note 4, at 37551-52 (citing 2004 Regulation NMS Proposing Release at 11165).

See

Regulation NMS Adopting Release,

supra

note 4, at 37553 (“Even assuming that quoting in sub-penny increments would reduce spreads, the Commission continues to believe, on balance, that the costs of sub-penny quoting are not justified by the benefits.”).

When the Commission adopted Rule 612 in 2005, it acknowledged that the markets could evolve over time and shift the balance of the costs and benefits of the adopted tick size.

Two decades later, the market has evolved considerably, and amendments to Rule 612 are necessary to continue to further the objectives of the Exchange Act. Data analysis shows that stocks with sufficiently narrow bid-ask spreads would trade better, namely it would be easier and less costly for investors to transact, if they were allowed to quote at increments smaller than one penny.

Indeed, for these stocks, the risks of “stepping ahead” are lowered while the benefits of greater price competition from relaxing the “tick constraint” are greater.

Id.

(“Nevertheless, the Commission acknowledges the possibility that the balance of costs and benefits could shift in a limited number of cases or as the markets continue to evolve.”).

See infra

section VII.D.1.

See infra

sections VII.B.2 and VII.D.1.b.

2. Proposed and Adopted Amendments

Accordingly, the Commission proposed amendments to Rule 612 to introduce three minimum pricing increments that were less than $0.01 (

i.e.,

$0.005, $0.002, $0.001) for quotes and orders priced $1.00 or more for certain NMS stocks based upon each stock's time weighted average quoted spread (“TWAQS”).

The proposed amendments would have assigned sub-penny minimum pricing increments to any NMS stock that had a TWAQS of $0.04 or less. This proposed amendment was designed to address the issues related to tick-constrained stocks described above that have arisen since 2005. The Commission also proposed to impose these minimum pricing increments for trades, subject to certain exceptions.

See

Proposing Release,

supra

note 11, at 80280.

As explained below, in response to commenters, the Commission is adopting modified amendments to Rule 612 to introduce one minimum pricing increment that is less than $0.01,

i.e.,

$0.005, for quotes and orders priced $1.00 or more for NMS stocks that have a TWAQS of $0.015 or less.

The Commission is not adopting a minimum pricing increment for trades.

See infra

section III.C.

See infra

section III.D.

B. Rule 610 Fees for Access to Quotations and Transparency of Fees

1. Background

Trading centers

can choose to charge an access fee, or pay a rebate, to the participants—liquidity providers (market participants with orders resting at the trading center) and liquidity takers (market participants who submit incoming orders to execute against orders resting at the trading center)—who trade at their venue. As discussed in section VII.C.2.b, the predominant exchange fee structure is maker-taker, in which an exchange charges a fee to liquidity takers and pays a rebate to liquidity providers, and the rebate is typically funded through the access fee.

17 CFR 242.600(b)(106) (providing a definition of the term “trading center”). This discussion focuses on exchange fees because, currently, exchanges are the only trading centers that have quotations that are subject to the access fee caps under Rule 610(c).

See infra

note 367.

See also

Proposing Release,

supra

note 11, at 80348 (stating “the access fee cap should not be greater than

1/2

of the tick size in order to preserve coherence between net and nominal price rankings of trading venues.”).

See infra

sections VII.B.3 and VII.C.2.

See infra

sections IV.D.1 and VII.B.3.

See also

Regulation NMS Adopting Release,

supra

note 4, at 37545 (“For quotations to be fair and useful, there must be some limit on the extent to which the true price for those who access quotations can vary from the displayed price.”).

First, the actual prices, inclusive of fees and rebates, for investors and other market participants to trade a stock are not fully transparent. In general, the higher the permitted level of access fees, the higher the rebates, and the greater the potential discrepancy between displayed quoted prices on the one hand, and actual prices on the other.

See infra

sections IV.B.2, VII.D.2, and VII.E.1. In certain cases, the disparity between market quotations and actual transaction costs may be substantial.

See, e.g.,

Proposing Release,

supra

note 11, at 80328.

Furthermore, exchanges' use of fees and rebates creates a potential conflict of interest between broker-dealers and their customers with respect to broker-dealer order routing, by providing incentives for a broker-dealer to route customer orders to certain exchanges to receive higher rebates or avoid higher fees based on their own economic interest.

This potential conflict of interest is exacerbated if broker-dealers do not fully pass on the fees and rebate to their customers, since rebate-seeking by broker-dealers may come at the cost of execution quality of customers.

In addition, exchanges use complex fee schedules. Generally, the higher the access fee cap, the wider the range of possible fees and rebates, which results in more complex pricing schedules. Such complexity makes it more costly for market participants to design and implement order execution strategies.

See infra

sections IV.B.2, IV.D and VII.D.3.

See

text accompanying

infra

note 1518.

Finally, exchanges' fee and rebate schedules are typically calculated at month's end, which requires market participants to make trading decisions without the ability to determine their full trading costs at the time of execution.

In turn, this lack of transparency impedes a market participant's ability to evaluate fully where to send its orders because the market participant cannot calculate the fees and rebates that will apply to the order contemporaneous with execution.

Concerns with such lack of price transparency are exacerbated when various exchanges have different fee schedules, as it is difficult for market participants to compare net prices across markets.

See infra

sections IV.E, VII.C.2, and VII.D.3.

See infra

sections IV.E, VII.C.2, and VII.D.3.

2. Proposed and Adopted Amendments

Accordingly, the Commission proposed to amend Rule 610 in two ways. First, to accommodate the proposed smaller minimum pricing increments under proposed Rule 612, as well as to address the distortions that have developed under the access fee caps, the Commission proposed to reduce Rule 610(c)'s 30 mil cap for executions against protected quotations priced $1.00 or more as follows: a $0.001 (or 10 mils) access fee cap for NMS stocks that would have been assigned a minimum pricing increment larger than $0.001; and a $0.0005 (or 5 mils) access fee cap for NMS stocks that would have been assigned a $0.001 minimum pricing increment. For protected quotations in NMS stocks priced under $1.00 per share, the Commission proposed to reduce the 0.3% fee cap to 0.05% of the quotation price.

As discussed in detail below, in response to comments, the Commission is adopting amendments to Rule 610(c) with modifications from the proposal. Specifically, in light of the amendments to Rule 612, the Commission is adopting only the proposed 10 mil per share access fee cap for all protected quotations priced $1.00 or more.

For protected quotations priced less than $1.00, the Commission is adopting an access fee cap of 0.1% of the quotation price per share.

As discussed in section VII.D.2.b, the adopted amendments to the access fee caps will not impede the ability of exchanges to fund their execution services.

See infra

section IV.D.

See id.

Second, to facilitate the ability of market participants to understand and calculate the total price of transactions at the time of execution, the Commission proposed an amendment to Rule 610 to add subpart (d) to require that all exchange fees charged, and rebates paid, for the execution of an order in an NMS stock be determinable at the time of execution. As discussed in detail below, the Commission is adopting Rule 610(d) as proposed.

C. Transparency of Better Priced Orders

1. Background

The widespread availability of timely information with respect to quotations for and transactions in NMS stocks (“NMS information”) is critical to the ability of market participants to participate effectively in the U.S. securities markets.

NMS information is currently disseminated within the national market system by the exclusive plan processors (“exclusive securities information processors” or “SIPs”).

NMS information is made widely available to investors through the national market system and “serves an essential linkage function by helping to assure that the public is aware of the best displayed prices for a stock, no matter where they may arise in the national market system.”

See

Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) (“Concept Release on Equity Market Structure”) at 3600. The availability of NMS information also “enables investors to monitor the prices at which their orders are executed and assess whether their orders received best execution.”

Id.

There are three effective national market system plans that govern the collection, consolidation, processing and dissemination of quotation and transaction information for NMS stocks: the Consolidated Tape Association Plan (“CTA Plan”); the Consolidated Quotation Plan (“CQ Plan”); and the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis (“UTP Plan”) (together the “Equity Data Plans”). Currently, the Securities Industry Automation Corporation (“SIAC,” an affiliate of the NYSE) is the exclusive SIP for the CTA and CQ Plans, and Nasdaq is the exclusive SIP

for the UTP Plan.

See

MDI Adopting Release,

supra

note 10, at 18728. Each exclusive SIP is the plan processor for one of the Equity Data Plans.

In 2020, the Commission adopted amendments to Regulation NMS to modernize the NMS information provided within the national market system for the benefit of market participants and to better achieve section 11A's goals of assuring “the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities that is prompt, accurate, reliable, and fair” (“MDI Rules”).

In light of delays in the implementation of the MDI Rules, the Commission is accelerating the implementation of the round lot and odd-lot information definitions adopted as part of the MDI Rules so that investors will benefit sooner from greater transparency and accessibility of better priced orders

and improved ability to assess the execution quality of their orders, as explained below.

See

MDI Adopting Release,

supra

note 10.

“Better priced orders” refers to orders that are priced superior to the national best bid and national best offer but are not included in NMS information because they consist of too few shares.

See infra

notes 66-68 and accompanying text. The MDI Rules' round lot and odd-lot information definitions will allow better priced orders to be included in NMS information so that market participants that subscribe to the exclusive SIP feeds (that otherwise would not be able to view these orders without purchasing exchange proprietary feeds) will be able to view and access these orders.

See infra

sections V.C.1.a and VII.D.4.

Until the full implementation of the MDI Rules, NMS information disseminated within the national market system by the exclusive SIPs includes, for each NMS stock, the price, size, and exchange of each last sale, each exchange's current highest bid and lowest offer and the shares available at those prices (the best bid and best offer or “BBO”), the national best bid and national best offer (“NBBO”), odd-lot

transaction information, and certain regulatory and administrative data (“SIP data”).

Information on NMS stock quotations is provided in round lots, and, until the round lot definition adopted in the MDI Rules is implemented, round lots are defined in rules of the exchanges.

For most NMS stocks, exchange rules define a round lot as 100 shares.

Market participants interested in quotation data for orders that have a size less than a round lot,

i.e.,

odd-lots, must purchase individual exchange proprietary feeds.

This odd-lot order information is highly relevant to market participants, including for investors who trade small numbers of shares.

Odd-lot is defined in Rule 600(b)(68) as an order for the purchase or sale of an NMS stock in an amount less than a round lot. 17 CFR 242.600(b)(68).

See

Proposing Release,

supra

note 11, at 80294. Under the decentralized consolidation model established by the MDI Rules, NMS information will consist of “consolidated market data,” as defined in the MDI Rules. 17 CFR 242.600(b)(24).

See

Proposing Release,

supra

note 11, at 80294 n.328. A “round lot” is not defined in the Exchange Act and, prior to the MDI Rules, it was not defined in Regulation NMS. Exchange rules typically define a round lot as 100 shares, but they also allow the exchange, or the primary listing exchange for the stock, discretion to define it otherwise.

See, e.g.,

NYSE Rule 7.5 (“A `round lot' is 100 shares, unless specified by the primary listing market to be fewer than 100 shares.”).

According to NYSE Trade and Quote (“TAQ”) Data, as of Nov. 28, 2023, 11 NMS stocks have a round lot size other than 100. Nine NMS stocks have a round lot size of 10 and two NMS stocks have a round lot size of one share.

See

Proposing Release,

supra

note 11, at 80294; MDI Adopting Release,

supra

note 10, at 18599.

The MDI Rules expanded the NMS information that will be made available for dissemination within the national market system in order to increase transparency about better prices available in the market.

The Commission, in the MDI Rules, amended Regulation NMS to include a definition of “round lot” that assigns each NMS stock to a round lot size based on the stock's average closing price. The round lot definition, once implemented, will increase transparency about smaller sized orders in higher priced stocks by assigning NMS stocks priced over $250 to round lot sizes that are less than the predominant 100 shares.

The Commission also adopted a definition of odd-lot information as part of the MDI Rules.

Once implemented, information regarding the prices and sizes of odd-lot orders priced better than the NBBO will be made available within the national market system and is expected to be made widely available to investors.

See

Proposing Release,

supra

note 11, at 80270.

17 CFR 242.600(b)(93). In the MDI Adopting Release, the Commission stated that “[d]efining smaller-sized orders in higher-priced stocks as round lots, in addition to providing transparency into such quotations, ensures that these smaller-sized orders can establish the [national best bid and national best offer], receive order protection, and invoke the applicability of several other rules under Regulation NMS.”

See

MDI Adopting Release,

supra

note 10, at 18613.

Preexisting 17 CFR 242.600(b)(69). “Odd-lot information” is defined as (1) odd-lot transactions, and (2) odd-lots at a price greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association.

Id.

The Commission stated that the inclusion of this odd-lot quotation information would allow market participants “to trade in a more informed and effective manner,” and that “the new definition of round lot and the increased availability of better priced odd-lot information will provide investors with valuable information about the best prices available and help to facilitate more informed order routing decisions and the best execution of investor orders.”

See

MDI Adopting Release,

supra

note 10, at 18602 and 18613. Unlike orders in the round lot sizes adopted pursuant to the MDI Rules, odd-lots are not “protected quotations.”

See

17 CFR 242.600(b)(16), (81), (82).

For the reasons explained in the MDI Adopting Release, the MDI Rules sequenced the implementation of these definitions in the later stages of the implementation schedule.

The implementation of the MDI Rules began with the filing of amendments to the effective national market system plan(s) as required under Rule 614(e) (“MDI Plan Amendments”).

The Operating Committees of the CTA/CQ Plan and UTP Plan

filed the proposed MDI Plan Amendments on November 5, 2021,

which the Commission disapproved.

As a result, the participants to the effective national market system plan(s) will need to develop and file new proposed amendments pursuant to Rule 608.

See

MDI Adopting Release,

supra

note 10, at 18698. Pursuant to the implementation schedule of the MDI Rules, the round lot definition was set to be implemented as part of the last phase and odd-lot quotation information was set to be implemented during a “parallel operation period.”

See id.

at 18700-01. As originally adopted, during the parallel operation period, the exclusive SIPs would have continued to disseminate the data that they currently disseminate and competing consolidators would have been permitted to offer consolidated market data products, including odd-lot information. Because the round lot definition would have been implemented during a later phase, the exclusive SIPs and competing consolidators would have collected, consolidated and disseminated NMS information based on then current exchange definitions of round lot.

Id.

at 18699-18701.

17 CFR 242.614(e). The Commission's approval of amendments to the effective national market system plan(s) filed pursuant to rule 614(e) will be the starting point for the rest of the MDI Rules implementation schedule, which includes a 180-day development period, during which competing consolidators can register with the Commission, and ends with the cessation of the operations of the exclusive SIPs and testing and implementation of the changes necessary to implement the round lot definition.

See

MDI Adopting Release,

supra

note 10, at 18699-701; Proposing Release,

supra

note 11, at 80295.

See supra

note 60.

See

Securities Exchange Act Release Nos. 93615 (Nov. 19, 2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov. 19, 2021), 86 FR 67517 (Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR 67541 (Nov. 26, 2021); 93618 (Nov. 19, 2021), 86 FR 67562 (Nov. 26, 2021).

See

Securities Exchange Act Release Nos. 95848 (Sept. 21, 2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 21, 2022), 87 FR 58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept. 27, 2022); 95851 (Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022).

On Sept. 1, 2023, the Commission ordered the exchanges and the Financial Industry Regulatory Authority, Inc. (“FINRA”) to file a new single national market system plan regarding consolidated equity market data.

See

Securities Exchange Act Release No. 98271, 88 FR 61630 (Sept. 7, 2023). On Jan. 19, 2024, the Commission published notice of filing of a National Market System Plan for

Consolidated Equity Market Data.

See

Securities Exchange Act Release No. 99403, 89 FR 5002 (Jan. 25, 2024). On April 23, 2024, the Commission instituted proceedings pursuant to Rule 608(b)(2)(i) of Regulation NMS to determine whether to approve or disapprove the proposed plan or to approve the proposed plan with any changes or subject to any conditions the Commission deems necessary or appropriate after considering public comment.

See

Securities Exchange Act Release No. 100017, 89 FR 33412 (Apr. 29, 2024). On July 11, 2024, the Commission extended the period within which to conclude proceedings regarding the proposed plan to 240 days from the date of publication of the notice.

See

Securities Exchange Act Release No. 100500 (Jul. 11, 2024), 89 FR 58235 (Jul. 17, 2024).

2. Proposed and Adopted Amendments

In light of the delays in the implementation of the MDI Rules, the Commission proposed to accelerate the implementation of the round lot and odd-lot information definitions, to allow investors to benefit sooner from greater transparency and accessibility of better priced orders and improved execution quality.

As discussed further below, the Commission is accelerating the implementation of the round lot and odd-lot information definitions but is providing the industry with more time to make the necessary systems changes to implement these definitions than what was proposed.

See

Proposing Release,

supra

note 11, at 80299;

See also

Proposing Release,

supra

note 11, at 80272 (discussing considerations of minimum pricing increments since Rule 612 was adopted) and 80287 (discussing considerations of access fee caps since Rule 610 was adopted).

See also

IEX Letter I at 5 (describing steps taken by the Commission since the adoption of Regulation NMS in 2005 to review the impact of Regulation NMS, including the solicitation of input from stakeholders, further stating, “[t]he history shows that the Commission's current Proposals do not arise in a vacuum. In fact, the Commission has deliberately considered the views of multiple stakeholders over years of review, and its current Proposals grow out of and build on that ongoing review.”).

The Commission received several comments that addressed the interaction between the different individual proposed rule amendments that made up the Regulation NMS Proposal. One commenter stated that adopting the proposed changes to the minimum pricing increments in proposed Rule 612 along with the proposed acceleration of the round lot definition and the proposed access fee caps in Rule 610 “would impact the value of providing liquidity on public markets and consequently would raise costs for

investors,” and urged the Commission to review how these changes would together impact liquidity.

The Commission has considered the impact of the amendments on liquidity and does not believe that they will raise costs for investors.

On the contrary, as discussed further below, the amendments will enhance the ability of market participants to price their orders in a competitive manner, reduce the amount of fees for accessing protected quotations, help to ensure that exchange fees are knowable when an order is placed and provide transparency about orders in the market that are priced better than the NBBO. These changes will enhance the operation of the national market system and provide significant benefits to investors.

See

Letter from Naureen Hassan, President, UBS Americas, Robert Karofsky, President, UBS Investment Bank, and Suni Harford, President, UBS Asset Management, dated Mar. 31, 2023 (“UBS Letter”) at 10.

See infra

section V.B.3.b.i and section VII.D.4.a for discussions of the interaction between the round lot definition and the proposed changes to the minimum pricing increments.

See infra

section VII.D.4.a (explaining that the interaction of the reduction in tick size and the MDI Rules' round lot definition would not have a material impact on the NBBO for affected stocks as such stocks would be exceptionally liquid, which should protect their NBBO from material deterioration).

Another commenter stated that the Regulation NMS Proposal would increase “market data costs” because retail brokers would have to take in and store an increased amount of market data to comply with the changing minimum pricing increments, the MDI Rules' round lot definition, and the odd-lot information requirements and to update their systems accordingly, and because the exclusive SIPs may cause third-party data vendors to require additional hardware to support higher message rates.

As discussed below,

the Commission is adopting amendments to the minimum pricing increments with modifications from the proposal, which will lessen the potential costs identified by the commenter. Specifically, the Commission is adopting one minimum pricing increment for a smaller universe of NMS stocks than was proposed and is reducing the frequency of minimum pricing increment updates from a quarterly to a semiannual basis.

While this additional minimum pricing increment will likely require market participants to incur new technology costs to manage the new data, fewer changes are being adopted than were proposed and these changes are necessary and justified to address the issues related to constraints that have developed with the $0.01 minimum pricing increment.

Further, the costs related to implementing the round lot definition were considered as part of the MDI Rules and the acceleration of the timing of implementation does not increase those costs. Although the Commission is modifying the round lot definition from the definition adopted in the MDI Rules, the modifications will reduce ongoing round lot implementation costs because round lots will be assigned less frequently,

i.e.,

from a monthly basis to a semiannual basis, which means that systems will have to be updated less frequently. Synchronizing the dates of the changes to round lots and minimum pricing increments should also lower ongoing implementation costs for market participants by potentially decreasing the number of updates needed for their trading systems.

Finally, the costs related to implementing the odd-lot information definition were considered in the Proposing Release.

100

The adopted amendments, which will result in fewer systems changes than anticipated in the Proposing Release, will result in lower implementation costs than were contemplated in the proposal

101

and reduce the amount of data disseminated by the exclusive SIPs and any future competing consolidators as compared to what was contemplated in the Proposing Release.

See

Letter from Derrick Chan, Head of Equities, Fidelity Capital Markets, dated Mar. 31, 2023 (“Fidelity Letter”) at 17. The commenter described “market data costs” as those related to systems changes necessary to implement the new minimum pricing increments, round lot definition, and odd-lot information definition.

See infra

section III.C.

See infra

section III.C.7.a; section III.C.8; section VII.D.1.d and section VII.F.1.c.

See infra

section VII.A; section VII.D.1.c (responding to comments raising concerns about increased message traffic increasing costs and stating: “[t]he Commission recognizes the potential for these costs articulated by the commenters but, considering additional information provided by commenters, expects these effects to be mild—including the effect on CAT costs.”).

See infra

notes 1594-1595 and accompanying text.

100

See

Proposing Release,

supra

note 11, at 80334.

101

See infra

section VII.D.5.

One commenter stated that the implementation of various components of the Proposing Release at or around the same time (specifically access fees, minimum pricing increments and round lot sizes) could complicate the Commission's ability to assess the impact of a specific change and “whether other consequences will ensue.”

102

To the specific concerns of this commenter, the Commission has carefully considered the interacting effects of access fees, minimum pricing increments, and round lot sizes,

see

section VII. While the Commission acknowledges that staging amendments may make them easier to study, the nature of the adopted amendments will still make such study possible, even if implemented together. Namely, the set of stocks for which the tick size change applies tends to differ from the set of stocks for which round lot changes apply.

103

Access fee changes apply to some stocks that will not be directly affected by either round lot reform or tick size changes. Further, staging the amendments would delay the significant benefits of the amendments.

104

102

See

Letter from Rich Steiner, Head of Global Market Structure, RBC Capital Markets, dated Mar. 31, 2023 (“RBC Letter”) at 2.

See also

Letter from Nathaniel N. Evarts, Managing Director, Head of Trading, Americas, and Kimberly Russell, Market Structure Specialist, Global SPDR Business, State Street Global Advisors, dated Mar. 30, 2023 (“State Street Letter”) at 5 (suggesting that the amendments to reduce the access fee caps should be implemented before the minimum pricing increments to isolate the impact of the effects) and

infra

section VII.D.2.c (responding to the State Street Letter).

103

See infra

note 801 for analysis identifying only two stocks that would have qualified for both the tick reduction and a reduction in the round lot as of Nov. 30, 2023.

See also

infra

section VII.D.4.a for a discussion of the small overlap of the round lot definition and the tick size change.

104

See, infra,

section II. The Commission recognizes that delaying the rule would likewise delay costs to affected parties.

Several commenters suggested implementing the proposed accelerated implementation of the round lot and odd-lot information definitions so that the effects of these definitions could inform other proposed changes.

105

Other commenters suggested that round lots should be implemented before the proposed changes to the minimum pricing increments, so that data based on the MDI Rules' round lots could inform changes to the minimum pricing increments.

106

105

See, e.g.,

Letters from Jennifer W. Han, Executive Vice President, Chief Counsel & Head of Global Regulatory Affairs, Managed Funds Association, dated Mar. 30, 2023 (“MFA Letter”) at 14; Sarah A. Bessin, Deputy General Counsel, and Nhan Nguyen, Assistant General Counsel, Investment Company Institute, dated Mar. 31, 2023 (“ICI Letter I”) at 2, 7; Gerald O'Reilly, Co-CEO and Chief Investment Officer, and Ryan Wiley, Global Head of Equity Trading, Dimensional Fund Advisors LP, dated Mar. 31, 2023 (“Dimensional Letter”) at 2.

106

See

Letter from Hubert De Jesus, Managing Director, Global Head of Market Structure and Electronic Trading, and Samantha DeZur, Managing Director, Global Public Policy Group, BlackRock, Inc., dated Mar. 31, 2023 (“BlackRock Letter”) at 17; Dimensional Letter at 2.

While the dissemination of odd-lot information will result in the display of narrower spreads based on odd-lots, the calculation of the TWAQS for determining minimum pricing

increments is based on round lots.

107

Therefore, odd-lot information will not have an impact on determining minimum pricing increments under Rule 612. Further, for the reasons discussed below, the interaction of the reduction in tick size and the MDI Rules' round lot definition will likely not have a material impact on the NBBO of affected stocks since only the most exceptionally liquid stocks would have prices over $250 and a TWAQS equal to or less than $0.015.

108

Therefore, it is not necessary to postpone amending the minimum pricing increments until data is analyzed using the MDI Rules' round lots.

107

See infra

section III.C.7.b.

108

See infra

section V.B.3.b.i (identifying only two stocks—both highly liquid—that would have qualified for both a tick reduction and a reduction in the round lot as of Nov. 30, 2023).

In addition, the dissemination of odd-lot information in conjunction with the MDI Rules' round lot sizes will increase transparency about better priced orders and therefore should be implemented within a similar time frame.

109

Odd-lot information will be provided for all NMS stocks, not just those NMS stocks that may be assigned a smaller round lot. As discussed below, the number of NMS stocks that may be assigned a smaller round lot as of November 30, 2023 is 163 NMS stocks.

110

Therefore, while the MDI Rules' round lot sizes will provide transparency about some better priced orders in higher priced stocks, they will not enhance transparency about those orders that continue to be defined as odd-lots and will not increase transparency for NMS stocks priced at $250 or less. This transparency is important for investors as it will enhance their ability to assess the current pricing in the market for certain NMS stocks. Therefore, the odd-lot information definition and the round lot definition each represents important, but different information that will enhance the usefulness of quotation information.

109

See infra

section VII.D.4.

110

Id.

Some commenters recommended implementing the round lot definition but not the odd-lot information definition,

111

stating that implementing odd-lot information would be burdensome on the industry,

112

or would delay the implementation of the round lot definition by increasing the development work needed to be performed by the industry,

113

or that implementation of the odd-lot information definition “could lead investors to expect prices that are not available.”

114

For the reasons discussed above, the implementation of both of these definitions is important to enhancing transparency for investors. The Commission has provided more time for implementing these data elements to accommodate the systems changes that will be necessary, therefore lessening implementation and development burdens on the industry.

115

Further, as discussed below, market participants may decide to provide information to their customers about the changes that are being implemented, such as how to understand the different prices, and how the changes may impact their order entry requirements. Investor notification and education can help investors understand the operation and impact of these data elements.

116

111

See, e.g.,

Letters from Michael Blaugrund, Chief Operating Officer, NYSE, Jason Clague, Managing Director, Head of Operations, Charles Schwab & Co., and Joseph Mecane, Head of Execution Services, Citadel Securities, dated Mar. 6, 2023 (“NYSE, Schwab, and Citadel Letter”) at 2; Jason Clague, Managing Director, Head of Operations, Charles Schwab & Co., Inc., dated Mar. 31, 2023 (“Schwab Letter II”) at 6, 36; Ryan Kwiatkowski, Chairman of the Board, and James Toes, President & Chief Executive Officer, Security Traders Association, dated Apr. 3, 2023 (“STA Letter”) at 8; Adam Nunes, Hudson River Trading LLC, dated Mar. 31, 2023 (“Hudson River Letter”) at 2; Joanna Mallers, Secretary, FIA Principal Traders Group, dated Mar. 31, 2023 (“FIA PTG Letter II”) at 4-5; BlackRock Letter at 12.

See also

infra

section V.C.1.a. for a discussion of comments received on the accelerated implementation of the odd-lot information definition.

112

See

FIA PTG Letter II at 4-5; Hudson River Letter at 2.

113

See

FIA PTG Letter II at 4-5.

114

Schwab Letter II at 36.

115

See infra

section VI.C.

116

See infra

section V.B.3.a.

II. Equity Market Structure Initiatives and the Regulation NMS Proposal

In December 2022, the Commission issued three other proposals related to separate aspects of equity market structure and Regulation NMS.

117

A number of commenters provided comments on all four EMS Proposals jointly.

118

One commenter stated that adoption of the Rule 605 Proposal is not a prerequisite to adoption of the other equity market structure proposals.

119

However, some commenters stated that the Commission should consider an incremental approach and stagger the implementation of the four EMS Proposals because of the extent to which the proposed changes could impact the market and investors.

120

Some

commenters suggested implementing only some of the proposed equity market structure changes, such as the Rule 605 Amendments or portions of the Regulation NMS Proposal.

121

Some commenters stated that the Rule 605 Proposal should be implemented first and that data from the changes implemented in the Rule 605 Proposal should be analyzed to assess whether the changes proposed in the Regulation NMS Proposal should be made.

122

Some commenters stated that, in light of the Commission's approval of the amendments to rule 605, the Commission should defer or suspend action on the Regulation NMS Proposal (and the two remaining EMS Proposals) and re-evaluate whether to proceed after the amendments to rule 605 have been implemented and the data collected following implementation has been analyzed.

123

One commenter suggested implementing the round lot and odd-lot information definitions after implementation of the Rule 605 Proposal, and thereafter pausing to assess the impact of the changes on the markets.

124

117

See

Securities Exchange Act Release Nos. 96943 (Dec. 14, 2022), 88 FR 3786 (Jan. 20, 2023) (proposal to amend rule 605 of Regulation NMS) (“Rule 605 Proposal”); 96945 (Dec. 14, 2022), 88 FR 128 (Jan. 3, 2023) (proposal to adopt a new rule under Regulation NMS that would enhance competition for the execution of marketable orders of individual investors) (“OCR Proposal”); and 96946 (Dec. 14, 2022), 88 FR 5440 (Jan. 27, 2023) (proposal to establish Commission rule-based best execution standards) (“Best Execution Proposal”) (together, with the Proposing Release, the “EMS Proposals”). The Rule 605 Proposal was adopted on Mar. 6, 2024.

See

Rule 605 Amendments,

supra

note 10.

118

See, e.g.,

Letters from Thom Tillis, Bill Hagerty, Mike Crapo, Cynthia Lummis, and Kevin Cramer, United States Senate, dated Jan. 20, 2023 (“Tillis et al. Letter”); Ellen Greene, Managing Director, Equity and Options Market Structure, Securities Industry and Financial Markets Association, dated Feb. 8, 2023 (“SIFMA Letter I”); Joanna Mallers, Secretary, FIA Principal Traders Group, dated Feb. 15, 2023 (“FIA PTG Letter I”); Hope M. Jarkowski, General Counsel, NYSE Group, Inc., dated Mar. 13, 2023 (“NYSE Letter I”); John A. Zecca, Executive Vice President, Global Chief Legal, Risk & Regulatory Officer, Nasdaq, Inc., dated Mar. 30, 2023 (“Nasdaq Letter I”); Stephen John Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel Securities, dated Mar. 31, 2023 (“Citadel Letter I”); Adrian Griffiths, Head of Market Structure, MEMX LLC, dated Mar. 31, 2023 (“MEMX Letter”); Mehmet Kinak, Vice President and Global Head of Equity Trading, and Jonathan Siegel, Vice President and Managing Legal Counsel (Legislative & Regulatory Affairs), T. Rowe Price Associates, Inc., dated Mar. 31, 2023 (“T. Rowe Price Letter”); Bill Foster, French Hill, Henry Cuellar, Bill Huizenga, Wiley Nickel, Andy Barr, Ritchie Torres, Ann Wagner, Brittany Pettersen, Dan Meuser, Josh Gottheimer, Mike Flood, Vicente Gonzalez, Byron Donalds, Mike Quigley, Michael V. Lawler, David Scott, Andrew R. Garbarino, Gregory W. Meeks, Monica De La Cruz, Sean Casten, Scott Fitzgerald, Bradley S. Schneider, Erin Houchin, Jim Himes, Young Kim, Steven Horsford, Ralph Norman, Gwen Moore, Tom Emmer, Marc Veasey, and Zach Nunn, United States House of Representatives, dated Sept. 26, 2023 (“Foster et al. Letter”).

See also

Form Letter Type E, of which 14 comments were received, Form Letter Type F, of which 1,703 comments were received, and Form Letter Type G, of which 652 comments were received,

available

https://www.sec.gov/comments/s7-30-22/s73022.htm

119

See

Letter from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC, dated Oct. 13, 2023 (“IEX Letter III”) at 3-5 (explaining how adoption of the amendments to rule 605 should not delay adoption of the access fee cap and minimum increment amendments, and stating, “the premise that Rule 605 updates must be a precondition to any other changes looks more like a calculated stall than an argument for careful, reasoned decision making”).

120

See, e.g.,

T. Rowe Price Letter at 3; BlackRock Letter at 17; FIA PTG Letter II at 2; Dimensional Letter at 1, 3; State Street Letter at 1-2; Letters from Jameson Schriber, Managing Director, Goldman Sachs & Co. LLC, dated Mar. 31, 2023 (“Goldman Sachs Letter”) at 8-9; Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, dated Mar. 24, 2023 (“MMI Letter”) at 2; William Capuzzi, Chief Executive Officer, Apex Fintech Solutions, Inc., dated Mar. 31, 2023 (“Apex Letter”) at 14, 19; Michael Markunas, Deputy General Counsel, Chief Compliance Officer, B. Riley Securities, Inc., dated Mar. 31, 2023 (“B. Riley Letter”) at 1; Kristen Malinconico, Director, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce, dated Mar. 31, 2023 (“Chamber of Commerce Letter”) at 2; Ellen Greene, Managing Director, Equity and Options Market Structure, Securities Industry and Financial Markets Association, dated Mar. 31, 2023 (“SIFMA Letter II”) at 2, 22-23; William C. Thum, Managing Director and Assistant General Counsel, Securities Industry and Financial Markets Association Asset Management Group, dated Mar. 31, 2023 (“SIFMA AMG Letter I”) at 2; Peter D. Stutsman, Global Head of Equity Trading, and Timothy J. Stark, Head of Equity Markets and Transaction Research, The Capital Group

Companies, Inc., dated Mar. 31, 2023 (“Capital Group Letter”) at 2, 5; Ann Wagner, United States House of Representatives, dated Nov. 28, 2022 (“Wagner Letter”) at 2.

121

See, e.g.,

Letters from Stephen John Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel Securities, dated Mar. 31, 2023 (“Equity Market Structure Citadel Letter”) at 21; Ellen Greene, Managing Director, Equities & Options Market Structure, and Joseph Corcoran, Managing Director, Associate General Counsel, Securities Industry and Financial Markets Association, dated Aug. 24, 2023 (“SIFMA Letter III”) at 3; Steven M. Greenbaum, Senior Vice President, General Counsel, TradeStation Securities, Inc., dated Mar. 30, 2023 (“TradeStation Letter”) at 7; Gregory Davis, Managing Director and Chief Investment Officer, and Matthew Benchener, Managing Director, Personal Investor, The Vanguard Group, Inc., dated Mar. 31, 2023 (“Vanguard Letter”) at 2; Michael Camacho, Chief Executive Officer, Wealth Management Solutions, George C.W. Gatch, Chief Executive Officer, J.P. Morgan Asset Management, and Jason E. Sippel, Chief Executive Officer, J.P. Morgan Securities LLC, JPMorgan Chase & Co., dated Mar. 31, 2023 (“JPMorgan Letter”) at 2; Jiří Król, Deputy Chief Executive Officer, Global Head of Government Affairs, Alternative Investment Management Association, dated Mar. 31, 2023 (“AIMA Letter”) at 3; John L. Thornton, Co-Chair, Hal S. Scott, President, and R. Glenn Hubbard, Co-Chair, Committee on Capital Market Regulation, dated Mar. 31, 2023 (“CCMR Letter”) at 46; Douglas A. Cifu, Chief Executive Officer, Virtu Financial, Inc., dated Mar. 30, 2023 (“Virtu Letter II”) at 4; Andrew M. Saperstein, Co-President, Morgan Stanley, dated Mar. 31, 2023 (“Morgan Stanley Letter”) at 2-3, 6 and 7; Steve Quirk, Chief Brokerage Officer, Robinhood Markets, dated Mar. 31, 2023 (“Robinhood Letter”) at 46; MFA Letter at 14; FIA PTG Letter II at 2, 4, 7; NYSE Letter I at 10-11; SIFMA Letter II at 11, 23; State Street Letter at 3; Chamber of Commerce Letter at 1; STA Letter at 10-11; T. Rowe Price Letter at 3; Verret Letter I at 1, 5, 11; MMI Letter at 2-3; BlackRock Letter at 17; Capital Group Letter at 5; UBS Letter at 1-2; Foster et al. Letter at 1, 2; Fidelity Letter at 2, 5.

122

See, e.g.,

Letters from David Howson, Executive Vice President, Global President, Cboe Global Markets, Nathaniel N. Evarts, Managing Director, Head of Trading, Americas, State Street Global Advisors, Kimberly Russell, Market Structure Specialist, Global SPDR Business, State Street Global Advisors, Mehmet Kinak, Global Head of Equity Trading, T. Rowe Price, Todd Lopez, Americas Head of Execution Services, UBS Securities LLC, and Douglas A. Cifu, Chief Executive Officer, Virtu Financial Inc., dated Mar. 24, 2023 (“Cboe, State Street, et al. Letter”) at 1-2, 3; Michelle Bryan Oroschakoff, Managing Director, Chief Legal Officer, LPL Financial LLC, dated Mar. 31, 2023 (“LPL Financial Letter”) at 4; Schwab Letter II at 6, 37; UBS Letter at 1-2; Apex Letter at 14-15; MFA Letter at 6; SIFMA Letter II at 11, 22; SIFMA AMG Letter I at 2; T. Rowe Price Letter at 3; Vanguard Letter at 2, 7; JPMorgan Letter at 2; AIMA Letter at 3; CCMR Letter at 46; UBS Letter at 1-2, 10; Virtu Letter II at 4; Foster et al. Letter at 1, 2; Capital Group Letter at 5; Morgan Stanley Letter at 2, 6-7; Fidelity Letter at 2, 5, 27; Letter from Ann Wagner, Andrew R. Garbarino, Frank D. Lucas, Bill Huizenga, Tom Emmer, Dan Meuser, Zach Nunn, Pete Sessions, French Hill, Bryan Steil, Michael V. Lawler, Erin Houchin, United States House of Representatives, dated June 27, 2024 (“Wagner et al. Letter”). Some commenters suggested adopting only the Rule 605 Amendments and portions of the Regulation NMS Proposal and then evaluating the impact of those changes on the market.

See

Letter from Melanie Ringold, Head of Legal, Americas, and Will Geyer, Global Head of Capital Markets, Invesco Ltd., dated Mar. 31, 2023 (“Invesco Letter”) at 2, 5; Hudson River Letter at 1-2; TradeStation Letter at 7.

123

See, e.g.,

Letters from Barbara Comstock, Executive Director, American Consumer & Investor Institute, dated May 20, 2024 (“ACII Letter II”) at 1 and 3; Ellen Greene, Managing Director, Equities & Options Market Structure, SIFMA, and Joseph Corcoran, Managing Director, Associate General Counsel, SIFMA, dated 14, 2024 (“SIFMA Letter IV”); Ellen Greene, Managing Director, Equities & Options Market Structure, SIFMA, Joseph Corcoran, Managing Director and Associate General Counsel, SIFMA, William C. Thum, Managing Director and Associate General Counsel, dated Aug. 13, 2024 (“SIFMA AMG Letter II”) at 1-2; Thomas H. Merritt, Deputy General Counsel, Virtu Financial, Inc., dated June 21, 2024 (“Virtu Letter III”).

See also

Letters from Dan Meuser, Ann Wagner, Frank Lucas, Pete Sessions, Bill Huizenga, French Hill, Andrew Garbarino, Young Kim, Byron Donalds, Michael V. Lawler, Zach Nunn, United States House of Representatives, dated June 27, 2024 (“Meuser et al. Letter”) at 2; Michael V. Lawler, United States House of Representatives, dated July 9, 2024 (“Lawler Letter”) at 1; Wagner et al. Letter at 1-2.

124

See

State Street Letter at 3.

The Commission disagrees with comments urging delayed implementation of the Regulation NMS Proposal, either in its entirety or portions of it, as delaying these amendments will delay significant benefits for investors.

125

The amendments adopted in this release revise several provisions of Regulation NMS to benefit investors. The Commission is adopting amendments to Rule 612 that will benefit investors and other market participants by allowing certain NMS stocks to be priced in increments that are smaller than the preexisting rule allowed, which will lower transaction costs and introduce greater competition on price into the market. The adopted amendments to Rule 610 will lower costs for investors and other market participants by reducing the access fee caps and will help to address distortions in the market associated with the preexisting fee caps. Additionally, the amendments will require all exchange fees charged and rebates paid for the execution of an order to be determinable at the time of execution, allowing investors and other market participants the ability to know with certainty the costs of their transactions at the time of the trade and to allow investors to more readily request details about the fees and rebates applicable to their orders. Accelerating the implementation of the MDI Rules' round lot and odd-lot information definitions will provide investors and other market participants that use SIP data with transparency about better priced quotes and orders that are available in the market but only visible to subscribers of exchange proprietary data feeds sooner than originally planned. The amendments provide important investor benefits, which are discussed throughout. Therefore, the Commission is not delaying adopting the amendments.

125

See supra

notes 121-124 and accompanying text.

See also

Letters from Patrick McHenry, French Hill, Frank Lucas, Pete Sessions, Bill Posey, Blaine Luetkemeyer, Bill Huizenga, Ann Wagner, Andy Barr, Roger Williams, Tom Emmer, Barry Loudermilk, Alexander X. Mooney, Warren Davidson, John Rose, Bryan Steil, William Timmons, Ralph Norman, Dan Meuser, Scott Fitzgerald, Andrew R. Garbarino, Young Kim, Byron Donalds, Mike Flood, Michael V. Lawler, Zach Nunn, Monica De La Cruz, Erin Houchin, and Andy Ogles, United States House of Representatives, dated Sept. 26, 2023 (“McHenry et al. Letter”) at 2; Ronald C. Parker, President and CEO, National Association of Securities Professionals, dated Feb. 28, 2023 (“NASP Letter”) at 4; State Street Letter at 2.

136

See, e.g.,

SIFMA Letter I at 1; SIFMA Letter II at 3, 8-9, 11, 12-13; SIFMA AMG Letter I 4-5; GTS Letter at 4-5; Hudson River Letter at 1; UBS Letter at 2; NYSE, Schwab, and Citadel Letter at 1; Citadel Letter I at 2, 28-29; Schwab Letter II at 2-3, 37; Virtu Letter II at 5, 19-20, 31-35, 55-57; MMI Letter at 2; Nasdaq Letter I at 6-7; Invesco Letter at 2; Goldman Sachs Letter at 3; Robinhood Letter at 7, 22, 24, 42, 44; Apex Letter at 14, 15; McHenry et al. Letter at 1, 2; CCMR Letter at 46; Chamber of Commerce Letter at 3; Equity Market Structure Citadel Letter at 13-14; Letters from JJ Kinahan, President, Tastytrade, Inc., dated Mar. 30, 2023 (“Tastytrade Letter”) at 2; Jason Clague, Managing Director, Head of Operations, Charles Schwab & Co., dated Mar. 22, 2023 (“Schwab Letter I”) at 2; Eric J. Pan, President and CEO, and Susan Olson, General Counsel, Investment Company Institute, dated Aug. 17, 2023 (“ICI Letter II”) at 2-3, 7-9; Mary Lou H. Ivey, Chairman of the Boards and Independent Trustee, David J. Urban, Independent Trustee, and Theo H. Pitt, Jr., Independent Trustee, Independent Trustees of ETF Opportunities Trust and World Funds Trust, dated Mar. 31, 2023 (“Independent Trustees Letter”) at 1-2; Stephen John Berger, Managing Director, Global Head of Government & Regulatory Policy, Citadel Securities, dated Dec. 5, 2023 (“Citadel Letter II”) at 1, 10; Christopher A. Iacovella, President & Chief Executive Officer, American Securities Association, dated Mar. 31, 2023 (“ASA Letter”) at 2, 3; Seth A. Miller, President, Cambridge Investment Research, Inc. dated Mar. 31, 2023 (“Cambridge Letter”) at 3; Nicolas Morgan, Founder and President, Investor Choice Advocates Network, dated Mar. 31, 2023 (“ICAN Letter”) at 2; Rebekah Goshorn Jurata, General Counsel, American Investment Council, dated Aug. 8, 2023 (“AIC Letter”) at 2, 5, 10; James Angel, Associate Professor of Finance, Georgetown University, dated Mar. 31, 2023 (“Angel Letter”) at 2;

see also

Letter from Jonathan Kanter, Assistant Attorney General, Doha Mekki, Principal Deputy Assistant Attorney General, Maggie Goodlander, Deputy Assistant Attorney General, David Lawrence, Policy Director, Karina Lubell, Chief, Competition Policy & Advocacy Section, Ihan Kim, Attorney Advisor, Competition Policy & Advocacy Section, and Owen M. Kendler, Chief, Financial Services, Fintech & Banking Section, United States Department of Justice, dated Apr. 11, 2023 (“DOJ Letter”) at 6.

137

See

McHenry et al. Letter at 2.

As discussed below in the economic analysis, the Commission uses as a baseline the world as it exists at the time of adoption, including adopted rules but not proposed rules.

138

Each release, like this release and the Rule 605 Amendments (which were adopted prior to the amendments in this release), explains fully the rationale for the particular rulemaking and includes a robust economic analysis of the rules being adopted, including the possible economic effects that commenters raised with regard to specific interactions between the amendments and the Rule. In addition, comments on how the adoption of the amendments should affect the timing or sequence of the other EMS Proposals will be considered if and when those rules are adopted. The economic analysis considers potential economic effects arising from any overlap in compliance dates between these amendments and other recent amendments.

139

Similarly, the effects of the amended rules are measured against the existing regulatory baseline, which includes recently adopted rules.

140

138

See infra

section VII.C.

139

See infra

sections VII.C and VII.D.6.

140

The OCR Proposal and the Best Execution Proposal Release mentioned by commenters remain at the proposal stage. To the extent that the Commission takes final action on either of those proposals, the baseline in each of those subsequent rulemakings will reflect the regulatory landscape that is current at that time.

See infra

section VII.C, note 1047.

Commenting on the Proposing Release together with the other EMS Proposals, some commenters requested that the Commission publicly release anonymized subsets of CAT data

141

used in connection with the tables and figures in the EMS Proposals' economic analyses.

142

In the Proposing Release, unlike certain of the other EMS Proposals, CAT data was not used in any tables and figures.

143

Rather, the Proposing Release used CAT data to determine the numbers of affected broker-dealers in the baseline and compliance cost discussion in the economic analysis, as well as to determine statistics in a reasonable alternative to the proposed amendment that would have imposed a minimum pricing increment for trades.

144

The CAT information used in this adopting release is narrower still. Specifically, the Commission uses CAT information, consisting of lists of firm names, including firm identifier numbers and account type information, only to determine the numbers of affected firms. The Commission is not releasing anonymized versions of the CAT information used in this release because releasing an anonymized list of firm names would provide no meaningful information beyond the total number of affected firms, which is the same information provided in this release. The Commission described in the Proposing Release and describes in this release the CAT data and methodology used in connection with its estimates.

141

The CAT database contains confidential market information.

See, e.g.,

Securities Exchange

Act Release No. 67457 (Jul. 18, 2012), 77 FR 45722, 45782 (Aug. 1, 2012) (stating that maintaining the confidentiality of customer and other information reported to CAT “is essential” and that “[w]ithout adequate protections, market participants would risk the exposure of highly-confidential information about their trading strategies and positions”);

see also

Securities Exchange Act Release No. 84696 (Nov. 15, 2016), 81 FR 84696 (Nov. 23, 2016).

142

See, e.g.,

SIFMA Letter I at 1-2, 3-4; Letters from Thomas M. Merritt, Deputy General Counsel, Virtu Financial, Inc., dated Feb. 24, 2023 (“Virtu Letter I”) at 1, 2; SIFMA Letter II at 2-3, 11, 22; SIFMA AMG Letter I at 5; Schwab Letter II at 3-4; T. Rowe Price Letter at 3; Chamber of Commerce Letter at 2-3; Robinhood Letter at 8; Equity Market Structure Citadel Letter at 16-17; Cambridge Letter at 4; Jefferies Letter at 1; SIFMA AMG Letter II at 5-7; and SIFMA Letter IV at 6.

143

See

SIFMA Letter I at 7 (“Regulation NMS: Minimum Pricing Increments, Access Fees, and Transparency of Better Priced Orders—The following tables/figures within the Proposal use CAT data: none.”). The Commission responds to specific comments on releasing the CAT data used in the tables and figures of the specific EMS Proposals in the relevant adopting release, where appropriate.

See

Rule 605 Amendments,

supra

note 10.

144

See, e.g.,

Proposing Release,

supra

note 11, at 80316, 80340-41. A commenter identifies this limited use of CAT data in the Proposing Release but does not identify specific additional information the Commission should provide.

See

Equity Market Structure Citadel Letter at 16-17.

III. Final Rule 612 of Regulation NMS—Minimum Pricing Increment

Rule 612 of Regulation NMS establishes minimum pricing increments (also known as minimum price variations or tick sizes) for quotations and orders in NMS stocks. Specifically, preexisting Rule 612 stated that “[n]o national securities exchange, national securities association, alternative trading system, vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, or an indication of interest in any NMS stock priced in an increment smaller than $0.01 if that bid or offer, order, or indication of interest is priced equal to, or greater than, $1.00 per share.”

145

Preexisting Rule 612(b) had similar language that applied to bids, offers, orders, and indications of interest in any NMS stock priced less than $1.00 per share and specified that the minimum pricing increment could not be smaller than $0.0001. Preexisting Rule 612 of Regulation NMS did not establish or include minimum pricing increments for transactions.

146

145

See

17 CFR 242.612.

146

As discussed in the Proposing Release, the Commission granted exemptions from Rule 612 to various national securities exchanges' retail liquidity programs (“RLPs”) as a way to allow them to compete with over-the-counter (“OTC”) market maker sub-penny price improvement.

See

Proposing Release,

supra

note 11, at 80271. Under the RLPs, exchanges can accept and rank certain quotes and orders from certain participants in sub-penny increments as small as $0.001.

A. Issues Raised in the Existing Market Structure Related to Tick Sizes

The Proposing Release contains an extensive discussion of the development and the consideration by the Commission and market participants of Rule 612 since its adoption.

147

Since the adoption of Rule 612, there has been a marked increase in the trading volume of NMS stocks that would likely be priced with tighter spreads if their pricing was not constrained by the uniform $0.01 minimum pricing increment required by preexisting Rule 612 for quotes and orders all NMS stocks priced equal to, or greater than, $1.00 per share. Easing constraints on ticks for these NMS stocks will reduce transaction costs for market participants, including investors, and allow prices to be determined in a more competitive manner. In other words, the number and volume of NMS stocks that could benefit from the ability to quote in a minimum pricing increment that is smaller than $0.01 (

i.e.,

sub-pennies) has grown.

147

See

Proposing Release,

supra

note 11, at 80272-80273.

In the Proposing Release, the Commission considered data to evaluate and determine which NMS stocks, by number and by volume, would benefit from a reduced minimum pricing increment for quotes and orders that would allow for tighter spreads. While the Commission could not estimate the number of stocks that would have a TWAQS of $0.008 or less due to the preexisting Rule 612 requirement that all orders priced equal to greater than $1.00 per share have a $0.01 minimum pricing increment, the Commission could estimate that 1,707 stocks, which represented approximately 64% of share volume and 37.9% of dollar volume in January through May 2022, had TWAQS that were less than $0.016.

148

Additionally, 2,648 stocks, which represented approximately 17.9% of share volume and 22.3% of dollar volume in January through May 2022, traded with a spread that was greater than $0.016 and less than or equal to $0.04. More recently, the Commission analyzed NMS stocks in 2023 and identified 2,420 NMS stocks that had a TWAQS of $0.015 or less; these NMS stocks represent about 74% of share volume and about 47% of dollar volume.

149

148

See

Proposing Release,

supra

note 11, at 80280.

149

See infra

section VII.D.1.b, table 3.

Prior to the Proposing Release, certain market participants conducted data analyses on the effects of Rule 612 and concluded that a $0.01 minimum quoting increment may not be appropriate for all NMS stocks that are priced greater than or equal to $1.00.

150

The Commission discussed these data analyses in the Proposing Release.

151

One of these market participants, Cboe, submitted updated data analysis in two comment letters to the Proposing Release.

152

150

See, e.g.,

The Tick-Constrained Stock Problem by Phil Mackintosh (Jan. 20, 2022),

available at http://www.nasdaq.com/articles/the-tick-constrained-stock-problem

) (“Nasdaq Paper”).

See also

Petition for Rulemaking to Amend Rule 612 of Regulation NMS to Adopt Intelligent Tick-Size Regime, dated Dec. 16, 2019, submitted by John A. Zecca, Executive Vice President, Chief Legal Officer & Chief Regulatory Officer, Nasdaq Inc.

available

https://www.sec.gov/rules/petitions/2019/petn4-756.pdf

(“Nasdaq Intelligent Tick Proposal”); The Impact of Tick-constrained Securities on the U.S. Equity Market (available at

http://www.nyse.com/publicdocs/Tick_Constrained_Stocks.pdf

) (“NYSE White Paper”) (no date available); and Cboe Proposes Tick-Reduction Framework to Ensure Market Structure Benefits All Investors (

available at https://www.cboe.com/insights/posts/cboe-proposes-tick-reduction-framework-to-ensure-market-structure-benefits-all-investors/

) (“Cboe Proposal”).

151

See

Proposing Release,

supra

note 11, at 80274-80278.

152

See

Letters from Angelo Evangelou, Cboe Global Markets, Inc., dated Feb. 28, 2023 (“Cboe Letter I”); Patrick Sexton, EVP, General Counsel & Corporate Secretary, Cboe Global Markets, Inc., dated Mar. 31, 2023 (“Cboe Letter II”) at Appendix A.

See also

Letter from Hope M. Jarkowski, General Counsel, NYSE Group, Inc., dated Mar. 27, 2023

(“NYSE Letter II”) (submitting for the record its paper entitled

Price Improvement, tick harmonization & investor benefit

(Aug. 22, 2022). This paper was described in the Proposing Release,

supra

note 11, at 80275; MEMX Letter, Appendix (submitting

Tick-constrained Securities

(Aug. 2021). This paper was described in the Proposing Release,

supra

note 11, at 80274. In the MEMX Letter, MEMX also submitted

Tick-constrained Securities, The Tick Size Debate, Revisited

(Jan. 2022) which analyzed a set of reverse splits on certain low-priced ProShares exchange-traded products (“ETPs”) and finding that the tick-constrained ETPs analyzed traded with significantly lower spreads post reverse split. This paper was described in the Proposing Release,

supra

note 11, at 80318.

B. Proposal To Amend Rule 612

The Commission proposed variable minimum pricing increments for quotes and orders for NMS stocks priced at, or greater than, $1.00 per share based on the TWAQS of a particular NMS stock. The Commission also proposed that the minimum pricing increment for executions be the same as, and correlate to, the minimum pricing increment for quoting on all trading venues (

i.e.,

on-exchange and OTC), subject to certain exceptions.

Specifically, the Commission proposed that the minimum pricing increments for quotations, orders and executions in NMS stocks that are priced equal to or greater than $1.00 per share would be variable and no smaller than: (1) $0.001 if the TWAQS

153

for the NMS stock during the Evaluation Period

154

was equal to, or less than, $0.008; (2) $0.002, if the TWAQS for the NMS stock during the Evaluation Period was greater than $0.008 but less than, or equal to $0.016; (3) $0.005, if the TWAQS for the NMS stock during the Evaluation Period was greater than $0.016 but less than, or equal to, $0.04; and (4) $0.01 if the TWAQS for the NMS stock during the Evaluation Period was greater than $0.04.

155

Further, as proposed, NMS stocks' TWAQS would have been measured quarterly based on one month of trading data.

156

In other words, it was proposed that the assignment of minimum pricing increments for the quoting and trading of NMS stocks priced equal to or greater than $1.00 per share be done on a quarterly basis.

153

See infra

section III.C.7.b.

See also

proposed Rule 612(a).

154

See infra

section III.C.7.a.

See also

proposed Rule 612(a).

155

See

proposed Rule 612(c).

156

See

proposed Rule 612(a).

The Commission stated that it preliminarily believed that the proposed Rule 612 amendments would promote: (1) fair and orderly markets and economically efficient executions, particularly for tick-constrained NMS stocks and retail order flow; and (2) fair competition and equal regulation between OTC market makers, exchanges, and ATSs that compete for retail liquidity by requiring that NMS stocks trade with the same minimum pricing increment regardless of venue (

i.e.,

on or off-exchange).

157

The Commission also stated that proposed Rule 612 would promote price discovery and price competition, particularly for tick-constrained stocks and retail order flow, by permitting the uniform quoting and trading of NMS stocks across trading venues, in finer increments, based on objective criteria. The Commission preliminarily believed that the proposed Rule 612 amendments would result in the pricing of quotes and orders being more in alignment with the principles of supply and demand.

157

See

Proposing Release,

supra

note 11, at 80273 (discussing the competitive dynamic among exchanges, ATSs and OTC market makers).

C. Final Rule—Minimum Pricing Increments for Orders Priced Equal to or Greater Than $1.00 per Share

After considering comments, and analyzing additional data in response to those comments, the Commission is modifying and adopting the proposed amendments to Rule 612. As adopted, Rule 612(b)(2) provides that no national securities exchange, national securities association, ATS, vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, or an indication of interest in any NMS stock in an increment smaller than required pursuant to either paragraph (i) or (ii) below if that bid or offer, order, or indication of interest is priced equal to or greater than $1.00 per share:

(i) $0.01, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was greater than, $0.015; or

(ii) $0.005, if the Time Weighted Average Quoted Spread for the NMS stock during the Evaluation Period was equal to or less than $0.015.

Rule 612(b)(3) provides that no national securities exchange, national securities association, alternative trading system, vendor, or broker or dealer shall display, rank, or accept from any person a bid or offer, an order, or an indication of interest in any NMS stock priced in an increment smaller than $0.0001 if that bid or offer, order, or indication of interest is priced less than $1.00 per share.

158

Rule 612(b)(3) is the same as preexisting Rule 612(b).

Further, as amended, minimum pricing increments for quotes and orders will be assigned on a semiannual basis using 3-months of trading data to calculate each NMS stock's TWAQS.

159

Therefore, as adopted, a minimum pricing increment of either $0.01 or $0.005 will be assigned to each NMS stock for quotes and orders that are priced equal to or greater than $1.00 per share twice a year and will be operative for a six-month period.

160

159

See

Rule 612(a)(1).

160

Some commenters suggested that the Commission consider wider quoting increments.

See, e.g.,

Nasdaq Letter I; ASA Letter at 4; MEMX Letter at 20; Cboe, State Street, et al. Letter at 2; BIO Letter at 3; Invesco Letter at 3; Robinhood Letter at 39; Themis Letter at 5; Dimensional Letter at 2; and Letter from Tim Gately, Managing Director, Head of Equities Sales, Americas, Citigroup Global Markets, Inc., dated Mar. 31, 2023 (“Citigroup Letter”) at 5. The Commission is not adopting a wider quoting increment for NMS stocks or a subset of NMS stocks as part of these amendments. As discussed throughout this release, the Commission is amending Rule 612 to address issues that developed related to the constraint that results from the $0.01 minimum pricing increment. A wider quoting increment would not address these specific issues.

The amendment differs from the proposal because rather than adding three proposed smaller minimum pricing increments for quotes and orders ($0.005, $0.002, $0.001) to the current $0.01 increment, only one additional minimum pricing increment ($0.005) for NMS stocks that have a TWAQS of $0.015 or less will be added. In addition, the amendment differs from the proposal as it (1) does not include a minimum pricing increment for trades, (2) modifies the Evaluation Period, and (3) provides for an implementation period.

1. General Comments and Discussion

The Commission received many comments on the proposal to amend Rule 612.

161

Some commenters supported the need to amend Rule 612.

162

Many individual commenters generally supported the proposed amendments;

163

while some individual

commenters agreed that Rule 612 should be amended but recommended that the proposal be modified.

164

161

See supra

note 82.

162

See, e.g.,

Form Letter Type A, of which 22 comments were received; Form Letter Type D, of which 255 comments were received; Form Letter Type G, of which 652 comments were received,

available at

https://www.sec.gov/comments/s7-30-22/s73022.htm

; IEX Letter I at 6; Letters from David Mechner, Chief Executive Officer, Pragma, LLC, dated Mar. 23, 2023 (“Pragma Letter”); Citigroup Letter at 4; MMI Letter at 3; Cboe, State Street, et al. Letter at 2; Nasdaq Letter I at 2; Managed Funds Letter dated March 30, 2023 at 11; letter from Joseph Scafidi, Global Head of Trading, and Carlos Oliveira, Head of Trading Analytics and Market Structure, Brandes Investment Partners, L.P., dated Mar. 23, 2023 (endorsed by Adam Conn, Director, Baillie Gifford (Overseas) Ltd. et al.) (“Brandes Letter”) at 1; Angel Letter at 5; TradeStation Letter; Vanguard Letter at 4; B. Riley Letter at 1; JPMorgan Letter at 4; and UBS Letter at 10.

163

See, e.g.,

Form Letter Type D, of which 255 comments were received; Form Letter Type E, of which 14 comments were received; and Form Letter Type G, of which 652 comments were received,

available at

https://www.sec.gov/comments/s7-30-22/s73022.htm

; Letter from Bibambop RIP, dated

Mar. 16, 2023; Letter from Binh Tran, dated Mar. 4, 2023; Letter from Jerry Pang, dated Mar. 4, 2023; Letter from Charlie Chen, dated Mar. 1, 2023; Letter from Daniel Song, dated Jan. 12, 2023; Letter from Deok Park, dated Dec. 26, 2023; and Letter from Clarissa West, dated Apr. 1, 2023.

164

See, e.g.,

Form Letter Type H, of which 853 comments were received,

available at

https://www.sec.gov/comments/s7-30-22/s73022.htm

Broadly, many commenters stated that preexisting Rule 612 should be amended in order to permit sub-penny quoting.

165

One commenter stated that for those stocks that are tick-constrained “[t]he one-cent increment for quoting can make it difficult for liquidity providers to fill orders and often results in higher trading costs.”

166

Another commenter stated that tick-constrained stocks experience wider quoted spreads, which results in “significantly increased transaction costs for investors,” and that these securities generally have longer queues and trade with “outsized notional liquidity at the NBBO.”

167

Several commenters stated that the “one-size-fits-all” requirement in Rule 612 should be revisited.

168

One commenter stated that Rule 612 impedes the ability of market participants to price some NMS stocks that would naturally be priced within the penny spread.

169

The adopted minimum quoting increment of $0.005 will enable the targeted NMS stocks to be more naturally priced based on the principles of supply and demand within the penny spread.

165

See, e.g.,

Letter from Stephen W. Hall, Legal Director and Securities Specialist, Better Markets, Inc., dated Oct. 31, 2023 (“Better Markets Letter II”) at 3; SIFMA Letter II; Brandes Letter at 1; ICI Letter I; BlackRock Letter; B. Riley Securities Letter; JPMorgan Letter at 4; Cambridge Letter at 6; Invesco Letter at 3; UBS Letter at 10; Citigroup Letter at 4; TradeStation Letter at 6; letters from individuals, including the Form Letter Type D, of which 255 comments were received; Form Letter Type G, of which 652 comments were received; and Form Letter Type H, of which 853 comments were received,

available at

https://www.sec.gov/comments/s7-30-22/s73022.htm

166

See

ASA Letter at 4.

167

See

MEMX Letter at 9.

168

See, e.g.,

SIFMA Letter II at 33; BlackRock Letter at 5; Citigroup Letter at 4; and MMI Letter at 5; UBS Letter at 10; Letter from Lawrence Harris, Ph.D., CFA, Professor of Finance and Business Economics, U.S.C. Marshall School of Business, dated Dec. 18, 2023 (“Harris Letter”) at 8.

169

See

Better Markets Letter II at 8.

Generally, comments from individuals supported the proposal without any additional suggested changes.

170

One commenter stated of the proposal, “[t]his means that the pricing of stocks will be more precise and accurate, ensuring that I can get the best possible price for my trades.”

171

Another commenter stated that “[a]llowing for sub-penny pricing will enable buyers to obtain lower prices from willing sellers and sellers to obtain higher prices from willing buyers, resulting in a more efficient market.”

172

Comments from other market participants, including exchanges,

173

broker-dealers, and institutional investors

174

recommended modifying the proposal to Rule 612 to reduce the number of potential minimum quoting increments. Some commenters stated that further reduction of the minimum pricing increment for quotes and orders may be warranted for certain NMS stocks “in the future” but that a $0.005 increment should be implemented and studied before any further reductions.

175

For the reasons discussed throughout, in response to commenters, the Commission is adopting amended Rule 612. Compared to the initial proposal, the modified amendments will be easier for market participants to implement and adapt to.

170

See, e.g.,

Form Letter Type A, of which 22 comments were received; Form Letter Type D, of which 255 comments were received; Form Letter Type E, of which 14 comments were received; Form Letter Type G, of which 652 comments were received; Form Letter Type I, of which 22 comments were received; Form Letter Type J, of which 15 comments were received; and Form Letter Type K, of which 22 comments were received,

available at

https://www.sec.gov/comments/s7-30-22/s73022.htm

171

Letter from John dated Feb. 23, 2023.

172

Letter from Nevin Varghese dated Dec. 26, 2022.

173

See

IEX Letter I at 6; Cboe, State Street, et al. Letter at 2; Nasdaq Letter I at 14; MEMX Letter at 18; and Cboe Letter II at 3.

174

See

Capital Group Letter at 4; ICI Letter I at 5-6; Vanguard Letter at 4-5; Invesco Letter at 3; Schwab Letter II at 6; T. Rowe Price Letter at 4; Fidelity Letter at 14; Brandes Investment Letter dated March 31, 2023 at 2; Ontario Teachers, Alberta Investment, CalSTRS, CalPERS, Canada Pension, and Texas Retirement Letter dated Mar. 31, 2023 at 2 (“Ontario Teachers et al. Letter”); BlackRock Letter at 5; Dimensional Letter at 2; B. Riley Letter at 1; and Letter from Christopher P. Bowker Jr., Director of Global Equity Trading, Boston Partners Global Investors, Inc., Joe Mariano, Senior Vice President, Global Head of Trading, Calamos Advisors LLC, Melissa F. Hinmon, Director of Equity Trading, Glenmede Investment Management, Dan Royal, Global Head of Equity Trading, Janus Henderson Investors US LLC, dated Apr. 6, 2023 (“Boston Partners, Calamos Advisors, Glenmede Investment, and Janus Henderson Letter”); State Street Letter at 3; NYSE, Schwab, and Citadel Letter at 2; Letter from John Zhu, Head of Trading, Optiver US LLC, dated Mar. 15, 2023 (“Optiver Letter”) at 4; Pragma Letter at 1; Cboe, State Street, et al. Letter at 2; Letter from Milan Galik, Chief Executive Officer, Interactive Brokers Group, Interactive Brokers LLC, dated Mar. 30, 2023 (“Interactive Brokers Letter”) at 5; RBC Letter at 3; Morgan Stanley Letter at 3-4; JPMorgan Letter at 4-5; Letter from at 2; Joe Wald, Managing Director & Co-Head of Electronic Trading, Eric Stockland, Managing Director, Global Markets, Brad A. Rothbaum, Managing Director & Head U.S. Global Markets, Chief Operating Officer & Head of the U.S. Branches, and Michael Forlenza, Managing Director & Head of U.S. Capital Markets Compliance, BMO Capital Markets Corp., dated Mar. 31, 2023 (“BMO Letter”); Brandes Investment Letter dated March 23, 2023 at 2; B Riley Letter at 1; Themis Letter; UBS Letter at 10; Citigroup Global Letter at 4-5; and Jefferies Letter at 3.

175

See, e.g.,

BlackRock Letter at 6 and B. Riley Letter at 1.

One commenter suggested that the Commission use its exemptive authority to reduce minimum pricing increments and access fees in a manner similar to that requested by MEMX.

176

MEMX requested an increment of $0.005 for NMS stocks that are “tick-constrained” (defined by MEMX as stocks that trade with an average quoted spread of $0.011 or less).

177

The commenter recommended this course of action as a means to gather data on sub-penny pricing increments to help determine whether, and to what degree, the proposed modifications were warranted.

178

The commenter also stated that using an exemption to test a reduction of minimum pricing increments and the access fee caps could include an expiration and a “roll-back” plan should unintended consequences become apparent.

179

Other commenters recommended that the Commission reduce the minimum pricing increments for a sample of stocks so that data could be gathered and evaluated before changes were adopted on a more widespread basis.

180

Finally, one commenter recommended that the Commission establish a “transparent structured process to evaluate whether proposed changes to minimum pricing increments and access fees are actually improving the execution experience” and that a “clearly articulated off-ramp/kill-switch to unwind these changes” be in place to return to current minimum pricing increments and the access fee caps.

181

Another commenter stated that if the Commission adopted a modified amendment to Rule 612 that such modification should be re-proposed for public comment.

182

176

See

Jefferies Letter.

See also

Proposing Release,

supra

note 11, at 80277 for a discussion of the MEMX request for exemption.

177

See

Proposing Release,

supra

note 11, at 80277 for a discussion of the MEMX request for exemption.

178

See

Jefferies Letter at 2.

179

Id.

at 4.

180

See, e.g.,

Cboe, State Street, et al. Letter at 2; letter from Carlo Passeri, Vice President Biotechnology Innovation Organization (“BIO Letter”), dated Mar. 30, 2023; and State Street Letter at 3; MMI Letter at 3-7.

181

See

Citigroup Letter at 6. With regard to the comment about an “off-ramp/kill-switch,” should the Commission observe trends detrimental to investors, the Commission could take appropriate action.

182

See

Citadel Letter II at 3.

An exemption, other temporary course of action, such as a pilot or sample reduction, or a re-proposal of the

adopted amendments is not warranted. The Commission and market participants already have provided data and analyses that support amending Rule 612 to address tick constraints.

183

As discussed throughout this release, the adopted amendments to Rule 612 will allow NMS stocks that are experiencing tick constraints with the $0.01 minimum pricing increment to be priced more competitively (

i.e.,

reduce quoted spreads) and reduce transaction costs for liquidity demanders. The amendments to minimum pricing increments are designed to appropriately address significant concerns related to Rule 612.

184

One of the primary goals of the proposal and the adopted amendments is to alleviate tick constraints.

183

See, e.g.,

MEMX Letter, Pragma Letter; IEX Letter I; and Nasdaq Letter I.

See infra

section VII.D.1.b.

184

See supra

section III.A.

Reducing the minimum quoting increment for quotes and orders to $0.005 for certain NMS stocks will enable such stocks to quote with tighter spreads, which in return reduces the transaction costs of investors.

185

As discussed below, the Commission has conducted analysis to show that quoted and effective spreads are likely to decline such that costs of executing small and medium trades will likely decline.

186

Further, Rule 612, as amended, while simplified compared to the proposal, continues to be designed to address constraint concerns with respect to those NMS stocks. Market participants and investors will be able to more easily adapt to the amended tick regime because they will only need to accommodate, and adjust for, one additional minimum pricing increment that is already familiar for a limited, readily discernable, group of NMS stocks.

187

The $0.005 minimum pricing increment for quotes and orders, one of the three additional ticks proposed by the Commission, was widely supported by commenters.

188

Price improvement on exchanges and ATSs often occurs through midpoint executions in an increment of $0.005. Accordingly, $0.005 is an appropriate increment to introduce smaller, sub-penny minimum pricing increments in the national market system for quotes and orders priced equal to or greater than $1.00.

185

See infra

section VII.D.1.b.ii.

186

See infra

section VII.D.1.b.ii.

187

See infra

section VII.D.1.a.

188

See, e.g.,

MEMX Letter at 15-16.

See also

note 219 and accompanying text.

Some individual commenters did not support the proposal.

189

One of those commenters stated that the minimum pricing increment for quotes and orders should be “based solely on that which can be spent in real life; no less than a single penny.”

190

Preexisting Rule 612 allowed quotes and orders in NMS stocks priced less than $1.00 per share to be accepted, ranked and displayed in an increment as small as $0.0001. Similarly, certain RLP Programs for national securities exchanges have been granted Commission exemptions to permit quotes and orders in NMS stocks priced equal to, or greater than, $1.00 per share to be accepted, ranked and displayed in an increment as small as $0.001. Sub-penny increments also existed in the market for many years, even prior to the adoption of Rule 612 in 2005.

191

Sub-penny increments can allow market participants to better convey prices at which they are willing to trade, which can promote better price competition and lead to better price discovery. Further, as discussed above, sub-penny trading occurs frequently, whether at the midpoint or in other sub-penny increments.

192

Thus, sub-penny increments are not a novel concept. As discussed above, $0.005 is a common trading increment because of the use of midpoint orders under current Rule 612, and the ability to use such orders will not change under amended Rule 612. Nonetheless, the Commission understands that market participants may decide to provide investor notice and education about the availability of the new increment.

193

189

See, e.g.,

letters from Joshua Russell dated Dec. 27, 2022; Matthew Gayvin Mutman dated Mar. 7, 2023; Aswin Joy dated Mar. 7, 2023.

190

See

Letter from Joshua Russell dated Dec. 27, 2022.

But see

letter from Anonymous dated Apr. 1, 2023 (stating “[g]etting more precise increment should be easy enough with our modern computers. At the gas station I get charged down to the .000th place, so why shouldn't our markets work the same? Seems fair to me.”).

191

Prior to decimalization, quotes and orders were made in increments that were fractions of a dollar, including

1/8

, 1/16 and 1/32, which resulted in sub-penny pricing.

192

See supra

section III.A.

193

One commenter stated that to the extent the minimum quoting increment is reduced, FINRA would need to update the Manning Rule (FINRA rule 5320 which protects customer limit orders by requiring a minimum amount of price improvement for a firm to execute an order on a proprietary basis while holding an unexecuted customer limit order—the minimum amount of price improvement is currently $0.01 for orders equal to or greater than $1) in an equivalent manner.

See

Citadel Letter I at 8. The compliance date of the adopted rule provides sufficient time for FINRA to determine whether it would want to amend the Manning Rule in light of the amendments to Rule 612 and to file a proposed rule change pursuant to section 19(b) of the Exchange Act and rule 19b-4 thereunder.

Another commenter stated that the proposed variable minimum pricing increments were “not an effective solution to address concerns related to tick-constrained stocks” and suggested a uniform $0.001 minimum pricing increment for all NMS stocks.

194

A uniform $0.001 minimum pricing increment for all NMS stocks goes beyond what is necessary to address the issues related to NMS stocks that are currently constrained by the $0.01 tick. A $0.001 minimum pricing increment would be significantly smaller than the current uniform $0.01 minimum pricing increment for quotes and orders for NMS stocks that are priced equal to, or greater than, $1.00 per share. A sub-penny increment for NMS stocks that is too small would increase the incidence of stepping ahead (

i.e.,

pennying)

195

and costs would not justify the benefits.

194

See

Letter from Matthew Gayvin Mutman dated Mar. 7, 2023. The commenter suggested a uniform $0.001 minimum pricing increment for all NMS stocks. Comments related to the level of minimum pricing increment are addressed in the next section.

195

See infra

note 994 defining pennying.

See also

Virtu Letter II at 2 and 6-7.

214

See infra

section VII.D.1.b.i.

215

See infra section III.C.6.

216

See infra

note 1299 and accompanying text.

3. Comments on the Number of Proposed Increments

Some commenters supported reducing the minimum pricing increment for quotes and orders to address those NMS stocks that are tick-constrained, but overall did not support the proposal's four minimum quoting increments.

217

Many commenters stated that the proposed quoting increments were too numerous.

218

Instead, a number of commenters recommended that the Commission adopt a modified, simpler amendment to Rule 612 and suggested only adopting one additional minimum quoting increment of $0.005 for tick-constrained NMS stocks.

219

One commenter said that “reducing the tick size to one-half cent for stocks with narrower spreads will address the current market need.”

220

Commenters opposed the proposed four minimum quoting increments based on complexity for market participants to program into their systems these increments,

221

potential increased costs for

investors,

222

and potential investor confusion with respect to minimum pricing increments that could change periodically as proposed.

223

Another commenter stated that the four-tier proposal would favor “high-frequency traders who have a long history of leveraging complexity to their advantage and to the detriment of ordinary investors.”

224

One commenter stated that the proposed variable minimum pricing increments “as small as $0.001 goes well beyond what is necessary, and would also be cost prohibitive and complicated to implement.”

225

One commenter questioned the impact of smaller increments on Rule 611 of Regulation NMS and recommended that if the Commission “proceed[ed] with their sub-penny quoting proposal. . . .”, it should consider amending Rule 611 to include all displayed depth of book quotes.

226

217

See, e.g.,

SIFMA Letter II at 34; AIMA Letter at 2; STA Letter at 6-7; Citadel Letter I at 30; Citigroup Letter at 4; Dimensional Letter at 2; BlackRock Letter at 3; Public Pension Letters dated Mar. 31, 2023; MMI Letter at 3; Brandes Letter at 1; Schwab Letter II at 35-36; Invesco Letter at 3; B. Riley Letter at 1; JPMorgan Letter at 4; Cambridge Letter at 6; and Tastytrade Letter at 18.

218

See, e.g.,

MFA Letter at 12; Capital Group Letter at 3; ICI Letter I ; Angel Letter at 6 ; Vanguard Letter at 5; and Meuser et al. Letter at 1.

219

See id.

See also

Nasdaq Letter I; MFA Letter; MEMX Letter; Capital Group Letter; ICI Letter I; Citadel Letter I; Citigroup Letter at 4; BlackRock Letter; Apex Letter; Ontario Teachers et al. Letter at 2; Citigroup Letter; GTS Letter; ICI Letter I; Invesco Letter; Robinhood Letter; SIFMA Letter II; STA Letter; UBS Letter; Vanguard Letter; TradeStation Letter at 6; Cboe Letter; IEX Letter; Nasdaq Letter I; and NYSE Letter I; Brandes Letter at 2; Invesco Letter at 2; Fidelity Letter at 14; Themis Letter at 6; B. Riley Letter at 1; JPMorgan Letter at 4; Morgan Stanley Letter at 4; State Street Letter at 3; Dimensional Letter at 2; BMO Capital Letter at 2; and Meuser et al. Letter at 1.

220

See

ASA Letter at 5.

See also

TradeStation Letter at 6.

221

See, e.g.,

CTA/UTP Letter dated March 29, 2023; Nasdaq Letter I; State Street Global Letter; RBC Letter; ICI Letter I; Vanguard Letter; Cboe Letter II; SIFMA Letter II; Fidelity Letter; Brandes Letter at 2; Robinhood Letter at 20; Morgan Stanley Letter at 4; and Meuser et al. Letter at 2.

222

See, e.g.,

Dimensional Letter at 2.

223

See, e.g.,

Tastytrade Letter at 5, 18; SIFMA Letter II at 7; Morgan Stanley Letter at 3, 4; Fidelity Letter at 13; SIFMA Letter II at 34; Better Markets Letter I at 14; Robinhood Letter at 20; Citadel Letter I at 8; and STA Letter at 5.

224

See

Better Markets Letter II at 4.

See also

Fidelity Letter at 12; Themis Letter at 6; Ontario Teacher et al. Letter at 2; and Harris Letter at 7.

225

See

TradeStation Letter at 6.

226

See

Themis Letter at 5. As discussed, the Commission is adopting a modified amendment to Rule 612 to introduce only a $0.005 minimum pricing increment for certain NMS stocks, not the smaller proposed increments of $0.002 and $0.001. Therefore, the commenter's recommendation is no longer germane because without the proposed smaller $0.002 and $0.001 increments, the liquidity would not be as dispersed throughout the depth of the book which would not necessitate protection of the full depth of the book.

After considering the comments and analyzing data,

227

the Commission is amending Rule 612 to only add one new minimum pricing increment of $0.005 for those NMS stocks that have a TWAQS of $0.015 or less, rather than also adopting the additional two $0.002 and $0.001 pricing increments as proposed. The Commission's basis for the new minimum pricing increment of $0.005 is rooted by the current midpoint increment when the NBBO is at its narrowest (or smallest) spread. The midpoint increment of the current $0.01 minimum quoting spread is calculated as (NBB plus NBO) divided by 2, and when the spread is at its narrowest, the midpoint increment is equal to $0.005. For example, if the NBB is 10.01 and the NBO is 10.02, the midpoint would be 10.015 ((10.01 + 10.02)/2) = 10.015). Further, the new minimum quoting increment is at a price level familiar to all market participants and is already programmed into many computer systems. This modified approach addresses the concerns raised by commenters related to the proposed $0.002 and $0.001 minimum pricing increments. The adopted amendments also address commenters' concerns about complexity and potentially advantaging certain types of market participants by reducing the number of new increments and the universe of NMS stocks that may be eligible for a smaller minimum pricing increment. The adopted $0.005 minimum pricing increment for those NMS stocks that have a TWAQS of $0.015 will address the immediate concerns about the constraints that have developed in the national market system as a result of preexisting Rule 612.

227

See infra

section VII.D.1.

4. Comments on Small- and Mid-Sized Stocks

A few commenters stated that the proposal to reduce minimum pricing increments did not consider the impact on small and mid-sized stocks.

228

One commenter opposed the Regulation NMS Proposal because of concerns that it did not “address the needs and possible unintended consequences for small and mid-sized stocks” and that the Commission should “not take any action until such time as a pilot has been launched and its effects studied and verified by a committee of market participants and academics.”

229

Another commenter stated that the proposed tick sizes were “too granular” for small to mid-sized stocks and would result in fewer liquidity providers.

230

228

See

BIO Letter at 1-2, 3 and STA Letter at 5.

229

See

BIO Letter at 1-2, 3.

230

See

STA Letter at 5.

The assignment of the smaller minimum pricing increment is not based on market capitalization because the economics of being tick-constrained do not depend on market capitalization. Rather, whether a stock is experiencing constraint depends on its spread. In other words, since a stock's spread relative to the tick size does not depend on whether it has a small or mid-sized market capitalization, such a stock could still trade with a quoted spread constrained by $0.01 minimum pricing increment. With respect to implementing a pilot program to assess the needs and potential consequences of the proposal for small and mid-sized stocks, the Commission previously conducted a tick size pilot program for small- and mid-sized stocks to assess the impact of wider minimum quoting and trading increments.

231

The Commission analyzed data from that pilot program for purposes of the amendments.

232

Another pilot program is not necessary because the Commission and market participants have demonstrated with data the issues related to tick constraints that have increased since the preexisting rule was adopted.

233

Further, the modified amendment will not introduce increments that are “too granular” for any NMS stock; only those NMS stocks that have a TWAQS of $0.015 or less will be assigned the new $0.005 increment, or three ticks or fewer within the spread. These NMS stocks are constrained by the preexisting increment and the amendment will alleviate this regulatory constraint to allow competitive forces of supply and demand to better establish bid and ask prices.

234

231

See

Proposing Release,

supra

note 11, at 80272-73 for a discussion of the tick size pilot program.

See also

Tick Sizes and Market Quality: Revisiting the Tick Size Pilot by Yashar H. Barardehi, Peter Dixon, Qiyu Liu, and Ariel Lohr,

available at https://www.sec.gov/dera/staff-papers/working-papers/dera_wp_tick-sizes-and-market-qualityrevisiting-tick-size-pilot

232

See infra

section VII.D.1.

233

See infra

section VII.D.1.b.ii.

234

See also

Robinhood Letter at 41; Morgan Stanley Letter at 3; UBS Letter at 12; Citigroup Letter at 4; TradeStation Letter at 7; and Goldman Sachs Letter at 9.

The amendments modifying Rule 612 will result in less message traffic, fewer systems changes and lower costs related to updating ticks for NMS stocks compared to the original proposal and

therefore there should pose less of a concern related to market resiliency. The modified amendment adopts a single sub-penny increment that impacts a smaller universe of NMS stocks compared to the proposal, which included three sub-penny increments that would have impacted more NMS stocks. The need for a phased approach is significantly reduced because fewer NMS stocks will be impacted by the one additional minimum quoting increment, and there will be fewer ticks between the spread.

The commenter stated that the potential costs to industry members from increased message traffic would include purchasing additional computer hardware such as servers and that the costs would also apply to production, backup, test, and development environments.

238

The commenter stated that the actual costs would be multiples of the estimated costs from the proposal. However, the adopted amendment to Rule 612 will result in less message traffic than the proposal because it has fewer quoting increments. Consequently, the modified amendments that are being adopted will reduce computer hardware and developmental costs for the industry compared to the proposal. In the Proposing Release, the Commission considered the message traffic of the options markets, and the systems for the options markets that handle many times more messages compared to (1) the current NMS stock market or (2) the estimated additional message traffic from the adopted amendments.

239

One commenter submitted data that supported this conclusion.

240

238

See

FIF Letter at 9.

See also

Citigroup Letter at 2.

See infra

section VII.D.5.a.

239

See

Proposing Release,

supra

note 11, at 80279, notes 196 and 197 (stating that in the second quarter of 2011, the average peak message per second for Tapes A and B reported by the CTA/CQ Plan was 1,015,000 and for Tape C reported by the UTP Plan was 408,300 versus 36.4 million reported by the Options Price Reporting Authority (“OPRA”)).

See also

section VII.E.1.

240

See

NYSE Letter I at 11-13.

The commenter also raised concerns that increased quote message traffic could significantly increase the costs of the operation of the CAT system.

241

The commenter recommended that the Commission estimate the potential increase in message traffic, provide those estimates to CAT LLC, obtain estimates from the CAT LLC of the increased CAT costs that would result from this increased message traffic, and factor the estimated costs into the cost benefit analysis of the proposed minimum pricing increments changes. Another commenter also stated that the Commission failed to consider whether the increase in message traffic will increase the CAT operating budget.

242

The Commission estimates the impact of the adopted amendments on message traffic, and thus on the CAT operating budget in section VII.D.1.c. As discussed further below, the Commission estimates the increase in CAT costs associated with adopting the additional minimum pricing increment to be approximately $4.1 million per year.

243

The Commission does not believe it is appropriate to delay action on Rule 612 to have CAT LLC engage in its own analysis of the potential costs.

241

See

FIF Letter at 10 (“FIF members are concerned that increased message traffic could significantly increase the costs for the operation of the CAT system as increased quote volumes (including increased frequency of quote updates) would increase the number of CAT-reportable events. 100% of these increased CAT costs would be charged to broker-dealers and exchanges. The operating expenses for CAT were $84.5 million for 2020 and $146.5 million for 2021. CAT LLC, the operator of the CAT system, has estimated the total expenditures for CAT for 2022 at $178.9 million. These costs are in excess of the costs that were contemplated in the CAT NMS Plan.”).

242

See

Citadel Letter II at 5. The commenter added that increased message traffic increases costs for all market participants, including higher fees charged by CAT and the exclusive SIPs.

See also

Citadel Letter I at 9 and Virtu Letter II at 6-7.

243

See infra

section VII.D.1.c.

Commenters raised the issue of increased market data volume on competing consolidators, which are not yet in operation.

244

Likewise, the possible costs to potential competing consolidators will be reduced vis-à-vis the proposal. The Commission recognizes that while the costs may be lower than the proposed rule, the adopted rule could nevertheless create increased message traffic than the preexisting rule. It follows that more message traffic could lead to more possible costs for competing consolidators. However, this new message traffic should still be within the operational capacity of the existing computer systems.

245

244

See, e.g.,

Citadel Letter II at 9 (“A material increase in total message traffic increases costs for all market participants, including due to the resulting higher fees charged by industry utilities, such as the [CAT] and the [SIP]”) and Virtu Letter II at 6-7 (“The Commission has failed to analyze the impact of the significantly increased volume of market data on competing consolidators.”).

245

See infra

section VII.D.1.

One commenter stated that even with the largest potential increases in messages, equity messaging traffic would remain well below that of the options market and that “the increase in messaging activity from adopting finer tick increments is now well within the industry's capability.”

246

On the other hand, another commenter stated that a larger number of ticks across a large number of stocks would lead to increased message traffic, which would, in turn, increase data and infrastructure costs and market latency.

247

One commenter added that increased message traffic would lead to increased latency, which would harm market participants by disrupting trading strategies and impairing market functionality and liquidity.

248

As stated above, the adopted amendment to Rule 612 is significantly less complex than the proposal and will not result in the larger number of ticks across a large number of stocks as the commenter suggested. The proposal's four minimum tick increment has been simplified to one additional new tick at $0.005, and the proposal's reduction of minimum pricing increments for NMS stocks that had a TWAQS of $0.04 or less has been reduced to those NMS stocks that have a TWAQS equal to or less than $0.015, which results in fewer expected NMS stocks being assigned a smaller minimum pricing increment.

249

These adopted changes may result in significantly less message traffic than under the commenter's assumption on the proposal. While message traffic may increase over today's message traffic, any increase in message traffic will be significantly less than in the options market, and the options market participants have over the years adjusted to increasingly higher message traffic.

250

246

See

NYSE Letter II at 11 (stating that OPRA handles many times more messages than the equity markets).

247

See

MFA Letter at 11.

248

See

Tradeweb Letter at 2-3 (“Even trading platforms with the most advanced technological infrastructure will need to expend considerable amounts of time and resources to prepare the accommodate increased message traffic, since any increase in latency (even at the millisecond level) would disrupt trading strategies, impair market functionality and liquidity, and, ultimately, harm market participants.”);

see also

Virtu Letter II at 6 (“This increase in message traffic. . . will significantly add to the overall content of market data.”).

See also

NYSE Letter I at 6 and Nasdaq Letter I at 9 (“Securities with too many ticks not only have wider spreads, but they also have more odd lots, and more message traffic, leading to a more fragile NBBO.”).

249

See infra

section VII.D.1.a.

250

See

Options Clearing Corporation Daily Volume report,

available at https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Daily-Volume

6. Comme

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