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

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URL: https://www.frixlaw.com/law-library/documents/fr%3A2024-21867

## Record

- **Collection:** Federal Register
- **Document type:** Rule
- **Published:** October 8, 2024
- **Citation:** 89 FR 81620

## Text

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,
1

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:

1

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.”
2

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.
3

2
Senate Report on Securities Act Amendments of 1975, S. Rep. No. 94-75 at 8-9.

3
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.
4

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.
5

4

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”).

5

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,
6

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,
7

and how information about quotations and trades is made widely available to investors, among others.
8

6

See
Rule 612 of Regulation NMS; 17 CFR 242.612.

7

See
Rule 610 of Regulation NMS; 17 CFR 242.610.

8

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.
9

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.
10

The following

subsections provide an overview of the amendments and the rationales for each.
11

9

See
Cboe, “Historical Market Volume Data,”
available at https://www.cboe.com/us/equities/market_statistics/historical_market_volume/
.

10
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).

11

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.
12

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.
13

12
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.

13
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.
14

As a result, subject to certain exceptions,
15

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

14

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.

15

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.
16

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.
17

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.
18

This may lead to a decline in limit orders, harm liquidity, and make it more costly to trade.
19

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

16
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).

17
But with the minimum pricing increment of a penny, that same market participant would be required to post a bid of $10.01 instead.

18

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

19

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.
20

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.
21

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.
22

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.
23

These widened bid-ask spreads increase transaction costs for investors.
24

Conversely, a smaller tick size that allows for narrower bid-ask spreads would benefit investors by reducing transaction costs.
25

20

See infra
section VII.B.2.

21

See infra
section VII.B.2;
see also
17 CFR 242.600(b)(16).

22

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).

23

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”).

24

See infra
section VII.B.2.

25

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).
26

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).
27

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).
28

In January 2000, the Commission mandated decimal pricing (
i.e.,
moving from fractional increments to penny increments) in certain securities,
29

and by April 2001, the market had fully converted to decimal pricing.
30

26

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.

27

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).

28

See
Staff Decimalization Report,
supra
note 26, at 4-5.

29

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

30

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.
31

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.
32

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.
33

31

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.”).

32

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

33

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.
34

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.
35

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.
36

34

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.”).

35

See infra
section VII.D.1.

36

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”).
37

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.

37

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.
38

The Commission is not adopting a minimum pricing increment for trades.
39

38

See infra
section III.C.

39

See infra
section III.D.

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

1. Background

Trading centers
40

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.
41

40
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.

41

See also infra
sections VII.B.3 and VII.C.2.c, table 5 and table 6 (showing the predominance of both dollar and share exchange trading volume occurs on maker-taker venues).

As adopted in 2005, Rule 610(c) set the access fee cap for protected quotations
42

priced at $1 or more at 30 cents per 100 shares (“30 mils” per share) for NMS stocks. Rule 610(c) also applies to any other quotation of a trading center that is the best bid or offer of an exchange or association.
43

The access fee cap was based, in part, upon the prevailing fees that were charged by certain trading centers at that time.
44

For NMS stocks priced below $1, the fee cap was set at 0.3% of the quotation price.
45

Rule 610 was adopted at the same time as Rule 611, the Order Protection Rule, which established intermarket protection

against trade-throughs
46

for all NMS stocks. Rule 610(c) was designed to preclude trading centers that posted protected quotations from raising their fees in an attempt to take improper advantage of the trade-through protections adopted under Rule 611.
47

The Commission designed the access fee caps to preserve the benefits of both the strengthened price protection under Rule 611 and the more efficient linkages among trading centers that were developed under Regulation NMS to access protected quotations because the benefits could be compromised if substantial fees were charged.
48

42
17 CFR 242.610(c). A protected quotation is defined in Rule 600(b)(82) as “a protected bid or protected offer.” 17 CFR 242.600(b)(82). A protected bid or protected offer is defined as “a quotation in an NMS stock that: (i) Is displayed by an automated trading center; (ii) Is disseminated pursuant to an effective national market system plan; and (iii) Is an automated quotation that is the best bid or best offer of a national securities exchange, or the best bid or best offer of a national securities association.” 17 CFR 242.600(b)(81).

43
For purposes of this discussion, references to protected quotations under Rule 610(c) also include manual quotations that are the best bid or best offer of an exchange or association.

44

See
Regulation NMS Adopting Release,
supra
note 4, at 37545.

45

See
Regulation NMS Adopting Release,
supra
note 4, at 37544 n.406.

46
A trade-through occurs when a trading center executes an order at a price that is inferior to the price of a protected quotation that is displayed by another trading center.
See
17 CFR 242.600(b)(105) for the definition of trade-through under Regulation NMS.

47

See
Regulation NMS Adopting Release,
supra
note 4, at 37544 and 37595.

48

See
Regulation NMS Adopting Release,
supra
note 4, at 37544.

Since an access fee that is too high when compared to the tick size can create pricing distortions, the access fee caps need to be adjusted in conjunction with the reduction in tick size to prevent such distortions.
49

In addition, as discussed below, many exchanges charge the maximum fee allowed to access protected quotes, and primarily use those fees to pay rebates to market participants that provide liquidity.
50

This practice raises a number of concerns and may interfere with section 11A's objectives of ensuring the fairness and usefulness of quotation information.
51

49

See infra
sections IV.D.1 and VII.D.2.a.
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.”).

50

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

51

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.
52

52

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.
53

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.
54

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.

53

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

54

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.
55

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.
56

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.

55

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

56

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.
57

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.
58

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.

57

See infra
section IV.D.

58

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.
59

NMS information is currently disseminated within the national market system by the exclusive plan processors (“exclusive securities information processors” or “SIPs”).
60

59
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.

60
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”).
61

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
62

and improved ability to assess the execution quality of their orders, as explained below.
63

61

See
MDI Adopting Release,
supra
note 10.

62
“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.

63

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
64

transaction information, and certain regulatory and administrative data (“SIP data”).
65

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.
66

For most NMS stocks, exchange rules define a round lot as 100 shares.
67

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.
68

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

64
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).

65

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).

66

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.”).

67
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.

68

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.
69

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.
70

The Commission also adopted a definition of odd-lot information as part of the MDI Rules.
71

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.
72

69

See
Proposing Release,
supra
note 11, at 80270.

70
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.

71
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.

72
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.
73

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”).
74

The Operating Committees of the CTA/CQ Plan and UTP Plan
75

filed the proposed MDI Plan Amendments on November 5, 2021,
76

which the Commission disapproved.
77

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.
78

73

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.

74
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.

75

See supra
note 60.

76

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).

77

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).

78
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.
79

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.
80

79

See
Proposing Release,
supra
note 11, at 80299;
see also infra
sections V.B.2. and V.C.1. In addition, as discussed below, the Commission is amending the definition of round lot so that the frequency of round lot changes will be consistent with the frequency of minimum pricing increment changes under amended Rule 612.
See infra
section V.B.3.b. The Commission is not changing the calculation used to assign round lots or the round lot tiers in the round lot definition adopted in the MDI Rules.

80

See infra
sections V.B.3, V.C.1, and VI.C.

Additionally, the Commission proposed to amend the definition of odd-lot information to include a new data element for the best odd-lot orders available in the market, which would be made available to investors broadly. The Commission is adopting the best odd-lot order to buy and the best odd-lot order to sell as part of odd-lot information as proposed.
81

81

See infra
section V.C.2.

D. Overarching Comments on the Proposing Release

The Commission received comments from a variety of market participants on the Proposing Release.
82

82
The comment letters on the Proposing Release (File No. 7-30-33) are
available at https://www.sec.gov/comments/s7-30-22/s73022.htm.

Many commenters broadly supported the Regulation NMS Proposal.
83

Two commenters urged the Commission to promptly adopt the Regulation NMS Proposal.
84

One commenter urged the Commission to revise and adopt the Rule 605 Proposal as well as the Regulation NMS Proposal without delay.
85

Another commenter suggested that the Commission prioritize the adoption of the Regulation NMS Proposal
86

stating that, of the four EMS Proposals related to equity market structure, the Regulation NMS Proposal “is the least controversial and the least interdependent on the other three, and so is the easiest one for the Commission to move forward”
87

and “has garnered the most consensus and support from various market participants.”
88

83

See, e.g.,
Letters from Mark Rogers dated Mar. 30, 2023 (“I approve of the proposed changes to Regulation NMS”); Omar Fakhro dated Mar. 28, 2023 (“I as a household investor strongly support this rule for a better and fair market for EVERYONE”); Danielle Ball dated Mar. 27, 2023 (“The proposed tick size regime, variable minimum pricing increment model, and revised round lot definition are important steps towards promoting fair and transparent pricing across trading venues.”); Keith Noble dated Apr. 1, 2023; Chris Miller dated Apr. 1, 2023; Kristen Palmer dated Apr. 1, 2023; Amanda Kappes dated Apr. 1, 2023; Ian Rohel, dated Apr. 1, 2023; Riley Hume dated Apr. 1, 2023; Matt Kelleher dated Apr. 1, 2023; Keagan Wethington dated Mar. 31, 2023; J.W. Verret, Associate Professor, George Mason University Antonin Scalia Law School, dated Jan. 12, 2024 (“Verret Letter III”) at 26 (“. . . the proposed amendments to Reg NMS rules regarding minimum pricing increments and the proposed reforms to volume/access fees both support the core principles of free market economics and will lead to a more competitive, transparent, and efficient market landscape.”); Eric Budish, Paul G. McDermott Professor of Economics and Entrepreneurship, The University of Chicago Booth School of Business, dated Jan. 18, 2024 (“Budish Letter”) at 1 (“. . . this set of rules changes—primarily, a finer tick-size for tick-constrained stocks, a lower access fee cap, and harmonization of pricing increments for on-exchange and off-exchange trading—will reduce both investors' costs and the overall complexity of U.S. equity markets.”); Stephen W. Hall, Legal Director and Securities Specialist, and Brady Williams, Legal Counsel, Better Markets, Inc., dated Mar. 31, 2023 (“Better Markets Letter I”) at 8-17; Joseph Saluzzi, Partner, Themis Trading LLC, dated Mar. 31, 2023 (“Themis Letter”) at 2-8; John Ramsay, Chief Market Policy Officer, Investors Exchange LLC, dated Mar. 20, 2023 (“IEX Letter I”); Letter Type A, of which 22 comments were received; Letter Type C, of which 5 comments were received; Letter Type D, of which 255 comments were received; Letter Type E, of which 14 comments were received; Letter Type G, of which 652 comments were received; Letter Type H, of which 853 comments were received; Letter Type I, of which 22 comments were received; Letter Type J, of which 15 comments were received; Letter Type K, of which 22 comments were received; and Letter Type L, of which 4 comments were received;
available at https://www.sec.gov/comments/s7-30-22/s73022.htm.

84

See, e.g.,
Letters from Tyler Gellasch, President & CEO, Healthy Markets Association, dated Mar. 31, 2023 (“Healthy Markets Letter I”) at 28, 31; J. W. Verret, Associate Professor, George Mason University Antonin Scalia Law School, dated Sept. 20, 2023 (“Verret Letter I”) at 1-2, 4, 5.

85

See
Healthy Markets Letter I at 28, 31.

86

See
Verret Letter I at 1.

87
Verret Letter I at 1-2.

88

See
Verret Letter I at 2 (stating that the Regulation NMS Proposal is supported by “a wealth of prior work by the Commission in the form of a pilot tick size study, comments submitted to the SEC regarding the transaction fee pilot, and numerous roundtables and proceedings of the SEC's Investor Advisory Committee and SEC's Equity Market Structure Advisory Committee.”).

Some commenters agreed that Rules 610 and 612 should be amended but recommended that the proposed amendments be modified and that the Commission consider more modest, incremental changes to minimize the possibility of unintended consequences and to enable the Commission and market participants to evaluate the impact of the changes on trading and execution quality.
89

89

See, e.g., infra
note 92.

The issues related to the amended rules have been considered by the Commission and market participants for several years.
90

Further, the Commission has analyzed data provided by market participants and conducted its own data analysis to inform the amendments that were included in the Proposing Release and in this release.
91

The Commission has evaluated the national market system and its operation in light of changes in the market and has sought input from market participants throughout this process.
92

After considering the comments, which are discussed in context below, the Commission is adopting amendments to these rules with certain modifications from the Proposing Release.

90

See, e.g.,
EMSAC Archives,
supra
note 4 (Rule 610 was considered at the EMSAC),
see also supra
note 4 (discussing the EMSAC);
infra
note 362 and accompanying text for a discussion of previous considerations of Rule 610. For a discussion of previous considerations of Rule 612,
see
Proposing Release,
supra
note 11, at 80272.

91

See infra
sections V.B.1; V.B.3.b.iv and VII.D.

92

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.
93

The Commission has considered the impact of the amendments on liquidity and does not believe that they will raise costs for investors.
94

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.

93

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.

94

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.
95

As discussed below,
96

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.
97

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.
98

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.
99

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.

95

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.

96

See infra
section III.C.

97

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

98

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.”).

99

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
at
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 supra
note 104.

With respect to the Rule 605 Amendments, the Commission does not agree with commenters that stated that amended rule 605 data must be analyzed before adoption of the changes in this release.
126

The amendments adopted in this release are not dependent on rule 605 data nor is the data from rule 605 reports necessary before the Commission makes changes to better protect investors and benefit the markets more broadly.
127

While the Rule 605 Amendments will bring improvements to disclosures for order executions of NMS stocks,
128

the Regulation NMS amendments address other structural concerns relating to investors' trading and the lack of transparency in the national market system. For example, quoted spreads for NMS stocks could not get tighter than $0.01 under preexisting Rule 612 for all quotes and orders in NMS stocks that were priced equal to, or greater than, $1.00 per share.

126

See supra
note 122.

127
Although the amendments adopted in this release are not dependent on the implementation of the Rule 605 Amendments, the amendments adopted in this release will enhance the usability of information in the recently amended rule 605 reports.
See infra
section VII.D.6.a.ii.

128

See
Rule 605 Amendments,
supra
note 10.

The Commission disagrees with the commenter that stated that the Commission should implement the

round lot and odd-lot information definitions after the implementation of the Rule 605 Amendments and then wait to assess the effects of these changes.
129

The commenter stated that it supported the round lot and odd-lot information definitions but stated, without providing details or any other support, that “these changes could have unintended impacts on price discovery, routing complexity, and trading costs.”
130

The Commission adopted the definitions in 2020 to provide transparency about better priced orders that are available in the market but are not fully transparent in NMS information. These definitions will result in the provision to market participants of important information about the prices at which market participants are willing to trade and therefore will enhance price discovery. Market participants may have to assess their order routing decisions based on this enhanced transparency of better priced orders that are available in the market.
131

129

See
State Street Letter at 3.

130

See
State Street Letter at 3.

131

See
Rule 605 Amendments,
supra
note 10, at 26482 (stating, “Rule 605's price improvement statistics that are relative to the best available displayed price will not be required to be reported until six months after odd-lot order information needed to calculate the best available displayed price is made available pursuant to an effective national market system plan.”).

As discussed below, the data analysis performed by the Commission and other market participants to assess changes in minimum pricing increments and the access fee caps were not derived from rule 605 reports.
132

While one commenter stated that rule 605 data should be used to assess the amendments adopted in this release, the Commission has utilized relevant and sufficient data other than rule 605 data that fully and robustly support the amendments.
133

One commenter states that if this proposal were to be finalized along with the amendments to Rule 605, “it appears that market participants and regulators would be unable to accurately assess the true impact of the market structure changes contained in this Proposal, precluding an `apples-to-apples' before-and-after comparison.”
134

However, market participants have other data with which to analyze the effects of these amendments.

132

See infra
section VII.D.6.a.iii (stating that the Commission did not rely on rule 605 data in its analyses in the Proposing Release and in this release).

133

See id.
The Commission also has considered the interaction of the compliance dates of the adopted amendments with the compliance date of the Rule 605 Amendments.
See infra
section VI; section VII.D.6.b.

134

See
Citadel Letter I at 29.

Some commenters stated that the EMS Proposals would have an impact on each other.
135

Some commenters stated that the EMS Proposals should have been analyzed together to assess how the proposals would relate to, and operate with, each other.
136

One group of members of Congress recommended that no equity market structure rule “should be finalized or implemented” until the Commission “[c]onduct[s] a comprehensive cost-benefit analysis of the aggregate impact of [these rules] and seek[s] public comment on this analysis[,]” and the Commission proposes “a reasonable, workable, and staggered schedule for public comment on the adoption and implementation of the proposals, considering their overlapping nature, significant compliance and operational burdens, and if they may be insurmountable for smaller or emerging firms.”
137

135

See, e.g.,
NYSE, Schwab, and Citadel Letter at 2; STA Letter at 4, 10-11; T. Rowe Price Letter at 3; RBC Letter at 2 and 5; Nasdaq Letter I at 1, 6; Dimensional Letter at 1-2; FIA PTG Letter II at 2; Schwab Letter II at 3, 37; Apex Letter at 14-15, 19; JPMorgan Letter at 2-3; Chamber of Commerce Letter at 2; BlackRock Letter at 3, 17; MMI Letter at 2-3, 9; B. Riley Letter at 2; Capital Group Letter at 5; Letters from Ari Rubenstein, CEO, GTS Securities LLC, dated Mar. 31, 2023 (“GTS Letter”) at 4, 9; Jatin Suryawanshi, Managing Director, Head of Global Quantitative Strategies, and Anna Ziotis Kurzrok, Managing Director, Head of Market Structure, Jefferies, LLC, dated May 2, 2023 (“Jefferies Letter”) at 1.
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
at
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

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2024-21867. Public record. Not legal advice.