Justia Agencies And Commissions Securities And Exchange Commission Joint Industry Plans; Order Approving the National Market System Plan To Implement a Tick Size Pilot Program by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, for a Two-Year Period, 27513-27553 [2015-11425]

Joint Industry Plans; Order Approving the National Market System Plan To Implement a Tick Size Pilot Program by BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, for a Two-Year Period, 27513-27553 [2015-11425]

Download as PDF Vol. 80 Wednesday, No. 92 May 13, 2015 Part III Securities and Exchange Commission mstockstill on DSK4VPTVN1PROD with NOTICES2 Joint Industry Plans; Notice VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 PO 00000 Frm 00001 Fmt 4717 Sfmt 4717 E:\FR\FM\13MYN2.SGM 13MYN2 27514 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices SECURITIES AND EXCHANGE COMMISSION [Release No. 34–74892; File No. 4–657] Joint Industry Plans; Order Approving the National Market System Plan To Implement a Tick Size Pilot Program by BATS Exchange, Inc., BATS YExchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as Modified by the Commission, for a Two-Year Period May 6, 2015. I. Introduction On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, the Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., (collectively ‘‘SROs’’ or ‘‘Participants’’), filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 11A of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 608 thereunder,2 a proposed national market system (‘‘NMS’’) Plan to Implement a Tick Size Pilot Program on a one-year basis (‘‘NMS plan’’).3 The Participants filed the NMS plan to comply with an order issued by the Commission on June 24, 2014 (‘‘June 2014 Order’’).4 The NMS plan, which included the details of Participants’ proposal of the Tick Size Pilot Program (‘‘Tick Size Pilot’’), was published for comment in the Federal Register on November 7, 2014.5 The Commission received 77 comment letters in response to the NMS plan.6 On 1 15 U.S.C. 78k–1. CFR 242.608. 3 See Letter from Brendon J. Weiss, Vice President, Intercontinental Exchange, Inc., to Secretary, Commission, dated August 25, 2014. 4 See Securities Exchange Act Release No. 72460 (June 24, 2014), 79 FR 36840 (June 30, 2014). 5 See Securities and Exchange Act Release No. 73511 (November 3, 2014), 79 FR 66423 (‘‘Notice’’). 6 See Letters from John Richardson, dated August 26, 2014 (‘‘Richardson Letter’’); Arthur T. Ling, dated August 26, 2014 (‘‘Ling Letter’’); Dan Blecha, dated August 26, 2014 (‘‘Blecha Letter’’); Tom Sosnoff, dated August 27, 2014 (‘‘Sosnoff Letter’’); Michael Choffy, dated August 28, 2014 (‘‘Choffy Letter’’); Joseph Runsdorf, dated August 29, 2014 (‘‘Runsdorf Letter’’); Tony J. Gagliano, dated September 1, 2014 (‘‘Gagliano Letter I’’); Howard L. Greenblatt, dated September 2, 2014 (‘‘Greenblatt mstockstill on DSK4VPTVN1PROD with NOTICES2 2 17 VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Letter’’); Ernest Callipari, dated September 2, 2014 (‘‘Callipari Letter’’); Ali Bangura, dated September 3, 2014 (‘‘Bangura Letter’’); Tony J. Gagliano, dated September 3, 2014 (‘‘Gagliano Letter II’’); Theodore R. Lazo, Managing Director and Associate General Counsel of Securities Industry and Financial Markets Association (‘‘SIFMA’’), dated September 9, 2014 (‘‘SIFMA Letter I’’); John C. Nagel, Managing Director and Sr. Deputy General Counsel of Citadel, LLC, dated September 12, 2014 (‘‘Citadel Letter I’’); Christopher Nagy, CEO, and Dave Lauer, President, KOR Group LLC, dated September 15, 2014 (‘‘KOR Letter I’’); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel of Managed Funds Association, dated September 20, 2014 (‘‘MFA Letter I’’); John Daley, Chairman of the Board and James Toes, President & CEO of Security Traders Association, dated September 23, 2014 (‘‘STA Letter I’’); Brian A. Johnson, Executive Director for Research of Committee on Capital Markets Regulation, dated September 26, 2014 (‘‘CMR Letter I’’); Jeffrey P. Ricker, dated October 6, 2014 (‘‘Ricker Letter’’); David Adorney, Professional Equity Trader, dated November 11, 2014 (‘‘Adorney Letter’’); Richard B. Gorelick, CEO of RGM Advisors, LLC, dated November 13, 2014 (‘‘RGM Letter’’); Representative Sean P. Duffy, U.S. House of Representatives, dated November 17, 2014 (‘‘Duffy Letter’’); Joseph Galinskie, dated November 18, 2014 (‘‘Galinskie Letter’’); Tom Quaadman, Vice President, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, dated November 20, 2014 (‘‘CCMC Letter I’’); David Shields, Vice Chairman & Co-CEO, Wellington Shields & Co., dated December 2, 2014 (‘‘Wellington Shields Letter’’); Dave Weild, Chairman & CEO, IssuWorks, Inc., dated December 3, 2014 (‘‘IssuWorks Letter’’); Tim Quast, President, ModernNetworks IR, LLC, dated December 8, 2014 (‘‘ModernNetworks Letter’’); Larry Tabb, Founder & CEO, Tabb Group, dated December 10, 2014 (‘‘Tabb Letter’’); John Endean, President, American Business Conference, dated December 12, 2014 (‘‘ABC Letter’’); Scott Kupor, Managing Partner, Andreessen Horowitz and Jeffrey M. Solomon, CEO Cowen and Company; Equity Capital Formation Task Force, dated December 18, 2014 (‘‘ECFTF Letter’’); Eduardo A. Repetto, Co-Chief Executive Officer and Co-Chief Investment Officer, Dimensional Fund Advisors, dated December 18, 2014 (‘‘DFA Letter’’); Sal Arnuk and Joseph Saluzzi, Partners and Co-Founders, Themis Trading, LLC, dated December 19, 2014 (‘‘Themis Letter’’); Simon D. Yates, CEO, Two Sigma Securities, LLC, dated December 19, 2014 (‘‘Two Sigma Letter’’); Mortimer J. Buckley, Managing Director and Chief and Investment Officer, The Vanguard Group, Inc., dated December 19, 2014 (‘‘Vanguard Letter’’); Rob Flatley, CEO and Dave Weisberger, MD, Head of Market Structure Analysis, CoreOne Technologies LLC, submitted December 19, 2014 (‘‘CoreOne Letter’’); Alan F. Hill, CEO and William K. Jones, Executive Chairman, JonesTrading Institutional Services LLC, dated December 19, 2014 (‘‘JonesTrading Letter’’); R. Glenn Hubbard, CoChair, John L. Thornton, Co-Chair and Hal S. Scott, Director, Committee on Capital Markets Regulation, dated December 19, 2014 (‘‘CMR Letter II’’); John Daley, Chairman of the Board and James Toes, President & CEO, Security Traders Association, dated December 19, 2014 (‘‘STA Letter II’’); John McCarthy, General Counsel, KCG Holdings, Inc., dated December 19, 2014 (‘‘KCG Letter’’); Douglas A. Cifu, Chief Executive Officer, Virtu Financial, dated December 19, 2014 (‘‘Virtu Letter’’); E. Cartier Esham, Executive Vice President, Emerging Companies, Biotechnology Industry Organization, dated December 22, 2014 (‘‘BIO Letter’’); Micah Hauptman, Financial Services Counsel, Consumer Federation of America, dated December 22, 2014 (‘‘CFA Letter’’); Bobby Franklin, President & CEO, National Venture Capital Association, dated December 22, 2014 (‘‘NVCA Letter’’); Eric Swanson, General Counsel and Secretary, BATS Global PO 00000 Frm 00002 Fmt 4701 Sfmt 4703 Markets, Inc. dated December 22, 2014 (‘‘BATS Letter’’); Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated December 22, 2014 (‘‘SIFMA Letter II’’); Daniel G. Weaver, Ph.D., Professor of Finance, Director, Master of Financial Analysis Program, Associate Director, Whitcomb Center for Research in Financial Services, Rutgers, The State University of New Jersey, dated December 22, 2014 (‘‘Weaver Letter’’); Stuart J. Kaswell, Executive Vice President & Managing Director, General Counsel, Managed Funds Association, dated December 22, 2014 (‘‘MFA Letter II’’); Kurt N. Schacht, Managing Director and James C. Allen, Head, CFA Institute, dated December 22, 2014 (‘‘CFA Institute Letter’’); Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo Advisors, LLC, dated December 22, 2014 (‘‘Wells Fargo Letter’’); Daniel Keegan, Managing Director, Head of Equities for the Americas, Citigroup Global Markets Inc., dated December 22, 2014 (‘‘Citigroup Letter’’); Richie Prager, Managing Director; Hubert DeJesus, Managing Director; Supurna Vedbrat, Managing Director; Joanne Medero, Managing Director, BlackRock, Inc., dated December 22, 2014 (‘‘BlackRock Letter’’); Adam Sussman, Head of Market Structure, Liquidnet, Inc., dated December 22, 2014 (‘‘Liquidnet Letter’’); Manisha Kimmel, Managing Director, Financial Information Forum, dated December 22, 2014 (‘‘FIF Letter’’); Tom Quaadman, Vice President, U.S. Chamber of Commerce, Center for Capital Markets Competitiveness, dated December 22, 2014 (‘‘CCMC Letter II’’); Ari Burstein, Senior Counsel, Investment Company Institute, dated December 22, 2014 (‘‘ICI Letter’’); Jeff Brown, Senior Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc., dated December 22, 2014 (‘‘Schwab Letter’’); Kimberly Unger, CEO and Executive Director, Security Traders Association of New York, dated December 22, 2014 (‘‘STANY Letter’’); Scott C. Goebel, Senior Vice President & General Counsel, Fidelity Management & Research Co., dated December 22, 2014 (‘‘Fidelity Letter’’); Dennis Dick, CFA, Head, Equity Market Structure, Bright Trading LLC, dated December 22, 2014 (‘‘Bright Trading Letter’’); Raymond M. Tierney III, President and Chief Executive Officer, Gary Stone, Chief Strategy Officer, Bloomberg Tradebook LLC dated December 22, 2014 (‘‘Bloomberg Letter’’); Mao Ye, Assistant Professor of Finance, University of Illinois, UrbanaChampaign, dated December 22, 2014 (‘‘Ye Letter’’); Paul J. Jiganti, Managing Director, Market Structure and Client Advocacy and John S. Markle, Deputy General Counsel—Retail and Clearing Operations, TD Ameritrade, Inc., dated December 22, 2014 (‘‘TD Ameritrade Letter’’); James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University dated December 22, 2014 (‘‘Angel Letter’’); Christopher Nagy and Dave Lauer, KOR Group, LLC dated December 22, 2014 (‘‘KOR Letter II’’); James G. Ongena, General Counsel, Chicago Stock Exchange, Inc., dated December 22, 2014 (‘‘CHX Letter’’); Andrew Stevens, General Counsel, IMC Financial Markets, dated December 30, 2014 (‘‘IMC Letter’’); Michael Jacejko, Chief Executive Manager, Birch Bay Capital, LLC, dated December 31, 2014 (‘‘Birch Bay Letter’’); James P. Selway III, Managing Director, Head of Electronic Brokerage, ITG Inc., dated January 5, 2015 (‘‘ITG Letter’’); John C. Nagel, Managing Director & Sr. Deputy General Counsel, Citadel LLC, dated January 5, 2015 (‘‘Citadel Letter II’’); Thomas Wittman, Executive Vice President, The NASDAQ OMX Group, LLC, dated January 16, 2015 (‘‘Nasdaq Letter’’); Brendon J. Weiss, Co-Head Government Affairs, NYSE, LLC, dated January 16, 2015 (‘‘NYSE Letter’’); Senators Mark R. Warner and Pat Toomey, The United States Senate, dated January 23, 2015 (‘‘Warner-Toomey Letter’’); Daniel Zinn, General Counsel, OTC Markets Group Inc., dated February 24, 2015 (‘‘OTC Markets Letter’’); Jared Albert, dated March 10, 2015 (‘‘Albert Letter’’); Representative Juan Vargas, U.S. House of Representatives, dated March 27, E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices February 26, 2015, the Commission extended the deadline for Commission action on the NMS plan and designated May 6, 2015 as the new date by which the Commission would be required to take action.7 This order approves the NMS plan, as modified by the Commission, for a two-year period. A copy of the NMS plan, as modified by the Commission, is attached as Exhibit A hereto. II. Background mstockstill on DSK4VPTVN1PROD with NOTICES2 Since the inception of decimalization 8 in 2001, there has been a significant shift in the nature of trading, the structure of the markets, and the roles of market participants. In the context of decimalization, market participants and others have raised concerns that the shift to quoting and trading in the one penny minimum price variation may have had a detrimental impact on the market quality for securities of small and middle capitalization companies. For example, a few studies issued after the implementation of decimalization raised questions regarding whether decimalization has reduced incentives for underwriters to pursue public offerings of smaller companies, limited the production of sell-side research for small and middle capitalization companies and made it less attractive to become a market maker in the shares for smaller companies.9 In 2012, the Jumpstart Our Business Startups Act (‘‘JOBS Act’’) 10 directed the Commission to conduct a study and report to Congress on how decimalization affected the number of initial public offerings (‘‘IPOs’’), and the liquidity and trading of securities of 2015 (‘‘Vargas Letter’’); and Atsushi Saito, Director and Representative Executive Officer, Group CEO, Japan Exchange Group, Inc., received April 17, 2015 (‘‘Saito Letter’’). The Commission received two comment letters after the June 2014 Order was issued and before the proposed NMS plan was submitted. These comment letters are included in the comment file with the other comment letters received in response to the NMS plan. See also Letters from Shawn Leary, dated August 24, 2014 (‘‘Leary Letter’’); and Tony BenBrahim, dated August 24, 2014 (‘‘BenBrahim Letter’’). 7 See Securities and Exchange Act Release No. 74388, 80 FR 12054 (March 5, 2015). 8 Decimalization refers to setting the tick size at penny increments. A tick is the minimum pricing increment that can be used to trade securities. Prior to 2001, securities in the U.S. equity markets were generally quoted and traded in fractional tick sizes, ranging from $1/32 or $1/64 for low-priced securities to $1/8 or $1/4 for higher-priced securities. 9 See June 2014 Order, supra note 4, for a complete discussion of the background on decimalization. 10 Jumpstart Our Business Startups Act, Pub. L. 112–106, 126 Stat. 306 (2012). VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 smaller capitalization companies.11 The JOBS Act also provided that the Commission could, by rule, designate a minimum increment for the securities of emerging growth companies 12 that is greater than $0.01 but less than $0.10 for use in all quoting and trading of securities in any exchange or other execution venue, if the Commission determined that such securities should be quoted and traded using a minimum increment of greater than $0.01.13 The Commission submitted the staff study to Congress in July 2012 (‘‘Decimalization Report’’).14 The Decimalization Report did not reach any firm conclusions about the impact of decimalization on the number of IPOs or the liquidity and trading of the securities of small capitalization companies.15 However, based on the information considered in the Decimalization Report, staff recommended that ‘‘[t]he Commission should not proceed with the specific rulemaking to increase tick sizes, as provided for in Section 106(b) of the JOBS Act, but should consider additional steps that may be needed to determine whether rulemaking should be undertaken in the future.’’ 16 The Decimalization Report suggested a public roundtable, where recommendations could be presented on a pilot program that would generate data to allow the Commission to further assess decimalization’s impact. The Commission staff convened a Decimalization Roundtable, in February 2013, with broad participation from market participants, academics and others, including an issuer representative. Many panelists believed that factors other than decimalization were more significant contributors to the decline of IPOs in recent years. Although participants offered diverging views on the likely outcome of any increase in the minimum tick size, there was broad support among the panelists for the Commission to conduct a pilot program to gather further information, particularly with respect to the impact of wider tick sizes on liquidity in the 11 Section 106(b) of the JOBS Act. 15 U.S.C. 78k– 1(c)(6). 12 An ‘‘emerging growth company’’ is defined in the Securities Act of 1933 (‘‘Securities Act’’) and the Act as an issuer with total annual gross revenues of less than $1 billion during its most recently completed fiscal year. See Section 2(a)(19) of the Securities Act and Section 3(a)(80) of the Act. 13 Id. 14 Report to Congress on Decimalization (July 2012) available at https://www.sec.gov/news/studies/ 2012/decimalization-072012.pdf. 15 See Decimalization Report supra note 13. See also June 2014 Order supra note 4 (describing the Decimalization Report). 16 Id. PO 00000 Frm 00003 Fmt 4701 Sfmt 4703 27515 securities of small capitalization companies. Some panelists, however, expressed concern about the potential costs to investors of wider minimum tick sizes.17 In June 2014, the Commission issued the June 2014 Order, pursuant to Section 11A(a)(3)(B) of the Act,18 directing the Participants to act jointly in developing and filing with the Commission an NMS plan to implement a pilot program that, among other things, would widen the quoting and trading increment for certain small capitalization stocks.19 The Commission issued the June 2014 Order to further study and assess the impact of decimalization on the securities of small capitalization companies. Pursuant to the June 2014 Order, on August 25, 2014, the Participants filed the proposed NMS plan.20 As discussed in detail throughout this order, the Commission believes that the Tick Size Pilot, as reflected in the proposed NMS plan, and subject to the modifications prescribed by the Commission, should support further examination and analysis on the impact of tick sizes on the trading and liquidity of the securities of small capitalization companies. The Commission believes that altering tick sizes could result in significant market-wide benefits and improvements to liquidity and capital formation. Yet, as discussed in detail below, these changes could also impose costs, including on investors resulting from larger spreads. Because of the potential significance of the benefits and costs, as well as the uncertainty that currently exists about the likely outcome of changing tick sizes, the Commission believes it is appropriate to test these important issues in a way that can produce robust results that informs future policy making. The Tick Size Pilot is therefore, by design, an objective, data-driven test that is designed to evaluate how a wider tick size would impact trading, liquidity, and market quality of securities of smaller capitalization companies. The Commission believes that the Tick Size Pilot, as now constructed, is necessary to provide for a test that can produce robust results that will allow the Commission to effectively test the potential benefits and costs of permanently changing tick sizes for smaller capitalization stocks. 17 Information about the Decimalization Roundtable, including the transcript, comment letters and list of panelists is available at https:// www.sec.gov/spotlight/decimalization.shtml. 18 15 U.S.C. 78k–1(a)(3)(B). 19 See June 2014 Order supra note 4. 20 See NMS plan supra note 3. E:\FR\FM\13MYN2.SGM 13MYN2 27516 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 The Commission believes that the potential magnitude of the benefits that would be revealed by the Tick Size Pilot justify the costs of running these tests. The effect of wider tick sizes for small capitalization stocks on trading, liquidity, and market quality is not clear and the Tick Size Pilot will provide data to analyze any such effects. A wider tick size for small capitalization stocks may change the composition of market participants for these stocks as well as the behavior of market participants. The wider tick size may incentivize market makers to increase their market making activities in these stocks. This, in turn, may attract more investors and with increased interest in those stocks, trading activity may increase, which may also improve liquidity and market quality. There are many interconnected dimensions to trading, liquidity, and market quality. If a wider tick size leads to more active market making and attracts more investors to small capitalization stocks, we may observe positive effects on trading, liquidity, and market quality as measured by metrics such as trading volume, displayed depth, effective spreads, or execution costs for small and large trades. Improved liquidity and market quality would be desirable for any stock, but would be particularly beneficial for small capitalization stocks because these stocks tend to be difficult and/or expensive to trade, which may discourage investment. Were there to be improved liquidity, investors and issuers would benefit. Investors would benefit because it would be easier and less expensive for them to trade in these stocks. Issuers would benefit from improved liquidity and market quality in two ways. First, more trading activity and investor attention may make an issuer’s stock more attractive, which may reduce the company’s cost of capital as well as increase their opportunities to raise capital. Second, improved liquidity may reduce an issuer’s cost of capital because stocks with higher liquidity tend to have lower cost of capital. Consequently, improved liquidity may reduce liquidity risk and translate into lower cost of capital.21 We expect these benefits would manifest 21 See, e.g., Amihud, Y., Mendelson, H., Asset pricing and the bid-ask spread, 17 Journal of Financial Economics 223, (1986); Easley, D., Hvidkjaer, S. O’Hara, M., Is Information Risk a Determinant of Asset Returns?, 57 Journal of Finance 2185 (2002); Easley, D., O’Hara, M., Information and the Cost of Capital, 59 Journal of Finance 1553 (2004); Acharya, V., Pedersen, L., Asset Pricing with Liquidity Risk, 77 Journal of Financial Economics 375 (2005). VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 during the Pilot Period if they are in fact present. The Commission, however, recognizes that these benefits may not manifest in the manner or to the extent anticipated. And, as noted above, we cannot know in advance the full effects, whether they be positive or negative, of a wider tick size on the market behavior of market participants in response to the Tick Size Pilot. As discussed in detail below, the Commission has seriously considered the concerns about costs that implementation of the Tick Size Pilot would create for market participants and the complexity of the Tick Size Pilot, and has tried to mitigate both where possible without undermining the objectives of the Tick Size Pilot. The Commission nevertheless believes that incurring the costs of the Tick Size Pilot is appropriate in these circumstances. The Tick Size Pilot will provide the Commission and interested parties with real-world data regarding the effect of wider tick sizes on trading, liquidity and market quality for smallcapitalization companies, and this empirical data will inform analyses and potential future regulatory actions to, among other things, capture any benefits from wider tick sizes on a permanent basis.22 Therefore, the Commission finds that the NMS plan is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act. III. Description of the Proposed NMS Plan and the Tick Size Pilot The NMS plan filed by the Participants contained provisions to implement the Tick Size Pilot,23 including provisions related to the administration and operation of the Tick Size Pilot, the data to be collected and made public, and the specific assessments to be conducted by the Participants. In this section, the proposed NMS plan is described, and further below there is discussion and analysis of the comments received and the NMS plan, as approved with Commission modifications. 22 The Commission notes that certain commenters believed that the Tick Size Pilot could provide valuable data and should be studied notwithstanding its potential costs. See Tabb Letter at 8; CFA Institute Letter at 2; CHX Letter at 17; Nasdaq Letter at 5–6; and NYSE Letter at 3. 23 See NMS plan supra note 3. PO 00000 Frm 00004 Fmt 4701 Sfmt 4703 A. Criteria for Pilot Securities Section V of the NMS plan sets forth five criteria for selection of NMS common stocks 24 that would be included in the Tick Size Pilot (‘‘Pilot Securities’’). The five criteria for determining the Pilot Securities are: (1) a market capitalization 25 of $5 billion or less on the last day of the Measurement Period; 26 (2) a Closing Price 27 of at least $2.00 on the last day of the Measurement Period; (3) a Closing Price on every U.S. trading day during the Measurement Period that is not less than $1.50; (4) a Consolidated Average Daily Volume (‘‘CADV’’) 28 during the Measurement Period of one million shares or less; and (5) a Measurement Period Volume-Weighted Average Price (‘‘VWAP’’) 29 of at least $2.00. Further, the Participants proposed that an NMS 24 The NMS plan defines NMS common stock as an NMS stock that is common stock of an operating company. See NMS plan Section (I)(Q). NMS stock means any NMS security other than an option. See 17 CFR 242.600(b)(47). NMS security means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. See 17 CFR 242.600(b)(46). 25 The NMS plan calculates market capitalization by multiplying the total number of shares outstanding on such day by the Closing Price of the security on such date. See NMS plan Section (V)(A)(1). 26 The NMS plan defines Measurement Period as the U.S. trading days during the three calendar month period ending at least 30 days prior to the effective date of the Pilot Period. See NMS plan Section (I)(N). The NMS plan defines Pilot Period as the operative period of the Tick Size Pilot, lasting one year from the date of implementation. See NMS plan Section (I)(U). As discussed further below, in response to comments and after additional consideration, the Commission has modified the market capitalization threshold to lower it to $3 billion or less. In addition, as discussed further below, in response to comments and after additional consideration, the Commission has modified the definition of Pilot Period to extend the duration of the Tick Size Pilot to two years. See infra Section V.B. 27 The NMS plan defines Closing Price as the closing auction price on the primary listing exchange or if not available, the last regular-way trade reported by the processor prior to 4:00 p.m. ET. See NMS plan Section (I)(H). The NMS plan defines processor as the single plan processor responsible for the consolidation of information for an NMS stock pursuant to Rule 603(b) of Regulation NMS. See NMS plan Section (I)(Y). 28 The NMS plan calculates CADV by adding the single-counted share volume of all reported transactions in the Pilot Security during the Measurement Period and dividing by the total number of U.S. trading days during the Measurement Period. See NMS plan Section (V)(A)(4). 29 The NMS plan calculates the Measurement Period VWAP by calculating the volume-weighted average price for each U.S. trading day during the Measurement Period, summing the daily volumeweighted average price across the Measurement Period, and dividing by the total number of U.S. trading days during the Measurement Period. See NMS plan Section (V)(A)(5). E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 common stock for an issuer that had its IPO within 6 months of the start of the Pilot Period would not be eligible to be a Pilot Security. B. Assignment of Pilot Securities As proposed in the NMS plan, the Tick Size Pilot would consist of three Test Groups, with each Test Group consisting of 400 Pilot Securities. The Pilot Securities that are not placed in the Test Groups would be placed in the Control Group. The Operating Committee 30 of the NMS plan would oversee the process of assigning the Pilot Securities into the Control Group and the three Test Groups. First, the Pilot Securities would be placed into a maximum of 27 categories by means of a stratified random sampling process. Each Pilot Security would be categorized as: (1) low, medium, or high share price based on the Measurement Period VWAP; (2) low, medium, or high market capitalization based on the last day of the Measurement Period; and (3) low, medium, or high trading volume based on the CADV during the Measurement Period. Each category (share price, market capitalization, trading volume) would then be divided into three subcategories, each containing a third of the securities in the category. This process would yield 27 categories. However, if a single category contained fewer than ten securities, such category would be combined with another category that contains at least ten securities. If two or more categories contained fewer than ten securities each, those categories would be combined, provided that the combined category contains at least ten securities. If the combined category contains fewer than ten securities, then such category would be combined with another of the 27 categories that contains at least ten securities. After the categories are finalized, the Pilot Securities would then be randomly selected from each category to be included in the three Test Groups, based on the percentage of Pilot Securities in such category. Each category would be represented in all three Test Groups based on the category’s relative proportion to the population of Pilot Securities. Similarly, a primary listing exchange’s securities would be selected from each category and included in the three Test Groups. Each primary listing exchange would, free of charge, make publicly available on its Web site the list of Pilot Securities 30 See NMS plan Section (III)(C) on the composition of the Operating Committee. Each Participant will have one individual staff member to represent the Participant on the Operating Committee. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 27517 that are listed on such exchange and that are included in the Control Group and Test Groups. Appendix A to the NMS plan provides the specific details about the data that each exchange would make available on its Web site to identify the Pilot Securities. the best protected offer.33 Second, Retail Investor Orders 34 could be executed with price improvement of at least $0.005 better than the best protected bid or the best protected offer. Finally, Negotiated Trades 35 could trade in increments less than $0.05. C. Control Group and Test Groups As noted above, the Tick Size Pilot would contain a Control Group and three Test Groups, each of which has incrementally different quoting and trading requirements. 4. Test Group Three: Widened Quote and Trade Increment With a Trade-At Prohibition Pilot Securities in Test Group Three would be subject to the same quoting and trading increments as those in Test Group Two as well as the same exceptions. However, the trading of these securities would also be subject to a trade-at prohibition.36 The trade-at 1. Control Group Pilot Securities in the Control Group would continue to be quoted and traded at any price increment currently permitted. 2. Test Group One: Widened Quote Increment Pilot Securities in Test Group One would have a quoting increment of $0.05 but could continue to trade at any currently permitted price increment. The Participants would be required to adopt rules that would prohibit the Participants or any member of a Participant from displaying, ranking, or accepting from any person any displayable or non-displayable bids or offers, orders, or indications of interest in increments other than $0.05. Orders priced to execute based on the midpoint and orders entered in a Participantoperated retail liquidity program 31 could be ranked and accepted in increments of less than $0.05. 3. Test Group Two: Widened Quote and Trade Increment Pilot Securities in Test Group Two would have the same quoting increment as Test Group One ($0.05) along with the applicable quoting exceptions, but could only be traded in $0.05 minimum increments. The Participants would be required to adopt rules that prohibit trading centers operated by the Participants and members of the Participants from executing orders in any Pilot Security in Test Group Two in price increments other than $0.05. The $0.05 trading increment would apply to all trades, including brokered cross trades, absent an exception. Three exceptions to the $0.05 trading increment would be applicable. First, trading could occur at the midpoint of the National Best Bid (‘‘NBB’’) and the National Best Offer (‘‘NBO’’ and together with NBB, ‘‘NBBO’’),32 or the midpoint of the best protected bid and 31 See NASDAQ OMX BX Rule 4780; BATS Y Rule 11.24; NYSE Rule 107C; NYSE MKT—Equities Rule 107C and NYSE Arca Equities Rule 7.44. 32 See 17 CFR 242.600(b)(42). PO 00000 Frm 00005 Fmt 4701 Sfmt 4703 33 See 17 CFR 242.600(b)(57). NMS plan Section (I)(DD) (defining Retail Investor Order as ‘‘an agency order or a riskless principal order originating from a natural person, provided that, prior to submission, no change is made to the terms of the order with respect to price or side of market and the order does not originate from a trading algorithm or any other computerized methodology. The Participant that is the DEA of a member of a Participant operating a trading center executing a Retail Investor Order will require such trading center to sign an attestation that substantially all orders to be executed as Retail Investor Orders will qualify as such under the [NMS] [p]lan’’). 35 See NMS plan Section (I)(P) (defining Negotiated Trades as ‘‘(i) a Benchmark trade, including, but not limited to, a VWAP trade or a Time-Weighted Average Price trade, provided that, if such trade is composed of two or more component trades, each component trade complies with the quoting and trading increment requirements of the [NMS] [p]lan, or with an exception to such requirements, or (ii) a Pilot Qualified Contingent Trade.’’). The NMS plan defines a Benchmark trade as ‘‘the execution of an order at a price that was not based, directly or indirectly, on the quoted price of a Pilot Security at the time of execution and for which the material terms were not reasonably determinable at the time the commitment to execute the order was made.’’ See NMS plan Section (I)(C). The NMS plan defines Pilot Qualified Contingent Trade as ‘‘a transaction consisting of two or more component orders, executed as agent or principal, where: (1) at least one component order is in an NMS common stock; (2) all components are affected with a product or price contingency that either has been agreed to by the respective counterparties or arranged for by a broker-dealer as principal or agent; (3) the execution of one component is contingent upon the execution of all other components at or near the same time; (4) the specific relationship between the component orders (e.g., the spread between the prices of the component orders) is determined at the time the contingent order is placed; (5) the component orders bear a derivative relationship to one another, represent different classes of shares of the same issuer, or involve the securities of participants in mergers or with intentions to merge that have been announced or since canceled; and (6) the transaction is fully hedged (without regard to any prior existing position) as a result of the other components of the contingent trade.’’ See NMS plan Section (I)(V). 36 A ‘‘trade-at’’ is defined under the NMS plan as an execution by a trading center of a sell order for a Pilot Security at the price of a protected bid or the execution of a buy order for a Pilot Security at the price of a protected offer. See NMS plan Section (I)(LL). As discussed further below, after additional 34 See E:\FR\FM\13MYN2.SGM Continued 13MYN2 27518 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 prohibition, as defined under the NMS plan, would‘‘ (1) prevent a trading center that was not quoting from pricematching protected quotations and (2) permit a trading center that was quoting at a protected quotation to execute orders at that level, but only up to the amount of its displayed size’’ (‘‘TradeAt Prohibition’’). Specifically, the Participants would be required to adopt rules prohibiting trading centers operated by the Participants and members of the Participants from executing a sell order for a Pilot Security at the price of a protected bid, or from executing a buy order for a Pilot Security at the price of a protected offer, unless such executions fall within certain enumerated exceptions. The NMS plan contains thirteen exceptions to the Trade-At Prohibition. These exceptions describe when a trading center would be permitted to execute an order for a Pilot Security at a price equal to a protected bid or protected offer. The first exception would be for when an order is executed by a trading center that is displaying a quotation, via either a processor or an SRO quotation feed, at a price equal to the traded-at protected quotation, but only up to the trading center’s full displayed size (‘‘Size Limitation’’). A further condition to this exception proposed by the Participants would limit trading centers’ ability to execute an incoming order by requiring that executions occur on the venue where the protected quote was displayed. Specifically, the Participants proposed that where the quotation is displayed through a national securities exchange, the execution at the size of the order must occur against the displayed size on such national securities exchange (‘‘Exchange Venue Limitation’’). Where the quotation is displayed through the Alternative Display Facility (‘‘ADF’’) or another facility approved by the Commission that does not provide execution functionality, the execution of the order must occur against the displayed size in accordance with the rules of the ADF or such approved facility (‘‘ADF Venue Limitation’’ together with Exchange Venue Limitation, ‘‘Venue Limitation’’).37 In addition, the NMS plan provides that Block Size orders 38 and Retail consideration, the Commission modified the definition of trade-at to clarify that it applies during Regular Trading Hours. See infra Section V.D.4. 37 As discussed further below, in response to comments and after additional consideration, the Commission has modified the NMS plan to remove the Venue Limitation. See infra Section V.D.4.d. 38 See 17 CFR 242.600(b)(9). As discussed further below, in response to comments and after additional consideration, the Commission has VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Investor Orders executed with at least $0.005 price improvement would be excepted from the Trade-At Prohibition. These exceptions were also set forth in the June 2014 Order. The next exceptions (numbers 4 through 12) are based on the exceptions that are found in Rule 611 of Regulation NMS.39 Specifically, the NMS plan provides that trading centers would be permitted to execute an order for a Pilot Security at a price equal to a protected bid or protected offer in the following situations: (1) when the trading center displaying the protected quotation that was traded-at was experiencing a failure, material delay, or malfunction of its systems or equipment; (2) when an order is executed as part of a transaction that was not a ‘‘regular way’’ contract; (3) when an order is executed as part of a single-priced opening, reopening, or closing transaction by the trading center; (4) when a protected bid was priced higher than a protected offer in the Pilot Security; (5) when an order is identified as an Intermarket Sweep Order; (6) when an order is executed by a trading center that simultaneously routed Trade-at Intermarket Sweep Orders 40 to execute against the full displayed size of the protected quotation that was traded-at; (7) when the order is executed as part of a Negotiated Trade; (8) when the trading center displaying the protected quotation that was traded-at, had displayed, within one second prior to execution of the transaction that constituted the trade-at, a best bid or best offer, as applicable, for the Pilot Security with a price that was inferior to the price of the trade-at transaction; and (9) when the order executed by a trading center which, at the time of order receipt, the trading center had guaranteed an execution at no worse than a specified price (‘‘stopped order’’) where: (A) the stopped order was for the account of a customer; (B) the customer agreed to the specified price on an modified the definition of Block Size for purposes of the Tick Size Pilot. See infra Section V.D.4.e. 39 17 CFR 242.611. 40 The NMS plan defines Trade-at Intermarket Sweep Orders as ‘‘a limit order for a Pilot Security that meets the following requirements: (1) When routed to a trading center, the limit order is identified as an Intermarket Sweep Order; and (2) Simultaneously with the routing of the limit order identified as an Intermarket Sweep Order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the Pilot Security with a price that is equal to the limit price of the lit order identified as an Intermarket Sweep Order. These additional routed orders also must be marked as Intermarket Sweep Orders.’’ See NMS plan Section (I)(MM). PO 00000 Frm 00006 Fmt 4701 Sfmt 4703 order-by-order basis; and (C) the price of the trade-at transaction was, for a stopped buy order, equal to the NBB in the Pilot Security at the time of execution or, for a stopped sell order, equal to the NBO in the Pilot Security at the time of execution. Lastly, the NMS plan contains an exception for an order of a fractional share of a Pilot Security, provided that such fractional share order was not the result of breaking an order for one or more whole shares of a Pilot Security into orders for fractional shares or was not otherwise effected to evade the requirements of the Trade-At Prohibition or any other provisions of the Tick Size Pilot. D. Collection and Assessment of Tick Size Pilot Data 1. Trading Center Data The Participants would be responsible for collecting data specified in Appendix B of the NMS plan, which generally includes daily market quality statistics, data on specific orders, and data on market makers 41 (‘‘Trading Center Data’’).42 In addition, each Participant that is the Designated Examining Authority (‘‘DEA’’) 43 of a member of a Participant operating a trading center would require such member to collect and provide to the DEA data related to daily market quality statistics and data related to specific orders consistent with the terms and conditions specified in Appendix B of the NMS plan. The Participants and each member of a Participant operating a trading center would also be required to collect such data for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. Each Participant would make available to other Participants a list of members designated as market makers on that Participant’s trading center. On a monthly basis, the Participants and the DEA for each member of a 41 A ‘‘market maker’’ is defined under the NMS plan as ‘‘a dealer registered with any self-regulatory organization, in accordance with the rules thereof, as (i) a market maker or (ii) a liquidity provider with an obligation to maintain continuous, twosided trading interest.’’ See NMS plan Section (I)(L). 42 See NMS plan Appendix B. 43 A DEA is defined under the NMS plan as ‘‘the self-regulatory organization responsible for (i) examining such member for compliance with the financial responsibility requirements imposed by the Exchange Act, or by Commission or selfregulatory organization rules, (ii) receiving regulatory reports from such member, (iii) examining such member for compliance with, and enforcing compliance with, specified provisions of the Exchange Act, the rules and regulations thereunder, and self-regulatory organization rules, and (iv) carrying out any other specified regulatory functions with respect to such member.’’ See NMS plan Section (I)(I). E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices Participant operating a trading center would make the specified Trading Center Data publicly available on their Web sites for free and would report such data to the Commission on a disaggregated basis by trading center. The publicly available data would not identify the trading center that generated the data. 2. Market Maker Profitability Data 44 Each Participant that is the DEA of a market maker would require such market maker to provide the DEA the data specified in Appendix C of the NMS plan regarding daily market maker trading profits with respect to the Pilot Securities on a monthly basis (‘‘Market Maker Profitability Data’’). Each market maker would also be required to provide to its DEA the Market Maker Profitability Data for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. Moreover, on a monthly basis, the DEA would aggregate the Market Maker Profitability Data and make the aggregated data publicly available via the DEA’s Web site for free, and report such data to the Commission. The publicly available data would not identify the market makers that generated the data. mstockstill on DSK4VPTVN1PROD with NOTICES2 3. Assessment of Tick Size Pilot Data The Participants proposed to provide to the Commission, and make publicly available, a joint assessment of the impact of the Tick Size Pilot, no later than six months after the end of the Pilot Period.45 As proposed, the assessment would include the statistical and economic impact of an increase in the quoting increment related to: (1) market quality, (2) the number of market makers, (3) market maker participation, and (4) market transparency.46 The assessment would also evaluate: • whether any market capitalization, daily trading volume, or other thresholds can differentiate the results of the above assessment across stocks; • the statistical and economic impact of the above assessments for the incremental impact of the trading 44 As discussed further below, in response to comments and after additional consideration, the Commission has modified the Market Maker Profitability Data requirement. See infra Section V.E.2. 45 As discussed further below, in response to comments and after additional consideration, the Commission has modified the NMS plan to require the assessment to be submitted to the Commission 18-months after the implementation of the Tick Size Pilot. See infra Section V.E.3. 46 As discussed further below, in response to comments and after additional consideration, the Commission has modified the NMS plan to require the Participants to conduct an assessment on market maker profitability. See infra Section V.E.3. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 increment and for the joint effect of an increase in both the quoting increment and the trading increment; • the statistical and economic impact of the above assessments for the incremental impact of a Trade-At Prohibition and for the joint effect of an increase in the quoting increment, an increase in the trading increment, and a Trade-At Prohibition; and • any other economic issues that Participants believe the Commission should consider in any rulemaking that may follow. The Participants may also individually submit to the Commission, and make publicly available, an additional supplemental assessment of the impact of the Tick Size Pilot. E. Policies and Procedures Pursuant to the NMS plan, the Participants and members of Participants would be required to establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with the quoting and trading increments for the Pilot Securities. Each Participant would develop appropriate policies and procedures that provide for collecting and reporting to the Commission the Trading Center Data. Each Participant that is the DEA of a member of a Participant operating a trading center would require such member to develop appropriate policies and procedures for collecting and reporting the Trading Center Data to the DEA. Each Participant that is the DEA of a member of a Participant operating a trading center would develop appropriate policies and procedures for collecting and reporting the Trading Center Data to the Commission. Further, each Participant that is the DEA of a market maker would require such market maker to develop policies and procedures for collecting the Market Maker Profitability Data and report it to the DEA. Each Participant that is the DEA of a market maker would develop appropriate policies and procedures that provide for collecting and reporting such data to the Commission on an aggregated basis.47 The DEA would also develop policies and procedures reasonably designed to ensure the confidentiality of the non-aggregated data it receives from market makers. F. Additional Components of the NMS Plan In addition to setting forth the details of the Tick Size Pilot, the NMS plan contains operational details including provisions related to the admission of 47 The Market Maker Profitability Data would be aggregated by Pilot Security. PO 00000 Frm 00007 Fmt 4701 Sfmt 4703 27519 new participants, amendments, the composition and responsibilities of the Operating Committee, and withdrawal from the NMS plan. IV. Summary of Comments As noted above, the Commission received 77 comment letters on the Tick Size Pilot contained in the proposed NMS plan.48 Thirty-three commenters generally supported the Tick Size Pilot,49 although almost all of these commenters suggested that certain aspects of the proposed Tick Size Pilot be modified prior to approval and implementation.50 Several of the 48 See supra note 6. The opinions’ of the commenters are nuanced as many commenters support certain aspects of the NMS plan while opposing other aspects of the NMS plan. Eighteen comment letters were received in response to the Commission’s press release announcing that the proposed NMS plan and Tick Size Pilot had been submitted. These comment letters are included in the comment file with the comment letters received in response to the Notice. The Commission notes that five of the comment letters received in response to the press release requested that the Commission provide an extended comment period. See CMR Letter I; MFA Letter I; KOR Letter I; SIFMA Letter I; and Citadel Letter I. See also CCMC Letter I. The Investor Advisory Committee (‘‘IAC’’) established by Section 911 of The Dodd-Frank Act also submitted recommendations to the Commission with respect to a tick pilot. See Recommendation of the Investor Advisory Committee Decimalization and Tick Sizes, available at: https://www.sec.gov/spotlight/investor-advisorycommittee-2012/investment-adviser-decimilizationrecommendation.pdf (‘‘IAC Recommendations’’). The IAC’s Recommendations were issued prior to the Commission’s June 2014 Order. The Commission discussed the IAC Recommendations in the June 2014 Order. 49 See Gagliano Letter I; Callipari Letter; Gagliano Letter II; STA Letter I; Duffy Letter; Galinskie Letter; IssuWorks Letter; Tabb Letter; ABC Letter; ECFTF Letter; Themis Letter; Two Sigma Letter; STA Letter II; KCG Letter; Virtu Letter; BIO Letter; NVCA Letter; BATS Letter; SIFMA Letter II; Weaver Letter; CFA Institute Letter; Citigroup Letter; BlackRock Letter; STANY Letter; Bright Trading Letter; Bloomberg Letter; KOR Letter II; CHX Letter; IMC Letter; Nasdaq Letter; NYSE Letter; Warner-Toomey Letter; OTC Markets Letter; and Vargas Letter. 50 Four of these commenters, while supporting a pilot to test wider tick sizes, nevertheless questioned whether wider ticks would have a positive impact on liquidity or would support increased research for small capitalization companies. See Tabb Letter at 1 (‘‘While I am a strong proponent of the Tick Size Pilot, I do not foresee positive results, such as greater research coverage, more small/mid-cap[italization] IPOs, a wider diversity of market makers, reduced impact of high-frequency traders, lower transaction costs, or better quality of equity markets.’’); CFA Institute Letter at 1 (stating ‘‘skeptic[ism] that wider trading increments for small cap[italization] stocks will enhance the liquidity of those securities. . .’’); KOR Letter II at 4 (stating the ‘‘idea that increased market making profitability will lead to better research/ analyst coverage and encourage more IPOs is an idea that is out of touch with modern markets postRegulation NMS’’); and IMC Letter at 1 (noting reservations about the effect of wider ticks on IPOs and job growth). See also CoreOne Letter at 2 (stating that it is unlikely the Tick Size Pilot will increase the amount of research coverage for Pilot Securities). E:\FR\FM\13MYN2.SGM 13MYN2 27520 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 commenters supporting the Tick Size Pilot believed that a wider tick increment would improve the quality of trading for small capitalization securities or that it is valuable to test this hypothesis.51 Additionally, some of these commenters believed that a wider tick increment would increase depth and liquidity.52 For example, one commenter stated that a well-designed Tick Size Pilot would ‘‘[allow] for a true empirical test of the effects of wider spreads and limited increments in small-cap[italization] stocks [would] encourage fundamental buyers and sellers to meaningfully engage with each other.’’ 53 Conversely, twenty commenters generally opposed the Tick Size Pilot.54 Some of these commenters were concerned that a wider tick increment would increase investor execution costs or that the Tick Size Pilot would be unduly disruptive.55 Three commenters argued that the impact of tick sizes had already been studied.56 One commenter noted that increasing tick sizes would impact his ability to trade efficiently.57 Other commenters argued that wider spreads would only help market professionals at the expense of investors.58 Generally, commenters opposing the Tick Size Pilot were concerned about its costs to investors and the complexity of its design.59 For example one 51 See Gagliano Letter I (arguing that five cent spreads will greatly enhance participation, volume and increase market depth); Callipari Letter; ECFTF Letter at 1; STA Letter II at 2; BIO Letter at 2; NVCA Letter at 2; BATS Letter at 1; SIFMA Letter II at 1; STANY Letter at 2; Bloomberg Letter at 2; CHX Letter at 1; Nasdaq Letter at 3; and NYSE Letter at 1. 52 See Gagliano Letter I; Callipari Letter; BIO Letter at 2; NVCA Letter at 2; and NYSE Letter at 1. 53 See ECFTF Letter at 1. 54 See BenBrahim Letter; Richardson Letter; Ling Letter; Blecha Letter; Sosnoff Letter; Choffy Letter; Runsdorf Letter; Greenblatt Letter; Bangura Letter; Ricker Letter; DFA Letter; Vanguard Letter; CFA Letter; MFA Letter II; Wells Fargo Letter; ICI Letter; Schwab Letter; Fidelity Letter; TD Ameritrade Letter; and Citadel Letter II. See also IAC Recommendations. 55 See Vanguard Letter at 1; CFA Letter at 4; MFA Letter II at 6 (stating more than 20% of all U.S. listed companies will be impacted by the Tick Size Pilot); Wells Fargo Letter at 4; and ICI Letter at 5. See also IAC Recommendations. 56 See Ling Letter; Blecha Letter; and Runsdorf Letter. 57 See Richardson Letter. 58 See Richardson Letter; Ling Letter; Sosnoff Letter; Choffy Letter; and Bangura Letter. See also Greenblatt Letter (stating that expanding the tick sizes will only help market makers become wealthy). 59 See DFA Letter at 2 (raising concerns that U.S. companies would incur a higher cost of capital); Vanguard Letter at 4 (stating that ‘‘any program that increases the minimum quoting or trading increments will necessarily result in increased VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 commentator estimated ‘‘that the [Tick] Pilot could cost investors hundreds of millions of dollars.’’ 60 Other commenters stated the Tick Size Pilot would ‘‘make it more expensive for investors to buy and sell [P]ilot [S]ecurities.’’ 61 Commenters also opined that the Tick Size Pilot would increase operational risk, and heighten market complexity which would require ‘‘a whole redesign of trading systems and algorithms.’’ 62 Another commenter stated that, ‘‘while the purported benefits of the [Tick Size Pilot] are questionable, the costs are real and significant.’’ 63 Additionally, Tick Size Pilot opponents indicated that the underlying goals of the Tick Size Pilot were not properly defined and tenuous.64 For example, one commenter stated that the Tick Size Pilot’s ‘‘goal seems simply to find ways to drive higher profits to exchanges and some of their favored clients.’’ 65 Seventeen commenters, while providing substantive analysis and opinion, did not specifically express support for, or, opposition to, the Tick Size Pilot.66 While the commenters generally focused on issues related to the proposed Tick Size Pilot, some also raised tangential or alternative marketbased solutions such as those relating to access fees, maker-taker fee models, payment-for-order-flow, and high transaction costs to long-term investors’’); MFA Letter II at 3 (expressing concern that the Tick Size Pilot would harm investors by creating unnecessary market complexities and systems risks); Wells Fargo Letter at 9 (expressing concerns about both costs to investors and complexity); Fidelity Letter at 3–4 (citing concerns both about increased trading costs for retail investors and complexity and implementation costs); TD Ameritrade Letter at 2; and Citadel Letter II at 5 (citing concerns about implementation costs, systems risks, and investor costs). See also IAC Recommendations. 60 See TD Ameritrade Letter at 2. 61 See BenBrahim Letter; Greenblatt Letter; Bangura Letter; Wells Fargo Letter at 2 (expressing opposition to increased tick sizes and increased transaction costs); and MFA Letter II at 3 (stating that artificially widening spreads and increasing trading costs would make it expensive for investors to buy and sell securities). 62 See MFA Letter II at 3. See also infra note 74 and accompanying text. 63 See Vanguard Letter at 4. 64 See Vanguard Letter at 1; Wells Fargo Letter at 6; Schwab Letter at 9; and Citadel Letter II at 2. See also IAC Recommendations. 65 See Schwab Letter at 9. 66 See Leary Letter; Adorney Letter; RGM Letter; CCMC Letter I; Wellington Shields Letter; ModernNetworks Letter (noting its agreement with the premise behind wider ticks, such as discouraging arbitrage, encouraging market making and longer holding periods); CoreOne Letter; JonesTrading Letter; CMR Letter II; Liquidnet Letter; FIF Letter; CCMC Letter II; Ye Letter; Angel Letter; Birch Bay Letter; ITG Letter; Albert Letter and Saito Letter. PO 00000 Frm 00008 Fmt 4701 Sfmt 4703 frequency trading.67 For instance, nine commenters stated that the Commission should test the elimination of exchange access fees, either independently or in conjunction with the Trade-At Prohibition; 68 two commenters suggested the Commission implement a stand-alone trade-at pilot; 69 and three commenters suggested that subpenny pricing should be explored and studied.70 Several commenters supported the Commission’s use of ‘‘data-driven’’ research to formulate market structure changes.71 Additionally, some commenters believed that, while the Tick Size Pilot may not achieve the goal of improved liquidity for small67 See Wellington Shields Letter at 2 (subpenny pricing should be eliminated and quotes should have a time-in-force); Virtu Letter at 2 (recommending the Commission study and establish specific market maker obligations through an NMS plan and eliminate access fees); Liquidnet Letter at 1–2 (asserting that Commission should pass Rule 10b–18 prior to the Tick Size Pilot and should conduct a simplified version of the TradeAt Prohibition independently along with other market structure issues such as removing access fees, and eliminating maker-taker pricing); BIO Letter at 5 (suggesting other measures to assist small capitalization companies such as an increase in the qualifying cap for accelerated filers and as well as an exception from XBRL reporting requirements); CFA Institute at 6; ICI Letter at 6 (stating other market initiatives, such as maker-taker, should be addressed prior to the Tick Size Pilot); Birch Bay Letter at 1 (asserting all orders should have a minimum lifespan of at least one-second); Schwab Letter at 5 (stating that if the Commission wants to test order flow migration, it should reduce exchange access fees and liquidity rebates); Bright Trading Letter at 3 (suggesting that OTC market makers should be required to provide ‘‘meaningful’’ price improvement); Bloomberg Letter at 15 (suggesting that reduced access fees should be the subject of a pilot); Ye Letter at 1 (suggesting that the makertaker fees should be analyzed); Angel Letter at 11 (suggesting that a maker-taker pilot should be conducted); and KOR Letter II at 2. 68 See Virtu Letter at 2; CFA Institute at 6; Liquidnet Letter at 2 (asserting a simplified version of the Trade-At Prohibition should be tested independently along with other market structure issues such as removing access fees, and eliminating maker-taker pricing); Schwab Letter at 5; Fidelity Letter at 5 (suggesting that a trade-at prohibition should also contemplate access fees, maker-take, internalization, but noted that these were properly excluded from the Tick Size Pilot); Bright Trading Letter at 3; Bloomberg Letter at 15; Ye Letter at 1; Angel Letter at 11; and KOR Letter II at 5 (suggesting that the Trade-At Prohibition should be coupled with access fee reform or the elimination of rebates). 69 See Vanguard Letter at 2 and ICI Letter at 4. 70 See Greenblatt Letter; RGM Letter at 1; and MFA Letter II at 3. But see Wellington Shields Letter at 5 (stating subpenny pricing causes the front running of trades); Ye Letter at 2; and ModernNetworks Letter at 3 (arguing against studying subpenny pricing). 71 See RGM Letter at 1; ABC Letter at 3; ECFTF Letter at 1; Two Sigma Letter at 1; KCG Letter at 6; Virtu Letter at 2; BIO Letter at 4; CFA Institute Letter at 6; BlackRock Letter at 1; STANY Letter at 2; Bloomberg Letter at 3; Angel Letter at 2; KOR Letter II at 2; IMC Letter at 2; Nasdaq Letter at 4; and OTC Markets Letter at 2. E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices capitalization securities, it nonetheless should be tested.72 For example, one commenter stated, ‘‘we believe it is worth the effort, time and money to test these ideas in the real world . . . as an important step in helping to improve the market for small capitalization companies in the future.’’ 73 mstockstill on DSK4VPTVN1PROD with NOTICES2 A. Costs and Complexity of the Tick Size Pilot Several commenters expressed concerns related to the costs and complexity of the Tick Size Pilot.74 Some commenters expressed concern that trading costs of the wider tick size would be borne either by investors 75 or the brokers and institutions representing customer interest.76 Two commenters suggested that investor costs related to the Tick Size Pilot would be at least $200 million annually.77 Certain commenters expressed concern that the Tick Size Pilot would inflate the cost of capital for the issuers of Pilot Securities.78 Other commenters were concerned with the costs associated with the complexity of the Tick Size Pilot. Some commenters thought that the three Test Group design of the Tick Size Pilot would drive costs upward,79 but several commenters more directly attributed the potential costs to the complexity caused by the inclusion of Test Group Three and its Trade-At Prohibition.80 Some commenters opined that eliminating 72 See Tabb Letter at 1; Angel Letter at 1–2 (arguing that corporate issuers should set their trading increments and supporting a data-driven approach); KOR Letter II at 4; and IMC Letter at 1. 73 See CFA Institute Letter at 2. 74 See Duffy Letter at 2; DFA Letter at 2; Vanguard Letter at 4; Fidelity Letter at 3–4; TD Ameritrade Letter at 2; MFA Letter II at 3; Wells Fargo Letter at 9; ITG Letter at 4–6; and Citadel Letter II at 5. 75 See BenBrahim Letter; DFA Letter at 2; Vanguard Letter at 1; KCG Letter at 2–3; Wells Fargo Letter at 5; and Citadel Letter II at 5. 76 See DFA Letter at 1; Two Sigma Letter at 2; and TD Ameritrade Letter at 2. 77 See Two Sigma Letter at 2 (estimating excess trading costs of implementing Test Group Two and Three of $200 million annually) and TD Ameritrade Letter at 2 (utilizing optimistic assumptions would be $273,149,484 annually). 78 See DFA Letter at 2 and NVCA Letter at 7. 79 See DFA Letter at 2 (arguing that the Tick Size Pilot’s four group design where each group has its own rules and exemptions increases both the risk and costs); MFA Letter II at 7–8 (asserting that the Tick Size Pilot ‘‘will greatly increase complexity by creating four different trading schemes that will need to be implemented by trading centers and institutional investors . . . The financial cost for such significant systems development, coding, reprogramming and testing are likely to be meaningful.’’); and Wells Fargo Letter at 9 (stating ‘‘the costs and risks of the [Tick] Pilot would be lessened in a study involving only one control group and one test group without exceptions). 80 See Tabb Letter at 1; ECFTF Letter at 2; CMR Letter II at 7; KCG Letter at 14; FIF Letter at 3; and TD Ameritrade Letter at 2. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Test Group Three would eliminate much of the complexity related to the Tick Size Pilot.81 In particular, certain commenters stated that the complexity and costs of the Trade-At Prohibition result from the changes to technology and programming that would be necessary for effective implementation.82 Some commenters expressed concern that the Tick Size Pilot would lead to increased operational risks.83 However some commenters, while acknowledging that there would be costs associated with the Tick Size Pilot, believed the Commission should move forward because of the importance of testing the impact of wider tick increments on the liquidity and market quality of securities with smaller capitalization.84 Certain commenters believed that the Tick Size Pilot should be subject to a cost benefit analysis pursuant to the Commission rulemaking process.85 Some of these commenters questioned whether the costs of the Tick Size Pilot outweighed its benefits. Others commenters posited that a cost-benefit analysis, focused on the implementation costs of the Tick Size Pilot, should be completed.86 Other commenters suggested that an assessment of investor costs should be completed prior to the implementation of the Tick Size Pilot.87 B. Duration of the Tick Size Pilot Twenty-three commenters discussed whether the Pilot Period should be extended, remain as proposed, or implemented on a provisional basis.88 81 See Tabb Letter at 1; Two Sigma Letter at 3; Vanguard Letter at 5; MFA Letter II at 6; and Wells Fargo Letter at 8. 82 See Tabb Letter at 5–6 (stating ‘‘[t]he programing for this . . . will be challenging, significant, and require massive testing.’’); CoreOne Letter at 7; Wells Fargo Letter at 8; FIF Letter at 3; and ITG Letter at 5. 83 See SIFMA Letter II at 5; Wells Fargo Letter at 3; ICI Letter at 5; and Citadel Letter II at 6 (stating ‘‘it would be unfortunate if the Commission approved a pilot that imposed such an extraordinary degree of operational risk on the markets.’’). 84 See Tabb Letter at 8; CFA Institute Letter at 2; CHX Letter at 17 (this commenter provided an estimate of potential implementation costs for all three Test Groups of approximately $140,000 and suggested that such costs for all market centers could be in excess of $8.0 million); Nasdaq Letter at 5–6; and NYSE Letter at 3. 85 See Duffy Letter at 2; KCG Letter at 8–9; SIFMA Letter II at 7; MFA Letter II at 8; Wells Fargo Letter at 3; Citigroup Letter at 5; Schwab Letter at 8–9; STANY Letter at 9–10; Bloomberg Letter at 21–22; TD Ameritrade Letter at 4; ITG Letter at 4; Citadel Letter II at 3–4; Nasdaq Letter at 7; and OTC Markets Letter at 9. 86 See BlackRock Letter at 4; FIF Letter at 6; and Citadel Letter II at 5. 87 See Wells Fargo Letter at 9; SIFMA Letter II at 8; and Citadel Letter II at 5. 88 See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks Letter at 3; Tabb Letter at 1; ABC Letter PO 00000 Frm 00009 Fmt 4701 Sfmt 4703 27521 Seventeen commenters opined that the Pilot Period should be longer than oneyear.89 Some of these commenters indicated that the Pilot Period should be extended to justify the associated implementation costs.90 Others indicated that better data could be gathered with a longer Pilot Period.91 In particular, some of these commenters opined that the data generated from a longer Pilot Period would be less likely to be skewed by short-term or aberrational events.92 One commenter suggested that the one-year time period would make it easy to manipulate the data to produce negative outcomes.93 Other commenters stated that additional time is necessary to allow for market participants to adjust their behavior.94 Some commenters also indicated that the relatively short Pilot Period could have a negative impact on participation. Several commenters indicated that due to, among other things, the complexity and cost relative to the short duration of the Pilot Period, some market participants would avoid trading Pilot Securities during the Tick Size Pilot.95 at 2; ECFTF Letter at 1–2; Themis Letter at 6; CoreOne Letter at 2; CMR Letter II at 2; STA Letter II at 7; BIO Letter at 7; CFA Letter at 6; NVCA Letter at 3–5; CFA Institute Letter at 3; BlackRock Letter at 6; Liquidnet Letter at 1; CCMC Letter II at 2; ICI Letter at 5; STANY Letter at 9; Angel Letter at 7; KOR Letter II at 3; CHX Letter at 6; and WarnerToomey Letter at 1. See also IAC Recommendations. 89 See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks Letter at 3; Tabb Letter at 5–6; ABC Letter at 2; ECFTF Letter at 1–2; Themis Letter at 6; CoreOne Letter at 2; CMR Letter II at 2; BIO Letter at 3; NVCA Letter at 3–5; CFA Institute Letter at 3; Liquidnet Letter at 1; STANY Letter at 9; KOR Letter II at 3; Warner-Toomey Letter at 1; and Vargas Letter at 1. 90 See Duffy Letter at 1; IssuWorks Letter at 3; ABC Letter at 3; NVCA Letter at 3; Liquidnet Letter at 3; STANY Letter at 9; Warner-Toomey Letter at 1; and Vargas Letter at 1. See also Tabb Letter at 8 (while not suggesting a longer duration, asserting that the one-year duration, which would require extensive technology development, may not be the best use of industry resources). 91 See ECFTF Letter at 1 (arguing that ‘‘[a] significantly longer time period is required to gather meaningful data around whether the changes to the market structure are having the desired effects’’); CoreOne Letter at 2 (stating ‘‘it remains unclear if the [Tick] Pilot could generate meaningful data . . . given the [Tick] Pilot’s length among other things.’’); NVCA Letter at 4; and STANY Letter at 9. 92 See ECFTF Letter at 1–2; CMR Letter II at 2; NVCA Letter at 4–5; and Vargas Letter at 1. 93 See Duffy Letter at 1. 94 See Duffy Letter at 2; ECFTF Letter at 1–2; Themis Letter at 6; CMR Letter II at 2; BIO Letter at 3; SIFMA Letter II at 5–6; CFA Institute Letter at 3; and KOR Letter II at 3. 95 See IssuWorks Letter at 4; ECFTF Letter at 2; CMR Letter II at 7; STA Letter II at 11; NVCA Letter at 5; BATS Letter at 4; SIFMA Letter II at 6–7; FIF Letter at 6; ICI Letter at 6; Schwab Letter at 5; STANY Letter at 9; Fidelity Letter at 4; Bloomberg Letter at 13; TD Ameritrade Letter at 3; CHX Letter at 7; Citadel Letter II at 6; Warner-Toomey Letter at 4; and Vargas Letter at 1. E:\FR\FM\13MYN2.SGM 13MYN2 27522 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 A number of commenters expressed concern that if market participants avoided trading Pilot Securities the assessment of the Tick Size Pilot would be frustrated by skewed data.96 The recommended duration for the Tick Size Pilot varied among commenters advocating for a longer Pilot Period. Four commenters stated that the Pilot Period should be extended to five-years,97 while other commenters suggested either a two- 98 or three-year duration.99 Some commenters opined that the Pilot Period should be longer, but did not provide a specific time period.100 Instead of a specific time period, others suggested a range of eighteen months to five years.101 Six commenters stated that the Pilot Period of the Tick Size Pilot should be one-year as proposed.102 One commenter, who advocated for a Tick Size Pilot with a one-year Pilot Period, asserted that sufficient data to analyze the effects of wider ticks could be generated within that timeframe.103 Another commenter stated that there would need to be greater confidence in the benefits of Tick Size Pilot in order to justify a longer Pilot Period.104 Among the commenters advocating for a one-year Pilot Period, there was variance on whether the Tick Size Pilot should be cut off immediately after oneyear 105 or remain in operation while the results are assessed.106 One commenter stated that the Tick Size Pilot should be 96 See IssuWorks Letter at 4; CoreOne Letter at 7; BATS Letter at 5; SIFMA Letter II at 6; WarnerToomey Letter at 1; and Vargas Letter at 1. 97 See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks Letter at 3; and Themis Letter at 6. 98 See KOR Letter II at 3. 99 See ECFTF Letter at 1–2 and Liquidnet Letter at 1. See also Vargas Letter at 1 (advocating for a longer Tick Size Pilot and stating that many experts suggested a three-year duration.). 100 See Tabb Letter at 1; ABC Letter at 2; CMR Letter II at 2 (believing the Tick Size Pilot should be extended by one to two years); and CFA Institute Letter at 3. 101 See CMR Letter II at 2; BIO Letter at 3 (stating a range of three to five years); NVCA Letter at 3– 5 (stating the Pilot should last greater than threeyears); and STANY Letter at 9 (indicating a Pilot duration of eighteen months to five-years). 102 See CCMC Letter II at 2; STA Letter II at 7; CFA Letter at 6; BlackRock Letter at 6; ICI Letter at 5; and CHX Letter at 6. 103 See CFA Letter at 6. 104 See BlackRock Letter at 6. See also IAC Recommendations. 105 See CCMC Letter II at 2 (asserting the Pilot should end completely following a year). See also BlackRock Letter at 6 (asserting that the Tick Size Pilot should have a ‘‘finite duration and clear end date’’). 106 See STA Letter II at 7; FIF Letter at 6 (advocating for a preliminary assessment during the Tick Size Pilot to avoid unnecessary disruption); STANY Letter at 9 (noting that ending the Tick Size Pilot and possibly reintroducing it after the assessment would result in unnecessary risks and costs); KOR Letter II at 3; and CHX Letter at 6. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 assessed following the first six months of the Pilot Period but that the Tick Size Pilot should still only operate for the one-year Pilot Period.107 Five commenters offered that the Pilot Period should initially operate for one-year with the possibility of an extension if such action is supported by the data.108 Five commenters stated that the Tick Size Pilot should continue during the final assessment of the data in order to mitigate unnecessary changes in the market.109 Another commenter stated that the Pilot Period should be at least one-year to gather preliminary results and, if deemed appropriate, extended for a ‘‘full economic cycle’’ thereafter to determine its impact on capital formation.110 C. Criteria for Pilot Securities The Commission received many comments with respect to the selection criteria for Pilot Securities. The commenters raised concerns about the proposed selection criteria, especially the market capitalization threshold, and suggested other criteria to be considered.111 1. Market Capitalization of Pilot Securities Sixteen commenters argued that a $5 billion market capitalization threshold is too high.112 Commenters argued that the market capitalization threshold should be decreased because the $5 billion threshold would capture securities not traditionally considered small capitalization securities, which are the focus of the Tick Size Pilot.113 107 See STA Letter II at 7. STA Letter II at 7; ICI Letter at 5 (asserting that the Tick Size Pilot could only be extended for one-year if necessary); Angel Letter at 7; KOR Letter II at 3; and CHX Letter at 6. 109 See supra note 106 and accompanying text. 110 See Angel Letter at 7. 111 One commenter stated that the proposed Measurement Period should be extended to the previous twelve months to verify whether any unique circumstances created any unintentional biases. See CFA Institute Letter at 4. See also FIF Letter at 1 (suggesting that the Measurement Period should be redefined to conclude seven months before the effective date of the Tick Size Pilot). Another commenter argued that consideration be given to securities that are priced under $5.00 per share. See IssuWorks Letter at 4. 112 See ECFTF Letter at 2; Themis Letter at 3; Vanguard Letter at 6; CMR Letter II at 5; CFA Letter at 3; NVCA Letter at 6; BATS Letter at 2–3; SIFMA Letter II at 8; MFA Letter II at 5–6; Wells Fargo Letter at 8; ICI Letter at 4; Schwab at 10–11; STANY Letter at 7; Fidelity Letter at 3; Warner-Toomey Letter at 2; and OTC Markets Letter at 3–4. 113 See MFA Letter II at 4; Wells Fargo Letter at 8; ICI Letter at 4; and Warner-Toomey Letter at 2 (stating ‘‘re-examine . . . [the capitalization threshold] to remain consistent with goals of the Pilot’’). Commenters stated the directive from Congress in the JOBS Act and also echoed by the Commission in the June 2014 Order was to address concerns of small capitalization securities. See 108 See PO 00000 Frm 00010 Fmt 4701 Sfmt 4703 Two commenters believed that the $5 billion market capitalization threshold would include stocks that do not have the liquidity and market quality concerns that the Tick Size Pilot seeks to address.114 Various commenters recommended that the market capitalization threshold for Pilot Securities be lowered from $5 billion to a range of $250 million to $2 billion.115 2. Other Comments on the Selection Criteria Some commenters stated that the current volume threshold of CADV of one million shares should be altered. For example, one commenter suggested that the volume threshold should range from 300,000 shares to 500,000 shares for illiquid securities.116 Another commenter stated that the volume threshold should be based upon the daily dollar trading value to focus on small capitalization securities.117 One commenter opined that the volume threshold should be based upon the volume relative to the public float.118 3. Suggestions for Additional Selection Criteria A number of commenters recommended that additional selection criteria should be required and recommended additional thresholds for the selection of Pilot Securities. Nine commenters opined that an average weighted daily spread of five cents or greater should be a qualifying factor to avoid artificially widening the spread and increasing transaction costs for MFA Letter II at 5–6 and KCG Letter at 10. One commenter also argued that small capitalization stocks would benefit the most from the Tick Size Pilot. See ECFTF Letter at 2. 114 See Vanguard Letter at 6 and STA Letter II at 5. 115 See ECFTF Letter at 2 (recommending lowering the threshold to $750 million); Themis Letter at 3 (recommending lowering the threshold to $2 billion); Vanguard Letter at 6 (recommending lowering the threshold to $500 million); CMR Letter II at 5 (recommending lowering the threshold to $750 million); CFA Letter at 3 (recommending lowering the threshold to $2 billion); NVCA Letter at 6 (recommending lowering the threshold to less than $1 billion); BATS Letter at 2–3 (recommending lowering the threshold to less than $1 billion); SIFMA Letter II at 8 (recommending lowering the threshold to less than $1 billion); MFA Letter II at 6 (recommending lowering the threshold to $750 million); Wells Fargo Letter at 8 (recommending lowering the threshold to $1 billion); STANY Letter at 7 (recommending lowering the threshold to $750 million); Fidelity Letter at 3 (recommending lowering the threshold to $750 million to $1 billion); and OTC Markets Letter at 3–4 (recommending lowering the threshold to $250 million). 116 See CFA Letter at 3. 117 See NVCA Letter at 6 (stating an appropriate average daily dollar trading value for small capitalization stocks is less than $10 million). 118 See Virtu Letter at 2. E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices investors.119 Other commenters stated that securities with an average spread of less than five cents would not benefit from the Tick Size Pilot because they are already very liquid.120 Finally, two commenters suggested that including the daily turnover of a security would be a useful qualifying criterion to help determine liquidity.121 4. Securities Excluded from the Tick Size Pilot Two commenters raised the possibility of regulatory arbitrage and asserted that cross-listed securities from Canada should not be eligible for the Tick Size Pilot.122 Another commenter suggested that any security that trades below $1.00 during the Measurement Period should be eliminated from consideration as a Pilot Security. Further, the commenter stated that if a Pilot Security during the Pilot Period trades below $1.00 then its data should be removed from the Tick Size Pilot.123 Two commenters supported the exclusion of ETFs.124 mstockstill on DSK4VPTVN1PROD with NOTICES2 D. Control Group, Test Groups, and Trade-At Prohibition A number of commenters discussed the design of the Tick Size Pilot. Two commenters opined that there were too many Pilot Securities included in each Test Group.125 Some commenters indicated there were too many test groups, which would make the Tick Size Pilot complex to implement and difficult to assess.126 One commenter 119 See CoreOne Letter at 3 (advocating for using the average displayed spread for the Measurement Period); Two Sigma Letter at 2 (stating the securities meeting this criteria are approximately 25% of the NMS common stocks and would therefore be a large enough universe while minimizing the risk of increasing transaction costs to investors); CFA Letter at 3; MFA Letter II at 7 (asserting that the spread on some qualifying securities could increase by 500%); CFA Institute Letter at 4; Wells Fargo Letter at 9; Schwab Letter at 10–11; and OTC Markets Letter at 3–4. See also KCG Letter at 10 (arguing that artificially wider spreads will increase transaction costs). 120 See CFA Letter at 3 (stating that ‘‘securities with $0.01 spreads are already highly liquid and actively traded’’); MFA Letter II at 7; and Schwab Letter at 10–11. 121 See CMR Letter II at 3–4 and STA Letter II at 4–5. 122 See STA Letter II at 9 and SIFMA Letter II at 10. 123 See CHX Letter at 2. 124 See CFA Institute at 4 (stating that the exclusion recognizes their different shareholder base) and ICI Letter at 4. 125 See STA Letter II at 5–6 and BATS Letter at 3 (arguing that the number of Pilot Securities per Test Group should be reduced to 100 securities). But see CFA Institute at 4 (asserting that 400 securities per Test Group are appropriate for ‘‘more robust analysis’’). 126 See STA Letter II at 5 (arguing that the Tick Size Pilot should have only one test group); KCG Letter at 3 (asserting the Tick Size Pilot should VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 supported the Tick Size Pilot design opining that it represented ‘‘logical steps’’ by comparing the trading environments of the test groups, and adding that ‘‘[i]f there is an incremental effect that each change has on various quality of markets metrics, it should be apparent from the [Tick] Pilot data.’’ 127 Another commenter supported the inclusion of all three Test Groups in order to ‘‘deepen [the] understanding of the various factors impacting liquidity in [today’s] fragmented market.’’ 128 Commenters suggested testing tick sizes other than the proposed $0.05 increment. Some commenters suggested that various tick size increments, both larger 129 and smaller 130 than the proposed $0.05 increment, be concurrently tested. Other commenters suggested that subpenny increments should be tested.131 One commenter believed the $0.05 trade increment should apply to the opening and closing auctions and asked for this issue to be directly addressed in the Tick Size Pilot.132 Conversely, another commenter suggested that the opening and closing auctions should be exempt from the Tick Size Pilot.133 One commenter asserted that, in order to avoid logistical and operational problems of rejecting non-conforming orders for brokers and customers, the Tick Size Pilot should permit orders that are received but not priced in $0.05 increments to be re-priced for display purposes to a permissible $0.05 increment.134 Another commenter requested clarification on the handling of orders and quotes that are not in a proper tick increment.135 include only Test Group One, but generally supports Test Groups One and Two); MFA Letter II at 6 (arguing that the Tick Size Pilot’s ‘‘broader scope will likely frustrate the Commission’s ability to assess the impact of increased tick sizes on liquidity for small-cap[italization] stocks’’). See also supra note 81 and accompanying text (advocating for the elimination of Test Group Three). See also infra note 136 and accompanying text (asserting Test Group One should be eliminated). 127 See CHX Letter at 11. 128 See NYSE Letter at 3. 129 See IssuWorks Letter at 3 (advocating to study $0.10 or larger trade increments); CoreOne Letter at 3 (suggesting testing $0.02 and $0.10 trade increments); and OTC Markets Letter at 4 (stating the Commission should review trade increments of $0.10 and $0.25). 130 See CoreOne Letter at 3. 131 See Greenblatt Letter; RGM Letter at 2 (suggesting the Commission look into subpenny trade increments); and MFA Letter II at 3 (asserting that the Commission should test half-penny increments for highly liquid securities). 132 See FIF Letter at 2. 133 See Citigroup Letter at 6. 134 See ITG Letter at 6–7 (noting that for purposes of order display and regulatory compliance, ‘‘pricesliding’’ is permissible in the context of Rule 201 of Regulation SHO). 135 See FIF Letter at 2. PO 00000 Frm 00011 Fmt 4701 Sfmt 4703 27523 1. Test Group One: Widened Quote Increment One commenter suggested that Test Group One should be eliminated in order to reduce the Tick Size Pilot’s complexity.136 Four commenters theorized that Test Group One ‘‘probably will drive more volume to the dark pools’’ because the trade increment is less than $0.05.137 For example, one commenter stated, ‘‘[w]ith no controls around trading increments, we will see a deterioration in market quality as more trading moves off-exchange, and lit market making is further disadvantaged.’’ 138 One commenter suggested that market participants should be permitted in Test Group One to accept or rank orders in penny increments because exchanges and agency ATSs would be at a competitive ` disadvantage vis-a-vis broker-owned proprietary execution systems that could trade, accept and rank orders at otherwise impermissible increments.139 One commenter stated that Test Group One should be eliminated because ‘‘we should not be engaging in experiments that actively increase undisplayed liquidity.’’ 140 2. Test Group Two: Widened Quote and Trade Increment The comments on Test Group Two were mainly directed at the exception for Retail Investor Orders, which is also applicable to Test Group Three. Two commenters argued that the definition of Retail Investor Order should be broadened so that it would be less burdensome to implement and applicable to more individuals.141 Five commenters stated that an attestation should not be required, as it would be unwieldy for trading centers to surveil and attest that substantially all trades entered into the system originated from an individual.142 136 See KOR Letter II at 3. Wellington Shields Letter at 4 (arguing that market participants may be hesitant to display liquidity in instances where the quoting increment is changed without corresponding changes to the minimum trading increment); Tabb Letter at 3 (forecasting that off-exchange volume to rise to between 60–70% from its current range of lower to mid-40%); CFA Letter at 4; and KOR Letter II at 3 (stating that ‘‘as constructed, [Trade Group One] will simply divert flow from lit markets to dark pools and internalizers.’’). 138 See KOR Letter II at 3. 139 See BATS Letter at 3. 140 See CFA Letter at 4. 141 See Wells Fargo Letter at 5 and FIF Letter at 2. 142 See Tabb Letter at 5; Two Sigma Letter at 2; KCG Letter at 9 (noting that the definition of Retail Investor Order was too complex and ambiguous and would lead to many of the largest retail firms to not sign the required attestations); STANY Letter at 6; and TD Ameritrade at 5. 137 See E:\FR\FM\13MYN2.SGM 13MYN2 27524 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 Other commenters requested clarification of the Retail Investor Order definition.143 One commenter questioned whether the definition of Retail Investor Order in the Tick Size Pilot was consistent with that of the Retail Liquidity Programs at various exchanges.144 Another commenter suggested that the Retail Investor Order definition should be based on the ‘‘individual customer’’ account type definition used by FINRA’s OATS.145 Other commenters supported the Tick Size Pilot’s proposed exception for Retail Investor Orders.146 Two other commenters thought the exception for Retail Investor Orders should apply generally to all orders, including institutional orders.147 One commenter opined that the exception should be broadened to alleviate the implementation burden.148 Seven commenters opposed the Retail Investor Order exception because the minimum price improvement required by the exception was not large enough.149 Some of these commenters were concerned that the relatively low level of required price improvement needed to qualify for the exception would encourage internalization.150 Some of these commenters also believed that the wider spread warranted a more significant amount of price improvement relative to the spread.151 143 See Two Sigma Letter at 2; KCG Letter at 9; STANY Letter at 6; Fidelity Letter at 7 (seeking clarification on whether there is a restriction on who the contra party may be for a Retail Investor Order); and TD Ameritrade Letter at 5–6. 144 See TD Ameritrade Letter at 7–8. 145 FINRA’s Order Audit Trail System (‘‘OATS’’) is a FINRA owned automated reporting system that captures order information in NMS stocks and OTC equity securities that is required for all FINRA members. See FINRA Rule 7410(k). OATS defines an individual customer account type as ‘‘an account that does not meet the definition of FINRA Rule 4512(c) and is also not a proprietary account.’’ See FIF Letter at 2. 146 See Virtu Letter at 2 (supporting the midpoint, retail, block size, and single-priced transactions exceptions in the Tick Size Pilot) and CHX Letter at 13. 147 See SIFMA Letter II at 9 and Citadel Letter II at 8–9. 148 See SIFMA Letter II at 9. 149 See Galinskie Letter at 2; CFA Letter at 5; Weaver Letter at 2; CFA Institute Letter at 6; STANY Letter at 6; IMC Letter at 2; and Birch Bay Letter at 1. 150 See IMC Letter at 2 and Birch Bay Letter at 1 (asserting that the exception would also undermine the Trade-At Prohibition of Test Group 3). See also Wells Fargo Letter at note 19 (asserting that the number of exceptions, especially the retail price improvement exception, would render the data inconclusive). 151 See Galinskie Letter at 2 (arguing for ‘‘meaningful’’ price improvement); CFA Letter at 5; IMC Letter at 2 (advocating for price improvement of fifty-percent of the tick size); and Birch Bay Letter at 1 (arguing that price improvement should be a full five-cent improvement). VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Some commenters opposed the exception for Retail Investor Orders for other reasons.152 For instance, one commenter believed that all Tick Size Pilot pricing should be in $0.05 increments to effectively attract liquidity and market makers and thus the Retail Investor Order exception could undermine the validity of the Tick Size Pilot.153 Another commenter argued that in light of the highly desirable nature of retail order flow, the elimination of the exception would encourage more displayed liquidity.154 Another commenter was concerned that the Retail Investor Order exception would cause price competition to be prioritized, and negatively impact the Tick Size Pilot because of its view that markets that compete mostly on price are generally unable to compete on the value provided by, for instance, research, sales, and capital commitment.155 This commenter stated that the tick size must have ‘‘integrity’’ in order to attract investor interest, and did not think, among other things, that the Retail Investor Order exception made ‘‘economic sense.’’ 156 3. Test Group Three: Widened Quote and Trade Increment With a Trade-At Prohibition The Commission received many comments on Test Group Three, and in particular, on the Trade-At Prohibition. Twenty-seven commenters opposed the Trade-At Prohibition.157 These 152 See Wellington Shields Letter at 4; IssuWorks Letter at 5; and KOR Letter II at 4. See also Galinskie Letter at 2 (arguing that subpenny trading should be eliminated across all markets). 153 See Wellington Shields Letter at 4 (arguing that the midpoint exception should be eliminated because it provides price improvement to the liquidity taker but prevents public order interaction with a liquidity provider, which the commenter suggests is not necessarily a market benefit.). See also Bright Trading Letter at 2 (opining that the Retail Order exception will increase the toxicity of the order flow, which will result in market makers widening their quote spreads or not quoting at all). 154 See KOR Letter II at 4. This commenter also opined that the retail price improvement exception would increase payment-for-order-flow stating, ‘‘With tick sizes at a penny, internalizers had little leeway in how much they could pay for orders, as they are generally only profiting at a fraction of the spread. By blowing out spreads but excluding retail trades at the midpoint, the result will be a dramatic increase in PFOF rates.’’ 155 This commenter believes that pure price competition would not attract more liquidity. See IssuWorks Letter at 5. 156 See IssuWorks Letter at 5. 157 See STA Letter I at 3; Tabb Letter at 5–6; ECFTF Letter at 2; Two Sigma Letter at 2–3; Vanguard Letter at 5 (stating that while it is opposed to including the Trade-At Prohibition in the Tick Size Pilot, it supports a trade-at prohibition for the overall market if it is coupled with the elimination of maker-taker pricing); CoreOne Letter at 7; JonesTrading Letter at 1 (stating that Trade-At Prohibition is not related to the purpose of the Tick PO 00000 Frm 00012 Fmt 4701 Sfmt 4703 commenters generally believed that the Trade-At Prohibition was overly complex 158 and would be costly to implement and operate,159 and could induce market participants to opt-out of quoting and trading in Test Group Three Pilot Securities.160 Some of these commenters opined that the Tick Size Pilot data could be distorted if a number of market participants were to forego quoting and trading in the Test Group Three Pilot Securities because of the Trade-At Prohibition.161 Other commenters argued that the Trade-At Prohibition would increase costs for investors.162 One commenter pointed to Australian and Canadian rules163 as evidence that market quality would be adversely affected and as a justification to not implement trade-at domestically.164 Finally, three commenters supported testing the Trade-At Prohibition and encouraged Size Pilot); CMR Letter II 5–8; STA Letter II at 6; KCG Letter at 11–17; NVCA Letter at 7; BATS Letter at 4–6; SIFMA Letter II at 4; MFA Letter II at 7– 8; Wells Fargo Letter at 5–6; Citigroup Letter at 2; BlackRock Letter 2–3; Liquidnet Letter at 2; ICI Letter at 3–4; Schwab Letter at 4; STANY Letter at 5–6; Fidelity Letter at 5; Bloomberg Letter at 16; TD Ameritrade Letter 2–4; KOR Letter II at 4–5; ITG Letter at 4–5; Citadel Letter II at 6; and OTC Markets Letter at 7–9. 158 See Tabb Letter at 5 (noting that the Trade-At Prohibition would introduce significant market structure complexity); ECFTF Letter at 2 (stating the belief that Trade-At Prohibition introduces an unnecessary layer of complexity); STA Letter II at 6; ICI Letter at 4; ITG Letter at 3 (noting that the Trade-At Prohibition introduces unnecessary levels of complexity and associated unintended consequences); and Citadel Letter II at 6–7. 159 See MFA Letter II at 7 (expressing concerns that Test Group Three would exponentially increase the complexity and cost of the Tick Size Pilot) and Citigroup Letter at 4 (noting that overwhelming majority of the cost of the Tick Size Pilot can be attributed to the Trade-At Prohibition). 160 See CoreOne Letter at 7 (noting that an unintended consequence of Trade-At Prohibition is that a number of market participants will elect to trade using third parties or not trade at all in Test Group Three in order to avoid the cost of implementation). 161 See Two Sigma Letter at 3 and CoreOne Letter at 7 (noting that opting-out would potentially compromise the validity of the results and cast doubt on whether the results could be extrapolated to a broader based, final rule). 162 See CMR Letter II at 3 (noting that the inclusion of a Trade-At Prohibition without also addressing related issues like exchange access fees and backup systems could harm investors and increase the likelihood of extreme adverse market events); Schwab Letter at 2 (noting concerns that the Trade-At Prohibition will have on execution quality and cost for retail investors); and Citadel Letter II at 5. 163 See Australian Securities and Investment Commission Market Integrity Rule 4.1.1 and Investment Industry Regulatory Organization of Canada Universal Market Integrity Notice 12–0130. 164 See BlackRock Letter at 2. But see CFA Institute Letter at 2–3 (asserting that despite the negative market quality effects of trade-at rules internationally, the NMS plan should be implemented domestically as it could lead to valuable information). E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 the Commission to simultaneously reduce the market access fee cap.165 Ten commenters that opposed the Trade-At Prohibition nevertheless recommended modifications related to the provision should the Commission approve the Tick Size Pilot with the Trade-At Prohibition.166 These other commenters’ recommendations included, among other things, changing the scope of the Trade-At Prohibition,167 and changing the retail price improvement exception.168 Fourteen commenters supported testing the Trade-At Prohibition.169 Five commenters supported the Trade-At Prohibition as proposed.170 Certain commenters expressed their belief that the Trade-At Prohibition could enhance 165 See Virtu Letter at 2; CFA Institute Letter at 6; and Bright Trading Letter at 3. See also KOR Letter II at 5. 166 See KCG Letter at 11–17; NVCA Letter at 7; BATS Letter at 5–6 (noting that Trade-At Prohibition should only apply to protected NBBO, not protected quotes and executing against nondisplayed orders when the market is crossed); SIFMA Letter II at 4; BlackRock Letter at 2–3; Liquidnet Letter at 2 (noting that the thirteen exceptions are too complex); STANY Letter at 5–6; Bloomberg Letter at 15 (opining that there are less burdensome alternatives to the proposed Trade-At Prohibition, including reduced access fees, permitting issuers enter into contracts with market makers to set their own spreads, and implementing a trade-at prohibition that is more consistent with the June 2014 Order); KOR Letter II at 4–5; and Citadel Letter II at 7. 167 See BATS Letter at 5 (noting that Trade-At Prohibition should only apply to protected NBBO, not protected quotes); SIFMA Letter II at 7 (noting that broker-dealers should be able to internalize without any size limitation if they are quoting at the NBBO); BlackRock Letter at 2 (stating that nondisplayed liquidity at NBBO should be allowed to execute); KOR Letter II at 5 (supporting a simplified Trade-At Prohibition independently); and Citadel Letter II at 7 (noting that the Trade-At Prohibition should not prohibit a trading center from executing more than displayed size). 168 See KCG Letter at 9 (stating the proposed Retail Investor Order definition is too complex); STANY Letter at 6 (stating that the price improvement of the Retail Investor Order exception needs to be greater and the attestation should be amended); KOR Letter II at 4 (stating that the Retail Investor Order exception would offset the purpose of the Trade-At Prohibition to promote the execution of displayed liquidity and should be eliminated); and Citadel Letter II at 8–9 (noting that all orders should have price improvement exception and exchange retail programs should not receive special treatment). 169 See Adorney Letter; Wellington Shields Letter at 5; Themis Letter at 2 (expressing concerns for the exceptions to Trade-At Prohibition as overly complex); Virtu Letter at 2; BIO Letter at 4; CFA Letter at 5–6; CFA Institute Letter at 5 (stating the Tick Size Pilot as well as the Trade-At Prohibition would be a ‘‘useful exercise’’); Bright Trading Letter at 2; Angel Letter at 10–11; CHX Letter at 17; IMC Letter at 2; Birch Bay Letter at 1 (stating strong support for the Trade-At Prohibition to curtail internalization); Nasdaq Letter at 4; and NYSE Letter at 3. 170 See Adorney Letter; Wellington Shields Letter at 3; BIO Letter at 4; CHX Letter at 17; IMC Letter at 1; and Nasdaq Letter at 4. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 displayed liquidity 171 and provide valuable information to the Commission.172 Several commenters argued that the Trade-At Prohibition should apply to all securities not just Pilot Securities.173 One commenter suggested that interested parties should not prejudge the efficacy of the TradeAt Prohibition and stated that ‘‘studying the impact of tick increments and display priority will benefit emerging growth companies regardless of whether the [Tick Size Pilot] leads to the permanent adoption of five-cent tick increments, national display priority, a Trade-At rule, or any other rule.’’ 174 Another commenter, while skeptical about the benefits of the Trade-At Prohibition, supported its inclusion in the Tick Size Pilot in order to ‘‘gather hard evidence to help make the case . . . whether trade-at is a good idea.’’ 175 Several commenters believed that the Trade-At Prohibition would support the price discovery mechanism and mitigate the migration of displayed interest to off-exchange trading venues.176 Many of these commenters argued that the Trade-At Prohibition should be included in the Tick Size Pilot in order to mitigate this potential migration of trading.177 a. Protected Quotations Standard Several commenters discussed the use of the protected quotation standard rather than the NBBO for the Trade-At Prohibition. Some commenters were concerned that using the protected quotation standard would protect less competitive prices and undermine price competition 178 or would be too onerous.179 While other commenters favored using the protected quotation standard as a means to encourage 171 See Wellington Shields Letter at 5; CHX Letter at 17; and IMC Letter at 2. 172 See BIO Letter at 4. 173 See Adorney Letter (‘‘every time an order is executed away in a dark pool at the same price (or some cruel di minimis price like $15.997), it is 100% trading ahead of potential orders . . .’’) and Vanguard Letter at 2. 174 See Nasdaq Letter at 4. 175 See Angel Letter at 10–11. 176 See CHX Letter at 17 (expressing concern that ‘‘if left unchecked migration could rise to a level where the price discovery mechanism provided by ‘lit’ venues could be compromised.’’); IMC Letter at 2; Nasdaq Letter at 5; and NYSE Letter at 3 (acknowledging speculation that larger ticks could lead to more internalization and harm liquidity, but believes the outcome is uncertain and it is important for the data to decide). 177 See CHX Letter at 17; IMC Letter at 2; and NYSE Letter at 3. 178 See CMR Letter II at 6. 179 See CMR Letter a 6; BATS Letter at 5 (stating that use of protected quotes at the NBBO properly balances the goal of rewarding those who set lit prices while also preserving trading center competition); and Citigroup Letter at 2. PO 00000 Frm 00013 Fmt 4701 Sfmt 4703 27525 posting lit quotations.180 Two commenters requested that the protected quotation standard be clarified.181 b. SRO Quotation Feed One commenter supported the use of an SRO Quotation Feed to post and execute trades at the protected quote.182 This commenter stated that this feature would assist trading centers which cannot publish their own protected quotation. c. Size Limitation Several commenters discussed the Tick Size Pilot’s Size Limitation.183 Commenters specifically took issue with the restriction prohibiting a trading center from immediately accessing its hidden, reserve interest that is at a protected price.184 Several commenters were concerned the Size Limitation would inhibit execution quality and create risks of information leakage.185 180 See CFA Institute Letter 3 and CHX Letter at 18 (stating the protected quotation standard ‘‘supports price discovery’’ and is analogous to Rule 611 of Regulation NMS that would make it ‘‘simple to understand and implement’’). 181 See FIF Letter at 3 (requesting clarification on what quotes would be subject to the Trade-At Prohibition—protected quotations or NBBO) and Bloomberg Letter at 21 (inquiring whether a matching engine could use the protected quotation standard for routing while using the NBBO standard for matching). 182 See CHX Letter at 18. 183 See Tabb Letter at 5; CMR Letter II at 6; STA Letter II at 10; KCG Letter at 15 (stating that the Size Limitation is beyond the scope of the Commission’s June 2014 Order); BATS Letter at 5–6; SIFMA Letter II at 7; Citigroup Letter at 2; BlackRock Letter at 3; Bloomberg Letter at 13; CHX Letter at 19; Citadel Letter II at 7; and NYSE Letter at 3. 184 See STA Letter II at 10 (noting that the change in execution logic is highly complex and recommends that hidden orders be provided an exemption to satisfy incoming orders); SIFMA Letter II at 7 (stating that broker-dealers should be allowed to internalize order flow without a limitation on size if they are displaying a quote at the price of the NBB or NBO and execution quality of large orders primarily from institutions could be harmed); Bloomberg Letter at 13 (expressing lack of support for trading with all display before trading with reserve); and Citadel Letter II at 7 (noting that there is substantial un-displayed liquidity at exchanges through iceberg orders and other nondisplayed orders, and tapping this additional liquidity is very important to institutional and retail investors). 185 See Tabb Letter at 5 (noting that execution certainty would be reduced); CMR Letter II at 6 (noting that information leakage risk would increase as investors with large orders would have to simultaneously execute against the BBO at multiple venues, thereby exposing the orders to significant signaling risk and market impact); BATS Letter at 5–6 (noting that not allowing execution of nondisplayed order at a price equal to a protected quotation may disincent trading centers from quoting in the lit markets); SIFMA Letter II at 7 (stating that broker-dealers should be allowed to internalize order flow without a limitation on size if they are displaying a quote at the price of the NBB or NBO and execution quality of large orders E:\FR\FM\13MYN2.SGM Continued 13MYN2 27526 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices Other commenters were concerned that the Size Limitation would add implementation complexity, among other things, due to additional routing obligations.186 Two commenters supported the Size Limitation arguing that without it the Trade-At Prohibition would do very little to promote displayed liquidity.187 mstockstill on DSK4VPTVN1PROD with NOTICES2 d. Venue Limitation Commenters generally opposed the Venue Limitation because it would restrict market makers’ execution of incoming orders to lit exchanges.188 Commenters opined that the Venue Limitation offered little, if any, market quality enhancement, and was anticompetitive.189 One commenter stated; ‘‘[T]here is no real benefit to price discovery and no real benefit to the displayed order; therefore, there is no incentive for market participants to display additional liquidity. It is simply a way to subsidize the for-profit exchanges by forcing more orders to be routed to them.’’ 190 Two of the Participants, however, asserted that the Venue Limitation was an analog to the primarily from institutions could be harmed); and BlackRock Letter at 3 (stating that the Size Limitation creates excessive delay in execution and sub-optimally broadcasts order flow in illiquid names to multiple venues when there might have been sufficient reserve or non-displayed interest to accommodate the order). 186 See CMR Letter II at 6; STA Letter II at 10 (noting that the change in execution logic is highly complex and recommends that hidden orders be provided an exemption to satisfy incoming orders); Citigroup Letter at 2 (noting that the Size Limitation and Venue Limitation are more onerous than any version of trade-at and there is no real benefit to price discovery and to displayed order); and BlackRock Letter at 3. 187 See CHX Letter at 19 (stating that without the Size Limitation, the Trade-At Prohibition would do little if anything to promote displayed liquidity and that it would reinforce the price discovery mechanism) and NYSE Letter at 3. 188 See CMR Letter II at 7 (noting that the Venue Limitation would increase message traffic between exchanges and other trading centers, which may cause additional failures of systems); KCG Letter at 16; SIFMA Letter II at 7 (stating that broker-dealers should be allowed to internalize order flow without a limitation on size if they are displaying a quote at the price of the NBB or NBO); Citigroup Letter at 2; Citadel Letter II at 7; and OTC Markets Letter at 8. 189 See KCG Letter at 16 (stating that the Venue Limitation is beyond the scope of the Commission’s June 2014 Order and ‘‘anti-competitive on its face’’); Citigroup Letter at 2 (noting that the Size Limitation and Venue Limitation are more onerous than any version of trade-at and there is no real benefit to price discovery and to displayed order); Citadel Letter II at 7 (stating that market makers should not be forced to route all of their orders to the exchanges who would then reap the full benefit of their unnecessarily high, but permitted, ‘‘take’’ fees); and OTC Markets Letter at 8 (stating that the Venue Limitation violates the most basic principles of competition and capitalism, under which a variety of venues should be able to compete to offer the best package of price and services to investors). 190 See Citigroup Letter at 2. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Size Limitation and is necessary to gauge the market impact of wider tick sizes.191 e. Block Size Orders Several commenters suggested that the Block Size definition be altered to more accurately reflect block size transactions of small capitalization securities.192 Two commenters recommended that the Block Size exception should be included in all Test Groups to help maintain institutional trading in Pilot Securities,193 while another commenter stated that block trades should have the same execution increments as Retail Investor Orders.194 f. Other Test Group Three Exceptions Seven commenters, while supporting the Trade-At Prohibition, recommended that its exceptions be modified.195 Two commenters opined that the Trade-At Prohibition should not contain exceptions similar to Rule 611 of Regulation NMS because the Trade-At Prohibition would then replicate the complexity of Regulation NMS.196 Other commenters opined that the Retail Investor Order exception should be 191 See CHX Letter at 20 (stating that the Venue Limitation is necessary for the same reason as the Size Limitation) and NYSE Letter at 3 (supporting the Venue Limitation to protect displayed quotes, strengthen the incentive for market makers to quote aggressively, and allow the ability to analyze the impact of a protected quote requirement on a wider tick size). 192 See SIFMA Letter II at 7 (stating that the block size definition should be decreased); BlackRock Letter at 3–4 (noting that ‘‘[n]early a third of equities eligible for the [Tick] [P]ilot have average daily trading volumes which are lower than 50,000 shares. A block of 10,000 shares would be incommensurate with the volume profile for these stocks as it represents a substantial percentage of the daily trading volume.’’); and Fidelity Letter at 7. 193 See JonesTrading Letter at 2 (asserting that the Negotiated Trade Exception should also apply to al Test Groups to preserve institutional anonymity) and Citadel Letter II at 8 (advocating for the exemption to preserve executive quality). 194 See Liquidnet Letter at 2 (noting that block execution is important to institutional investors and that block orders should be allowed to execute at half-penny increments). 195 See Themis Letter at 4–5; CFA Letter; CFA Institute Letter; Bright Trading Letter; IMC Letter; Birch Bay Letter; and NYSE Letter (supporting certain limited exceptions to the Trade-At Prohibition in circumstances where the end customer is benefited by the exception). See also IssuWorks Letter at 5 (while not expressing support or opposition to the Trade-At Prohibition, the commenter suggested that odd-lot trades should be subject to the Trade-At Prohibition). But see CHX Letter at 18 (supporting the exceptions as proposed). 196 See Themis Letter at 4–5 and CFA Letter at 5– 6 (arguing that the exceptions should be eliminated and the price improvement for retail investors should be increased). But see FIF Letter at 3 (while not expressing support or opposition to the TradeAt Prohibition, the commenter stated that it approved of mirroring the Regulation NMS exceptions). PO 00000 Frm 00014 Fmt 4701 Sfmt 4703 modified or eliminated.197 One commenter stated that the fractional shares exception to the Trade-At Prohibition was reasonable because fractional shares cannot be displayed and this exception would have a minimal effect on the market.198 g. Odd Lots Finally, several commenters made suggestions regarding odd lots. One commenter suggested that odd lots should be subject to the Trade-At Prohibition because current trading practices create a large number of odd lot trades that would circumvent the Tick Size Pilot.199 Another commenter, however, suggested that odd lot orders be excepted from the Trade-At Prohibition, as odd lots historically are often excluded from regulatory requirements.200 One commenter requested clarity on the treatment of odd lots.201 E. Collection and Assessment of Tick Size Pilot Data 1. Trading Center Data Several commenters stated that the Tick Size Pilot should leverage existing reporting requirements to ease the implementation burden.202 Commenters suggested that existing data, such as data available through MIDAS,203 Rule 197 See CFA Letter at 5; CFA Institute Letter at 5– 6 (objecting to the retail price improvement amount as not sufficient to prevent market participants from stepping in front of displayed limit orders); Bright Trading Letter at 2 (objecting strongly to the retail exception because retail order flow would be more valuable on the exchanges); IMC Letter at 2 (noting that $0.005 hardly qualifies as meaningful price improvement and recommends at least half of the applicable tick); and Birch Bay Letter at 1 (believing that price improvement should be the full five cent tick increment for retail orders). 198 See CHX Letter at 20. 199 See IssuWorks Letter at 5 (citing O’Hara, Yao, and Ye paper, What’s Not There, The Odd-Lot Bias in TAQ Data, that asserted 19% of trades are missing from the consolidated tape). 200 See SIFMA Letter at 9 (asserting that larger orders divided up to create odd lots should not qualify for the exemption). 201 See BATS Letter at 6. 202 See CoreOne Letter at 6; STA Letter II at 3 (recommending a widely used quantitative market metrics to measure improvements and degradations in overall liquidity available); FIF Letter 3–4; SIFMA Letter II at 8; STANY Letter at 8–9; Nasdaq Letter at 6–7; and NYSE Letter at 2–3. 203 Market Information Data and Analytics System (‘‘MIDAS’’) collects and processes data from the consolidated tapes as well as from separate proprietary feeds made individually available by each equity exchange. See https://www.sec.gov/ marketstructure/midas.html. E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices 605,204 the SIPs,205 and OATS,206 could be used to lessen the burden of collection.207 One commenter stated the collected data should focus only on data that allows for centralized comparisons and analysis.208 This commenter also suggested that only data relevant to increased liquidity of Pilot Securities should be collected.209 Some commenters believed certain additional data metrics should be included to better facilitate the assessment of the Tick Size Pilot.210 Several commenters supported the public availability of data for potential analysis by academics and other interested parties.211 mstockstill on DSK4VPTVN1PROD with NOTICES2 2. Market Maker Profitability Data Thirteen commenters discussed whether the Market Maker Profitability Data should be collected.212 Ten commenters opposed collecting the Market Maker Profitability Data 213 204 Rule 605, Disclosure of Order Execution Information (‘‘Rule 605’’) is a trading center monthly reporting requirement regarding covered orders in NMS stocks. See 17 CFR 242.605. 205 Securities Information Processor (‘‘SIP’’) is any person engaged in the business of collecting, processing, or preparing for distribution information with respect to transactions or quotations. See 15 U.S.C. 78c(22). 206 See supra note 145 and accompanying text. 207 See CoreOne Letter at 6; STA Letter II at 4 (advocating for additional categories of data that can be obtained through MIDAS); SIFMA Letter II at 8; STANY Letter at 8–9; CHX Letter at 2; Nasdaq Letter at 6–7; and NYSE Letter at 2–3. 208 See FIF Letter at 3. 209 See FIF Letter at 3–4 (suggesting sixteen specific data requirements that would be relevant to assessing liquidity). 210 See Bloomberg Letter at 17 (suggesting the NMS plan data include order type usage statistics, off-exchange trading information, and research coverage metrics); Weaver Letter at 2 (requiring brokers to report the number of shares internalized). See also IAC Recommendations. 211 See BIO Letter at 4 (stating an interest in reviewing the Tick Size Pilot results on an industryby-industry basis); CFA Institute Letter at 6 (asserting that ‘‘[p]ublic release ensures accountability and peer review of the data by enabling independent researchers to look for unique and potentially valuable bits of information within the data.’’); Bloomberg Letter at 17; and KOR Letter II at 5–6 (urging the Commission to provide free and open access to Tick Size Pilot data to ensure broadened analysis from varied perspectives). Two commenters suggested that the data should be available in a downloadable format. See CFA Letter at 6; and FIF Letter at 2. 212 See Duffy Letter at 2; CoreOne Letter at 2 (noting that it is going to be very difficult to measure the impact on research coverage from market maker profitability); STA Letter II at 10; KCG Letter at 18; CFA Letter at 7; SIFMA Letter II at 9; Citigroup Letter at 4–5; FIF Letter at 5–6; STANY Letter at 8; TD Ameritrade Letter at 5; Angel Letter at 8; CHX Letter at 21–22; and NYSE Letter at 2. 213 See Duffy Letter at 2; STA Letter II at 10; KCG Letter at 18; SIFMA Letter II at 9; Citigroup Letter at 4–5; FIF Letter at 5–6; STANY Letter at 8; TD Ameritrade Letter at 5; CHX Letter at 21–22; and NYSE Letter at 2. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 because they believe gathering such data would be costly.214 One commenter noted that profitability information is highly confidential and proprietary.215 This commenter stated that profitability information is not currently disclosed except in a public company context, and requiring market makers to disclose their profitability to competitors (i.e., the exchanges) is anti-competitive. This commenter posited that market makers may opt-out of trading in Pilot Securities rather than disclose the profitability information. Additionally, two commenters stated that Market Maker Profitability Data is difficult to calculate and attribute to a specific activity.216 Other commenters argued that the Market Maker Profitability Data is not necessary or useful to the goals of the Tick Size Pilot and therefore should not be collected.217 Some commenters suggested that this data element was unnecessary and would provide the Participants with a competitive insight and advantage on market maker operations.218 Three commenters supported the collection of the Market Maker Profitability Data.219 One commenter stated that the collection of this data would help to identify the effect of the Tick Size Pilot on market maker business practices.220 Another commenter stated that Market Maker Profitability Data has analytical value for the Tick Size Pilot and indicated that 214 See SIFMA Letter II at 8 (arguing the collection of market maker profitability unnecessarily increases the burden on market makers) and FIF Letter at 5–6 (asserting that the collection of market maker profitability would involve significant implementation). See also STANY Letter at 8 and NYSE Letter at 2 (stating eliminating the collection of market maker profitability would reduce the cost of the Tick Size Pilot). 215 See STANY Letter at 8. 216 See Citigroup Letter at 4 (arguing it is not feasible, nor accurate, to measure market maker profitability on a symbol-by-symbol basis) and FIF Letter at 6 (calculating profit includes access fees and rebates that are computed monthly and not on a trade-by-trade basis at the time of execution). 217 See STA Letter II at 10; KCG Letter at 18; TD Ameritrade Letter at 5; and CHX Letter at 27. See also CoreOne Letter at 2 (asserting the correlation between market maker profitability and research would be difficult to determine). 218 See KCG Letter at 18 (stating that ‘‘[e]xchanges compete directly with market makers for order flow and should not collect, review and interpret their competitors’ profitability data’’ and it would also place market makers at a disadvantage when negotiating for services provided by exchanges); Citigroup Letter at 5 (arguing that market maker profitability should not be published to a primary competitor); and STANY Letter at 8 (asserting that the collection of market maker profitability is ‘‘anticompetitive and extremely disadvantageous to market makers’’). 219 See CFA Letter at 6–7; CFA Institute Letter at 6; and Angel Letter at 8. 220 See CFA Letter at 6–7. PO 00000 Frm 00015 Fmt 4701 Sfmt 4703 27527 the dissemination of the data on an aggregated basis would alleviate confidentiality concerns.221 One commenter stated the collection of the Market Maker Profitability Data should only be done if it is absolutely necessary for the Tick Size Pilot and, if so, then it should also be collected from ATSs and exchanges.222 As a potential alternative to Market Maker Profitability Data, one commenter suggested the use of a ‘‘Market Maker/Investment Bank’’ scorecard that includes metrics or important drivers of liquidity.223 Two commenters expressed concerns related to the confidentiality of Market Maker Profitability Data because of the potential for such data to be reverse engineered and attributed to specific market participants after becoming publicly available.224 3. Assessment of Tick Size Pilot Data Many commenters stated that the NMS plan should clearly define what would constitute a successful Tick Size Pilot and warrant implementation on a permanent basis.225 Some commenters stated that it is important to quantify, within the metrics, specific data ranges that would be considered successful.226 Another commenter noted that ‘‘liquidity’’ should be defined in order to facilitate the assessment of the Tick Size Pilot’s impact on liquidity.227 Other commenters suggested specific data that would indicate the Tick Size Pilot’s success or failure.228 One 221 See Angel Letter at 8. TD Ameritrade at 5. 223 See Fidelity Letter at 8. 224 See FIF Letter at 4 and STANY Letter at 8. 225 See ECFTF Letter at 3; CMR Letter II at 2; STA Letter II at 2; KCG Letter at 7; BATS Letter at 6; BlackRock Letter at 6; Schwab Letter at 10; STANY Letter at 4–5; Fidelity Letter at 5–6; and TD Ameritrade Letter at 5. 226 See STA Letter II at 2 (stating the Tick Size Pilot’s goals should be prioritized from the onset in the event a conflict among the specific goals developed.); KCG Letter at 8 (arguing that ‘‘the 200+ data collection items are susceptible to post-[Tick Size Pilot] use to build a story of ‘‘success’’ based on whatever criteria a given reviewer decides at that time’’); BATS Letter at 6; BlackRock Letter at 6 (asserting that due to the associated costs of the Tick Size Pilot ‘‘criteria for success should also be unambiguous’’); Schwab Letter at 10; STANY Letter at 4–5 (stating that without a clear metrics to determine success ‘‘[e]ach of the various business models will be able to lay a credible claim to success.’’); and Fidelity Letter at 5 (asserting that success metrics need to be clearly defined from the onset ‘‘to avoid post hoc justifications and arguments about success and failure.’’). 227 See Warner-Toomey Letter at 2. 228 See ModernNetworks Letter at 2 (stating increasing the number of committed market-makers, more market participants, larger trade sizes and deeper displayed buy-sell interest should determine the success of the Tick Size Pilot); Tabb Letter at 2 (providing six metrics that indicate success: market efficiency, greater liquidity, larger 222 See E:\FR\FM\13MYN2.SGM Continued 13MYN2 27528 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices commenter, focused on issuers of small capitalization securities, stated that capital formation criteria should be used to gauge the success of the Tick Size Pilot.229 Another commenter, however, was concerned that the Tick Size Pilot would be prejudged if success metrics were defined before empirical data was gathered.230 Three commenters stated that the Tick Size Pilot data should be analyzed on a more frequent periodic basis until the final assessment is conducted.231 mstockstill on DSK4VPTVN1PROD with NOTICES2 F. Use of an NMS Plan Fourteen commenters indicated that the Tick Size Pilot should not be the subject of an NMS plan, but instead should be presented as, and adhere to the procedural requirements of, a formal Commission rulemaking that includes additional cost-benefit analysis.232 Some commenters believed that the Tick Size Pilot is a market structure initiative that is too significant and impactful to be delegated to the Participants through an NMS plan.233 A number of commenters questioned whether it was appropriate to have Participants formulate an NMS plan that would affect their competitors.234 transaction size, increased certainty of execution, less off-exchange activity and greater price discovery, more market-making firms other than high-frequency firms); ECFTF Letter at 3 (indicating that Tick Size Pilot success should be determined by increase in relative level of trading liquidity, increase in change of institutional ownership, higher rate of equity capital issuance); and STA Letter II at 3–4. See also IAC Recommendations. 229 See ECFTF Letter at 3 (advocating for using higher rate of equity capital issuance as a metric for success). 230 See Nasdaq Letter at 4. 231 See FIF Letter at 6; KOR Letter II at 3; and CHX Letter at 6. See also STANY Letter at 9 (requesting the Tick Size Pilot continue while its final assessment is conducted to avoid unnecessary costs, potential confusion, and greater risks of system errors). 232 See Duffy Letter at 2; KCG Letter at 8–9; SIFMA Letter II at 7; MFA Letter II at 8; Wells Fargo Letter at 3; Citigroup Letter at 5; Schwab Letter at 8–9; STANY Letter at 9–10; Bloomberg Letter at 21– 22; TD Ameritrade Letter at 4; ITG Letter at 4; Citadel Letter II at 3–4; Nasdaq Letter at 7; and OTC Markets Letter at 9. 233 See Schwab Letter at Letter 8–9; Bloomberg Letter at 22 (stating the Commission should not defer to Participants for such major policy decisions); ITG Letter at 4 (opining that the Tick Size Pilot would modify certain obligations under Regulation NMS, and that NMS plans should implement the Commission’s policy directives but not amend existing regulations established under federal securities laws); and Citadel Letter II at 3 (asserting that the temporary nature of a significant pilot should not exempt it from traditional rulemaking). 234 See SIFMA Letter II at 2–3 (asserting the NMS plan benefits Participants more than others); TD Ameritrade Letter at 4 (stating the NMS plan unfairly gives more control of the Tick Size Pilot to one set of market participants over others); ITG Letter at 4 (stating that the SROs devising the NMS plan have potential conflicts of interests with ATSs VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Commenters were also concerned that not all affected market participants, such as market makers, broker-dealers, and institutional investors, were included in the process of establishing the terms of the Tick Size Pilot and the NMS plan.235 Additionally, some commenters intimated that a conflict of interest may exist by highlighting that the Participants who devised the NMS plan are now for-profit entities.236 G. Issuer Participation A few commenters suggested that Pilot Security issuers should have discretion to set their own minimum increments.237 One commenter stated that companies should be empowered to determine their increments by contract with market makers.238 Another commenter stated there should be an ‘‘Issuer Committee’’ formed to advocate for the interests of issuers in the process.239 Another commenter suggested the formation of a ‘‘Tick Size Pilot Advisory Committee’’ that would be able to provide input after the completion of the Tick Size Pilot comment period.240 Three commenters favored allowing issuers of Pilot Securities to opt-out of participating in the Tick Size Pilot.241 One commenter stated that the decision to participate in the Tick Size Pilot should be determined by the Board of Directors or current shareholders of the company.242 Three commenters opposed the idea of allowing a Pilot Security issuer to opt-out of the Tick Size Pilot because it could skew the data.243 H. Implementation of Tick Size Pilot Several commenters offered suggestions on how the Tick Size Pilot and market makers); and Citadel Letter II at 4 (claiming that exchanges are able implement an NMS plan while excluding broker-dealers, issuers, investment funds, and the general investing public from the process). 235 See Schwab Letter at 7 (asserting that ‘‘it is unacceptable for exchanges to design the [NMS] [p]lan without any input from other parts of the industry.’’); TD Ameritrade Letter at 4; and Citadel Letter II at 4. 236 See KCG Letter at 8–9; Schwab Letter at 7; TD Ameritrade Letter 1; and Citadel Letter II at 5. 237 See Bloomberg Letter at 16 and Angel Letter at 4. 238 See Bloomberg Letter at 16 (citing certain European markets that allow for issuers to contract with market makers to determine the spread). 239 See ModernNetworks Letter at 2. 240 See NYSE Letter at 3. 241 See DFA Letter at 3; Themis Letter at 2; and CCMC Letter II at 3. 242 See DFA Letter at 3. 243 See STA Letter II at 9; ICI Letter at 4; and CHX Letter at 9 (stating that an opt-out provision should be allowed only if there is also an opt-in provision; but either would be premature without data). See also IAC Recommendations. PO 00000 Frm 00016 Fmt 4701 Sfmt 4703 should be implemented. Two commenters suggested that the implementation period should be at least one-year, but could be reduced if the Tick Size Pilot was simplified.244 One commenter indicated that in order to adequately assess the burden and time necessary to implement the Tick Size Pilot, the requirements needed to be finalized prior to developing an implementation schedule.245 Other commenters stated that either the Commission, or the Participants, should release detailed frequently-askedquestions to assist implementation of the Tick Size Pilot to help alleviate confusion.246 One commenter requested that the list of securities be finalized prior to determining the implementation schedule.247 V. Discussion and Commission Findings In 1975, Congress directed the Commission, through the enactment of Section 11A of the Act,248 to facilitate the establishment of a national market system to link together the individual markets that trade securities. Congress found the development of a national market system to be in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets.249 Section 11A(a)(3)(B) of the Act authorizes the Commission, ‘‘by rule or order, to authorize or require self-regulatory organizations to act jointly with respect to matters as to which they share authority under this title in planning, developing, operating, or regulating a national market system (or a subsystem thereof) or one or more facilities.’’ 250 Rule 608 under Regulation NMS provides that the Commission’s approval of a NMS plan is required to be based upon a finding that the plan is ‘‘necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect 244 See SIFMA Letter II at 10 (citing the rollout period required for other Commission actions and indicating that if the Trade-At Prohibition is removed a shorter time would be sufficient) and FIF Letter at 6 (asserting a twenty month implementation would be necessary for the current NMS plan, but if it was simplified only a twelve month period would be necessary). 245 See CHX Letter at 1. 246 See KCG Letter at 17; Liquidnet Letter at 2; and Bloomberg Letter at 20. 247 See Bloomberg Letter at 20. 248 15 U.S.C. 78k–1. 249 15 U.S.C. 78k–1(a)(1)(C)(ii). 250 15 U.S.C. 78k–1(a)(3)(B). E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act.’’ 251 Further, Rule 608 provides the Commission with the authority to approve a NMS plan, ‘‘with such changes or subject to such conditions as the Commission may deem necessary or appropriate.’’ 252 While the Commission has reviewed certain aspects of decimalization and tick sizes over the years, the Commission has not tested whether a wider tick size for small capitalization stocks improves the market quality for these stocks.253 As noted above, the JOBS Act directed the Commission to conduct a study, which resulted in the Decimalization Report. The Decimalization Report further recommended a public roundtable, which in turn produced broad support among its panelists for a pilot program. Since issuing the June 2014 Order, the Commission has received 77 comment letters that relate to, among other things, the development, costs, and complexity of the Tick Size Pilot, and the Commission has carefully considered the comments and the issues raised. The Commission has conducted significant analysis relating to the development, costs, and complexity of the Tick Size Pilot. As noted in the June 2014 Order and reflected in several comment letters,254 it has been suggested that the minimum one penny tick size has had a detrimental impact on incentives for underwriters to pursue public offerings of smaller capitalization stocks, the production of sell-side research, and the incentives for broker-dealers to make markets in the securities of smaller capitalization companies. The Commission believes that it is in the public interest to gather objective evidence on the impact of the minimum tick size, and study a minimum of $0.05 tick size, on the trading, liquidity and market quality of securities of smaller capitalization companies. The Commission believes that the Tick Size Pilot set forth in the NMS plan is reasonably designed to provide 251 17 CFR 242.608(b)(2). See also 15 U.S.C. 78k– 1(a). 252 17 CFR 242.608(b)(2). supra note 56 and accompanying text. These commenters suggested that the Commission had already studied the impact of tick sizes. While the Commission staff did prepare the Decimalization Report, which summarized academic literature related to the impact of decimalization, the Commission has not studied the impact of wider ticks on small capitalization stocks. See Decimalization Report, supra note 14. 254 See June 2014 Order, supra note 4. See also IssuWorks Letter at 2; ECFTF Letter at 1; BIO Letter at 2 (‘‘The one-size-fits-all tick size imposed by decimalization has hampered small company growth since it was implemented in 2000.’’); BlackRock Letter at 1; and CCMC Letter II at 2. mstockstill on DSK4VPTVN1PROD with NOTICES2 253 See VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 measurable data that should facilitate the ability of the Commission, the public, and market participants to review and analyze the effect of tick size on the trading, liquidity, and market quality of securities of smaller capitalization companies. The Tick Size Pilot should provide a data-driven approach to evaluate whether certain changes to the market structure for Pilot Securities would be consistent with the Commission’s mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. As described in detail below, the Commission, consistent with Rule 608, is modifying certain aspects of the NMS plan and the Tick Size Pilot. Specifically, the Commission is making the following changes to the NMS plan: (1) Extending the Pilot Period to two years; (2) lowering the market capitalization threshold criteria for identifying Pilot Securities to $3 billion or less; (3) modifying the Trade-At Prohibition by: (i) Amending the definition of trade-at to clarify that the provision would only be operative during Regular Trading Hours; (ii) removing the Venue Limitation, and (iii) lowering the thresholds in the Block Size definition; (4) modifying the data elements related to Market Maker Profitability Data by: (i) Removing the data element that would have required realized trading profits to be calculated net of fees and rebates, and (ii) requiring further aggregation of the Market Maker Profitability Data made publically available; (5) requiring Participants to provide an assessment on the impact of the Tick Size Pilot on market maker profitability; and (6) modifying the time when Participants must submit their assessments to the Commission. The Commission received comments on market structure issues other than the Tick Size Pilot, such as maker-taker fee structures, access fees, payment for order flow, high frequency trading, and subpenny quoting.255 The Tick Size Pilot is a targeted, limited-term pilot that is directed at analyzing discrete issues related to a segment of the equity markets. While the Commission appreciates market participants’ views and opinions on these matters, the Commission believes that there would be substantial additional costs and complexity if the Tick Size Pilot were expanded to address these additional issues, and that they are broader than what the Commission wants to study in connection with the Tick Size Pilot. Therefore, the Commission is not 255 See PO 00000 supra notes 67–70 and accompanying text. Frm 00017 Fmt 4701 Sfmt 4703 27529 expanding the Tick Size Pilot to assess these other market structure issues. A. Costs and Complexity of the Tick Size Pilot The Commission received numerous comments related to the costs and complexity of implementing and complying with the Tick Size Pilot in general, and Test Group Three in particular.256 Commenters also expressed concerns about the potential increased costs that might be incurred by market participants, investors, and issuers as a result of the wider minimum tick size mandated by the Tick Size Pilot.257 With respect to market participants, such as trading centers and routing brokers, commenters believed that those market participants would incur substantial costs to reprogram and/or implement and operate as brand new, their trading, order routing, compliance, and other systems to implement the Tick Size Pilot. Such reprogramming or new implementation of systems would also include additional testing and compliance costs. Concerns were particularly pronounced with respect to the costs and complexity of implementing Test Group Three and its Trade-At Prohibition and, as noted above, some commenters believed market participants might cease trading Test Group Three securities for the proposed one-year duration of the Tick Size Pilot rather than incur those implementation costs.258 Other commenters expressed concerns that the complexity of the Tick Size Pilot would lead to increased operational risks for market participants and the market as a whole. One commenter believed that the Tick Size Pilot would impede its ability to trade efficiently in Pilot Securities. The Tick Size Pilot, by design, is an objective, data-driven test intended to evaluate how a wider tick size would impact trading, liquidity, and market quality of securities of smaller capitalization companies. As noted above, the Commission cannot know in advance the full effects, whether positive or negative, of a wider tick size on the behavior of market participants in response to the Tick Size Pilot. While the effects of wider tick sizes for small capitalization stocks on trading, liquidity, and market quality are not clear, the Commission believes that the Tick Size Pilot will generate data to help 256 See supra Section IV.A. See also infra Section V.D.4. for the discussion on Test Group Three and the Trade-At Prohibition. 257 See supra Section IV.A. 258 For a full discussion of the change in the Pilot Period to two years to address these concerns, see infra Section V.B. E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 27530 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices inform whether significant benefits, such as improved liquidity and market quality, could be realized by investors, issuers, and other market participants. The Tick Size Pilot will provide the Commission and interested parties with real-world data regarding the effects of wider tick sizes on trading, liquidity and market quality for smallcapitalization companies, and this empirical data will inform analyses and may serve as a basis for potential future regulatory actions to, among other things, capture any benefits from wider tick sizes on a permanent basis. The Commission, therefore, believes that the potential magnitude of the benefits that could be revealed by the Tick Size Pilot justify the costs of the Tick Size Pilot. The Commission acknowledges that implementation of the Tick Size Pilot would create costs for market participants and potential operational risks. The Commission has taken seriously the concerns about costs, complexity, and operational risks, and has tried to carefully balance those concerns with the objectives and goals of the Tick Size Pilot. As a result, in response to comments, the Commission has decided to exercise its authority under Rule 608(b)(2) 259 to modify the Tick Size Pilot, as described below and elsewhere in this order. As noted by a one commenter, ‘‘[a]ny systems change, no matter how thoroughly prepared and tested, creates a risk of error and negative impact to the market.’’ 260 The Commission acknowledges that implementation of the Tick Size Pilot may involve operational risks, but believes that the Tick Size Pilot’s design will permit market participants to leverage the use of existing compliance systems, which have been tested and currently are in use, and that this should serve to mitigate operational risks. In addition, certain of the Commission modifications to the Tick Size Pilot will further align the Tick Size Pilot requirements with existing systems which should further mitigate operational risks. The Commission believes that these Tick Size Pilot modifications should lessen the costs, complexity, and operational risks of its implementation and compliance without impairing the quality and relevance of the data to be collected. The Commission also notes that it is approving a one-year implementation period, which should provide market participants with adequate time for the careful development and rigorous 259 17 CFR 242.608(b)(2). SIFMA Letter at 6. 260 See VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 testing of their compliance systems for the Tick Size Pilot. Trading centers (i.e., exchanges, alternative trading systems, and market makers and other internalizing brokerdealers), as well as non-trading center broker-dealers that route orders for customers or themselves and certain institutional and other investors, would incur costs to implement and comply with the Tick Size Pilot. Market participants would need to modify systems to comply with the minimum $0.05 quoting and/or trading increment and applicable exceptions for all three Test Groups. While some systems changes would be required for the purposes of the Tick Size Pilot, market participants already have systems in place to comply with the existing minimum $0.01 quoting increment and applicable exemptions under Rule 612 of Regulation NMS.261 Rule 612 (‘‘Subpenny Rule’’) prohibits trading centers, among other things, from accepting, ranking or displaying an order priced greater than $1.00 per share in an increment smaller than $0.01, absent an applicable exemption. Consequently, the Commission believes that compliance with the quoting restrictions of the Tick Size Pilot would be implemented in a manner similar to the Subpenny Rule, so that trading centers and other market participants would be able to leverage existing Subpenny Rule compliance systems by, for example, adjusting their parameters from $0.01 to $0.05 as applicable. Nonetheless, the costs to market centers to implement the Tick Size Pilot could be substantial.262 As noted above, many commenters expressed concerns about the costs and complexity of implementing and complying with Test Group Three, and the Commission acknowledges the particular complexity of implementing and complying with the Trade-At Prohibition.263 Among other things, trading centers would need to monitor protected quotations on other trading centers and prevent an execution that would match the price of any such quotation unless the trading center itself was displaying a protected quotation at that price, and of at least that size, absent an applicable exception. While compliance with the Trade-At 261 17 CFR 242.612. CHX Letter at 17 (Estimating that its potential implementation costs for all three Test Groups would be approximately $140,000, and suggesting that such costs for approximately 60 market centers could be in excess of $8.0 million). See also supra note84. 263 See supra Section IV.A. See also infra Section V.D.4. for the discussion on Test Group Three and the Trade-At Prohibition. 262 See PO 00000 Frm 00018 Fmt 4701 Sfmt 4703 Prohibition would require systems changes by trading centers, the Commission believes that, as with the minimum quoting increment, trading centers should be able to leverage existing compliance systems when implementing this aspect of the Tick Size Pilot. Trading centers today already have systems in place to comply with the provisions of Rule 611 under Regulation NMS (‘‘Trade-Through Rule’’) 264 and applicable exceptions, which operates in a manner similar to the Trade-At Prohibition. In addition, as discussed below, the Trade-At Prohibition has been designed to closely parallel the operation of Rule 611 (e.g., by using protected quotations as the compliance benchmark rather than the NBBO, by mirroring most of the Rule 611 exceptions into the Trade-At Prohibition, and, as modified by the Commission, by eliminating the Venue Limitation). Accordingly, the Commission believes that trading centers should be able to efficiently build upon their existing Rule 611 compliance systems, which today monitor protected quotations on other trading centers and prevent an execution at a price worse than such quotations absent an applicable exception, to comply with the Trade-At Prohibition. In addition, the Commission acknowledges that certain non-trading center broker-dealers that desire to control the routing of their orders today monitor protected quotations and use ‘‘intermarket sweep orders’’ to allow trading centers to rely on an exception from Rule 611. These broker-dealers also would need to make adjustments to their compliance systems if they desire to use the comparable intermarket sweep order exception to the Trade-At Prohibition but, as with trading centers, the Commission believes they should be able to efficiently leverage their existing Rule 611 compliance systems to do so. Because compliance with the Trade-At Prohibition would be implemented in a manner similar to compliance with Regulation NMS, and by leveraging those longstanding systems, the Commission does not believe that compliance with the Trade-At Prohibition would create material additional operational risks or materially reduce the efficiency of trading in Pilot Securities as market participants already are complying with Regulation NMS. The Commission also acknowledges that trading centers would be required to produce specified data in connection with the Tick Size Pilot and there would 264 17 E:\FR\FM\13MYN2.SGM CFR 242.611. 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 be some associated costs and burdens.265 Among other things, trading centers would have to produce certain data on market quality, orders, and market maker participation, and market makers additionally would be required to produce certain profitability data. The Commission believes that trading centers should be able to leverage existing systems for collecting and reporting execution quality data under Rule 605 of Regulation NMS for certain of the data relating to market quality and order information.266 With respect to producing Market Maker Profitability Data, the Commission notes that market makers may capture trading profit data for internal business purposes. As discussed further below, the Commission believes that the design of the Trading Center Data already mitigates concerns about confidentiality and has further modified the Market Maker Profitability Data requirements to address concerns regarding the confidentiality of that data.267 The Commission recognizes that trading centers and market makers would be required to incur some additional costs to produce the specific data called for by the Tick Size Pilot. In particular, the Commission recognizes that trading centers and market makers would need to make changes to their systems to compile the data and that transmitting the data would entail costs as well. However, as discussed below, the Trading Center Data and Market Maker Profitability Data are necessary to examine specific components of the Tick Size Pilot. As such, the Tick Size Pilot will provide the Commission and interested parties with real-world data regarding the effects of wider tick sizes on trading, liquidity, and market quality for securities of small capitalization companies, and this empirical data will inform analyses and potential future regulatory actions to, among other things, capture any benefits from wider tick sizes on a permanent basis. As discussed below in Section V.E.2, the Commission is modifying certain aspects of the Tick Size Pilot to reduce the data production burdens and related concerns about the confidentiality thereof (e.g., by eliminating the requirement for market makers to report 265 See, e.g., FIF Letter at 5–6; SIFMA Letter at 8 (‘‘the data collections specified in Appendices B and C of the Proposed Plan are extremely burdensome on broker-dealers and should be eliminated . . . The proposed collections of order and profitability data unnecessarily increase the burden on all trading centers, especially market makers who would be subject to both Appendix B and C.’’); Nasdaq Letter at 6; and Citadel Letter at 8. 266 17 CFR 242.605. 267 See infra Section V.E.2. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 realized trading profits net of fees and rebates, and by requiring Market Maker Profitability Data that is made publicly available to be further aggregated).268 The Commission is not modifying the Trading Center Data to address confidentiality concerns. First, the order data and the market quality data would be available on a significant lag, mitigating potential risks about confidentiality. One concern is that order data and market quality data may reveal the trading intentions of market participants. However, this concern is mitigated if the data is disseminated with a significant lag because market participants may have completed their trades, rendering this information less sensitive. Second, the Commission does not believe that the order data would be sufficiently detailed to identify particular investors or their trading strategies. Further, current market quality data identifies the trading center producing the data, so any increases in risks regarding confidentiality are unlikely to be significant. The collection and analysis of relevant data, however, is the central purpose of the Tick Size Pilot. The effects of wider tick sizes for small capitalization stocks on trading, liquidity, and market quality are not clear and the Tick Size Pilot will provide data to allow the Commission to effectively test for the potential benefits and costs of permanently changed tick sizes. The Commission believes that the potential magnitude of the benefits that could be revealed by the Tick Size Pilot justify the costs of running the Tick Size Pilot. Finally, the Commission acknowledges the concerns expressed by commenters about the potential increased costs that might be incurred by investors and issuers as a result of the wider minimum tick size mandated by the Tick Size Pilot.269 As noted above, several commenters expressed concern that the Tick Size Pilot would help market professionals at the expense of investors. In fact, two commenters believed that the increased costs to investors could exceed $200 million per year. Other commenters expressed the 268 The Commission also notes that data production costs should also be reduced as a result of the modification of the market capitalization threshold which will reduce the universe of potential Pilot Securities. See infra Table 1 in Section V.C.1. 269 See supra note 59 and accompanying text. See also IAC Recommendations (expressing concern that a pilot would disproportionately harm retail investors because their trading costs would rise). The Commission has carefully considered the IAC Recommendations from January 2014. After careful deliberation and considering the IAC Recommendations, the Commission is approving the NMS plan, as modified. PO 00000 Frm 00019 Fmt 4701 Sfmt 4703 27531 view that the Tick Size Pilot could raise the cost of capital for issuers.270 Other commenters suggested that an assessment of investor costs should be completed prior to the implementation of the Tick Size Pilot. The Commission notes that the central purpose of the Tick Size Pilot is to assess the market quality impact of an increase in the tick size for the securities of smaller capitalization companies, which is comparable to assessing the impact of the Tick Size Pilot on investors. Notwithstanding the opinions of the commenters, whether an increased tick size would improve market quality, or increase or reduce execution costs for some or all investors, in some or all Pilot Securities, is not known at this time. As further discussed in Section V.C.1, the number of potential Pilot Securities that currently trade with a spread of greater than $0.05, and less than $0.05, is approximately equal. For Pilot Securities that currently trade with less than $0.05 spread, the costs for investors to trade smaller orders, typically placed by retail investors, at the quote may increase while the costs for investors to trade small orders in general may or may not increase, depending on the degree to which trades execute between the bid and the offer. The impact on larger orders, typically placed by institutional investors, however, is not clear. The impact on Pilot Securities that currently trade with a spread of greater than $0.05 similarly is not clear, as spreads in these securities may change as well depending on the impact of an increase in the tick size on market making incentives. The Commission notes that the exception for Retail Investor Orders was proposed by the Participants as a means to reduce the risk of the Tick Size Pilot having a detrimental impact on retail investor execution quality, and further, the Commission has made modifications to the proposal submitted by the Participants (e.g., lowering the market capitalization threshold to exclude securities that tend to have narrower spreads and, with respect to the Trade-At Prohibition, removing the Venue Limitation 271 and liberalizing the Block Size definition).272 270 See supra note 78 and accompanying text. removal of the Venue Limitation should reduce the potential costs and complexity associated with the proposed Tick Size Pilot by not requiring liquidity that would have been affected by the Trade-At Prohibition to be routed from off exchange venues to lit venues. See infra Section V.D.4.d. 272 The modification to liberalize the Block Size definition should serve to mitigate disruptions to 271 The E:\FR\FM\13MYN2.SGM Continued 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 27532 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices With respect to the specific cost estimates, the Commission appreciates the efforts of commenters to quantify costs and has carefully assessed the estimates. These estimates rely on historical trading data and reasonable assumptions on how retail execution quality may change with wider tick sizes. The Commission cannot know, however, the full impact of wider tick sizes on investors, before the Tick Size Pilot is underway. With the exception of the modifications and consideration for retail investors in the original design of the Tick Size Pilot, the Commission does not believe it can further reduce these costs without sacrificing the utility of the Tick Size Pilot. Specifically, the Commission would need to focus the Tick Size Pilot exclusively on stocks with higher transaction costs, which are determined by spreads. As noted in Section V.C.3. below, if the tick size mechanically affects a criterion for inclusion, then the Tick Size Pilot would be severely limited in its ability to inform any future rulemaking by the Commission. While the effects of wider tick sizes for small capitalization stocks on trading, liquidity, and market quality are not clear, the Commission believes that the Tick Size Pilot will generate data to help inform whether the significant benefits, such as improved liquidity and market quality, could be realized by investors, issuers, and other market participants. The Tick Size Pilot will provide the Commission and interested parties with real-world data regarding the effect of wider tick sizes on trading, liquidity, and market quality for smallcapitalization companies and this empirical data will inform analyses and potential future regulatory actions to, among other things, capture any benefits from wider tick sizes on a permanent basis. The Commission, therefore, believes that the potential magnitude of the benefits that would be revealed by the Tick Size Pilot justify the costs of the Tick Size Pilot. Similarly, while the Commission recognizes the potential connection between tick size, liquidity, and cost of capital, the impact of an increased tick size on the costs and ability of issuers to raise capital, if any, is not known at this time. As noted above, the Commission believes that altering tick sizes could result in significant marketwide benefits and improvements to capital formation. In particular, if a wider tick size leads to more active market making and attracts more investors to small capitalization stocks, positive effects on trading, liquidity, and market quality as measured by metrics such as trading volume, displayed depth, effective spreads, or execution costs for small and large trades could be observed. Indeed, some advocates for a tick size pilot argue that a wider tick size would benefit issuer’s capital formation and cost of capital.273 Nonetheless, the Commission recognizes that these benefits may not manifest in the manner or to the extent anticipated. Further, the Commission believes that the design of the Tick Size Pilot and the data in the Appendices will facilitate robust analyses to help assess the benefits and costs of wider tick sizes. Nevertheless, the Commission intends to carefully monitor implementation of the Tick Size Pilot and, should it appear that the protection of investors is compromised, the Tick Size Pilot can be modified or terminated early to protect them and integrity of the market. Some commenters expressed the view that the Tick Size Pilot should have been implemented through Commission rulemaking that includes a cost-benefit analysis or that the Commission should have conducted a cost-benefit analysis as part of the NMS plan process. The Commission reasonably concluded that proceeding with the Tick Size Pilot through an NMS plan was an appropriate way to gather information necessary to assess whether changes should ultimately be made through rulemaking or otherwise. As discussed in detail in the June 2014 Order, and noted above, consideration of issues related to minimum tick sizes has been ongoing for years.274 That history of study led the Commission to conclude that it could not adequately evaluate the need for additional regulatory action without empirical data that would be generated from a pilot implemented through an NMS plan. The Commission is modifying the NMS plan in response to comments, including comments with respect to the costs and benefits. Consideration of the potential costs and benefits of the Tick Size Pilot is reflected in the June 2014 Order, the Notice and this order which also addresses comments about the potential competitive impact and other economic consequences of the NMS plan. The Commission’s approval of the NMS plan is designed and intended to produce measurable data to study the impact of a wider tick size on the liquidity and trading in the securities of 273 See, e.g., BIO Letter at 5. supra Section II. See also June 2014 Order, supra note 4 for a further discussion on the history of decimalization and tick sizes. 274 See the institutional trading of securities with smaller market capitalization. See infra Section V.D.4.e. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4703 smaller capitalization companies, which should support an objective data-driven review of this important policy issue. Legitimate questions have been raised about the impact of decimalization on the market for small capitalization securities.275 The Tick Size Pilot, as modified, should produce valuable data to allow the Commission, the public, and market participants to assess the impact of a wider tick size on the trading, liquidity, and market quality of smaller company stocks. Notwithstanding, the Commission would, and expects the Participants to, actively monitor the operation of the Tick Size Pilot 276 and, if necessary, the Tick Size Pilot can be modified or terminated early to ensure the protection of investors and integrity of the market. In addition, the Commission emphasizes that it welcomes the submission of additional comments and empirical evidence during the Pilot Period with respect to, among other things, the operation of the Tick Size Pilot, in particular the three Test Groups, and the costs associated therewith. The Commission would take such comments into account in its consideration of related future regulatory actions. B. Tick Size Pilot Duration As proposed, consistent with the June 2014 Order, the Pilot Period would be for one year. In the June 2014 Order, the Commission noted that it preliminarily believed that a one-year Pilot Period would be sufficient to generate data to reliably analyze the effects and impact of wider tick sizes. Several commenters argued that the Pilot Period should be longer than one-year.277 Commenters suggested that the Tick Size Pilot would be too complex and costly to implement for a one-year Pilot Period, which could lead market participants to opt-out of quoting and trading in the Pilot Securities, especially in Test Group Three Pilot Securities.278 As noted by several commenters, the one-year Pilot Period could lead some market participants to decide not to participate in the Tick Size Pilot.279 For example, one commenter suggested that a oneyear Pilot Period would not be ‘‘enough time to warrant start-up costs and other 275 See supra note 9 and accompanying text. June 2014 Order, 79 FR at note 50, supra note 4. As noted in the June 2014 Order, during the Pilot Period, the Commission believes that Participants should notify the Commission if they detect any broadly negative impact of the Tick Size Pilot on market quality. 277 See supra note 89 and accompanying text. 278 See supra note 90 and accompanying text. 279 See supra notes 95–96 and accompanying text. 276 See E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices investments to participate.’’ 280 Another commenter suggested that a longer Pilot Period would ‘‘provide a better incentive for investments that market participants will need to make in order to increase their exposure to the small cap[italization] market.’’ 281 Some commenters suggested that a longer Pilot Period could also help justify its up-front implementation costs. Commenters noted that if market participants did not participate in the Tick Size Pilot, the reliability of the data could be compromised. The Commission recognizes that there would be start-up costs and other investments associated with participating in the Tick Size Pilot, and does not want the Pilot Period to be a disincentive to participate. The Commission believes that extending the Pilot Period to two years would help address some of those concerns in part by having those costs spread out over a longer period. The Commission expects that a longer Pilot Period should encourage wider participation (or remove incentives to opt-out of participation) and therefore help make the data more reliable, richer, and useful. 282 Accordingly, after carefully considering the comments, the Commission is modifying the NMS plan by lengthening the Pilot Period from one-year to two-years. The Commission does not think it is necessary to extend the Tick Size Pilot beyond two years. As noted above, several commenters suggested a Pilot Period longer than two years.283 In the Order, the Commission noted its preliminary belief that a one-year period would generate sufficient data to reliably analyze the effects and impact of the wider tick size. The Commission continues to believe that meaningful data could be generated in a relatively short time period but believes that extending the Pilot Period for one additional year could encourage participation in the Tick Size Pilot, which further supports the goal of generating sufficient data. If a number of 280 See Duffy Letter at 1. See also ABC letter at 3. 281 See ABC Letter at 3. Commission notes that market makers not trading in Pilot Securities would forgo the profits they could earn from trading in those securities. Those foregone potential profits would be larger over a longer time period. In addition, the larger potential profits that could be earned by market makers over the longer time period should help to offset any implementation and compliance costs associated with trading in the Pilot Securities. 283 See supra Section IV.B. mstockstill on DSK4VPTVN1PROD with NOTICES2 282 The VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 market participants decided to refrain from participating in the Tick Size Pilot, the ability to generate and collect data sufficient to study the impact of wider tick sizes would be frustrated. The Commission also notes that a longer Pilot Period should help to mitigate concerns that the data generated from the Tick Size Pilot could be susceptible to short term fluctuations as suggested by commenters. Therefore, the longer Pilot Period should also support representational faithfulness.284 The Commission understands that some commenters supported the one-year Pilot Period.285 However, the Commission believes that the longer Pilot Period is necessary for the reasons discussed above. The Commission received comments on whether the Tick Size Pilot should cease at the end of the Pilot Period or continue to operate while the data are assessed.286 As described below, the Participants will be required to submit their assessment 18 months after the start of the Tick Size Pilot, based on data generated during the first 12 months.287 This timing is consistent with the timing set forth in the June 2014 Order,288 but would provide the Commission and the public with valuable information about the Tick Size Pilot’s impact during the Pilot Period. In addition, the Trading Center Data and Market Maker Profitability Data would be publically available during the Pilot Period, which would allow market participants and the public to conduct analysis during the Pilot Period. The Commission, however, is only approving a Pilot Period of two years in this order. Any proposal to extend the Tick Size Pilot beyond the two-year term would be considered and evaluated at a later date. Therefore, the 284 In this respect, the Commission notes that the costs of implementing the Tick Size Pilot should be justified not by a longer duration per se, but by the benefits that a longer Tick Size Pilot would bring in generating useful data that could guide potential future tick size rulemaking. The Commission notes that one commenter suggested that the proposed one-year time period would make the data easy to manipulate. See Duffy Letter at 1. As noted, the Commission believes that the longer Pilot Period should support data integrity. 285 See supra Section IV.B. 286 See supra notes 105–108. 287 Therefore, the modification to the Pilot Period will not delay assessment of the Tick Size Pilot. 288 The June 2014 Order and proposed NMS plan provided that Participants should submit their assessment six months after the end of the Tick Size Pilot, which would have been 18-months after the start of the Tick Size Pilot. PO 00000 Frm 00021 Fmt 4701 Sfmt 4703 27533 modification to the Pilot Period of the Tick Size Pilot, extending its duration to two-years, is appropriate. C. Criteria for Pilot Securities The Tick Size Pilot sets forth five criteria for determining which NMS common stocks would be included: (1) Market capitalization of $5 billion or less; (2) Closing Price of at least $2.00 on the last day of the Measurement Period; (3) Closing Price of at least $1.50 on every trading day during the Measurement Period; (4) CADV of one million shares or less; and (5) VWAP of at least $2.00. 1. Market Capitalization for Pilot Securities Many commenters noted that the market capitalization threshold was too high and recommended that the threshold be lowered.289 Commenters expressed views that the $5 billion market capitalization threshold would include many securities not considered as small capitalization stocks. Certain comments recommended that the market capitalization threshold be as low as $250 million to $2 billion. After carefully considering the comments and reviewing prior staff analysis,290 the Commission deems it appropriate to change the NMS plan by lowering the market capitalization threshold for Pilot Securities from $5 billion or less to $3 billion or less. In the June 2014 Order, the Commission preliminary believed that a market capitalization of $5 billion or less would capture the securities of smaller and middle capitalization companies with low liquidity and trading activity, and would provide the Tick Size Pilot with a broad sample. However, in response to the comments received, the Commission staff reviewed its analysis of stocks from a period of July 1, 2013 to August 31, 2013,291 and found that lowering the market capitalization threshold from $5 billion or less to $3 billion or less should ensure that there would be a sufficient sampling of stocks to support the analysis of the Tick Size Pilot, including as it relates to a variability in effective spreads, particularly effective spreads greater than 5 cents per share for Pilot Securities. Table 1 reflects staff’s analysis. 289 See supra Section IV.C.1. June 2014 Order, supra note 4. 291 See June 2014 Order, supra note 4. 290 See E:\FR\FM\13MYN2.SGM 13MYN2 27534 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices TABLE 1—EFFECTIVE SPREAD DISTRIBUTION 292 90th percentile mstockstill on DSK4VPTVN1PROD with NOTICES2 Less Less Less Less than than than than $1 $2 $3 $5 billion billion billion billion .......................................................................................... .......................................................................................... .......................................................................................... .......................................................................................... Overall, Table 1 provides evidence that the selection of a market capitalization threshold involves trading-off potential sample size, which affects statistical power,293 and the potential negative impact of the Tick Size Pilot on stocks with low current effective spreads. The analysis in Table 1 shows that no single threshold can produce a clear-cut sample of securities for the Tick Size Pilot. In particular, for each potential market capitalization threshold in the table, approximately 10% of stocks have effective spreads of 1.43¢ or less. Further, for stocks in the lower thresholds, more stocks have higher effective spreads. This shows that the range of effective spreads is greater for lower market capitalization stocks. However, the number of stocks in the potential sample declines with market capitalization as well. Table 1 also shows that lowering the market capitalization threshold from $5 billion or less to $3 billion or less would reduce the universe of potential Pilot Securities by only 184 stocks, which suggests that the threshold of $3 billion or less would restrict the Tick Size Pilot to smaller stocks while still assuring a sufficiently large sample. Therefore, the Commission believes that it is necessary and appropriate to change the NMS plan by lowering the market capitalization threshold to $3 billion or less. The Commission notes that this change would result in fewer securities eligible to be included in the Tick Size Pilot, but this reduction should not materially impact the Tick Size Pilot’s goal of generating useful data. Further, the lowered threshold should lessen the impact of the Tick Size Pilot on the overall market, in that stocks included in the Test Groups would be smaller and less liquid; and their combined trading volume as a proportion of the overall market volume would also be lowered. 292 Data in this table covers common stocks with average price greater than $2 per share and average daily trading volume smaller or equal than one million shares during the period of July 1, 2013– August 31, 2013. Data comes from the NYSE’s Trade and Quote Data. 293 Statistical power is the ability to detect an effect, if the effect actually exists. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Effective spreads (in cents) 10th percentile Percent of stocks with effective spread >$0.05 25.33 23.10 22.31 21.93 1.42 1.43 1.43 1.43 53.97 50.04 48.10 46.63 Number of stocks Market capitalization categories 1,979 2,376 2,574 2,758 Many commenters recommended lowering the market capitalization threshold to $1 billion or less (or to an even lower threshold).294 However, Table 1 shows that further reducing the market capitalization threshold from $3 billion or less to $1 billion or less would reduce the number of Pilot Securities by additional 595 stocks. The Commission believes that such a reduction in market capitalization would result in a sample size that is too small (1,979 stocks, including the Control Group), significantly reducing the power of a statistical analysis of the Tick Size Pilot. Moreover, the threshold of $1 billion or less would limit the ability to assess the impact of the widened ticks on stocks with different market capitalizations and hence the utility of the Tick Size Pilot in assessing possible market capitalization thresholds for a potential future tick size rulemaking.295 2. Other Proposed Selection Criteria for Pilot Securities The Commission received a few comments on the other proposed selection criteria.296 For example, one commenter suggested that the volume threshold should range from 300,000 to 500,000 for illiquid shares. The Commission has considered these comments but does not believe it is necessary to modify the Tick Size Pilot any further in response. First, by having a floor of 300,000 shares, many small capitalization firms would be excluded from the Tick Size Pilot. Second, the upper threshold of 500,000 would reduce the sample size and limit the variation in stock characteristics in the Tick Size Pilot. The goal of the Tick Size 294 See supra note 115 and accompanying text. commenters recommended lowering the market capitalization threshold to $2 billion or less see supra note 115 and accompanying text. That threshold would suffer from the same disadvantages as the threshold of $1 billion or less, although to a lesser extent. In particular, Table 1 shows that reducing the market capitalization threshold from $3 billion or less to $2 billion or less would reduce the number of Pilot Securities by additional 198 stocks. See supra Table 1 in Section V.C.1. The threshold of $2 billion or less would also limit the ability to assess the impact of the widened ticks on stocks with different market capitalizations. 296 See supra Section IV.C.2. 295 Two PO 00000 Frm 00022 Fmt 4701 Sfmt 4703 Pilot is to study the effect of tick size on the liquidity and trading of small capitalization stocks. Therefore, the Commission believes that the universe of Pilot Securities should include a variety of stock characteristics in the sample to facilitate the ability to conduct fulsome assessments. Other commenters suggested that the CADV be lowered or that it should be based on the dollar trading value or that it should be based relative to public float. The Commission has considered these comments but does not believe it is necessary to modify the Tick Size Pilot any further in response. In particular, it is widely known that these volume measures are highly correlated with each other and therefore would most likely produce similar samples of Pilot Securities. Further, share volume is less correlated with market capitalization than other volume measures, so it would add the most as a separate criterion. 3. Additional Criteria for Pilot Securities Commenters also suggested additional criteria for selecting the Pilot Securities.297 For example, several commenters suggested that the average weighted daily spread of five cents or greater should be a criterion because some securities with spreads less than five cents would not benefit from the Tick Size Pilot. After careful review, the Commission believes that the selection criteria as proposed in the NMS plan, and modified by the Commission, are appropriate. In particular, the Commission believes that the selection criteria should provide an appropriate number of securities to test while also minimizing potential concerns about costs to investors and issuers. Further, tick size does not mechanically affect the approved criteria set forth in the Tick Size Pilot, making it more informative for any potential future tick size rulemaking. The Commission does not believe that a spread criterion should be included. Tick size mechanically affects alternative criteria such as bid-ask spreads and effective spreads, such that 297 See E:\FR\FM\13MYN2.SGM supra Section IV.C.3. 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 using such criteria to determine Pilot Securities would make the Tick Size Pilot less informative on when the tick size in a stock should be smaller. In addition, researchers should be better positioned, without spread criteria that is set forth by the NMS plan, to use Tick Size Pilot data to independently suggest tick size criteria for securities with smaller capitalization. 4. Securities Excluded From the Tick Size Pilot The Tick Size Pilot, as proposed, excludes securities that have had an IPO within six months of the start of the Pilot Period. Commenters expressed views on other securities that should be excluded from the Tick Size Pilot, including securities that are cross-listed in Canada and securities that trade below $1.00 per share during the Pilot Period. The Commission notes that securities that are cross-listed in Canada are included in other NMS provisions and plans; accordingly the Commission believes that such securities should also be included in the Tick Size Pilot. The Commission also notes that researchers may choose not to include all securities in the Test Groups when they undertake their analyses. In particular, researchers may choose not to include securities that are cross-listed with Canada if they think the results of their analyses may be significantly affected. The Commission believes that the exclusion of securities that have participated in a recent IPO is necessary because such stocks would not have a full data set prior the start of the Tick Size Pilot, which would limit the ability of the Commission and the public to analyze the effects of the Tick Size Pilot against a sufficient baseline. One commenter suggested that the NMS plan specifically eliminate Pilot Securities that trade at $1.00 or less during the Pilot Period. The Commission notes that the Participants proposed additional selection criteria to minimize the likelihood that securities that trade with a share price of $1.00 or less would be included in the Tick Size Pilot. Specifically, there are three criteria that seek to evaluate the share price of potential Pilot Securities: (1) a closing price of at least $2.00 on the last day of the Measurement Period; (2) a closing price on every U.S. trading day during the Measurement Period that is not less than $1.50; and (3) a Measurement Period VWAP of at least $2.00 per share. The Participants stated that these criteria were designed to avoid having securities priced $1.00 or less selected as Pilot Securities but the Participants state that Pilot Securities would not be excluded from the Tick VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Size Pilot if their share price falls to $1.00 or less during the Pilot Period. The commenter has not suggested that these criteria are not sufficient for this purpose but states that it is ‘‘reasonable to expect a small number of Pilot Securities to trade below $1.00 during the Pilot.’’ The Commission believes that once established, the universe of Pilot Securities should stay as consistent as possible so that the analysis and data can be accurate throughout the Pilot Period. Finally, the Commission received a few comments supporting the exclusion of ETFs from the Tick Size Pilot. The Commission agrees that these securities should be excluded because their pricing is derivative of the value of their component securities. 5. Assignment of Pilot Securities The NMS plan contains procedures for stratified random sampling in which the Participants would assign the Pilot Securities into 27 categories, and then randomly assign Pilot Securities into the Tick Size Pilot groups (Control Group and three Test Groups), based on the percentages of Pilot Securities in each category. The Commission did not receive comments with respect to this aspect of the NMS plan. In the June 2014 Order, the Commission stated that the assignment of Pilot Securities into each test group should involve stratified sampling by market capitalization and price. The Participants proposed to add the CADV to the market capitalization and price. The Commission believes that the addition of CADV should ensure that each test group contains a representative of the total universe of Pilot Securities. Specifically, this should help ensure that the four groups of securities are comparable to each other in terms of stock characteristics and therefore should provide an ideal experimental setting for robust analysis of the Tick Size Pilot.298 D. Control Group and Test Groups The Tick Size Pilot would have a Control Group and three Test Groups, comprised of 400 Pilot Securities per test group. Test Group One Pilot Securities would quote in $0.05 per share increments and would trade at any currently permitted increments. Test Group Two Pilot Securities would quote in $0.05 per share increments like 298 Ideally, researchers would want to have identical stocks in each group to isolate the effects of the different treatments in the four groups. However, because this is not possible, researchers employ techniques to make the stocks in the four groups as similar as possible. The SROs have proposed such a technique. PO 00000 Frm 00023 Fmt 4701 Sfmt 4703 27535 those in Test Group One, but would only be permitted to trade in $0.05 per share increments, subject to three exceptions. Finally, Test Group Three Pilot Securities would quote in $0.05 per share increments and trade at $0.05 per share increments consistent with Test Group Two, and be subject to the Trade-At Prohibition. Pilot Securities in the Control Group would continue to quote and trade at the pricing increments that are currently permitted. Several commenters opined about the design of the Tick Size Pilot. For example, some commenters suggested that the Tick Size Pilot should be narrower, with only one or two test groups which would lessen the cost and complexity of the Tick Size Pilot.299 Other commenters supported the incremental design of the Tick Size Pilot. The Commission notes that the NMS plan has been designed to incrementally assess potential changes to the Tick Size Pilot, such that Test Group One would only add a wider quoting increment, while Test Group Two would also add a wider trading increment, and finally Test Group Three would add the TradeAt Prohibition. The Commission believes that constructing the Tick Size Pilot in this manner should generate the most meaningful and measurable data that should allow the Commission and other interested parties to conduct studies. Commenters also expressed their views that other tick sizes, both larger and smaller than the proposed $0.05 tick size increment, should be included and tested concurrently within the Tick Size Pilot.300 In the June 2014 Order, the Commission stated its preliminary belief that $0.05 is an appropriate minimum increment, due to the significant percentage of Pilot Securities with a bidask spread of greater than $0.05. As noted above, the Commission modified and analyzed potential Pilot Securities based on the $3 billion market capitalization threshold, for a period of July 1, 2013 to August 31, 2013 and found that 48.1 percent of these securities had effective spreads greater than $0.05.301 For these securities, the impact on costs to investors of an increase of the minimum price increment to $0.05 is not clear, as effective spreads in these securities may change as well depending on the impact of an increase in the tick size on market making incentives. For securities with effective spreads smaller than $0.05, the 299 See 300 See supra note 126 and accompanying text. supra notes 129–131 and accompanying text. 301 See E:\FR\FM\13MYN2.SGM supra Table 1 in Section V.C.1. 13MYN2 27536 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 effective spread may or may not rise due to the increase in the minimum increment, depending on the degree to which trades execute between the bid and the offer. Increased effective spreads, holding everything else equal, would represent increased costs to investors. However, the Tick Size Pilot will be able to address whether the increased minimum increment will lead to more market maker participation and ultimately, to more liquidity in small capitalization stocks, which may counteract increased costs due to higher effective spreads. The Commission believes that the data supports the conclusion that, on balance, the $0.05 increment is appropriate for the Tick Size Pilot because it should mitigate cost increases to investors while supporting a robust test. While commenters suggested additional increments to test along with the $0.05 increment, the Commission believes that additional increments could increase the Tick Size Pilot’s complexity by, for example, increasing the number of test groups in the Tick Size Pilot, which in turn would require more programming development and system changes by market participants.302 In the NMS plan, the Participants proposed 400 Pilot Securities per Test Group positing that the increased size of each Test Group would help to ensure a sufficient data yield for the completion of required assessments even in the event of the removal or exclusion of Pilot Securities. The Commission received three comments on this aspect of the Tick Size Pilot, two of which said the Test Groups should be smaller and one who thought 400 was appropriate.303 The Commission believes 400 Pilot Securities per Test Group should be large enough to generate data to reliably test for the effects of larger tick size, and should make the Tick Size Pilot more resilient in the event of the unforeseen removal or exclusion of Pilot Securities. Therefore, the Commission believes that assigning 400 Pilot Securities to each Test Group is appropriate. The Commission received a few other comments related to the operation of the Tick Size Pilot. Specifically, two 302 While additional increments would provide additional data and would allow for additional tests, the Commission believes that the Tick Size Pilot with one increment will allow for a comprehensive analysis of the effects of an increased tick size and the added complexity would not be justified. In addition, the added complexity of additional increments may not only make analyses more complicated, but rather may even reduce the statistical power of such analyses and increase the operational risk of implementing the Tick Size Pilot. 303 See supra note 125 and accompanying text. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 commenters offered differing opinions with respect to whether the Tick Size Pilot should operate during opening and closing auctions.304 The Commission notes that the NMS plan provides that the Tick Size Pilot would be operational during and outside of Regular Trading Hours, which is defined in the NMS plan as consistent with Rule 600(b)(64) of Regulation NMS.305 If the Participants find that further clarification or modification is needed to address the opening and closing auctions, they may utilize the procedures set forth in Rule 608 to amend the NMS plan. However, the Commission notes that switching to penny increments during these auctions may cause additional complexity and would be different than how these auctions are currently run. Specifically, opening and closing auctions typically do not operate with increments different than the increments used during Regular Trading Hours. In addition, two commenters requested clarification on how to handle orders that do not conform to the quoting increments.306 The Commission notes that the Participants, as required under the NMS plan, would be required to adopt rules that are needed for compliance by the Participants and their members with the provisions of the Tick Size Pilot.307 In addition, the Participants, as required under the NMS plan would be required to develop written policies and procedures that are reasonably designed to comply with the quoting and trading requirements of the Tick Size Pilot. Therefore, the Participants should ensure that they address issues and questions related to the operation of the Tick Size Pilot during the implementation period. 1. Control Group The Pilot Securities in the Control Group would be quoted and traded in any increment currently permitted. Any Pilot Securities that are not selected to be included in a test group would be placed in the Control Group. The Commission believes that the Control Group should provide a baseline for the analysis of the effect of the Tick Size Pilot on liquidity and market quality data. 304 See supra notes 132–133 and accompanying text. 305 See NMS plan Section I(CC) and 17 CFR 242.600(b)(64) defines Regular Trading Hours as the time between 9:30 a.m. and 4:00 p.m. Eastern Time. 306 See supra notes 134–135 and accompanying text. 307 Any new rules or changes to existing rules of the Participants would be subject to Section 19 of the Act. See 15 U.S.C. 78s. PO 00000 Frm 00024 Fmt 4701 Sfmt 4703 2. Test Group One: Widened Quote Increment As discussed above, Pilot Securities in Test Group One would have a quoting increment restriction of $0.05 but could continue to trade at any currently permitted price increment. The Participants would be required to adopt rules that would prohibit the Participants or any member of a Participant from displaying, ranking, or accepting from any person any displayable or non-displayable bids or offers, orders, or indications of interest in increments other than $0.05. Orders priced to execute pegged to the midpoint of the NBBO and orders entered in a Participant’s retail liquidity program could be quoted at less than the $0.05 increment. The Commission notes that Test Group One would be different from the Control Group in only one manner—the quoting increment would be widened. Several commenters argued that Test Group One should be eliminated because trading for Test Group One Pilot Securities would migrate to nondisplaying trading centers.308 One commenter also suggested eliminating Test Group One to reduce the complexity of the Tick Size Pilot.309 This commenter believed that eliminating Test Group One would reduce the costs of implementing the Tick Size Pilot and posited that ‘‘there is little disagreement’’ that Test Group One would divert order flow to unlit markets.310 The Commission, however, believes, as noted above, that Test Group One is necessary as an initial incremental change to test the impact of the Tick Size Pilot on market quality and liquidity of this market segment. The Commission believes that Test Group One is reasonably designed to generate data on how trading characteristics and liquidity would change if the quoting increment alone is widened. One commenter suggested that exchanges and agency ATSs would be at a ` competitive disadvantage vis-a-vis broker-owned proprietary execution systems which can execute orders at any increment without accepting or ranking an order at an impermissible increment. This commenter recommended that market participants be permitted to accept and rank, but not display, orders in one penny increments for Test Group 308 See supra Section IV.D.1. supra note 136 and accompanying text. 310 The Commenter did however acknowledge that removing Test Group One from the Tick Size Pilot would be a significant change. See KOR Letter II at 3. 309 See E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices One.311 The Commission notes the quoting restrictions of Test Group One would be implemented in a manner similar to Rule 612, the Subpenny Rule.312 Further, the Commission notes that the issue raised by the commenter is present in the current trading environment with Rule 612, where brokers may execute trades in increments finer than $0.01 so long as they do not accept, rank, or display orders in such increments. The Commission believes it is important to test and evaluate Test Group One with a design that is similar to the current trading environment and within the context of the Tick Size Pilot’s incremental design that should permit qualitative comparison with Test Group Two and Test Group Three. Accordingly, the Commission does not believe it is necessary to modify the Tick Plan to address the distinction raised by the commenter. While commenters have raised counterpoints, the Commission believes that it is necessary to initially test this incremental change to generate data to analyze the impact, if any, on market quality for the Pilot Securities in Test Group One. The Commission notes that Test Group One would only test how a wider quoting increment implemented using the current regulatory framework, reflected in Rule 612, could impact the liquidity and trading of smaller capitalization securities. Test Group One is not designed to favor one group of market participants over other groups of market participants any more than the existing regulatory framework. In particular, including Test Group One would allow the Tick Size Pilot to examine each change incrementally to identify the changes that are economically most important. Further, the Commission recognizes that the design of the Test Groups create differing incentives for the display and execution of orders which may result in the migration of order flow,313 which is why the inclusion of Test Group One is vital. This Test Group could potentially generate data on the degree to which widening the quoting increment alone results in a migration to non-displaying trading centers. Specifically, Test Group One should enhance the ability of the Tick Size Pilot to generate data on the effects of wider ticks and any resulting order flow 311 See BATS Letter at 3. CFR 242.612. 313 For example, if a larger minimum quoting increment leads to wider bid-ask spreads, but the trading increment remains unchanged, it would produce an incentive to internalize order flow and execute off-exchange because price improvement would be relatively cheaper to provide. 312 17 VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 migration on liquidity, execution quality, volatility, market maker profitability, competition, and transparency. 3. Test Group Two: Widened Quote and Trade Increment Pilot Securities in Test Group Two would be required to be quoted in a $0.05 increment, like Test Group One, but trading would be limited to the $0.05 increment subject to three exceptions. Specifically, executions could occur at a price other than a $0.05 increment in the following circumstances: (1) midpoint executions at the NBBO or best protected bid and best protected offer; (2) retail price improvement of at least $0.005 better than the best protected bid or offer; and (3) Negotiated Trades. After carefully weighing comments, the Commission believes that Test Group Two and the exceptions, including the exception for retail price improvement, are reasonably designed to generate data on how trading characteristics and liquidity would incrementally change relative to Test Group One if the trading increment is widened. The Commission believes it is important to measure the incremental impact of a trading increment on market quality for small capitalization stocks and it would be useful to compare the data generated by this Test Group against the data in Test Group One. As the Commission noted in the June 2014 Order, if the minimum quoting increment is changed without corresponding changes to the minimum trading increment, market participants may be hesitant to display liquidity in larger $0.05 increments if other market participants could easily trade ahead of them in smaller increments. As noted above, commenters raised concerns with respect to the retail price improvement exception.314 Some commenters argued that the exception should be broadened to include all orders as a means to alleviate implementation burdens. Some commenters argued that the level of price improvement should be increased to more than the proposed $0.005. Another commenter expressed its opposition to the retail exception because it believes that the exception would undermine the Tick Size Pilot.315 By allowing Retail Investor Orders to trade at certain prices other than the $0.05 trading increment and receive price improvement, the Commission believes that some of concerns related to 314 See 315 See supra Section IV.D.2. supra notes 155–156 and accompanying text. PO 00000 Frm 00025 Fmt 4701 Sfmt 4703 27537 costs for retail investors could be minimized. As noted earlier in Section V.A., retail investors may incur costs due to the Tick Size Pilot in the form of wider bid-ask spreads, which imply less favorable prices and high transaction costs if retail investors were required to trade only at the displayed quotation. As noted above, many potential Pilot Securities would have bid-ask spreads of greater than $0.05, although an equal number may have spreads less than $0.05. Therefore, the Tick Size Pilot could potentially widen bid-ask spreads of some Pilot Securities, which could increase costs for retail investors. The ability to receive price improvement, therefore, should reduce some retail investor costs. Further, the Commission does not believe that the exception for Retail Investor Orders would undermine the Tick Size Pilot and believes it is appropriate to provide this exception for retail investors. The Commission, however, does not believe that it is necessary or appropriate to expand the price improvement exception to all orders. The Commission believes that such a modification could undermine the purpose of Test Group Two, which is to assess the impact of a trading increment on trading and liquidity. As noted above, this exception was designed to mitigate cost concerns for retail investors that typically receive price improvement under current trading conditions.316 Commenters stated that the attestation should not be required because it would be unwieldy for trading centers to conduct surveillance to ensure that only bona fide retail orders qualify.317 The Commission notes that certain Participants have approved retail liquidity programs that require market participants to submit an attestation. Thus, many market participants must currently comply with an attestation requirement, and should already have the appropriate policies and procedures in place. While it should not be unwieldy for these trading centers to conduct surveillance for the attestation requirement, the Commission acknowledges that there would be additional costs for trading centers and their market participants that are not 316 See June 2014 Order supra note 4. supra Section IV.D.2. See also Tabb Letter at 5; Two Sigma Letter at 2 (‘‘It is unclear how a trading center receiving order flow from large numbers of natural persons can design surveillance programs that would allow them to confidently make this attestation.’’); KCG Letter at 9 (noting that the definition of Retail Investor Order was too complex and ambiguous and would lead to many of the largest retail firms to not sign the required attestations); STANY Letter at 6; and TD Ameritrade at 5. 317 See E:\FR\FM\13MYN2.SGM 13MYN2 27538 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 currently required to comply with the attestation requirements. However, the Commission believes that the attestation requirement is necessary to promote the integrity and goals of the Tick Size Pilot by helping to ensure that only bona fide retail orders entered by market participants are eligible for the retail price improvement exception. The Commission acknowledges that there are potential downsides to widening the quoting and trade increment to $0.05 but believes that the Tick Size Pilot is designed to reasonably balance the need to generate data and the potential higher costs for investors. The Commission also recognizes that the $0.05 quoting and trading increment for Test Group Two could have an effect on competition between exchanges and non-exchange trading centers, including the potential migration of order flow. The extent of any such potential order flow migration or other competitive impact is not known at this time. The Commission believes that the data analysis from the results of Test Group Two should provide information on the potential competitive impact and the incremental economic effects of a wider trading increment, including any incremental effects on the incentives for the display and execution of orders that may result in the migration of order flow relative to the other Test Groups and the Control Group. This should better inform the Commission and interested parties of the impact of a wider tick increment. 4. Test Group Three: Widened Quote and Trade Increment With a Trade-At Prohibition Pilot Securities in Test Group Three would be quoted and traded in $0.05 increment like Test Group Two and provided with the same trading exceptions. In addition, Test Group Three would introduce another incremental change—the Trade-At Prohibition. In the June 2014 Order, the Commission described a trade-at prohibition as requiring a trading center that was not displaying at the NBBO at the time the trading center received an incoming marketable order to either: (1) execute the order with significant price improvement ($0.05 or the midpoint of the NBBO); (2) execute the order at the NBBO if the size of the incoming order is of block size; or (3) route intermarket sweep orders to execute against the full displayed size of the protected quotations at the NBBO and the execute the balance of the order at the NBBO price. In the Notice, the Commission noted that, in the context of the Tick Size Pilot, an important purpose of a trade-at requirement would be to test VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 whether, in a wider tick environment, the ability of market participants to match displayed quotes, without quoting, would negatively affect market makers’ quoting practices. The Commission further noted that if quoting practices were affected negatively, then it could undermine one of the central purposes of the Tick Size Pilot, namely to determine whether wider tick sizes positively affect market maker participation and pre-trade transparency. For example, if the results of Test Groups One and Two were to show an improvement in liquidity with wider tick increments but a loss to transparency because of an order flow migration to the OTC market, perhaps Test Group Three would show similar improvements to liquidity but without the loss to transparency. The Participants proposed to define ‘‘trade-at’’ in the NMS plan as ‘‘the execution by a trading center of a sell order for a Pilot Security at the price of a protected bid or the execution of a buy order for a Pilot Security at the price of a protected offer.’’ 318 The Commission notes that the proposed definition of trade-at set forth in the NMS plan would require compliance with the Trade-At Prohibition outside of Regular Trading Hours. In particular, the NMS plan states that the Tick Size Pilot would be applicable during and outside of Regular Trading Hours.319 The application of the Trade-At Prohibition outside of Regular Trading Hours would extend its application beyond what is currently required for the TradeThrough Rule under Regulation NMS.320 As noted above, the Commission expects that market participants would be able to leverage existing Rule 611 systems for implementing and complying with the Tick Size Pilot, which currently do not apply outside of Regular Trading Hours. The application of the Trade-At Prohibition outside of Regular Trading Hours would be broader than what the Commission envisioned for trade-at and could increase implementation and compliance burdens for market participants. Therefore, the Commission has deemed it necessary to modify the definition of trade-at under the NMS plan to provide that it is only applicable during Regular Trading Hours. Under the proposed Trade-At Prohibition, trading centers that are not quoting cannot match protected quotations and a trading center quoting 318 See NMS plan Section (I)(LL). NMS plan Section (IX). 320 The definition of ‘‘trade-through’’ in Rule 600(b)(77) of Regulation NMS provides that it is applicable during Regular Trading Hours. See 17 CFR 242.600(b)(77). 319 See PO 00000 Frm 00026 Fmt 4701 Sfmt 4703 at the protected quotation can execute orders but only up to the size of its displayed quotation. The Tick Size Pilot included thirteen exceptions to the Trade-At Prohibition, when trading centers may trade at a protected quotation or price match. The Commission received several comments that opposed the inclusion of the Trade-At Prohibition.321 Commenters raised concerns about the complexity and costs of implementing Test Group Three which they concluded could lead market participants to forego participation in Test Group Three and distort the resulting data. Other commenters suggested that the Trade-At Prohibition would increase operational risks. Several commenters suggested that Test Group Three should be eliminated to reduce the complexity related to the Tick Size Pilot. Other commenters suggested that the Trade-At Prohibition would increase investor costs if off-exchange venues are restricted in their ability to compete for executions. One commenter pointed to Australian and Canadian rules as evidence that market quality would be adversely affected and as a justification to not implement trade-at domestically. Several commenters, however, supported the inclusion of the Trade-At Prohibition.322 Commenters raised concerns that Test Group One and Test Group Two could provide less incentive for market participants to display liquidity and result in trades migrating to dark venues. As noted by several commenters, wider spreads, and the potential increased profits derived therefrom, could incentivize market participants to execute more transactions in Pilot Securities on dark venues.323 Some commenters, therefore, supported including the Trade-At Prohibition to test its impact on displayed liquidity and market quality. The data generated by this test group should inform the Commission, the public, and market participants on the incremental impact of the Trade-At Prohibition on trading characteristics and liquidity of Pilot Securities when the quoting and trading increments are widened. The Trade-At Prohibition should test whether market participants are incentivized to display more liquidity in a wider tick environment. Therefore, the Commission believes that the inclusion of the Trade-At Prohibition should enhance the utility of the Tick Size Pilot. Further, the data generated by Test Group Three would 321 See supra note 157 and accompanying text. See also Section IV.A. 322 See supra note 169 and accompanying text. 323 See supra note 176 and accompanying text. E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 allow the Commission and the public to test the incremental impact on displayed liquidity and market quality in a wider tick environment when compared to Test Group One and Test Group Two. As noted, several commenters stated that trading in Test Groups One and Two could migrate to non-displayed venues. As a control measure, the Commission believes that it is important to test whether given larger quoting and trading increments, market quality could be enhanced by an incentive to display liquidity such as the Trade-At Prohibition.324 However, the Commission acknowledges commenters’ concerns about the cost and complexity of the Trade-At Prohibition. The Commission is therefore modifying the Trade-At Prohibition, as described below, to mitigate and address some of these concerns. The Commission believes that the modifications to the Trade-At Prohibition should reduce the complexity of the provision while maintaining its utility in the Tick Size Pilot. The modified Trade-At Prohibition, as well as the modification to extend the Tick Size Pilot’s duration, should work in tandem to ensure that there is wider participation in the Tick Size Pilot. The Commission recognizes that the Trade-At Prohibition may have some effect on competition between exchanges and non-exchange trading centers. However, the Commission does not believe that this modified Trade-At Prohibition should have significant effects on this competition. Nonexchange trading centers should continue to be able to compete with exchanges for order flow, albeit either in a displayed manner or by providing price improvement. Further, the Commission believes that the exceptions to the modified Trade-At Prohibition, such as the exception for Retail Investor Orders and Block Size orders, should exclude the types of transactions that occur primarily offexchange.325 As a result, the Trade-At Prohibition should not result in a migration to exchanges of transactions not likely to occur on exchanges in the Control Group. In addition, the Tick Size Pilot data should facilitate tests on the effect of a conditional Trade-At 324 The Commission notes that the inclusion of Test Group Three would not necessarily provide data that could examine whether a broader tradeat prohibition, applied to all securities with all tick sizes and fewer exceptions, would benefit investors. 325 See Laura Tuttle, SEC Staff Paper, OTC Trading: Description of Non-ATS Trading in National Market System Stocks, (March 2014) available at https://www.sec.gov/marketstructure/ research/otc_trading_march_2014.pdf. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Prohibition on investors and the effect on competition of any resulting migration to exchanges. Finally, the Commission notes that the market structure and regulatory framework in Australia and Canada are very different from the U.S. market structure and regulatory framework. For example, the U.S. equity market structure includes higher levels of off-exchange trading and trading is dispersed among a large number of market centers.326 Accordingly, the Commission believes the experiences of those jurisdictions with a trade-at prohibition are not clearly relevant when considering a trade-at prohibition in the context of the Tick Size Pilot. As discussed above, the Commission believes that the Trade-At Prohibition is necessary to fully study the impact on the liquidity and trading of smaller capitalization securities. The Participants proposed deviations from, or additions to, the trade-at prohibition set forth in the June 2014 Order, as follows: (1) the proposed Trade-At Prohibition would apply to any protected bid or protected offer, rather than just the NBBO; (2) trading centers displaying a quote at the price of a protected quote on an SRO proprietary quote feed could execute an incoming order at that displayed price; (3) a trading center could only execute up to its displayed size (i.e., Size Limitation); (4) a trading center must execute where the protected quotation is displayed (i.e., Venue Limitation); (5) nine exceptions to the Trade-at Prohibition modeled after the exceptions found in Rule 611 of Regulation NMS; and (6) an exception for fractional shares. a. Protected Quotations Standard The Participants proposed to use a protected quotation standard rather than the NBBO for the Trade-At Prohibition. As described in the Notice, the protected quotation standard would give broader protection to aggressively displayed quotes because the protected quotation standard encompasses the aggregate of the most aggressively priced displayed liquidity on all trading centers, while the NBBO standard is limited to the single best order in the market.327 326 See Securities Exchange Act Release No. 61358 (January 14, 2010), 75 FR 3593 (January 21, 2010) (‘‘Concept Release on Equity Market Structure’’). 327 See 17 CFR. 242.600(b)(42). When two or more market centers transmit to the plan processor identical bids or offers for an NMS security, the best bid or best offer is determined by ranking the identical bids or offers by size and then time. As a result, while two market centers may display identical prices, only one market center will display the national best bid or national best offer. PO 00000 Frm 00027 Fmt 4701 Sfmt 4703 27539 A few commenters opposed expanding the Trade-At Prohibition to protected quotations. One commenter suggested that protecting less competitive prices than the NBBO would undermine price competition and increase complexity,328 while other commenters supported the protected quotation standard because it would encourage more aggressive quoting on multiple trading centers.329 After careful consideration, the Commission believes that using protected quotations as the basis for the Trade-At Prohibition is appropriate. The protected quotations standard should further enhance displayed liquidity by providing incentives for market participants and trading centers to display additional liquidity. The Commission does not believe that using protected quotations for the Trade-At Prohibition would necessarily result in less price competition. The Commission expects that market participants would continue to compete to provide liquidity via the best priced orders under the Tick Size Pilot.330 Further, the Commission believes that using the protected quotations standard should help to alleviate concerns that the Tick Size Pilot is complex and costly to implement, as it would allow more displaying trading centers to execute orders at their displayed price and because market participants currently use the same standard to comply with Rule 611 of Regulation NMS. b. SRO Quotation Feed The Participants proposed to allow price matching by trading centers that have displayed a quote at the price of a protected quote through an SRO proprietary data feed. One commenter stated this feature would assist a trading center that cannot publish its own protected quotation.331 The Commission believes that the use of an SRO proprietary data feed is appropriate. Trading centers displaying a quote on an SRO proprietary data feed have contributed to displayed liquidity, and therefore should be able to trade at these displayed prices, subject to the Size Limitation. Moreover, the Commission notes that the NBBO could contain manual quotations. 328 See supra Section IV.D.3.a. 329 Two other commenters requested clarification related to the protected quotation standard. The Commission notes that specific clarification questions should be addressed by the Participants during the implementation period. See supra note 181 and accompanying text. 330 The Commission notes that Rule 611 of Regulation NMS would apply to transactions executed under the Tick Size Pilot. 331 See supra Section IV.D.3.b. E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 27540 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices c. Size Limitation The Participants proposed to limit the price matching by trading centers that have displayed a protected quote with the Size Limitation. Under the Size Limitation, displaying trading centers would only be permitted to execute an incoming order up to the size of its protected quotation, and executions against undisplayed interest at that price level could not occur unless other protected quotations at that price are satisfied. Several commenters opposed the Size Limitation.332 Commenters suggested that hidden reserve orders at the protected quotation price level should be allowed to execute without satisfying the other protected quotations. A few commenters believed that the Size Limitation would reduce execution certainty or cause delays in executions. Other commenters stated that the Size Limitation would lead to information leakage for larger sized orders because of the need to route to multiple venues to execute against protected quotes. Further, commenters stated that undisplayed liquidity, both on- and off-exchange, is important to retail and institutional investors. While the June 2014 Order did not specify the Size Limitation, the Commission believes that it supports one of the reasons for testing trade-at in the Tick Size Pilot—to determine its impact on displayed liquidity and market quality in a wider tick environment. As one commenter noted, the Size Limitation should create a strong incentive to display liquidity.333 The Commission notes that some commenters suggested that allowing hidden reserve orders to execute before same-priced protected quotations could incentivize market participants to display a quote for a nominal size. The Trade-At Prohibition is intended to test whether a trade-at is needed to encourage the display of limit orders with depth greater than a nominal size in a wider tick environment. During the Tick Size Pilot, Test Group Three should allow researchers to measure whether this structure results in increases in displayed liquidity, and if so, whether it has a positive impact on market quality. The Commission believes that without the Size Limitation, the incentive to display liquidity could be reduced, which in turn would undermine a primary rationale for testing trade-at in a wider tick environment. Commenters also raised concerns with respect to execution certainty and execution delay. The Commission believes that the Size Limitation could potentially increase execution certainty by providing incentives to display additional liquidity. The Commission believes that the Size Limitation’s effect on execution delay is uncertain due to the potential increase in routing to execute against protected quotations, and would monitor results of the Tick Size Pilot to determine if there is significant execution delay. The Commission also notes that the modification to the Block Size definition should mitigate and address some commenter concerns related to execution certainty and information leakage that some commenters believe could occur as a result of the Size Limitation. The reduced threshold for Block Size orders should lower the risk of market exposure for investors trading with size. The liberalized Block Size definition should permit more orders to trade without being restricted by the Trade-At Prohibition. d. Venue Limitation The Participants proposed the Venue Limitation that would restrict where a trading center that is displaying a quotation at the price of a protected quotation could execute incoming orders. Commenters stated that the inclusion of the Venue Limitation would protect displayed quotations, strengthen incentives for market making and gauge the impact of tick size increments.334 Several other commenters, however, expressed concern that the Venue Limitation would increase the implementation costs and burdens for Test Group Three.335 For example, one commenter noted that the Venue Limitation would increase message traffic and potentially cause systems failures.336 Commenters also argued that the Venue Limitation was anti-competitive.337 In particular, commenters stated that off-exchange trading centers should not be forced to route orders to the exchanges. After carefully considering the comments, the Commission is modifying the Trade-At Prohibition to remove the Venue Limitation. The Commission notes that the Venue Limitation was not prescribed in the June 2014 Order. The Commission believes that the Venue Limitation would have unnecessarily restricted the ability of off-exchange market participants to execute orders in the 334 See 332 See supra Section IV.D.3.c. 333 See CHX Letter at 19. See also supra note 187 and accompanying text. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 supra Section IV.D.3.d. supra Section IV.D.3.d. 336 See CMR Letter II at 7. 337 See supra note 189 and accompanying text. 335 See PO 00000 Frm 00028 Fmt 4701 Sfmt 4703 Pilot Securities of Test Group Three.338 Further, the Commission believes that the Venue Limitation would not have created additional incentives to display liquidity and thus is not necessary to support the purposes of the Trade-At Prohibition.339 The Commission believes that the Size Limitation, as discussed above, should be sufficient to incentivize displayed liquidity because price matching generally would be permitted only if the market participant otherwise was publicly displaying an order in a size at least as large as the size of the matching transaction. The Commission does not believe the Venue Limitation would incentivize any material amount of additional displayed liquidity, and thus would not have provided additional economic information for the Tick Size Pilot. Further, the Commission believes that removing the Venue Limitation should mitigate commenter concerns about the complexity and cost of implementing the Trade-At Prohibition by reducing the need for off-exchange trading centers to route orders to the exchanges. Therefore, the Commission deems it appropriate to change the NMS plan by removing the Venue Limitation.340 e. Modifying the Definition of Block Size The Trade-At Prohibition proposed by the Participants included a Block Size order exception whereby the price matching of orders of a ‘‘block size’’ would be permitted. The Participants, consistent with the June 2014 Order, proposed to use the ‘‘block size’’ definition set forth in Regulation NMS, which is an order (1) of at least 10,000 shares or (2) with a market value of at least $200,000.341 Several commenters explained that a block size order for small capitalization stocks is generally considered to be substantially smaller than that for large capitalization stocks, and thus the Trade-At Prohibition included in the proposed Tick Size Pilot 338 A potential cost of the Venue Limitation would have been that a broker-dealer would need to connect to the ADF to display off-exchange, thereby incurring initial set-up costs for connectivity and costs to maintain that connectivity. In addition, each quote displayed on the ADF, in addition to an exchange, would result in costs to the broker-dealer related to message and recordkeeping capacity and fees and associated quoting activity costs to be paid to FINRA. 339 The incremental effect of the Venue Limitation would be to encourage those who display on an exchange to display off-exchange. 340 The Commission notes that the NMS plan includes three examples for how the Trade-At Prohibition would operate. Those examples do not implicate the Venue Limitation and therefore the Commission is not modifying the examples. See NMS plan supra note 3. 341 17 CFR 242.600(a)(9). E:\FR\FM\13MYN2.SGM 13MYN2 27541 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices would unduly restrict institutional trading.342 In light of the views expressed by the commenters and after supplemental staff analysis, the Commission deems it is appropriate to modify the definition of ‘‘block size,’’ for purposes of the Tick Size Pilot. Specifically, an order (1) of at least 5,000 shares or (2) with a market value of at least $100,000 will be considered a block size for purposes of the Tick Size Pilot. This block size adjustment aligns with commenters’ request for a smaller block size to reflect trading characteristics for potential Pilot Securities, and is consistent with the Commission staff analysis which indicates that, based on the modified selection criteria, the potential Pilot Securities, on average, trade at comparatively smaller sizes than securities with larger market capitalization. The following table reflects staff analysis: TABLE 2 343—TRADE SIZE DISTRIBUTION STATISTICS Percent of trades Shares/Dollars Percent of share volume Percent of $ volume Panel A: All NMS securities ≥10,000 shares or ≥$200,000 ..................................................................................................... 0.24 13.04 16.27 2.08 0.38 0.18 0.07 26.61 15.44 12.03 8.68 23.37 13.91 11.24 8.61 Panel B: Stocks eligible for the Tick Size Pilot ≥1,000 shares or ≥$20,000 ......................................................................................................... ≥3,000 shares or ≥$60,000 ......................................................................................................... ≥5,000 shares or ≥$100,000 ....................................................................................................... ≥10,000 shares or ≥$200,000 ..................................................................................................... mstockstill on DSK4VPTVN1PROD with NOTICES2 In particular, Table 2 indicates that among all NMS securities, trades with at least 10,000 shares or with a market value of at least $200,000 constitute 0.24 percent of all trades, 13.04 percent of traded share volume, and 16.27 percent of traded dollar volume. In contrast, among stocks eligible for the Tick Size Pilot, trades with at least 10,000 shares or with a market value of at least $200,000 constitute only 0.07 percent of all trades, 8.68 percent of traded share volume, and 8.61 percent of traded dollar volume. The Commission received one comment suggesting that Block Size orders should be able to execute in subpenny increments in a manner similar to Retail Investor Orders that receive price improvement.344 However, to avoid undermining the incremental design of the Tick Size Pilot, the Commission does not believe that Block Size orders in the Tick Size Pilot should have the same execution increments as Retail Investor Orders. The Commission also notes that the modified Block Size definition should ease some of the burden related to the Trade-At Prohibition. Specifically, the modified Block Size definition should mitigate any potential disruption to the institutional trading of Pilot Securities by allowing more of such orders to 342 See supra Section IV.D.3.e. in Panel A covers all securities in the NYSE’s Trade and Quote database, which consists of all NMS securities except options. Data in Panel B covers common stocks with average price greater than $2 per share, average daily trading volume smaller or equal than one million shares, and market capitalization smaller or equal than $3 billion. All data covers the period of July 1, 2013— 343 Data match protected quotes. Therefore, the Commission deems it appropriate to modify the definition of Block Size to lower the thresholds. f. Addressing Other Test Group Three Exceptions The Participants proposed nine exceptions (numbers 4 through 12) to the Trade-At Prohibition that were not specified in the June 2014 Order. These exceptions were based on the exceptions to Rule 611.345 Commenters raised concerns that the exceptions were too numerous and added to the complexity of the Tick Size Pilot.346 One commenter, however, agreed with the rationale for using the Rule 611 exceptions.347 The Commission believes that these exceptions are appropriate. The Commission notes that market participants currently have rules, procedures, and systems in place to comply with Rule 611. Therefore, the Commission believes that the consistency with Rule 611 should alleviate concerns regarding the costs and burdens of implementing the Tick Size Pilot because market participants should be able to leverage existing systems. The Commission recognizes the concerns related to modeling the TradeAugust 31, 2013 and comes from the NYSE’s Trade and Quote Data. 344 See supra note 194 and accompanying text. 345 17 CFR 242.611(b)(2). 346 See supra Section IV.D.3.f. 347 See CHX Letter at 18 (supporting the exceptions as proposed). 348 See supra note 196 and accompanying text. 349 See supra Section IV.D.3.f. At Prohibition exceptions on the Rule 611 exceptions. Specifically, the Commission notes that two commenters argued that the rationale for the Rule 611 exceptions should not be necessarily applied to the Trade-At Prohibition.348 The Commission notes that approval of the Trade-At Prohibition is limited solely to the instant NMS plan and the Tick Size Pilot, and believes that utilizing current rules, procedures and systems should facilitate the implementation of the Tick Size Pilot. The Participants also proposed an exception to the Trade-At Prohibition for fractional shares where fractional shares do not the result from dividing an order for one or more whole shares. One commenter supported this exception.349 The Commission notes that there could be potential difficulty in the routing and executing of fractional shares and believes that such a limited exception is appropriate. g. Odd Lots The Commission notes that several commenters requested clarification on how odd lot orders would be treated under the Trade-At Prohibition.350 Under Regulation NMS, odd lot orders are not considered protected quotations.351 Since the Trade-At 350 See supra Section IV.D.3.g. Rule 600(b)(8) defines a bid or offer as the bid price or offer price communicated by a member of a national securities exchange or member of a national securities association to any broker or dealer, or to any customer, at which it is willing to buy or sell one or more round lots of any NMS security, as either principal or agent, but shall not include indications of interest. This definition of 351 See Continued VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 PO 00000 Frm 00029 Fmt 4701 Sfmt 4703 E:\FR\FM\13MYN2.SGM 13MYN2 27542 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices Prohibition only applies to protected quotations, odd lot orders and the odd lot portion of mixed lot orders would therefore not be covered by the TradeAt Prohibition. On the other hand, if a trading center that is not displaying a quotation at the price equal to the traded-at protected quotation and then receives an odd lot order or the odd lot portion of a mixed lot order, the trading center would be prevented from executing the odd lot order at the price of the protected quotation unless an exception applies.352 E. Collection and Assessment of Tick Size Pilot Data The Participants proposed Trading Center Data and Market Maker Profitability Data elements that were consistent with the June 2014 Order. Several commenters suggested that the data elements should be based solely on currently available data, such as the data reported to the processors, SRO proprietary data feeds, or under Rule 605, which would ease reporting burdens and costs.353 However, as discussed below, the Commission believes that the Trading Center Data and Market Maker Profitability Data are necessary to provide the Commission and the public with measurable data on which to assess the Tick Size Pilot’s impact. mstockstill on DSK4VPTVN1PROD with NOTICES2 1. Trading Center Data The Tick Size Pilot would require the Participants to collect market quality statistics, data on specific orders, and data on market makers. The data would be publicly available on a monthly basis. Some commenters suggested that the Commission should rely on currently available data as this would reduce the implementation costs while still providing sufficient information to study the effects of the Tick Size Pilot.354 However, the Commission believes that it is necessary to collect the Trading Center Data in order to fully analyze the Tick Size Pilot. These new data elements are important for assessing the Tick Size Pilot’s impact on liquidity, execution quality, market maker activity, competition, and transparency and are not included bid or offer is embedded in the definition of ‘‘quotation’’ in Rule 600(b)(62), as well as the definition of ‘‘protected bid’’ or ‘‘protected offer’’ in Rule 600(b)(57). See ‘‘Frequently Asked Questions Concerning Rule 611 and Rule 610, Question 7.03’’, available at https://www.sec.gov/divisions/ marketreg/nmsfaq610–11.htm#sec7. 352 See Data Highlight 2014–01: Odd Lot Rates in a Post-Transparency World, (January 9, 2014), available at https://www.sec.gov/marketstructure/ research/sec_data_highlight_2014–01.pdf. 353 See supra Section IV.E.1. 354 Id. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 currently in the publicly available data.355 In particular, the market quality statistics in the Trading Center Data expand in several important ways on the data reported under Rule 605. For example, compared to Rule 605 data, the market structure statistics are daily instead of monthly and will be publicly available more centrally, contain a broader set of orders, contain additional information on cancelations and hidden orders, and contain additional categories on order size and time to execution. As described in more detail below, the Trading Center Data are intended to build on an infrastructure that already exists for the collection of Rule 605 data and tailors the data from that infrastructure to the purposes of the Tick Size Pilot. Requiring daily data and making it available more centrally should improve the feasibility of studying the Tick Size Pilot. Many liquidity and execution quality statistics using SIP data can be calculated, but these statistics are imperfect because they focus on trades instead of orders. For the purposes of assessing the Tick Size Pilot, execution quality of orders is more relevant. Rule 605 data, on the other hand, focuses on orders, but are available on a monthly aggregated basis and are from each of hundreds of trading centers. The daily frequency of the market quality statistics should allow for the study of the time series of metrics in a manner that provides a greater ability to statistically detect changes in market quality resulting from the Tick Size Pilot because it allows for the analysis of effects on a daily basis.356 Requesting data that can be collected using existing Rule 605 infrastructure should reduce the incidence of data errors that result from creating a dataset from scratch which should increase the reliability of the data and reduce costs. Including additional orders and reducing duplication could help to tailor the market quality statistics to the purposes of the Tick Size Pilot. The market quality statistics include a broader set of orders than Rule 605 statistics, with reduced double counting. In particular, the Tick Size Pilot requires producing market quality 355 Some commenters suggested that the datacollection requirements should be limited to data elements needed to assess the impact of the Tick Size Pilot on liquidity. While recognizing the importance of liquidity, as discussed throughout this order, measuring changes in liquidity is not the only goal of the Tick Size Pilot. Therefore, a broader range of data elements needs to be available for a full analysis of the Tick Size Pilot. 356 Statistically, a daily time series provides greater ability for tests to detect changes resulting from the Tick Size Pilot. PO 00000 Frm 00030 Fmt 4701 Sfmt 4703 statistics on all orders regardless of inclusion in Rule 605 statistics, but includes only statistics on orders that the execution venue executes in part or full. The market quality statistics categorize some of the orders not included in Rule 605 data. In particular, the market quality statistics include categories for resting intermarket sweep orders, retail liquidity providing orders and midpoint passive liquidity orders and separates statistics by whether the statistics are for orders included in Rule 605 data or not. In addition, the market quality statistics include an order size category to capture orders of 10,000 shares or more, which are excluded from Rule 605. Because the purpose of Rule 605 differs from that of the Tick Size Pilot, studies of the Tick Size Pilot necessarily benefit from the inclusion of all orders that could be impacted by wider tick sizes. The Trading Center Data does not include the Rule 605 data on orders that are routed away in their entirety. The Rule 605 data for a particular trading center includes orders that a trading center routed away in their entirety. If this data was aggregated, it would produce double counting of these orders. Because Commission staff intends to aggregate the Trading Center Data across the trading centers, the Commission has decided to not require this information to prevent the likely double counting that could occur when such orders are routed in their entirety.357 Including additional data elements and categories in market quality statistics compared to Rule 605 allows for the study of key issues and helps to supplement other existing public data such as the data on the Commission’s Market Structure Web site.358 The additional market quality statistics include information on displayed or hidden order status, which would provide a more fulsome view of transparency than other sources of information on hidden orders including those on the Commission’s Market Structure Web site.359 The market structure statistics include significantly more refined time interval categories 357 In addition, such orders would be attributed to the market center that routed them away and execution quality metrics for that market center would contain such orders that were not executed on the market center. 358 The Commission’s Market Structure Web site (https://www.sec.gov/marketstructure/) allows the public access to data derived from the Commission’s MIDAS, which several commenters suggested as an alternative to the Trading Center Data. See supra Section IV.E.1. 359 The Commission’s Market Structure Web site provides data on hidden orders for only a subset of exchanges because not all exchanges provide hidden order information in their proprietary data feeds, which supply data to MIDAS. E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices (starting with microseconds rather than seconds) to measure speed of order executions and additional order categories. These changes allow for comparability to the statistics available on the Commission’s Market Structure Web site. The Trading Center Data adds information on speed of order cancellations.360 Because the Tick Size Pilot may affect investors’ behavior regarding cancellations, the ability to observe those changes would help to better understand the effects of the Tick Size Pilot. The Trading Center Data on specific orders provides disaggregated execution, cancellation and routing statistics for individual market and marketable limit orders. This type of information is not available from any public source or from any raw data source that, as a practical matter, is available in an easily and publicly accessible manner to meet the needs of the Tick Size Pilot. As noted above, order information is more relevant for studies of the Tick Size Pilot than SIP data because order information can consider the full order size. The data on specific orders improves on the market quality statistics by allowing researchers to more directly test hypotheses on the effect of the Tick Size Pilot on quote competition and transparency, for example. Researchers can also supplement statistics they derive from this data with statistics on limit orders from the Commission’s Market Structure Web site. Finally, the Trading Center Data includes daily statistics on registration and participation of market makers. Information on market maker registration and participation is necessary to test the hypothesis that widening the tick size could encourage market making in such a way to improve the liquidity and trading of small capitalization stocks, which could potentially allow such issuers to raise capital more easily. Such data is not available publicly, except from a few exchanges. Because of these enhancements, the Commission believes that collections of Trading Center Data should facilitate a significantly richer analysis than the public data of the effects of the Tick Size Pilot on liquidity (e.g., transaction costs by order size), execution quality (e.g., speed of order executions), market maker activity, competition between 360 A wider tick size may change the composition of the market participants for a given stock and it may also change their behavior. For example, ‘‘pinging’’ the market, which results in frequent and fast cancellations, becomes more expensive and therefore less attractive. As a result, the practice may be used less in stocks with a wider tick size. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 trading venues (e.g., routing frequency of market orders), transparency (e.g., choice between displayed and hidden orders), and market dynamics (e.g., rates and speed of order cancellations), and thus is necessary to fully assess the impact of the Tick Size Pilot. 2. Market Maker Profitability Data The Tick Size Pilot would require market makers to produce the Market Maker Profitability Data, which relates to daily trading profits on the Pilot Securities. Several commenters opposed the collection of Market Maker Profitability Data.361 Commenters raised concerns about the costs of collecting the data as well as concerns related to the confidentiality and the competitive impact of the data. Commenters suggested that market makers would forego participation in the Tick Size Pilot if they were required to submit their Market Maker Profitability Data. The Commission notes that one of the premises behind the Tick Size Pilot is that a widened tick increment could increase market maker profits and that the increased profits could foster a more robust secondary market for small capitalization stocks (and ultimately a more robust primary market) by, for example, increasing liquidity, enhancing the attractiveness of acting as a market maker, and possibly increasing the provision of sell-side research. Without the Market Maker Profitability Data, the Commission and the public would not be able to test this hypothesis. In light of the comments on the costs of producing the Market Maker Profitability Data and the confidentiality of the data, however, the Commission deems it necessary to modify this datacollection requirement in two ways. First, the Commission is eliminating the data element which required realized trading profits net of fees and rebates from the list of the required market maker profitability statistics and the data element that would have required the DEA to calculate the volume-weighted average of market maker realized traded profits net of fees and rebates. Some commenters expressed concern that because fees and rebates are charged monthly and in an aggregate form, the fees and rebates could be difficult to assign to daily trades in specific securities. As a result, data on market maker realized trading profits net of fees and rebates could be difficult to produce accurately and in a cost effective manner. After carefully considering these comments, the Commission is eliminating these data elements from 361 See PO 00000 supra Section IV.E.2. Frm 00031 Fmt 4701 Sfmt 4703 27543 the list of the required Market Maker Profitability Data because of the difficulties in calculating the data and the concerns about the costs related to the calculation. Eliminating this data element should ease the implementation burdens and costs to produce the data. Further, the Commission recognizes that changes in raw realized trading profits may be more relevant for the economic relation the Tick Size Pilot is addressing. The Commission believes that the data on realized raw trading profits and unrealized raw trading profits should be sufficient to support robust analysis.362 Second, to address confidentiality concerns the Commission is modifying the NMS plan to require further aggregation of all Market Maker Profitability Data for public dissemination. Some commenters expressed concern about dissemination of Market Maker Profitability Data (even in aggregate form for each security) and opined that some designated market makers could deregister from Pilot Securities to avoid providing profitability data. The Commission recognizes that some Pilot Securities may have a relatively small number of designated market makers, and that in these cases aggregating profitability data across market makers may be insufficient to fully protect the confidentiality of profits of individual 362 The Commission believes that the costs of producing the modified Market Maker Data may not be high and the Commission understands that market makers may capture trading profit data for internal business purposes. One commenter suggested that measuring market maker profitability for each security may be difficult because ‘‘costs [of market making] are typically allocated to trading across the board, rather than on a symbol-by-symbol basis.’’ In response to this comment, the Commission notes that the modified Market Maker Data is limited to measures of gross trading profitability, which do not require information on general operating costs (or allocation of these costs to specific securities). Another commenter mentioned that some market makers may not currently compute their profits on a LIFO basis. However, the Commission believes that even for these market makers it should be fairly easy to implement a LIFO-like method for computing their profits as required by the Tick Size Pilot. Independent of which specific method, e.g., LIFO, FIFO, or average cost basis, is used to compute profits, the same information has to be collected, processed, and stored. The only difference is the formula for computation. The Commission recognizes that there will be costs associated with computing profits in a manner different than current profit calculations. However, the requirement to produce profitability figures for the Tick Size Pilot does not mean that market makers are required to change how they currently compute trading profits for internal business purposes. For example, a market maker may continue to use a FIFO-like method for internal profit computations and only report profits on a LIFO basis for the purpose of the Tick Size Pilot. This would alleviate the risk for disruptions due to a change in their practices. E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 27544 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices market makers. For example, some smaller market makers may be able to use aggregate data to infer the profitability of their larger competitors, which could give them an unfair competitive advantage. To address the confidentiality concerns raised by commenters and to ensure that public dissemination of the Market Maker Data does not adversely impact competition between market makers, the Commission has determined that the DEA should further aggregate the Market Maker Profitability Data by each Test Group and Control Group such that the public data will not contain profitability measures for each security. The Commission notes that the data available to Participants and the Commission would continue to identify the market maker profits in individual stocks.363 As a result of this change, the public would not have the ability to match individual stocks in the Test Groups with stocks from the Control Group and compare changes in profitability between stocks from the Test Groups and the matched stocks. The Commission, however, believes this modification should adequately address confidentiality concerns related the dissemination of detailed Market Maker Profitability Data. Therefore, the Commission deems it appropriate to modify the Market Maker Profitability Data as described above. Some commenters suggested that the disclosure of Market Maker Profitability Data to DEAs may be anti-competitive, as market makers would essentially have to disclose sensitive, proprietary information to their exchange competitors. In response to these comments, the Commission notes that many market makers are already required to provide profitability information to their DEAs as part of their registration requirements and by virtue of their membership with a national securities exchange or association. Thus, the Commission believes that the additional impact of the disclosing Market Maker Data is not likely to be significant. Moreover, the Commission emphasizes that the Participants are expected to collect and use Tick Size Pilot data, including Market Maker Profitability Data, for legitimate regulatory purposes, and not for inappropriate, anti-competitive purposes. 363 The Commission notes that it will keep this information confidential, subject to the provisions of applicable law. Additionally, as noted below, because the Participants will have data that is more detailed than the public, the Commission has determined that the SROs should provide an assessment of Market Maker Profitability Data. See infra Section V.E.3. VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 3. Assessment of Tick Size Pilot Data The Tick Size Pilot would require the Participants to provide a joint assessment on the impact of the Tick Size Pilot, no later than six months after the end of the Pilot Period. In the June 2014 Order, the Commission identified certain assessments that the Participants were to conduct and to submit to the Commission. However, the Participants did not include the assessment related to the impact of quoting and trading increments on the profitability of market makers in the proposed Tick Size Pilot because, in their view, the market makers would be better positioned, compared to the Participants, to analyze such data.364 As previously noted, the impact of a wider tick size on market maker profitability is an important assessment to be conducted. In addition, the Commission has modified the Market Maker Profitability Data to require further aggregation of publically released data. While the public will still be able to study this aggregated profitability data, the public is limited in its ability to conduct an independent assessment based on the more granular profitability data available to the Participants and the Commission. Therefore, the Commission is modifying the NMS plan to reflect that the Participants are required to conduct and submit this assessment. The Commission deems it appropriate to modify the NMS plan to require this assessment. The Commission is also modifying the timing when the impact assessments should be prepared by the Participants and submitted to the Commission. In particular, the Commission is modifying the NMS plan to require the Participants to submit their assessments 18-months after the Tick Size Pilot begins based on data generated during the first year of the Tick Size Pilot or a subset of which that represents the impact of the Tick Size Pilot. The Commission notes that the timing for when the assessments are due to the Commission has not changed. As proposed, the Participants would have submitted their assessment six months after the end of the Pilot Period (which would have been 18-months after the Tick Size Pilot was implemented). This modification has been made in relation to the modified Pilot Period. As a result, the Commission will receive the impact assessment of the Tick Size Pilot six months prior to its completion. The Commission is not modifying the NMS plan to require the Participants to conduct more frequent periodic impact assessments as some commenters’ suggested 365 because it does not believe that the incremental benefit of such additional assessment would justify the increased burdens and costs on the Participants. The Commission deems it appropriate to modify the timing of the Participant assessments because it would provide the Commission and the public with relevant data on the impact of the Tick Size Pilot before the Pilot Period ends. Commenters also stated that the Commission should define success metrics for the Tick Size Pilot and what would warrant it being adopted on a permanent basis.366 The Commission has carefully considered these comments but believes that defining the success metrics before the Tick Size Pilot begins could unduly influence behavior by market participants. The Tick Size Pilot is intended to be a test to inform the Commission and the public about the possible impacts of a wider tick size in small capitalization securities. The NMS plan sets forth the data elements that the Commission believes would be informative and support broad analysis. The Commission has described the questions that it believes the data should be able to address. In particular, the Commission believes that the Tick Size Pilot as designed should generate data that would support analysis and studies of the effect of increased tick size on liquidity, execution quality for investors, volatility, market maker profitability, competition, transparency and institutional ownership. The results of the Tick Size Pilot could reveal tradeoffs among these and other considerations and the potential permutations in the results are likely to be too extensive to define success at this point. F. Use of an NMS Plan Certain commenters suggested that the Tick Size Pilot should be implemented via Commission rulemaking, rather than through the NMS plan process.367 Some commenters suggested that the Tick Size Pilot was too significant to be delegated to the Participants and raised concerns that not all market participants, including market makers, broker-dealers and institutional investors, were included in the development of the Tick Size Pilot. Certain commenters were concerned about potential conflict of interests that could arise in the Participants’ 365 See supra Section IV.E.3. 366 Id. 364 See PO 00000 Notice, 79 FR at 66428, supra note 5. Frm 00032 Fmt 4701 Sfmt 4703 367 See E:\FR\FM\13MYN2.SGM supra Section IV.F. 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices development of the NMS plan. A number of commenters questioned whether it was appropriate to have Participants formulate an NMS plan that would affect their competitors. Additionally, some commenters intimated that a conflict of interest may exist by highlighting the Participants’ for-profit status. As discussed above, the Commission has reasons to proceed with the Tick Size Pilot as an NMS plan.368 The process for an NMS plan has some similarities to a rulemaking. Like a Commission rulemaking, an NMS plan is subject to public notice and comment, which provides all interested parties, including market makers, brokerdealers, investors, and issuers, an opportunity to offer substantive comment on the plan prior to Commission consideration of whether to approve it. The Commission published this NMS plan and therefore, it was subject to notice and comment.369 In addition, the process is subject to Commission’s oversight and approval authority. In this regard, Rule 608(b)(2) provides that the Commission shall approve an NMS plan, with such changes or subject to such conditions as the Commission may deem necessary or appropriate, if it finds that such plan or amendment is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the Act.370 As discussed throughout this order, the Commission believes the NMS plan meets the standard for approval and has exercised its authority to modify this NMS plan consistent with the standard. Certain commenters raised concerns related to the role of the Participants, and of potential conflicts of interest, in the development of the Tick Size Pilot. The Commission recognizes that most of the Participants are for-profit exchanges that compete in various respects with their broker-dealer members. However, the Participants also are self-regulatory organizations, with specified regulatory obligations under the Act and Commission rules. Among other things, Section 11A(a)(3) of the Act, and Rule 608 thereunder, contemplate that SROs may act jointly in furtherance of their regulatory obligations by developing and filing proposed NMS plans with the Commission and, if approved, operating them subject to the Commission’s 368 See supra Section V.A. Notice supra note 5. 370 17 CFR 242.608(b)(2). 369 See VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 oversight and authority.371 The Commission recognizes that certain provisions of the NMS plan could have a competitive impact on broker-dealer members and other market participants. The Rule 608 process, however, requires that proposed NMS plans be published for public comment and subject to Commission review and approval. As discussed above, the Commission has reviewed the NMS plan and thoroughly evaluated commenters’ concerns, including those relating to the impact of the Tick Size Pilot on competition. The Commission has modified the NMS plan by removing the Venue Limitation, which it believes would have placed an unnecessary burden on competition, and the Commission exercised its authority to make other modifications to address other concerns. G. Issuer Participation Commenters suggested that issuers should have the ability to opt-in or optout of the Tick Size Pilot,372 or establish committees that represent the interests of issuers during the Tick Size Pilot. One commenter believed that instead of approving the Tick Size Pilot, the Commission should permit issuers to contract with market makers for the purpose of determining their spreads. The Commission has carefully considered these comments but believes that in order to generate useful and reliable data from the Tick Size Pilot, issuers should not be able to opt-in or opt-out. Allowing such an option would introduce a selection bias that would make the results of the Tick Size Pilot applicable only to the participating securities and limit the ability of researchers to draw specific conclusions about the impact of wider tick sizes on market for small capitalization stocks. The Commission believes that permitting issuers to contract with market makers for the purpose of determining spreads would similarly introduce selection bias and undermine the goal of the Tick Size Pilot.373 H. Implementation Commenters noted that a one-year implementation period could be appropriate if the Tick Size Pilot was simplified, by among other things, 371 15 U.S.C. 78k-1(a)(3). See 17 CFR 242.608. supra Section IV.G. 373 In addition, the Commission notes that certain exchanges currently operate pilot programs that permit issuers to, indirectly through the exchange, compensate market makers to provide liquidity in the issuers’ securities. See, e.g., NYSE Arca Equities Rule 8.800 (NYSE Arca Equities ETP Incentive Program); BATS Rule 11.8.02 (BATS Competitive Liquidity Provider Program); and Nasdaq Rule 5950 (Market Quality Program). 372 See PO 00000 Frm 00033 Fmt 4701 Sfmt 4703 27545 removing the Trade-At Prohibition. 374 While the Commission has not removed the Trade-At Prohibition, the Commission believes that the modifications to the Tick Size Pilot, such as restricting the Trade-At Prohibition to Regular Trading Hours, removing the Venue Limitation and removing realized trading profits net of fees and rebates from the Market Maker Profitability Data, should lessen some of the implementation burdens. Accordingly, the Commission believes that he Tick Size Pilot should be implemented within one year after the publication of this order. The Commission believes that the one year period for implementation should provide adequate time for the development and testing of applicable trading and compliance systems, the filing and approval of SRO rules related to the Tick Size Pilot’s quoting and trading requirements, and the development and implementation of the written policies and procedures by Participants and their members that are reasonably designed to comply with the applicable quoting and trading increments. Certain commenters requested that the Commission, or the Participants, release detailed frequently-askedquestions (‘‘FAQs’’) to assist implementation of the Tick Size Pilot.375 As the implementation period progresses, should questions arise, the Commission and the Participants will consider whether to issue FAQs to address any such questions. One commenter requested that the list of securities be finalized prior to determining the implementation schedule.376 The Commission does not believe it is necessary to finalize the list of securities prior to determining the implementation schedule. The Commission notes that the list of securities would be finalized based on data collected during the Measurement Period. 377 To avoid including Pilot Securities whose characteristics would not meet the defined selection criteria, the time gap between the Measurement Period and the beginning of the Pilot Period should be as short as possible. For example, the NMS plan includes price as one criterion in the selection of securities such that the closing price be at least $1.50 on every trading day 374 See supra note 244 and accompanying text. KCG Letter at 17; Liquidnet Letter at 2; and Bloomberg Letter at 20. 376 See Bloomberg Letter at 20. 377 See NMS plan Section (I)(N), which defines the Measurement Period as the U.S. trading days during the three-calendar-month period ending at least 30 days prior to the effective date of the Pilot Period. 375 See E:\FR\FM\13MYN2.SGM 13MYN2 27546 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices during the Measurement Period. If the Measurement Period ended six months before the start of the Tick Size Pilot, the risk that securities may have prices below $1.00 during the Tick Size Pilot would be higher than the risk with a later Measurement Period. VI. Conclusion For the reasons discussed above, the Commission finds that the NMS Plan to Implement a Tick Size Pilot Program is necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanism of, a national market system, or otherwise in furtherance of the purposes of the Act. It is therefore ordered, that pursuant to Section 11A of the Act, and the rules and regulations thereunder, that the NMS plan (File No. 4–657), as modified, be and it hereby is approved and declared effective, and the Participants are authorized to act jointly to implement the NMS plan and its Tick Size Pilot as a means of facilitating a national market system. By the Commission. Brent J. Fields, Secretary. Exhibit A Plan To Implement a Tick Size Pilot Program Submitted to the Securities and Exchange Commission Pursuant to Rule 608 of Regulation NMS Under the Securities Exchange Act of 1934 (As Modified by the Commission; additions are in underline and deletions are in [brackets]) Table of Contents Section mstockstill on DSK4VPTVN1PROD with NOTICES2 Preamble .................................................................................................................................................................................................... I. Definitions ............................................................................................................................................................................................. II. Parties ................................................................................................................................................................................................... III. Amendments to Plan .......................................................................................................................................................................... IV. Policies and Procedures ..................................................................................................................................................................... V. Identification of Pilot Securities ......................................................................................................................................................... VI. Pilot Test Groups ................................................................................................................................................................................ VII. Collection of Pilot Data ..................................................................................................................................................................... VIII. Assessment of Pilot .......................................................................................................................................................................... IX. Implementation ................................................................................................................................................................................... X. Withdrawal from Plan ......................................................................................................................................................................... XI. Counterparts and Signatures .............................................................................................................................................................. Appendix A—Publication of Pilot Securities ......................................................................................................................................... Appendix B—Data Collected by Participants and Trading Centers ...................................................................................................... Appendix C—Data Collected by Market Makers .................................................................................................................................... Preamble Pursuant to Section 11A(a)(3)(B) of the Exchange Act, which authorizes the SEC to require by order self-regulatory organizations to act jointly with respect to matters as to which they share authority in planning, developing, operating, or regulating a national market system, the SEC issued an order directing the Participants to submit a Tick Size Pilot Plan as a national market system plan pursuant to Rule 608(a)(3) of Regulation NMS under the Exchange Act. In response, the Participants submit this Plan to implement a Tick Size Pilot Program that will allow the Commission, market participants, and the public to study and assess the impact of increment conventions on the liquidity and trading of the common stocks of small capitalization companies. To do so, the Plan provides for the widening of quoting and trading increments for a group of Pilot Securities. As detailed herein, the Pilot Securities will be subdivided into three Test Groups and a Control Group, each with its own requirements and exceptions relating to quoting and trading increments to facilitate the referenced analysis. I. Definitions (A) ‘‘Average effective spread’’ has the meaning provided in Rule 600(b)(5) of VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Regulation NMS under the Exchange Act. (B) ‘‘Average realized spread’’ has the meaning provided in Rule 600(b)(6) of Regulation NMS under the Exchange Act. (C) ‘‘Benchmark trade’’ means the execution of an order at a price that was not based, directly or indirectly, on the quoted price of a Pilot Security at the time of execution and for which the material terms were not reasonably determinable at the time the commitment to execute the order was made. (D) ‘‘Best protected bid’’ means the highest priced protected bid. (E) ‘‘Best protected offer’’ means the lowest priced protected offer. (F) ‘‘Block Size’’ means for purposes of this Tick Size Pilot Program, an order (1) of at least 5,000 shares or (2) for a quantity of stock having a market value of at least $100,000 [has the meaning provided in Rule 600(b)(9) of Regulation NMS under the Exchange Act]. (G) ‘‘Brokered cross trade’’ means a trade that a broker-dealer that is a member of a Participant executes directly by matching simultaneous buy and sell orders for a Pilot Security. (H) ‘‘Closing Price’’ means the closing auction price on the primary listing exchange, or if not available, then the PO 00000 Frm 00034 Fmt 4701 Sfmt 4703 1 2 7 9 10 11 14 20 22 23 23 24 26 28 37 last regular-way trade reported by the processor prior to 4:00 p.m. ET. (I) ‘‘Designated Examining Authority’’ means, with respect to a member of two or more self-regulatory organizations, the self-regulatory organization responsible for (i) examining such member for compliance with the financial responsibility requirements imposed by the Exchange Act, or by Commission or self-regulatory organization rules, (ii) receiving regulatory reports from such member, (iii) examining such member for compliance with, and enforcing compliance with, specified provisions of the Exchange Act, the rules and regulations thereunder, and selfregulatory organization rules, and (iv) carrying out any other specified regulatory functions with respect to such member. (J) ‘‘Exchange Act’’ means the Securities Exchange Act of 1934, as amended. (K) ‘‘Inside-the-quote limit order,’’ ‘‘at-the-quote limit order,’’ and ‘‘nearthe-quote limit order’’ mean nonmarketable buy orders that are ranked at a price, respectively, higher than, equal to, and lower by $0.10 or less than the National Best Bid at the time of order receipt, and non-marketable sell orders that are ranked at a price, respectively, lower than, equal to, and higher by E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices $0.10 or less than the National Best Offer at the time of order receipt. (L) ‘‘Market Maker’’ means a dealer registered with any self-regulatory organization, in accordance with the rules thereof, as (i) a market maker or (ii) a liquidity provider with an obligation to maintain continuous, twosided trading interest. (M) ‘‘Marketable limit order’’ means any buy order with a limit price equal to or greater than the National Best Offer at the time of order receipt, or any sell order with a limit price equal to or less than the National Best Bid at the time of order receipt. For price sliding, pegged, discretionary, or similar order types where the ranked price is different from the limit price, the ranked price will determine marketability. (N) ‘‘Measurement Period’’ means the U.S. trading days during the threecalendar- month period ending at least 30 days prior to the effective date of the Pilot Period. (O) ‘‘National Best Bid’’ and ‘‘National Best Offer’’ have the meanings provided in Rule 600(b)(42) of Regulation NMS under the Exchange Act. (P) ‘‘Negotiated Trade’’ means (i) a Benchmark trade, including, but not limited to, a Volume-Weighted Average Price trade or a Time-Weighted Average Price trade, provided that, if such a trade is composed of two or more component trades, each component trade complies with the quoting and trading increment requirements of the Plan, or with an exception to such requirements, or (ii) a Pilot Qualified Contingent Trade. (Q) ‘‘NMS common stock’’ means an NMS stock that is common stock of an operating company. (R) ‘‘NMS stock’’ has the meaning provided in Rule 600(b)(47) of Regulation NMS under the Exchange Act. (S) ‘‘Operating Committee’’ has the meaning provided in Section III(C) of the Plan. (T) ‘‘Participant’’ means a party to the Plan. (U) ‘‘Pilot Period’’ means the operative period of the Tick Size Pilot Program, lasting [one] two years from the date of implementation. (V) ‘‘Pilot Qualified Contingent Trade’’ means a transaction consisting of two or more component orders, executed as agent or principal, where: (1) at least one component order is in an NMS common stock; (2) all components are effected with a product or price contingency that either has been agreed to by the respective counterparties or arranged for by a broker-dealer as principal or agent; (3) the execution of one component is contingent upon the VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 execution of all other components at or near the same time; (4) the specific relationship between the component orders (e.g., the spread between the prices of the component orders) is determined at the time the contingent order is placed; (5) the component orders bear a derivative relationship to one another, represent different classes of shares of the same issuer, or involve the securities of participants in mergers or with intentions to merge that have been announced or since canceled; and (6) the transaction is fully hedged (without regard to any prior existing position) as a result of the other components of the contingent trade. (W) ‘‘Pilot Securities’’ means those securities that satisfy the criteria established in Section V. (X) ‘‘Plan’’ means the plan set forth in this instrument, as amended from time to time in accordance with its provisions. (Y) ‘‘Processor’’ means the single plan processor responsible for the consolidation of information for an NMS stock pursuant to Rule 603(b) of Regulation NMS under the Exchange Act. (Z) ‘‘Protected bid’’ and ‘‘protected offer’’ have the meanings provided in Rule 600(b)(57) of Regulation NMS under the Exchange Act. (AA) ‘‘Protected quotation’’ has the meaning provided in Rule 600(b)(58) of Regulation NMS under the Exchange Act. (BB) ‘‘Quotation’’ has the meaning provided in Rule 600(b)(62) of Regulation NMS under the Exchange Act. (CC) ‘‘Regular Trading Hours’’ has the meaning provided in Rule 600(b)(64) of Regulation NMS under the Exchange Act. For purposes of the Plan, Regular Trading Hours can end earlier than 4:00p.m. ET in the case of an early scheduled close. (DD) ‘‘Retail Investor Order’’ means an agency order or a riskless principal order originating from a natural person, provided that, prior to submission, no change is made to the terms of the order with respect to price or side of market and the order does not originate from a trading algorithm or any other computerized methodology. The Participant that is the Designated Examining Authority of a member of a Participant operating a trading center executing a Retail Investor Order will require such trading center to sign an attestation that substantially all orders to be executed as Retail Investor Orders will qualify as such under the Plan. (EE) ‘‘Retail liquidity providing order’’ means an order entered into a Participant-operated retail liquidity PO 00000 Frm 00035 Fmt 4701 Sfmt 4703 27547 program to execute against Retail Investor Orders. (FF) ‘‘SEC’’ means the United States Securities and Exchange Commission. (GG) ‘‘SRO quotation feed’’ means any market data feed disseminated by a selfregulatory organization. (HH) ‘‘Tick Size Pilot Program’’ means the program established by this Plan and by the corresponding rules of the Participants. (II) ‘‘Time of order execution’’ means the time (to the second, or to such smaller increments as are available) that an order was executed at any venue. (JJ) ‘‘Time of order receipt’’ means the time (to the second, or to such smaller increments as are available) that an order was received by a trading center for execution. (KK) ‘‘Time-Weighted Average Price’’ means the price calculated as the average price of a security over a specified period of time. (LL) ‘‘Trade-at’’ means the execution by a trading center of a sell order for a Pilot Security at the price of a protected bid or the execution of a buy order for a Pilot Security at the price of a protected offer during Regular Trading Hours. (MM) ‘‘Trade-at Intermarket Sweep Order’’ means a limit order for a Pilot Security that meets the following requirements: (1) When routed to a trading center, the limit order is identified as an Intermarket Sweep Order; and (2) Simultaneously with the routing of the limit order identified as an Intermarket Sweep Order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the Pilot Security with a price that is equal to the limit price of the limit order identified as an Intermarket Sweep Order. These additional routed orders also must be marked as Intermarket Sweep Orders. (NN) ‘‘Trading center’’ has the meaning provided in Rule 600(b)(78) of Regulation NMS under the Exchange Act. (OO) ‘‘Volume-Weighted Average Price’’ means the price calculated by summing up the products of the number of single-counted shares traded and the respective share price, and dividing by the total number of single-counted shares traded. II. Parties (A) List of Parties The parties to the Plan are as follows: E:\FR\FM\13MYN2.SGM 13MYN2 27548 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices (1) BATS Exchange, Inc., 8050 Marshall Drive, Lenexa, Kansas 66214 (2) BATS Y-Exchange, Inc., 8050 Marshall Drive, Lenexa, Kansas 66214 (3) Chicago Stock Exchange, Inc., 440 South LaSalle Street, Chicago, Illinois 60605 (4) EDGA Exchange, Inc., 545 Washington Boulevard, Sixth Floor, Jersey City, NJ 07310 (5) EDGX Exchange, Inc., 545 Washington Boulevard, Sixth Floor, Jersey City, NJ 07310 (6) Financial Industry Regulatory Authority, Inc., 1735 K Street NW., Washington, DC 20006 (7) NASDAQ OMX BX, Inc., One Liberty Plaza, New York, NY 10006 (8) NASDAQ OMX PHLX LLC, 1900 Market Street, Philadelphia, PA 19103 (9) The Nasdaq Stock Market LLC, 1 Liberty Plaza, 165 Broadway, New York, NY 10006 (10) New York Stock Exchange LLC, 11 Wall Street, New York, NY 10005 (11) NYSE MKT LLC, 11 Wall Street, New York, NY 10005 (12) NYSE Area, Inc., 11 Wall Street, New York, NY 10005 (B) Compliance Undertaking By subscribing to and submitting the Plan for approval by the SEC, each Participant agrees to comply with, and to enforce compliance by its members, as applicable, with the provisions of the Plan as required by Rule 608(c) of Regulation NMS under the Exchange Act. To this end, each Participant will adopt rules requiring compliance by its members with the provisions of the Plan, as applicable, and adopt such other rules as are needed for such compliance. (C) New Participants The Participants agree that any entity registered as a national securities exchange or national securities association under the Exchange Act may become a Participant by: (1) executing a copy of the Plan, as then in effect; (2) providing each then-current Participant with a copy of such executed Plan; and (3) effecting an amendment to the Plan as specified in Section III(B) of the Plan. III. Amendments to Plan mstockstill on DSK4VPTVN1PROD with NOTICES2 (A) General Amendments Except with respect to the addition of new Participants to the Plan, any proposed change in, addition to, or deletion from the Plan will be effected by means of a written amendment to the Plan that: (1) sets forth the change, addition, or deletion; (2) is executed on behalf of each Participant; and (3) is approved by the SEC pursuant to Rule VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 608 of Regulation NMS under the Exchange Act, or otherwise becomes effective under Rule 608 of Regulation NMS under the Exchange Act. (B) New Participants With respect to new Participants, an amendment to the Plan may be effected by the new national securities exchange or national securities association executing a copy of the Plan, as then in effect (with the only changes being the addition of the new Participant’s name in Section II(A) of the Plan) and submitting such executed Plan to the SEC for approval. The amendment will be effective when it is approved by the SEC in accordance with Rule 608 of Regulation NMS under the Exchange Act, or otherwise becomes effective pursuant to Rule 608 of Regulation NMS under the Exchange Act. (C) Operating Committee (1) Each Participant will select from its staff one individual to represent the Participant as a member of an Operating Committee, together with a substitute for such individual. The substitute may participate in deliberations of the Operating Committee and will be considered a voting member thereof only in the absence of the primary representative. Each Participant will have one vote on all matters considered by the Operating Committee. No later than the initial date of Plan operations, the Operating Committee will designate one member of the Operating Committee to act as the Chair of the Operating Committee. (2) The Operating Committee will monitor the procedures established pursuant to this Plan and advise the Participants with respect to any deficiencies, problems, or recommendations as the Operating Committee may deem appropriate. The Operating Committee will establish specifications and procedures for the implementation and operation of the Plan that are consistent with the provisions of this Plan. With respect to matters in this paragraph, Operating Committee decisions must be approved by a simple majority vote. (3) Any recommendation for an amendment to the Plan from the Operating Committee that receives an affirmative vote of at least two-thirds of the Participants, but is less than unanimous, will be submitted to the SEC as a request for an amendment to the Plan initiated by the Commission under Rule 608 of Regulation NMS. IV. Policies and Procedures Consistent with the compliance undertakings set out in Section II(B), all PO 00000 Frm 00036 Fmt 4701 Sfmt 4703 Participants and members of Participants will be required to establish, maintain, and enforce written policies and procedures that are reasonably designed to comply with applicable quoting and trading requirements specified in Section VI for the Pilot Securities. Each Participant, as applicable, will develop appropriate policies and procedures that provide for collecting and reporting to the SEC the data described in Appendix B. In addition, each Participant that is the Designated Examining Authority of a member of a Participant operating a trading center will require such member to develop appropriate policies and procedures for collecting and reporting the data described in Items I and II of Appendix B, as applicable, to the Designated Examining Authority. Each Participant that is the Designated Examining Authority of a member of a Participant operating a trading center will develop appropriate policies and procedures, as applicable, that provide for collecting and reporting such data to the SEC. The data collection and reporting obligations are described below in Section VII. Each Participant that is the Designated Examining Authority of a Market Maker will require such Market Maker to develop policies and procedures for collecting the data set out in Appendix C and reporting it to the Designated Examining Authority. Each Participant that is the Designated Examining Authority of a Market Maker will develop appropriate policies and procedures that provide for collecting and reporting such data to the SEC on an aggregated basis. The Designated Examining Authority will also develop policies and procedures reasonably designed to ensure the confidentiality of the non-aggregated data it receives from Market Makers. The data collection and reporting obligations are described below in Section VII. V. Identification of Pilot Securities (A) Criteria for Selection of Pilot Securities Pilot Securities will consist of those NMS common stocks that satisfy the following criteria: (1) A market capitalization of $[5]3 billion or less on the last day of the Measurement Period, where market capitalization is calculated by multiplying the total number of shares outstanding on such day by the Closing Price of the security on such day; (2) A Closing Price of at least $2.00 on the last day of the Measurement Period; E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES2 (3) A Closing Price on every U.S. trading day during the Measurement Period that is not less than $1.50; (4) A Consolidated Average Daily Volume (‘‘CADV’’) during the Measurement Period of one million shares or less, where the CADV is calculated by adding the single-counted share volume of all reported transactions in the Pilot Security during the Measurement Period and dividing by the total number of U.S. trading days during the Measurement Period; and (5) A Measurement Period VolumeWeighted Average Price (‘‘Measurement Period VWAP’’) of at least $2.00, where the Measurement Period VWAP is determined by calculating the VWAP for each U.S. trading day during the Measurement Period, summing the daily VWAP across the Measurement Period, and dividing by the total number of U.S. trading days during the Measurement Period. For purposes of the CADV and Measurement Period VWAP calculations described in Sections V(A)(4) and V(A)(5), U.S. trading days during the Measurement Period with early closes will be excluded. An NMS common stock that had its initial public offering within six months of the start of the Pilot Period will not be eligible to be a Pilot Security. (B) Grouping of Pilot Securities The Operating Committee will oversee the Pilot Security grouping process in accordance with the methodology and criteria set out in this subsection. Once the population of Pilot Securities has been determined based on the criteria in Section V(A), the Operating Committee will select the Pilot Securities to be placed into three Test Groups by means of a stratified random sampling process. To effect this sampling, each of the Pilot Securities will be categorized as having (1) a low, medium, or high share price based on the Measurement Period VWAP, (2) low, medium, or high market capitalization based on the last day of the Measurement Period, and (3) low, medium, or high trading volume based on the CADV during the Measurement Period, yielding 27 possible categories. Low, medium, and high subcategories will be established by dividing the categories into three parts, each containing a third of the population. Pilot Securities will be randomly selected from each of the 27 categories for inclusion into the Test Groups. If, however, a single category of Pilot Securities contains fewer than 10 securities, it will be combined with another of the 27 categories that contains at least 10 securities. If two or VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 more categories of Pilot Securities contain fewer than 10 securities, those categories will be combined, provided the combined category contains at least 10 securities. If the combined category contains fewer than 10 securities, then the category will be combined with another of the 27 categories that contains at least 10 securities. Pilot Securities will be randomly selected from each category for inclusion in the three Test Groups based on the percentage of Pilot Securities comprised of that category. As a result, each category will be represented in the three Test Groups based on its relative proportion to the population of Pilot Securities. Further, a primary listing market’s securities will be selected from each category and included in the three Test Groups in the same proportion as that primary listing market’s securities comprise each category of Pilot Securities. Each Test Group will consist of 400 Pilot Securities. Those Pilot Securities not placed into the three Test Groups will constitute the Control Group. (C) Publication of Pilot Securities and Groups Each primary listing exchange will make publicly available for free on its Web site a list of those Pilot Securities listed on that exchange and included in the Control Group and each Test Group, adjusting for ticker symbol changes and relevant corporate actions. The list of Pilot Securities will contain the data specified in Appendix A. VI. Pilot Test Groups As described in Section V(B), the Pilot Securities will be divided into four groups: a Control Group and three Test Groups. Each Test Group will consist of 400 Pilot Securities. The Control Group will consist of the Pilot Securities not placed into a Test Group. (A) Control Group Pilot Securities in the Control Group may be quoted and traded at any price increment that is currently permitted. (B) Test Group One Pilot Securities in Test Group One will be quoted in $0.05 minimum increments, but may continue to trade at any price increment that is currently permitted. Participants will adopt rules prohibiting Participants or any member of a Participant from displaying, ranking, or accepting from any person any displayable or non-displayable bids or offers, orders, or indications of interest in any Pilot Security in Test Group One in price increments other than $0.05. However, orders priced to PO 00000 Frm 00037 Fmt 4701 Sfmt 4703 27549 execute at the midpoint and orders entered in a Participant-operated retail liquidity program may be ranked and accepted in increments of less than $0.05. (C) Test Group Two Pilot Securities in Test Group Two will be subject to the same quoting requirements as Test Group One, along with the applicable quoting exceptions. In addition, Pilot Securities in Test Group Two may only be traded in $0.05 minimum increments. Participants will adopt rules prohibiting trading centers operated by Participants and members of Participants from executing orders in any Pilot Security in Test Group Two in price increments other than $0.05. The $0.05 minimum trading increment applies to brokered cross trades. Pilot Securities in Test Group Two may trade in increments less than $0.05, however, under the following circumstances: (1) Trading may occur at the midpoint between the National Best Bid and the National Best Offer or the midpoint between the best protected bid and the best protected offer; (2) Retail Investor Orders may be provided with price improvement that is at least $0.005 better than the best protected bid or the best protected offer; and (3) Negotiated Trades may trade in increments less than $0.05. (D) Test Group Three Pilot Securities in Test Group Three will be subject to the same quoting and trading requirements as Test Group Two, along with the applicable quoting and trading exceptions. In addition, Pilot Securities in Test Group Three will be subject to a trade-at prohibition. Trade-at Prohibition. Under the tradeat prohibition, the Plan will (1) prevent a trading center that was not quoting from price-matching protected quotations and (2) permit a trading center that was quoting at a protected quotation to execute orders at that level, but only up to the amount of its displayed size. In accordance with the trade-at prohibition, Participants will adopt rules prohibiting trading centers operated by Participants and members of Participants from executing a sell order for a Pilot Security at the price of a protected bid or from executing a buy order for a Pilot Security at the price of a protected offer unless such executions fall within an exception set forth below. Trade-at Prohibition Exceptions. Trading centers will be permitted to execute an order for a Pilot Security at a price equal to a protected bid or E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 27550 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices protected offer under the following circumstances: (1) The order is executed by a trading center that is displaying a quotation, via either a processor or an SRO quotation feed, at a price equal to the traded-at protected quotation but only up to the trading center’s full displayed size [. Where the quotation is displayed through a national securities exchange, the execution at the size of the order must occur against the displayed size on that national securities exchange. Where the quotation is displayed through the Alternative Display Facility or another facility approved by the Commission that does not provide execution functionality, the execution at the size of the order must occur against the displayed size in accordance with the rules of the Alternative Display Facility or such approved facility]; (2) The order is of Block Size; (3) The order is a Retail Investor Order executed with at least $0.005 price improvement; (4) The order is executed when the trading center displaying the protected quotation that was traded at was experiencing a failure, material delay, or malfunction of its systems or equipment; (5) The order is executed as part of a transaction that was not a ‘‘regular way’’ contract; (6) The order is executed as part of a single-priced opening, reopening, or closing transaction by the trading center; (7) The order is executed when a protected bid was priced higher than a protected offer in the Pilot Security; (8) The order is identified as an Intermarket Sweep Order; (9) The order is executed by a trading center that simultaneously routed Trade-at Intermarket Sweep Orders to execute against the full displayed size of the protected quotation that was traded at; (10) The order is executed as part of a Negotiated Trade; (11) The order is executed when the trading center displaying the protected quotation that was traded at had displayed, within one second prior to execution of the transaction that constituted the trade-at, a best bid or best offer, as applicable, for the Pilot Security with a price that was inferior to the price of the trade-at transaction. (12) The order is executed by a trading center which, at the time of order receipt, the trading center had guaranteed an execution at no worse than a specified price (a ‘‘stopped order’’), where: a. The stopped order was for the account of a customer; VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 b. The customer agreed to the specified price on an order-by-order basis; and c. The price of the trade-at transaction was, for a stopped buy order, equal to the national best bid in the Pilot Security at the time of execution or, for a stopped sell order, equal to the national best offer in the Pilot Security at the time of execution; or (13) The order is for a fractional share of a Pilot Security, provided that such fractional share order was not the result of breaking an order for one or more whole shares of a Pilot Security into orders for fractional shares or was not otherwise effected to evade the requirements of the trade-at prohibition or any other provisions of the Plan. The following examples illustrate the basic operation of the trade-at prohibition: Example 1 The NBBO for Pilot Security ABC is $20.00 × $20.10. Trading Center 1 is displaying a 100-share protected bid at $20.00. Trading Center 2 is displaying a 100-share protected bid at $19.95. There are no other protected bids. Trading Center 3 is not displaying any shares in Pilot Security ABC but has 100 shares hidden at $20.00 and has 100 shares hidden at $19.95. Trading Center 3 receives an incoming order to sell for 400 shares. To execute the 100 shares hidden at $20.00, Trading Center 3 must respect the protected bid on Trading Center 1 at $20.00. Trading Center 3 must route a Trade-at Intermarket Sweep Order to Trading Center 1 to execute against the full displayed size of the protected bid, at which point Trading Center 3 is permitted to execute against the 100 shares hidden at $20.00. To execute the 100 shares hidden at $19.95, Trading Center 3 must respect the protected bid on Trading Center 2 at $19.95. Trading Center 3 must route a Trade-at Intermarket Sweep Order to Trading Center 2 to execute against the full displayed size of the protected bid, at which point Trading Center 3 is permitted to execute against the 100 shares hidden at $19.95. Example 2 The NBBO for Pilot Security ABC is $20.00 × $20.10. Trading Center 1 is displaying a 100-share protected bid at $20.00. Trading Center 2 is displaying a 100-share protected bid at $20.00. Trading Center 2 also has 300 shares hidden at $20.00 and has 300 shares hidden at $19.95. Trading Center 3 is displaying a 100-share protected bid at $19.95. There are no other protected bids. Trading Center 2 receives an incoming order to sell for 900 shares. PO 00000 Frm 00038 Fmt 4701 Sfmt 4703 Trading Center 2 may execute 100 shares against its full displayed size at the protected bid at $20.00. To execute the 300 shares hidden at $20.00, Trading Center 2 must respect the protected bid on Trading Center 1 at $20.00. Trading Center 2 must route a Trade-at Intermarket Sweep Order to Trading Center 1 to execute against the full displayed size of Trading Center 1’s protected bid, at which point Trading Center 2 is permitted to execute against the 300 shares hidden at $20.00. To execute the 300 shares hidden at $19.95, Trading Center 2 must respect the protected bid on Trading Center 3 at $19.95. Trading Center 2 must route a Trade-at Intermarket Sweep Order to Trading Center 3 to execute against the full displayed size of Trading Center 3’s protected bid, at which point Trading Center 2 is permitted to execute against the 300 shares hidden at $19.95. Example 3 The NBBO for Pilot Security ABC is $20.00 × $20.10. Trading Center 1 is displaying a 100-share protected bid at $20.00. Trading Center 1 is also displaying 300 shares at $19.90 on an SRO quotation feed. Trading Center 2 is displaying a 100-share protected bid at $19.95. Trading Center 2 is also displaying 200 shares at $19.90 on an SRO quotation feed and has 200 shares hidden at $19.90. Trading Center 3 is displaying a 100-share protected bid at $19.90. There are no other protected bids. Trading Center 2 receives an incoming order to sell for 700 shares. To execute against its protected bid at $19.95, Trading Center 2 must comply with the trade-through restrictions in Rule 611 of Regulation NMS and route an intermarket sweep order to Trading Center 1 to execute against the full displayed size of Trading Center 1’s protected bid at $20.00. Trading Center 2 is then permitted to execute against its 100-share protected bid at $19.95. Trading Center 2 may then execute 200 shares against its full displayed size at the price of Trading Center 3’s protected bid. To execute the 200 shares hidden at $19.90, Trading Center 2 must respect the protected bid on Trading Center 3 at $19.90. Trading Center 2 must route a Trade-at Intermarket Sweep Order to Trading Center 3 to execute against the full displayed size of Trading Center 3’s protected bid, at which point Trading Center 2 is permitted to execute against the 200 shares hidden at $19.90. Trading Center 2 does not have to respect Trading Center 1’s displayed size at $19.90 for trade-at purposes because it is not a protected quotation. E:\FR\FM\13MYN2.SGM 13MYN2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices VII. Collection of Pilot Data mstockstill on DSK4VPTVN1PROD with NOTICES2 (A) Collection of Trading Center Pilot Data Throughout the Pilot Period, the Participants will collect the following data with respect to Pilot Securities (as set forth in Appendix B): (1) Daily market quality statistics of orders by security, order type, original order size (as observed by the trading center), hidden status (as applicable), and coverage under Rule 605 of Regulation NMS; (2) Specified data regarding market orders and marketable limit orders; (3) Daily number of registered Market Makers; and (4) Daily Market Maker participation statistics. Each Participant that is the Designated Examining Authority of a member of a Participant operating a trading center will require such member to collect and provide to the Designated Examining Authority the data described in subparagraphs (1) and (2) above, as applicable, subject to the terms and conditions in Appendix B. The Participants and each member of a Participant operating a trading center will also be required to collect such data for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. Each Participant will make available to other Participants a list of members designated as Market Makers on that Participant’s trading center. On a monthly basis, the Participants and the Designated Examining Authority for each member of a Participant operating a trading center will make the data in the applicable subparagraphs specified above publicly available on their Web sites for free and will report such data to the SEC on a disaggregated basis by trading center. The data made publicly available will not identify the trading center that generated the data. (B) Collection of Market Maker Profitability Data Each Participant that is the Designated Examining Authority of a Market Maker will require such Market Maker to provide to the Designated Examining Authority the data specified in Appendix C regarding daily Market Maker trading profits with respect to Pilot Securities on a monthly basis. Each Market Maker will also be required to provide to its Designated Examining Authority such daily data for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. On a monthly basis, the Designated Examining Authority will aggregate such data related to VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 Market Makers categorized by the Control Group and each Test Group and make the aggregated data publicly available on its Web site for free and will report such data to the SEC, provided, however, the data reported to the SEC shall include the profitability statistics categorized by security. The data made publicly available will not identify the Market Makers that generated the data or the individual securities. VIII. Assessment of Pilot No later than [six] eighteen months after the [end] start of the Pilot Period, the Participants will provide to the Commission and make publicly available a joint assessment of the impact of the Pilot. The assessment will be conducted using data generated during the first twelve months of the Pilot Period, or a subset of which that represents the impact of the Pilot. The assessment will include: (1) An assessment of the statistical and economic impact of an increase in the quoting increment on market quality; (2) An assessment of the statistical and economic impact of an increase in the quoting increment on the number of Market Makers; (3) An assessment of the statistical and economic impact of an increase in the quoting increment on Market Maker participation; (4) An assessment of the statistical and economic impact of an increase in the quoting increment on Market Maker profits; ([4]5) An assessment of the statistical and economic impact of an increase in the quoting increment on market transparency; ([5]6) An evaluation whether any market capitalization, daily trading volume, or other thresholds can differentiate the results of the above assessments across stocks (e.g., does the quoting increment impact differently those stocks with daily trading volume below a certain threshold); ([6]7) An assessment of the statistical and economic impact of the above assessments for the incremental impact of a trading increment and for the joint effect of an increase in a quoting increment with the addition of a trading increment; ([7]8) An assessment of the statistical and economic impact of the above assessments for the incremental impact of a trade-at prohibition and for the joint effect of an increase in a quoting increment with the addition of a trading increment and a trade-at prohibition; and PO 00000 Frm 00039 Fmt 4701 Sfmt 4703 27551 (8) An assessment of any other economic issues that the Participants believe the SEC should consider in any rulemaking that may follow the Pilot. Participants may individually submit to the SEC and make publicly available additional supplemental assessments of the impact of the Pilot. IX. Implementation The Tick Size Pilot Program will be implemented on a [one]two-year pilot basis. The Tick Size Pilot Program will be applicable during and outside of Regular Trading Hours. X. Withdrawal from Plan If a Participant obtains SEC approval to withdraw from the Plan, such Participant may withdraw from the Plan at any time on not less than 30 days’ prior written notice to each of the other Participants. At such time, the withdrawing Participant will have no further rights or obligations under the Plan. XI. Counterparts and Signatures The Plan may be executed in any number of counterparts, no one of which need contain all signatures of all Participants, and as many of such counterparts as will together contain all such signatures will constitute one and the same instrument. IN WITNESS THEREOF, this Plan has been executed as of the lday of l [2014] 2015 by each of the parties hereto. BATS EXCHANGE, INC. BY: llllllllllllllll BATS Y–EXCHANGE, INC. BY: llllllllllllllll CHICAGO STOCK EXCHANGE, INC. BY: llllllllllllllll EDGA EXCHANGE, INC. BY: llllllllllllllll EDGX EXCHANGE, INC. BY: llllllllllllllll FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC. BY: llllllllllllllll NASDAQ OMX BX, INC. BY: llllllllllllllll NASDAQ OMX PHLX LLC BY: llllllllllllllll THE NASDAQ STOCK MARKET LLC BY: llllllllllllllll NEW YORK STOCK EXCHANGE LLC BY: llllllllllllllll NYSE MKT LLC BY: llllllllllllllll NYSE ARCA, INC. BY: llllllllllllllll E:\FR\FM\13MYN2.SGM 13MYN2 27552 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices Appendix A—Publication of Pilot Securities The following data will be made publicly available in a pipe delimited format regarding the list of Pilot Securities included in the Control Group and each Test Group. Each primary listing exchange will be responsible for making publicly available for free on its Web site the following data with respect to the Pilot Securities listed on that exchange and included in the Control Group and each Test Group. I. Identification of Pilot Securities a. Ticker Symbol b. Security Name c. Listing Exchange d. Date e. Tick Size Pilot Program Group- character value of i. ‘‘C’’ for Pilot Securities in the Control Group ii. ‘‘G1’’ for Pilot Securities in Test Group One iii. ‘‘G2’’ for Pilot Securities in Test Group Two iv. ‘‘G3’’ for Pilot Securities in Test Group Three II. Change in Pilot Securities’ Ticker Symbols a. Ticker Symbol b. Security Name c. Listing Exchange d. Effective Date e. Deleted Date f. Tick Size Pilot Program Group—character value of i. ‘‘C’’ for Pilot Securities in the Control Group ii. ‘‘G1’’ for Pilot Securities in Test Group One iii. ‘‘G2’’ for Pilot Securities in Test Group Two iv. ‘‘G3’’ for Pilot Securities in Test Group Three g. Old Ticker Symbol(s) h. Reason for the change mstockstill on DSK4VPTVN1PROD with NOTICES2 Appendix B—Data Collected by Participants and Trading Centers Each Participant, as applicable, will collect and transmit the data described in Items I– IV with respect to Pilot Securities to the SEC in a pipe delimited format on a monthly basis. In addition, each Participant that is the Designated Examining Authority of a member of a Participant operating a trading center will require such member, as applicable, to collect and transmit the data described in Items I and II with respect to Pilot Securities to the Designated Examining Authority in a pipe delimited format on a monthly basis. Each Designated Examining Authority will transmit the data on a disaggregated basis to the SEC, i.e., by trading center. The data will be provided to the SEC within 30 calendar days following month end. All trading centers, including Participants, will report the data described in Items I.a(28) and I.b with respect to only those orders executed, in whole or part, on that trading center. All trading centers will report the remaining data described in Items I.a with respect to any order received by that trading center. The VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 data described in Item I will only be collected for orders received during Regular Trading Hours. All trading centers, including Participants, will report the data described in Item II with respect to any market or marketable limit orders received by that trading center. The data described in Item II will be collected for orders received during and outside of Regular Trading Hours. Orders entered while a trading halt is in effect will be excluded from the data. The data will be provided for dates starting six months prior to the Pilot Period through six months after the end of the Pilot Period. I. Market Quality Statistics—Daily market quality statistics categorized by security, order type, original order size, hidden status, and coverage under Rule 605, including the following columns of information: a. For regular hours orders which are market orders (10), marketable limit orders (11), inside-the-quote resting limit orders (12), at-the-quote resting limit orders (13), near-the-quote resting limit orders (within .10 from the NBBO) (14), resting intermarket sweep orders (15), retail liquidity providing orders (16), and midpoint passive liquidity orders (17) executed on the trading center: (1) Exchange code or trading center identifier; (2) Ticker Symbol; (3) Order Type, as defined in the Plan or in I.a of this Appendix; (4) Original Order size with the following modified categories from Rule 605 reports: a. Less than 100 shares; b. 100 to 499 shares; c. 500 to 1999 shares; d. 2000 to 4999 shares; e. 5000 to 9999 shares; and f. 10000 or more shares; (5) Hidden Status Category—indicates whether the orders fall into the following categories: a. Entirely Displayable; b. Partially Displayable; and c. Not Displayable; (6) Rule 605 Coverage—indicates whether the orders are covered in Rule 605 (Y/N); (7) The cumulative number of orders; (8) The cumulative number of shares of orders; (9) The cumulative number of shares of orders canceled; (10) The cumulative number of shares of orders executed on the receiving trading center; (11) The cumulative number of orders with special handling instructions (for example, slide, discretion, eligible counterparty, minimum quantity) excluded from price improvement and effective spread statistics; (12) The cumulative number of shares of orders with special handling instructions (for example slide, discretion, eligible counterparty, minimum quantity) excluded from price improvement and effective spread statistics; (13) The cumulative number of shares of orders executed at any other trading center; (14) The cumulative number of shares of orders executed from 0 to less than 100 microseconds after the time of order receipt; (15) The cumulative number of shares of orders executed from 100 microseconds to less than 100 milliseconds after the time of order receipt; PO 00000 Frm 00040 Fmt 4701 Sfmt 4703 (16) The cumulative number of shares of orders executed from 100 milliseconds to less than 1 second after the time of order receipt; (17) The cumulative number of shares of orders executed from 1 second to less than 30 seconds after the time of order receipt; (18) The cumulative number of shares of orders executed from 30 seconds to less than 60 seconds after the time of order receipt; (19) The cumulative number of shares of orders executed from 60 seconds to less than 5 minutes after the time of order receipt; (20) The cumulative number of shares of orders executed from 5 minutes to 30 minutes after the time of order receipt; (21) The cumulative number of shares of orders canceled from 0 to less than 100 microseconds after the time of order receipt; (22) The cumulative number of shares of orders canceled from 100 microseconds to less than 100 milliseconds after the time of order receipt; (23) The cumulative number of shares of orders canceled from 100 milliseconds to less than 1 second after the time of order receipt; (24) The cumulative number of shares of orders canceled from 1 second to less than 30 seconds after the time of order receipt; (25) The cumulative number of shares of orders canceled from 30 seconds to less than 60 seconds after the time of order receipt; (26) The cumulative number of shares of orders canceled from 60 seconds to less than 5 minutes after the time of order receipt; (27) The cumulative number of shares of orders canceled from 5 minutes to 30 minutes; (28) The share-weighted average realized spread for executions of orders; (29) Original Percentage Hidden—the received share-weighted average percentage of shares not displayable as of order receipt; (30) Final Percentage Hidden—the received share-weighted average percentage of shares not displayed prior to final order execution or cancellation; (31) Quoted Size at the National Best Bid and National Best Offer -the share weighted average of the consolidated quoted size at the inside price at the time of order execution; (32) Share-weighted average NBBO Spread at the time of order execution; and (33) Share-weighted average BBO Spread of reporting exchange at the time of order execution. b. For market orders and marketable limit orders, except those noted as excluded: (1) The share-weighted average effective spread for executions of orders; (2) The cumulative number of shares of orders executed with price improvement; (3) For shares executed with price improvement, the share-weighted average amount per share that prices were improved; (4) For shares executed with price improvement, the share-weighted average period from the time of order receipt to the time of order execution; (5) The cumulative number of shares of orders executed at the quote; (6) For shares executed at the quote, the share-weighted average period from the time of order receipt to the time of order execution; (7) The cumulative number of shares of orders executed outside the quote; E:\FR\FM\13MYN2.SGM 13MYN2 mstockstill on DSK4VPTVN1PROD with NOTICES2 Federal Register / Vol. 80, No. 92 / Wednesday, May 13, 2015 / Notices (8) For shares executed outside the quote, the share-weighted average amount per share that prices were outside the quote; and (9) For shares executed outside the quote, the share-weighted average period from the time of order receipt to the time of order execution. II. Market and Marketable Limit Order Data—The following columns of information with respect to Market Orders and nonbooked portions of Marketable Limit Orders: a. Exchange code or trading center identifier; b. Ticker Symbol; c. Date; d. Time of order receipt; e. Order Type; f. Order Size in Shares; g. Order side- ‘‘B’’, ‘‘S’’ (including sell short exempt), ‘‘SS’’; h. Order price (if marketable limit); i. NBBO quoted price; j. NBBO quoted depth in lots; k. Receiving market offer for buy or bid for sell (as applicable); l. Receiving market depth (offer for buy and bid for sell) (as applicable); m. ISO flag (Y/N); n. Retail Investor Order flag (Y/N); o. Routable flag (Y/N); p. IOC (Y/N); q. Indicator for quote leader- ‘‘1’’ if the receiving market is the first market to post the NBB for a sell or NBO for a buy (as applicable); r. Average execution price-share-weighted average that includes only executions on the receiving market; s. Average execution time-share-weighted average period that includes only executions on the receiving market; t. Executed shares-the number of shares in the order that are executed; u. Canceled shares—the number of shares in the order that are canceled; v. Routed shares-the number of shares in the order that are routed to another exchange or market; w. Routed average execution price-shareweighted average that includes only shares routed away from the receiving market; x. Average routed execution time-shareweighted average period that includes only executions on the routed markets; and y. Indicator for special handling instructions (for example, slide, discretion, eligible counterparty, minimum quantity)identifies orders that contain instructions that could result in delayed execution or an execution price other than the quote. III. Daily Market Maker Registration Statistics—Each Participant that is a National Securities Exchange will collect daily Market Maker registration statistics categorized by security, including the following columns of information: a. Ticker Symbol; b. SRO; c. Number of registered market makers; and d. Number of other registered liquidity suppliers. IV. Daily Market Maker Participation Statistics—Each Participant will collect daily Market Maker participation statistics with respect to each Market Maker engaging in trading activity on the trading center VerDate Sep<11>2014 20:08 May 12, 2015 Jkt 235001 operated by the Participant. With respect to each Market Maker, the Participant will collect such statistics irrespective of whether the Market Maker is registered with the Participant. The participation statistics will be categorized by security, including the columns of information listed below, except that a Participant that is a national securities association will not be required to collect such statistics unless a Market Maker registers with its Alternative Display Facility prior to or during the Pilot Period: a. Ticker Symbol; b. Share participation—the number of shares purchased or sold by Market Makers in a principal trade, not including riskless principal. When aggregating across Market Makers, share participation will be an executed share-weighted average per Market Maker; c. Trade participation—the number of purchases and sales by Market Makers in a principal trade, not including riskless principal. When aggregating across Market Makers, trade participation will be a tradeweighted average per Market Maker; d. Cross-quote share (trade) participationthe number of shares purchased (the number of purchases) at or above the NBO and the number of shares sold (the number of sales) at or below the NBB at the time of the trade; e. Inside-the-quote share (trade) participation-the number of shares purchased (the number of purchases) and the number of shares sold (the number of sales) between the NBBO at the time of the trade; f. At-the-quote share (trade) participationthe number of shares purchased (the number of purchases) that are equal to the National Best Bid price and the number of shares sold (the number of sales) that are equal to the National Best Offer price at the time of or immediately before the trade. In the case of a downward moving National Best Bid or Offer, the National Best Bid or National Best Offer price immediately before the trade will be used; and g. Outside-the-quote share (trade) participation-the number of shares purchased (the number of purchases) that are less than the National Best Bid price and the number of shares sold (the number of sales) that are greater than the National Best Offer price at the time of or immediately before the trade. In the case of a downward moving National Best Bid or Offer, the National Best Bid or National Best Offer price immediately before the trade will be used. Appendix C—Data Collected by Market Makers Each Participant that is the Designated Examining Authority of a Market Maker will require such Market Maker to collect the data described in Item I with respect to orders and executions in Pilot Securities on any trading center and to transmit such data in a pipe delimited format to the Designated Examining Authority on a monthly basis, to be provided within 30 calendar days following month end. Data will only be collected with respect to those orders and executions occurring during Regular Trading Hours. The data will be provided for dates starting six months prior to the Pilot Period through six months after the end of the Pilot PO 00000 Frm 00041 Fmt 4701 Sfmt 9990 27553 Period. Each Designated Examining Authority will be responsible for aggregating the data provided by the Market Makers under Item I and providing the data described in Item II in a pipe delimited format to the SEC. I. Market Maker Profitability—Daily Market Maker profitability statistics categorized by security, including the following columns of information: a. Total number of shares of orders executed by the Market Maker; b. Raw Market Maker realized trading profits—the difference between the market value of Market Maker sales (shares sold x price) and the market value of Market Maker purchases (shares purchased x price). A LIFO-like method will be used for determining which share prices to use in the calculation; and c. [Market Maker realized trading profits net of fees and rebates—realized trading profits plus rebates the Market Maker collects from trading on that day minus access fees the Market Maker pays for trading on that day (if estimated before allocation of rebates and fees, use expected rebates and fees); and] [d.] Raw Market Maker unrealized trading profits—the difference between the purchase or sale price of the end-of-day inventory position of the Market Maker and the Closing Price. In case of a short position, the Closing Price from the sale will be subtracted. In the case of a long position, the purchase price will be subtracted from the Closing Price. II. Aggregated Market Maker Profitability— Total Daily Market Maker profitability statistics categorized by security as well as categorized by the Control Group and each Test Group, including the following columns of information: a. Total Raw Market Maker realized trading profits—the difference between the market value of Market Maker sales (shares sold x price) and the market value of Market Maker purchases (shares purchased x price). A LIFO-like method will be used for determining which share prices to use in the calculation; b. Volume-weighted average of Raw Market Maker realized trading profits; [c. Total Market Maker realized trading profits net of fees and rebates—realized trading profits plus rebates the Market Maker collects from trading on that day minus access fees the Market Maker pays for trading on that day (if estimated before allocation of rebates and fees, use expected rebates and fees); d. Volume-weighted average of Market Maker realized trading profits net of fees and rebates;] c.[e.] Total Raw Market Maker unrealized trading profits—the difference between the purchase or sale price of the end-of-day inventory position of the Market Maker and the Closing Price. In case of a short position, the Closing Price from the sale will be subtracted. In the case of a long position, the purchase price will be subtracted from the Closing Price; and d.[f.] Volume-weighted average of Market Maker unrealized trading profits. [FR Doc. 2015–11425 Filed 5–12–15; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\13MYN2.SGM 13MYN2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 80, Number 92 (Wednesday, May 13, 2015)]
[Notices]
[Pages 27513-27553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-11425]



[[Page 27513]]

Vol. 80

Wednesday,

No. 92

May 13, 2015

Part III





Securities and Exchange Commission





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Joint Industry Plans; Notice

Federal Register / Vol. 80 , No. 92 / Wednesday, May 13, 2015 / 
Notices

[[Page 27514]]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74892; File No. 4-657]


Joint Industry Plans; Order Approving the National Market System 
Plan To Implement a Tick Size Pilot Program by BATS Exchange, Inc., 
BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA Exchange, 
Inc., EDGX Exchange, Inc., Financial Industry Regulatory Authority, 
Inc., NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, The Nasdaq Stock Market 
LLC, New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc., as 
Modified by the Commission, for a Two-Year Period

May 6, 2015.

I. Introduction

    On August 25, 2014, NYSE Group, Inc., on behalf of BATS Exchange, 
Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., EDGA 
Exchange, Inc., EDGX Exchange, Inc., Financial Industry Regulatory 
Authority, Inc. (``FINRA''), NASDAQ OMX BX, Inc., NASDAQ OMX PHLX LLC, 
the Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, 
and NYSE Arca, Inc., (collectively ``SROs'' or ``Participants''), filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 11A of the Securities Exchange Act of 1934 (``Act''),\1\ and 
Rule 608 thereunder,\2\ a proposed national market system (``NMS'') 
Plan to Implement a Tick Size Pilot Program on a one-year basis (``NMS 
plan'').\3\ The Participants filed the NMS plan to comply with an order 
issued by the Commission on June 24, 2014 (``June 2014 Order'').\4\ The 
NMS plan, which included the details of Participants' proposal of the 
Tick Size Pilot Program (``Tick Size Pilot''), was published for 
comment in the Federal Register on November 7, 2014.\5\ The Commission 
received 77 comment letters in response to the NMS plan.\6\ On

[[Page 27515]]

February 26, 2015, the Commission extended the deadline for Commission 
action on the NMS plan and designated May 6, 2015 as the new date by 
which the Commission would be required to take action.\7\ This order 
approves the NMS plan, as modified by the Commission, for a two-year 
period. A copy of the NMS plan, as modified by the Commission, is 
attached as Exhibit A hereto.
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    \1\ 15 U.S.C. 78k-1.
    \2\ 17 CFR 242.608.
    \3\ See Letter from Brendon J. Weiss, Vice President, 
Intercontinental Exchange, Inc., to Secretary, Commission, dated 
August 25, 2014.
    \4\ See Securities Exchange Act Release No. 72460 (June 24, 
2014), 79 FR 36840 (June 30, 2014).
    \5\ See Securities and Exchange Act Release No. 73511 (November 
3, 2014), 79 FR 66423 (``Notice'').
    \6\ See Letters from John Richardson, dated August 26, 2014 
(``Richardson Letter''); Arthur T. Ling, dated August 26, 2014 
(``Ling Letter''); Dan Blecha, dated August 26, 2014 (``Blecha 
Letter''); Tom Sosnoff, dated August 27, 2014 (``Sosnoff Letter''); 
Michael Choffy, dated August 28, 2014 (``Choffy Letter''); Joseph 
Runsdorf, dated August 29, 2014 (``Runsdorf Letter''); Tony J. 
Gagliano, dated September 1, 2014 (``Gagliano Letter I''); Howard L. 
Greenblatt, dated September 2, 2014 (``Greenblatt Letter''); Ernest 
Callipari, dated September 2, 2014 (``Callipari Letter''); Ali 
Bangura, dated September 3, 2014 (``Bangura Letter''); Tony J. 
Gagliano, dated September 3, 2014 (``Gagliano Letter II''); Theodore 
R. Lazo, Managing Director and Associate General Counsel of 
Securities Industry and Financial Markets Association (``SIFMA''), 
dated September 9, 2014 (``SIFMA Letter I''); John C. Nagel, 
Managing Director and Sr. Deputy General Counsel of Citadel, LLC, 
dated September 12, 2014 (``Citadel Letter I''); Christopher Nagy, 
CEO, and Dave Lauer, President, KOR Group LLC, dated September 15, 
2014 (``KOR Letter I''); Stuart J. Kaswell, Executive Vice President 
& Managing Director, General Counsel of Managed Funds Association, 
dated September 20, 2014 (``MFA Letter I''); John Daley, Chairman of 
the Board and James Toes, President & CEO of Security Traders 
Association, dated September 23, 2014 (``STA Letter I''); Brian A. 
Johnson, Executive Director for Research of Committee on Capital 
Markets Regulation, dated September 26, 2014 (``CMR Letter I''); 
Jeffrey P. Ricker, dated October 6, 2014 (``Ricker Letter''); David 
Adorney, Professional Equity Trader, dated November 11, 2014 
(``Adorney Letter''); Richard B. Gorelick, CEO of RGM Advisors, LLC, 
dated November 13, 2014 (``RGM Letter''); Representative Sean P. 
Duffy, U.S. House of Representatives, dated November 17, 2014 
(``Duffy Letter''); Joseph Galinskie, dated November 18, 2014 
(``Galinskie Letter''); Tom Quaadman, Vice President, U.S. Chamber 
of Commerce, Center for Capital Markets Competitiveness, dated 
November 20, 2014 (``CCMC Letter I''); David Shields, Vice Chairman 
& Co-CEO, Wellington Shields & Co., dated December 2, 2014 
(``Wellington Shields Letter''); Dave Weild, Chairman & CEO, 
IssuWorks, Inc., dated December 3, 2014 (``IssuWorks Letter''); Tim 
Quast, President, ModernNetworks IR, LLC, dated December 8, 2014 
(``ModernNetworks Letter''); Larry Tabb, Founder & CEO, Tabb Group, 
dated December 10, 2014 (``Tabb Letter''); John Endean, President, 
American Business Conference, dated December 12, 2014 (``ABC 
Letter''); Scott Kupor, Managing Partner, Andreessen Horowitz and 
Jeffrey M. Solomon, CEO Cowen and Company; Equity Capital Formation 
Task Force, dated December 18, 2014 (``ECFTF Letter''); Eduardo A. 
Repetto, Co-Chief Executive Officer and Co-Chief Investment Officer, 
Dimensional Fund Advisors, dated December 18, 2014 (``DFA Letter''); 
Sal Arnuk and Joseph Saluzzi, Partners and Co-Founders, Themis 
Trading, LLC, dated December 19, 2014 (``Themis Letter''); Simon D. 
Yates, CEO, Two Sigma Securities, LLC, dated December 19, 2014 
(``Two Sigma Letter''); Mortimer J. Buckley, Managing Director and 
Chief and Investment Officer, The Vanguard Group, Inc., dated 
December 19, 2014 (``Vanguard Letter''); Rob Flatley, CEO and Dave 
Weisberger, MD, Head of Market Structure Analysis, CoreOne 
Technologies LLC, submitted December 19, 2014 (``CoreOne Letter''); 
Alan F. Hill, CEO and William K. Jones, Executive Chairman, 
JonesTrading Institutional Services LLC, dated December 19, 2014 
(``JonesTrading Letter''); R. Glenn Hubbard, Co-Chair, John L. 
Thornton, Co-Chair and Hal S. Scott, Director, Committee on Capital 
Markets Regulation, dated December 19, 2014 (``CMR Letter II''); 
John Daley, Chairman of the Board and James Toes, President & CEO, 
Security Traders Association, dated December 19, 2014 (``STA Letter 
II''); John McCarthy, General Counsel, KCG Holdings, Inc., dated 
December 19, 2014 (``KCG Letter''); Douglas A. Cifu, Chief Executive 
Officer, Virtu Financial, dated December 19, 2014 (``Virtu 
Letter''); E. Cartier Esham, Executive Vice President, Emerging 
Companies, Biotechnology Industry Organization, dated December 22, 
2014 (``BIO Letter''); Micah Hauptman, Financial Services Counsel, 
Consumer Federation of America, dated December 22, 2014 (``CFA 
Letter''); Bobby Franklin, President & CEO, National Venture Capital 
Association, dated December 22, 2014 (``NVCA Letter''); Eric 
Swanson, General Counsel and Secretary, BATS Global Markets, Inc. 
dated December 22, 2014 (``BATS Letter''); Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA, dated 
December 22, 2014 (``SIFMA Letter II''); Daniel G. Weaver, Ph.D., 
Professor of Finance, Director, Master of Financial Analysis 
Program, Associate Director, Whitcomb Center for Research in 
Financial Services, Rutgers, The State University of New Jersey, 
dated December 22, 2014 (``Weaver Letter''); Stuart J. Kaswell, 
Executive Vice President & Managing Director, General Counsel, 
Managed Funds Association, dated December 22, 2014 (``MFA Letter 
II''); Kurt N. Schacht, Managing Director and James C. Allen, Head, 
CFA Institute, dated December 22, 2014 (``CFA Institute Letter''); 
Robert J. McCarthy, Director of Regulatory Policy, Wells Fargo 
Advisors, LLC, dated December 22, 2014 (``Wells Fargo Letter''); 
Daniel Keegan, Managing Director, Head of Equities for the Americas, 
Citigroup Global Markets Inc., dated December 22, 2014 (``Citigroup 
Letter''); Richie Prager, Managing Director; Hubert DeJesus, 
Managing Director; Supurna Vedbrat, Managing Director; Joanne 
Medero, Managing Director, BlackRock, Inc., dated December 22, 2014 
(``BlackRock Letter''); Adam Sussman, Head of Market Structure, 
Liquidnet, Inc., dated December 22, 2014 (``Liquidnet Letter''); 
Manisha Kimmel, Managing Director, Financial Information Forum, 
dated December 22, 2014 (``FIF Letter''); Tom Quaadman, Vice 
President, U.S. Chamber of Commerce, Center for Capital Markets 
Competitiveness, dated December 22, 2014 (``CCMC Letter II''); Ari 
Burstein, Senior Counsel, Investment Company Institute, dated 
December 22, 2014 (``ICI Letter''); Jeff Brown, Senior Vice 
President, Legislative and Regulatory Affairs, Charles Schwab & Co., 
Inc., dated December 22, 2014 (``Schwab Letter''); Kimberly Unger, 
CEO and Executive Director, Security Traders Association of New 
York, dated December 22, 2014 (``STANY Letter''); Scott C. Goebel, 
Senior Vice President & General Counsel, Fidelity Management & 
Research Co., dated December 22, 2014 (``Fidelity Letter''); Dennis 
Dick, CFA, Head, Equity Market Structure, Bright Trading LLC, dated 
December 22, 2014 (``Bright Trading Letter''); Raymond M. Tierney 
III, President and Chief Executive Officer, Gary Stone, Chief 
Strategy Officer, Bloomberg Tradebook LLC dated December 22, 2014 
(``Bloomberg Letter''); Mao Ye, Assistant Professor of Finance, 
University of Illinois, Urbana-Champaign, dated December 22, 2014 
(``Ye Letter''); Paul J. Jiganti, Managing Director, Market 
Structure and Client Advocacy and John S. Markle, Deputy General 
Counsel--Retail and Clearing Operations, TD Ameritrade, Inc., dated 
December 22, 2014 (``TD Ameritrade Letter''); James J. Angel, Ph.D., 
CFA, Associate Professor of Finance, Georgetown University dated 
December 22, 2014 (``Angel Letter''); Christopher Nagy and Dave 
Lauer, KOR Group, LLC dated December 22, 2014 (``KOR Letter II''); 
James G. Ongena, General Counsel, Chicago Stock Exchange, Inc., 
dated December 22, 2014 (``CHX Letter''); Andrew Stevens, General 
Counsel, IMC Financial Markets, dated December 30, 2014 (``IMC 
Letter''); Michael Jacejko, Chief Executive Manager, Birch Bay 
Capital, LLC, dated December 31, 2014 (``Birch Bay Letter''); James 
P. Selway III, Managing Director, Head of Electronic Brokerage, ITG 
Inc., dated January 5, 2015 (``ITG Letter''); John C. Nagel, 
Managing Director & Sr. Deputy General Counsel, Citadel LLC, dated 
January 5, 2015 (``Citadel Letter II''); Thomas Wittman, Executive 
Vice President, The NASDAQ OMX Group, LLC, dated January 16, 2015 
(``Nasdaq Letter''); Brendon J. Weiss, Co-Head Government Affairs, 
NYSE, LLC, dated January 16, 2015 (``NYSE Letter''); Senators Mark 
R. Warner and Pat Toomey, The United States Senate, dated January 
23, 2015 (``Warner-Toomey Letter''); Daniel Zinn, General Counsel, 
OTC Markets Group Inc., dated February 24, 2015 (``OTC Markets 
Letter''); Jared Albert, dated March 10, 2015 (``Albert Letter''); 
Representative Juan Vargas, U.S. House of Representatives, dated 
March 27, 2015 (``Vargas Letter''); and Atsushi Saito, Director and 
Representative Executive Officer, Group CEO, Japan Exchange Group, 
Inc., received April 17, 2015 (``Saito Letter''). The Commission 
received two comment letters after the June 2014 Order was issued 
and before the proposed NMS plan was submitted. These comment 
letters are included in the comment file with the other comment 
letters received in response to the NMS plan. See also Letters from 
Shawn Leary, dated August 24, 2014 (``Leary Letter''); and Tony 
BenBrahim, dated August 24, 2014 (``BenBrahim Letter'').
    \7\ See Securities and Exchange Act Release No. 74388, 80 FR 
12054 (March 5, 2015).
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II. Background

    Since the inception of decimalization \8\ in 2001, there has been a 
significant shift in the nature of trading, the structure of the 
markets, and the roles of market participants. In the context of 
decimalization, market participants and others have raised concerns 
that the shift to quoting and trading in the one penny minimum price 
variation may have had a detrimental impact on the market quality for 
securities of small and middle capitalization companies. For example, a 
few studies issued after the implementation of decimalization raised 
questions regarding whether decimalization has reduced incentives for 
underwriters to pursue public offerings of smaller companies, limited 
the production of sell-side research for small and middle 
capitalization companies and made it less attractive to become a market 
maker in the shares for smaller companies.\9\
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    \8\ Decimalization refers to setting the tick size at penny 
increments. A tick is the minimum pricing increment that can be used 
to trade securities. Prior to 2001, securities in the U.S. equity 
markets were generally quoted and traded in fractional tick sizes, 
ranging from $1/32 or $1/64 for low-priced securities to $1/8 or $1/
4 for higher-priced securities.
    \9\ See June 2014 Order, supra note 4, for a complete discussion 
of the background on decimalization.
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    In 2012, the Jumpstart Our Business Startups Act (``JOBS Act'') 
\10\ directed the Commission to conduct a study and report to Congress 
on how decimalization affected the number of initial public offerings 
(``IPOs''), and the liquidity and trading of securities of smaller 
capitalization companies.\11\ The JOBS Act also provided that the 
Commission could, by rule, designate a minimum increment for the 
securities of emerging growth companies \12\ that is greater than $0.01 
but less than $0.10 for use in all quoting and trading of securities in 
any exchange or other execution venue, if the Commission determined 
that such securities should be quoted and traded using a minimum 
increment of greater than $0.01.\13\
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    \10\ Jumpstart Our Business Startups Act, Pub. L. 112-106, 126 
Stat. 306 (2012).
    \11\ Section 106(b) of the JOBS Act. 15 U.S.C. 78k-1(c)(6).
    \12\ An ``emerging growth company'' is defined in the Securities 
Act of 1933 (``Securities Act'') and the Act as an issuer with total 
annual gross revenues of less than $1 billion during its most 
recently completed fiscal year. See Section 2(a)(19) of the 
Securities Act and Section 3(a)(80) of the Act.
    \13\ Id.
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    The Commission submitted the staff study to Congress in July 2012 
(``Decimalization Report'').\14\ The Decimalization Report did not 
reach any firm conclusions about the impact of decimalization on the 
number of IPOs or the liquidity and trading of the securities of small 
capitalization companies.\15\ However, based on the information 
considered in the Decimalization Report, staff recommended that ``[t]he 
Commission should not proceed with the specific rulemaking to increase 
tick sizes, as provided for in Section 106(b) of the JOBS Act, but 
should consider additional steps that may be needed to determine 
whether rulemaking should be undertaken in the future.'' \16\ The 
Decimalization Report suggested a public roundtable, where 
recommendations could be presented on a pilot program that would 
generate data to allow the Commission to further assess 
decimalization's impact.
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    \14\ Report to Congress on Decimalization (July 2012) available 
at https://www.sec.gov/news/studies/2012/decimalization-072012.pdf.
    \15\ See Decimalization Report supra note 13. See also June 2014 
Order supra note 4 (describing the Decimalization Report).
    \16\ Id.
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    The Commission staff convened a Decimalization Roundtable, in 
February 2013, with broad participation from market participants, 
academics and others, including an issuer representative. Many 
panelists believed that factors other than decimalization were more 
significant contributors to the decline of IPOs in recent years. 
Although participants offered diverging views on the likely outcome of 
any increase in the minimum tick size, there was broad support among 
the panelists for the Commission to conduct a pilot program to gather 
further information, particularly with respect to the impact of wider 
tick sizes on liquidity in the securities of small capitalization 
companies. Some panelists, however, expressed concern about the 
potential costs to investors of wider minimum tick sizes.\17\
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    \17\ Information about the Decimalization Roundtable, including 
the transcript, comment letters and list of panelists is available 
at https://www.sec.gov/spotlight/decimalization.shtml.
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    In June 2014, the Commission issued the June 2014 Order, pursuant 
to Section 11A(a)(3)(B) of the Act,\18\ directing the Participants to 
act jointly in developing and filing with the Commission an NMS plan to 
implement a pilot program that, among other things, would widen the 
quoting and trading increment for certain small capitalization 
stocks.\19\ The Commission issued the June 2014 Order to further study 
and assess the impact of decimalization on the securities of small 
capitalization companies. Pursuant to the June 2014 Order, on August 
25, 2014, the Participants filed the proposed NMS plan.\20\
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    \18\ 15 U.S.C. 78k-1(a)(3)(B).
    \19\ See June 2014 Order supra note 4.
    \20\ See NMS plan supra note 3.
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    As discussed in detail throughout this order, the Commission 
believes that the Tick Size Pilot, as reflected in the proposed NMS 
plan, and subject to the modifications prescribed by the Commission, 
should support further examination and analysis on the impact of tick 
sizes on the trading and liquidity of the securities of small 
capitalization companies. The Commission believes that altering tick 
sizes could result in significant market-wide benefits and improvements 
to liquidity and capital formation. Yet, as discussed in detail below, 
these changes could also impose costs, including on investors resulting 
from larger spreads. Because of the potential significance of the 
benefits and costs, as well as the uncertainty that currently exists 
about the likely outcome of changing tick sizes, the Commission 
believes it is appropriate to test these important issues in a way that 
can produce robust results that informs future policy making. The Tick 
Size Pilot is therefore, by design, an objective, data-driven test that 
is designed to evaluate how a wider tick size would impact trading, 
liquidity, and market quality of securities of smaller capitalization 
companies. The Commission believes that the Tick Size Pilot, as now 
constructed, is necessary to provide for a test that can produce robust 
results that will allow the Commission to effectively test the 
potential benefits and costs of permanently changing tick sizes for 
smaller capitalization stocks.

[[Page 27516]]

    The Commission believes that the potential magnitude of the 
benefits that would be revealed by the Tick Size Pilot justify the 
costs of running these tests. The effect of wider tick sizes for small 
capitalization stocks on trading, liquidity, and market quality is not 
clear and the Tick Size Pilot will provide data to analyze any such 
effects. A wider tick size for small capitalization stocks may change 
the composition of market participants for these stocks as well as the 
behavior of market participants. The wider tick size may incentivize 
market makers to increase their market making activities in these 
stocks. This, in turn, may attract more investors and with increased 
interest in those stocks, trading activity may increase, which may also 
improve liquidity and market quality. There are many interconnected 
dimensions to trading, liquidity, and market quality. If a wider tick 
size leads to more active market making and attracts more investors to 
small capitalization stocks, we may observe positive effects on 
trading, liquidity, and market quality as measured by metrics such as 
trading volume, displayed depth, effective spreads, or execution costs 
for small and large trades.
    Improved liquidity and market quality would be desirable for any 
stock, but would be particularly beneficial for small capitalization 
stocks because these stocks tend to be difficult and/or expensive to 
trade, which may discourage investment. Were there to be improved 
liquidity, investors and issuers would benefit. Investors would benefit 
because it would be easier and less expensive for them to trade in 
these stocks. Issuers would benefit from improved liquidity and market 
quality in two ways. First, more trading activity and investor 
attention may make an issuer's stock more attractive, which may reduce 
the company's cost of capital as well as increase their opportunities 
to raise capital. Second, improved liquidity may reduce an issuer's 
cost of capital because stocks with higher liquidity tend to have lower 
cost of capital. Consequently, improved liquidity may reduce liquidity 
risk and translate into lower cost of capital.\21\ We expect these 
benefits would manifest during the Pilot Period if they are in fact 
present.
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    \21\ See, e.g., Amihud, Y., Mendelson, H., Asset pricing and the 
bid-ask spread, 17 Journal of Financial Economics 223, (1986); 
Easley, D., Hvidkjaer, S. O'Hara, M., Is Information Risk a 
Determinant of Asset Returns?, 57 Journal of Finance 2185 (2002); 
Easley, D., O'Hara, M., Information and the Cost of Capital, 59 
Journal of Finance 1553 (2004); Acharya, V., Pedersen, L., Asset 
Pricing with Liquidity Risk, 77 Journal of Financial Economics 375 
(2005).
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    The Commission, however, recognizes that these benefits may not 
manifest in the manner or to the extent anticipated. And, as noted 
above, we cannot know in advance the full effects, whether they be 
positive or negative, of a wider tick size on the market behavior of 
market participants in response to the Tick Size Pilot. As discussed in 
detail below, the Commission has seriously considered the concerns 
about costs that implementation of the Tick Size Pilot would create for 
market participants and the complexity of the Tick Size Pilot, and has 
tried to mitigate both where possible without undermining the 
objectives of the Tick Size Pilot. The Commission nevertheless believes 
that incurring the costs of the Tick Size Pilot is appropriate in these 
circumstances. The Tick Size Pilot will provide the Commission and 
interested parties with real-world data regarding the effect of wider 
tick sizes on trading, liquidity and market quality for small-
capitalization companies, and this empirical data will inform analyses 
and potential future regulatory actions to, among other things, capture 
any benefits from wider tick sizes on a permanent basis.\22\
---------------------------------------------------------------------------

    \22\ The Commission notes that certain commenters believed that 
the Tick Size Pilot could provide valuable data and should be 
studied notwithstanding its potential costs. See Tabb Letter at 8; 
CFA Institute Letter at 2; CHX Letter at 17; Nasdaq Letter at 5-6; 
and NYSE Letter at 3.
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    Therefore, the Commission finds that the NMS plan is necessary or 
appropriate in the public interest, for the protection of investors and 
the maintenance of fair and orderly markets, to remove impediments to, 
and perfect the mechanism of, a national market system, or otherwise in 
furtherance of the purposes of the Act.

III. Description of the Proposed NMS Plan and the Tick Size Pilot

    The NMS plan filed by the Participants contained provisions to 
implement the Tick Size Pilot,\23\ including provisions related to the 
administration and operation of the Tick Size Pilot, the data to be 
collected and made public, and the specific assessments to be conducted 
by the Participants. In this section, the proposed NMS plan is 
described, and further below there is discussion and analysis of the 
comments received and the NMS plan, as approved with Commission 
modifications.
---------------------------------------------------------------------------

    \23\ See NMS plan supra note 3.
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A. Criteria for Pilot Securities

    Section V of the NMS plan sets forth five criteria for selection of 
NMS common stocks \24\ that would be included in the Tick Size Pilot 
(``Pilot Securities''). The five criteria for determining the Pilot 
Securities are: (1) a market capitalization \25\ of $5 billion or less 
on the last day of the Measurement Period; \26\ (2) a Closing Price 
\27\ of at least $2.00 on the last day of the Measurement Period; (3) a 
Closing Price on every U.S. trading day during the Measurement Period 
that is not less than $1.50; (4) a Consolidated Average Daily Volume 
(``CADV'') \28\ during the Measurement Period of one million shares or 
less; and (5) a Measurement Period Volume-Weighted Average Price 
(``VWAP'') \29\ of at least $2.00. Further, the Participants proposed 
that an NMS

[[Page 27517]]

common stock for an issuer that had its IPO within 6 months of the 
start of the Pilot Period would not be eligible to be a Pilot Security.
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    \24\ The NMS plan defines NMS common stock as an NMS stock that 
is common stock of an operating company. See NMS plan Section 
(I)(Q). NMS stock means any NMS security other than an option. See 
17 CFR 242.600(b)(47). NMS security means any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options. See 17 CFR 242.600(b)(46).
    \25\ The NMS plan calculates market capitalization by 
multiplying the total number of shares outstanding on such day by 
the Closing Price of the security on such date. See NMS plan Section 
(V)(A)(1).
    \26\ The NMS plan defines Measurement Period as the U.S. trading 
days during the three calendar month period ending at least 30 days 
prior to the effective date of the Pilot Period. See NMS plan 
Section (I)(N). The NMS plan defines Pilot Period as the operative 
period of the Tick Size Pilot, lasting one year from the date of 
implementation. See NMS plan Section (I)(U). As discussed further 
below, in response to comments and after additional consideration, 
the Commission has modified the market capitalization threshold to 
lower it to $3 billion or less. In addition, as discussed further 
below, in response to comments and after additional consideration, 
the Commission has modified the definition of Pilot Period to extend 
the duration of the Tick Size Pilot to two years. See infra Section 
V.B.
    \27\ The NMS plan defines Closing Price as the closing auction 
price on the primary listing exchange or if not available, the last 
regular-way trade reported by the processor prior to 4:00 p.m. ET. 
See NMS plan Section (I)(H). The NMS plan defines processor as the 
single plan processor responsible for the consolidation of 
information for an NMS stock pursuant to Rule 603(b) of Regulation 
NMS. See NMS plan Section (I)(Y).
    \28\ The NMS plan calculates CADV by adding the single-counted 
share volume of all reported transactions in the Pilot Security 
during the Measurement Period and dividing by the total number of 
U.S. trading days during the Measurement Period. See NMS plan 
Section (V)(A)(4).
    \29\ The NMS plan calculates the Measurement Period VWAP by 
calculating the volume-weighted average price for each U.S. trading 
day during the Measurement Period, summing the daily volume-weighted 
average price across the Measurement Period, and dividing by the 
total number of U.S. trading days during the Measurement Period. See 
NMS plan Section (V)(A)(5).
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B. Assignment of Pilot Securities

    As proposed in the NMS plan, the Tick Size Pilot would consist of 
three Test Groups, with each Test Group consisting of 400 Pilot 
Securities. The Pilot Securities that are not placed in the Test Groups 
would be placed in the Control Group.
    The Operating Committee \30\ of the NMS plan would oversee the 
process of assigning the Pilot Securities into the Control Group and 
the three Test Groups. First, the Pilot Securities would be placed into 
a maximum of 27 categories by means of a stratified random sampling 
process. Each Pilot Security would be categorized as: (1) low, medium, 
or high share price based on the Measurement Period VWAP; (2) low, 
medium, or high market capitalization based on the last day of the 
Measurement Period; and (3) low, medium, or high trading volume based 
on the CADV during the Measurement Period. Each category (share price, 
market capitalization, trading volume) would then be divided into three 
sub-categories, each containing a third of the securities in the 
category. This process would yield 27 categories. However, if a single 
category contained fewer than ten securities, such category would be 
combined with another category that contains at least ten securities. 
If two or more categories contained fewer than ten securities each, 
those categories would be combined, provided that the combined category 
contains at least ten securities. If the combined category contains 
fewer than ten securities, then such category would be combined with 
another of the 27 categories that contains at least ten securities.
---------------------------------------------------------------------------

    \30\ See NMS plan Section (III)(C) on the composition of the 
Operating Committee. Each Participant will have one individual staff 
member to represent the Participant on the Operating Committee.
---------------------------------------------------------------------------

    After the categories are finalized, the Pilot Securities would then 
be randomly selected from each category to be included in the three 
Test Groups, based on the percentage of Pilot Securities in such 
category. Each category would be represented in all three Test Groups 
based on the category's relative proportion to the population of Pilot 
Securities. Similarly, a primary listing exchange's securities would be 
selected from each category and included in the three Test Groups.
    Each primary listing exchange would, free of charge, make publicly 
available on its Web site the list of Pilot Securities that are listed 
on such exchange and that are included in the Control Group and Test 
Groups. Appendix A to the NMS plan provides the specific details about 
the data that each exchange would make available on its Web site to 
identify the Pilot Securities.

C. Control Group and Test Groups

    As noted above, the Tick Size Pilot would contain a Control Group 
and three Test Groups, each of which has incrementally different 
quoting and trading requirements.
1. Control Group
    Pilot Securities in the Control Group would continue to be quoted 
and traded at any price increment currently permitted.
2. Test Group One: Widened Quote Increment
    Pilot Securities in Test Group One would have a quoting increment 
of $0.05 but could continue to trade at any currently permitted price 
increment. The Participants would be required to adopt rules that would 
prohibit the Participants or any member of a Participant from 
displaying, ranking, or accepting from any person any displayable or 
non-displayable bids or offers, orders, or indications of interest in 
increments other than $0.05. Orders priced to execute based on the 
midpoint and orders entered in a Participant-operated retail liquidity 
program \31\ could be ranked and accepted in increments of less than 
$0.05.
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    \31\ See NASDAQ OMX BX Rule 4780; BATS Y Rule 11.24; NYSE Rule 
107C; NYSE MKT--Equities Rule 107C and NYSE Arca Equities Rule 7.44.
---------------------------------------------------------------------------

3. Test Group Two: Widened Quote and Trade Increment
    Pilot Securities in Test Group Two would have the same quoting 
increment as Test Group One ($0.05) along with the applicable quoting 
exceptions, but could only be traded in $0.05 minimum increments. The 
Participants would be required to adopt rules that prohibit trading 
centers operated by the Participants and members of the Participants 
from executing orders in any Pilot Security in Test Group Two in price 
increments other than $0.05. The $0.05 trading increment would apply to 
all trades, including brokered cross trades, absent an exception.
    Three exceptions to the $0.05 trading increment would be 
applicable. First, trading could occur at the midpoint of the National 
Best Bid (``NBB'') and the National Best Offer (``NBO'' and together 
with NBB, ``NBBO''),\32\ or the midpoint of the best protected bid and 
the best protected offer.\33\ Second, Retail Investor Orders \34\ could 
be executed with price improvement of at least $0.005 better than the 
best protected bid or the best protected offer. Finally, Negotiated 
Trades \35\ could trade in increments less than $0.05.
---------------------------------------------------------------------------

    \32\ See 17 CFR 242.600(b)(42).
    \33\ See 17 CFR 242.600(b)(57).
    \34\ See NMS plan Section (I)(DD) (defining Retail Investor 
Order as ``an agency order or a riskless principal order originating 
from a natural person, provided that, prior to submission, no change 
is made to the terms of the order with respect to price or side of 
market and the order does not originate from a trading algorithm or 
any other computerized methodology. The Participant that is the DEA 
of a member of a Participant operating a trading center executing a 
Retail Investor Order will require such trading center to sign an 
attestation that substantially all orders to be executed as Retail 
Investor Orders will qualify as such under the [NMS] [p]lan'').
    \35\ See NMS plan Section (I)(P) (defining Negotiated Trades as 
``(i) a Benchmark trade, including, but not limited to, a VWAP trade 
or a Time-Weighted Average Price trade, provided that, if such trade 
is composed of two or more component trades, each component trade 
complies with the quoting and trading increment requirements of the 
[NMS] [p]lan, or with an exception to such requirements, or (ii) a 
Pilot Qualified Contingent Trade.''). The NMS plan defines a 
Benchmark trade as ``the execution of an order at a price that was 
not based, directly or indirectly, on the quoted price of a Pilot 
Security at the time of execution and for which the material terms 
were not reasonably determinable at the time the commitment to 
execute the order was made.'' See NMS plan Section (I)(C). The NMS 
plan defines Pilot Qualified Contingent Trade as ``a transaction 
consisting of two or more component orders, executed as agent or 
principal, where: (1) at least one component order is in an NMS 
common stock; (2) all components are affected with a product or 
price contingency that either has been agreed to by the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent; (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time; (4) the 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined at the 
time the contingent order is placed; (5) the component orders bear a 
derivative relationship to one another, represent different classes 
of shares of the same issuer, or involve the securities of 
participants in mergers or with intentions to merge that have been 
announced or since canceled; and (6) the transaction is fully hedged 
(without regard to any prior existing position) as a result of the 
other components of the contingent trade.'' See NMS plan Section 
(I)(V).
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4. Test Group Three: Widened Quote and Trade Increment With a Trade-At 
Prohibition
    Pilot Securities in Test Group Three would be subject to the same 
quoting and trading increments as those in Test Group Two as well as 
the same exceptions. However, the trading of these securities would 
also be subject to a trade-at prohibition.\36\ The trade-at

[[Page 27518]]

prohibition, as defined under the NMS plan, would`` (1) prevent a 
trading center that was not quoting from price-matching protected 
quotations and (2) permit a trading center that was quoting at a 
protected quotation to execute orders at that level, but only up to the 
amount of its displayed size'' (``Trade-At Prohibition''). 
Specifically, the Participants would be required to adopt rules 
prohibiting trading centers operated by the Participants and members of 
the Participants from executing a sell order for a Pilot Security at 
the price of a protected bid, or from executing a buy order for a Pilot 
Security at the price of a protected offer, unless such executions fall 
within certain enumerated exceptions.
---------------------------------------------------------------------------

    \36\ A ``trade-at'' is defined under the NMS plan as an 
execution by a trading center of a sell order for a Pilot Security 
at the price of a protected bid or the execution of a buy order for 
a Pilot Security at the price of a protected offer. See NMS plan 
Section (I)(LL). As discussed further below, after additional 
consideration, the Commission modified the definition of trade-at to 
clarify that it applies during Regular Trading Hours. See infra 
Section V.D.4.
---------------------------------------------------------------------------

    The NMS plan contains thirteen exceptions to the Trade-At 
Prohibition. These exceptions describe when a trading center would be 
permitted to execute an order for a Pilot Security at a price equal to 
a protected bid or protected offer. The first exception would be for 
when an order is executed by a trading center that is displaying a 
quotation, via either a processor or an SRO quotation feed, at a price 
equal to the traded-at protected quotation, but only up to the trading 
center's full displayed size (``Size Limitation''). A further condition 
to this exception proposed by the Participants would limit trading 
centers' ability to execute an incoming order by requiring that 
executions occur on the venue where the protected quote was displayed. 
Specifically, the Participants proposed that where the quotation is 
displayed through a national securities exchange, the execution at the 
size of the order must occur against the displayed size on such 
national securities exchange (``Exchange Venue Limitation''). Where the 
quotation is displayed through the Alternative Display Facility 
(``ADF'') or another facility approved by the Commission that does not 
provide execution functionality, the execution of the order must occur 
against the displayed size in accordance with the rules of the ADF or 
such approved facility (``ADF Venue Limitation'' together with Exchange 
Venue Limitation, ``Venue Limitation'').\37\
---------------------------------------------------------------------------

    \37\ As discussed further below, in response to comments and 
after additional consideration, the Commission has modified the NMS 
plan to remove the Venue Limitation. See infra Section V.D.4.d.
---------------------------------------------------------------------------

    In addition, the NMS plan provides that Block Size orders \38\ and 
Retail Investor Orders executed with at least $0.005 price improvement 
would be excepted from the Trade-At Prohibition. These exceptions were 
also set forth in the June 2014 Order.
---------------------------------------------------------------------------

    \38\ See 17 CFR 242.600(b)(9). As discussed further below, in 
response to comments and after additional consideration, the 
Commission has modified the definition of Block Size for purposes of 
the Tick Size Pilot. See infra Section V.D.4.e.
---------------------------------------------------------------------------

    The next exceptions (numbers 4 through 12) are based on the 
exceptions that are found in Rule 611 of Regulation NMS.\39\ 
Specifically, the NMS plan provides that trading centers would be 
permitted to execute an order for a Pilot Security at a price equal to 
a protected bid or protected offer in the following situations: (1) 
when the trading center displaying the protected quotation that was 
traded-at was experiencing a failure, material delay, or malfunction of 
its systems or equipment; (2) when an order is executed as part of a 
transaction that was not a ``regular way'' contract; (3) when an order 
is executed as part of a single-priced opening, reopening, or closing 
transaction by the trading center; (4) when a protected bid was priced 
higher than a protected offer in the Pilot Security; (5) when an order 
is identified as an Intermarket Sweep Order; (6) when an order is 
executed by a trading center that simultaneously routed Trade-at 
Intermarket Sweep Orders \40\ to execute against the full displayed 
size of the protected quotation that was traded-at; (7) when the order 
is executed as part of a Negotiated Trade; (8) when the trading center 
displaying the protected quotation that was traded-at, had displayed, 
within one second prior to execution of the transaction that 
constituted the trade-at, a best bid or best offer, as applicable, for 
the Pilot Security with a price that was inferior to the price of the 
trade-at transaction; and (9) when the order executed by a trading 
center which, at the time of order receipt, the trading center had 
guaranteed an execution at no worse than a specified price (``stopped 
order'') where: (A) the stopped order was for the account of a 
customer; (B) the customer agreed to the specified price on an order-
by-order basis; and (C) the price of the trade-at transaction was, for 
a stopped buy order, equal to the NBB in the Pilot Security at the time 
of execution or, for a stopped sell order, equal to the NBO in the 
Pilot Security at the time of execution.
---------------------------------------------------------------------------

    \39\ 17 CFR 242.611.
    \40\ The NMS plan defines Trade-at Intermarket Sweep Orders as 
``a limit order for a Pilot Security that meets the following 
requirements: (1) When routed to a trading center, the limit order 
is identified as an Intermarket Sweep Order; and (2) Simultaneously 
with the routing of the limit order identified as an Intermarket 
Sweep Order, one or more additional limit orders, as necessary, are 
routed to execute against the full displayed size of any protected 
bid, in the case of a limit order to sell, or the full displayed 
size of any protected offer, in the case of a limit order to buy, 
for the Pilot Security with a price that is equal to the limit price 
of the lit order identified as an Intermarket Sweep Order. These 
additional routed orders also must be marked as Intermarket Sweep 
Orders.'' See NMS plan Section (I)(MM).
---------------------------------------------------------------------------

    Lastly, the NMS plan contains an exception for an order of a 
fractional share of a Pilot Security, provided that such fractional 
share order was not the result of breaking an order for one or more 
whole shares of a Pilot Security into orders for fractional shares or 
was not otherwise effected to evade the requirements of the Trade-At 
Prohibition or any other provisions of the Tick Size Pilot.

D. Collection and Assessment of Tick Size Pilot Data

1. Trading Center Data
    The Participants would be responsible for collecting data specified 
in Appendix B of the NMS plan, which generally includes daily market 
quality statistics, data on specific orders, and data on market makers 
\41\ (``Trading Center Data'').\42\ In addition, each Participant that 
is the Designated Examining Authority (``DEA'') \43\ of a member of a 
Participant operating a trading center would require such member to 
collect and provide to the DEA data related to daily market quality 
statistics and data related to specific orders consistent with the 
terms and conditions specified in Appendix B of the NMS plan. The 
Participants and each member of a Participant operating a trading 
center would also be required to collect such data for dates starting 
six months prior to the Pilot Period through six months after the end 
of the Pilot Period. Each Participant would make available to other 
Participants a list of members designated as market makers on that 
Participant's trading center.
---------------------------------------------------------------------------

    \41\ A ``market maker'' is defined under the NMS plan as ``a 
dealer registered with any self-regulatory organization, in 
accordance with the rules thereof, as (i) a market maker or (ii) a 
liquidity provider with an obligation to maintain continuous, two-
sided trading interest.'' See NMS plan Section (I)(L).
    \42\ See NMS plan Appendix B.
    \43\ A DEA is defined under the NMS plan as ``the self-
regulatory organization responsible for (i) examining such member 
for compliance with the financial responsibility requirements 
imposed by the Exchange Act, or by Commission or self-regulatory 
organization rules, (ii) receiving regulatory reports from such 
member, (iii) examining such member for compliance with, and 
enforcing compliance with, specified provisions of the Exchange Act, 
the rules and regulations thereunder, and self-regulatory 
organization rules, and (iv) carrying out any other specified 
regulatory functions with respect to such member.'' See NMS plan 
Section (I)(I).
---------------------------------------------------------------------------

    On a monthly basis, the Participants and the DEA for each member of 
a

[[Page 27519]]

Participant operating a trading center would make the specified Trading 
Center Data publicly available on their Web sites for free and would 
report such data to the Commission on a disaggregated basis by trading 
center. The publicly available data would not identify the trading 
center that generated the data.
2. Market Maker Profitability Data \44\
---------------------------------------------------------------------------

    \44\ As discussed further below, in response to comments and 
after additional consideration, the Commission has modified the 
Market Maker Profitability Data requirement. See infra Section 
V.E.2.
---------------------------------------------------------------------------

    Each Participant that is the DEA of a market maker would require 
such market maker to provide the DEA the data specified in Appendix C 
of the NMS plan regarding daily market maker trading profits with 
respect to the Pilot Securities on a monthly basis (``Market Maker 
Profitability Data''). Each market maker would also be required to 
provide to its DEA the Market Maker Profitability Data for dates 
starting six months prior to the Pilot Period through six months after 
the end of the Pilot Period. Moreover, on a monthly basis, the DEA 
would aggregate the Market Maker Profitability Data and make the 
aggregated data publicly available via the DEA's Web site for free, and 
report such data to the Commission. The publicly available data would 
not identify the market makers that generated the data.
3. Assessment of Tick Size Pilot Data
    The Participants proposed to provide to the Commission, and make 
publicly available, a joint assessment of the impact of the Tick Size 
Pilot, no later than six months after the end of the Pilot Period.\45\ 
As proposed, the assessment would include the statistical and economic 
impact of an increase in the quoting increment related to: (1) market 
quality, (2) the number of market makers, (3) market maker 
participation, and (4) market transparency.\46\ The assessment would 
also evaluate:
---------------------------------------------------------------------------

    \45\ As discussed further below, in response to comments and 
after additional consideration, the Commission has modified the NMS 
plan to require the assessment to be submitted to the Commission 18-
months after the implementation of the Tick Size Pilot. See infra 
Section V.E.3.
    \46\ As discussed further below, in response to comments and 
after additional consideration, the Commission has modified the NMS 
plan to require the Participants to conduct an assessment on market 
maker profitability. See infra Section V.E.3.
---------------------------------------------------------------------------

     whether any market capitalization, daily trading volume, 
or other thresholds can differentiate the results of the above 
assessment across stocks;
     the statistical and economic impact of the above 
assessments for the incremental impact of the trading increment and for 
the joint effect of an increase in both the quoting increment and the 
trading increment;
     the statistical and economic impact of the above 
assessments for the incremental impact of a Trade-At Prohibition and 
for the joint effect of an increase in the quoting increment, an 
increase in the trading increment, and a Trade-At Prohibition; and
     any other economic issues that Participants believe the 
Commission should consider in any rulemaking that may follow. The 
Participants may also individually submit to the Commission, and make 
publicly available, an additional supplemental assessment of the impact 
of the Tick Size Pilot.

E. Policies and Procedures

    Pursuant to the NMS plan, the Participants and members of 
Participants would be required to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to comply 
with the quoting and trading increments for the Pilot Securities. Each 
Participant would develop appropriate policies and procedures that 
provide for collecting and reporting to the Commission the Trading 
Center Data. Each Participant that is the DEA of a member of a 
Participant operating a trading center would require such member to 
develop appropriate policies and procedures for collecting and 
reporting the Trading Center Data to the DEA. Each Participant that is 
the DEA of a member of a Participant operating a trading center would 
develop appropriate policies and procedures for collecting and 
reporting the Trading Center Data to the Commission.
    Further, each Participant that is the DEA of a market maker would 
require such market maker to develop policies and procedures for 
collecting the Market Maker Profitability Data and report it to the 
DEA. Each Participant that is the DEA of a market maker would develop 
appropriate policies and procedures that provide for collecting and 
reporting such data to the Commission on an aggregated basis.\47\ The 
DEA would also develop policies and procedures reasonably designed to 
ensure the confidentiality of the non-aggregated data it receives from 
market makers.
---------------------------------------------------------------------------

    \47\ The Market Maker Profitability Data would be aggregated by 
Pilot Security.
---------------------------------------------------------------------------

F. Additional Components of the NMS Plan

    In addition to setting forth the details of the Tick Size Pilot, 
the NMS plan contains operational details including provisions related 
to the admission of new participants, amendments, the composition and 
responsibilities of the Operating Committee, and withdrawal from the 
NMS plan.

IV. Summary of Comments

    As noted above, the Commission received 77 comment letters on the 
Tick Size Pilot contained in the proposed NMS plan.\48\ Thirty-three 
commenters generally supported the Tick Size Pilot,\49\ although almost 
all of these commenters suggested that certain aspects of the proposed 
Tick Size Pilot be modified prior to approval and implementation.\50\ 
Several of the

[[Page 27520]]

commenters supporting the Tick Size Pilot believed that a wider tick 
increment would improve the quality of trading for small capitalization 
securities or that it is valuable to test this hypothesis.\51\ 
Additionally, some of these commenters believed that a wider tick 
increment would increase depth and liquidity.\52\ For example, one 
commenter stated that a well-designed Tick Size Pilot would ``[allow] 
for a true empirical test of the effects of wider spreads and limited 
increments in small-cap[italization] stocks [would] encourage 
fundamental buyers and sellers to meaningfully engage with each 
other.'' \53\
---------------------------------------------------------------------------

    \48\ See supra note 6. The opinions' of the commenters are 
nuanced as many commenters support certain aspects of the NMS plan 
while opposing other aspects of the NMS plan. Eighteen comment 
letters were received in response to the Commission's press release 
announcing that the proposed NMS plan and Tick Size Pilot had been 
submitted. These comment letters are included in the comment file 
with the comment letters received in response to the Notice. The 
Commission notes that five of the comment letters received in 
response to the press release requested that the Commission provide 
an extended comment period. See CMR Letter I; MFA Letter I; KOR 
Letter I; SIFMA Letter I; and Citadel Letter I. See also CCMC Letter 
I. The Investor Advisory Committee (``IAC'') established by Section 
911 of The Dodd-Frank Act also submitted recommendations to the 
Commission with respect to a tick pilot. See Recommendation of the 
Investor Advisory Committee Decimalization and Tick Sizes, available 
at: https://www.sec.gov/spotlight/investor-advisory-committee-2012/investment-adviser-decimilization-recommendation.pdf (``IAC 
Recommendations''). The IAC's Recommendations were issued prior to 
the Commission's June 2014 Order. The Commission discussed the IAC 
Recommendations in the June 2014 Order.
    \49\ See Gagliano Letter I; Callipari Letter; Gagliano Letter 
II; STA Letter I; Duffy Letter; Galinskie Letter; IssuWorks Letter; 
Tabb Letter; ABC Letter; ECFTF Letter; Themis Letter; Two Sigma 
Letter; STA Letter II; KCG Letter; Virtu Letter; BIO Letter; NVCA 
Letter; BATS Letter; SIFMA Letter II; Weaver Letter; CFA Institute 
Letter; Citigroup Letter; BlackRock Letter; STANY Letter; Bright 
Trading Letter; Bloomberg Letter; KOR Letter II; CHX Letter; IMC 
Letter; Nasdaq Letter; NYSE Letter; Warner-Toomey Letter; OTC 
Markets Letter; and Vargas Letter.
    \50\ Four of these commenters, while supporting a pilot to test 
wider tick sizes, nevertheless questioned whether wider ticks would 
have a positive impact on liquidity or would support increased 
research for small capitalization companies. See Tabb Letter at 1 
(``While I am a strong proponent of the Tick Size Pilot, I do not 
foresee positive results, such as greater research coverage, more 
small/mid-cap[italization] IPOs, a wider diversity of market makers, 
reduced impact of high-frequency traders, lower transaction costs, 
or better quality of equity markets.''); CFA Institute Letter at 1 
(stating ``skeptic[ism] that wider trading increments for small 
cap[italization] stocks will enhance the liquidity of those 
securities. . .''); KOR Letter II at 4 (stating the ``idea that 
increased market making profitability will lead to better research/
analyst coverage and encourage more IPOs is an idea that is out of 
touch with modern markets post-Regulation NMS''); and IMC Letter at 
1 (noting reservations about the effect of wider ticks on IPOs and 
job growth). See also CoreOne Letter at 2 (stating that it is 
unlikely the Tick Size Pilot will increase the amount of research 
coverage for Pilot Securities).
    \51\ See Gagliano Letter I (arguing that five cent spreads will 
greatly enhance participation, volume and increase market depth); 
Callipari Letter; ECFTF Letter at 1; STA Letter II at 2; BIO Letter 
at 2; NVCA Letter at 2; BATS Letter at 1; SIFMA Letter II at 1; 
STANY Letter at 2; Bloomberg Letter at 2; CHX Letter at 1; Nasdaq 
Letter at 3; and NYSE Letter at 1.
    \52\ See Gagliano Letter I; Callipari Letter; BIO Letter at 2; 
NVCA Letter at 2; and NYSE Letter at 1.
    \53\ See ECFTF Letter at 1.
---------------------------------------------------------------------------

    Conversely, twenty commenters generally opposed the Tick Size 
Pilot.\54\ Some of these commenters were concerned that a wider tick 
increment would increase investor execution costs or that the Tick Size 
Pilot would be unduly disruptive.\55\ Three commenters argued that the 
impact of tick sizes had already been studied.\56\ One commenter noted 
that increasing tick sizes would impact his ability to trade 
efficiently.\57\ Other commenters argued that wider spreads would only 
help market professionals at the expense of investors.\58\
---------------------------------------------------------------------------

    \54\ See BenBrahim Letter; Richardson Letter; Ling Letter; 
Blecha Letter; Sosnoff Letter; Choffy Letter; Runsdorf Letter; 
Greenblatt Letter; Bangura Letter; Ricker Letter; DFA Letter; 
Vanguard Letter; CFA Letter; MFA Letter II; Wells Fargo Letter; ICI 
Letter; Schwab Letter; Fidelity Letter; TD Ameritrade Letter; and 
Citadel Letter II. See also IAC Recommendations.
    \55\ See Vanguard Letter at 1; CFA Letter at 4; MFA Letter II at 
6 (stating more than 20% of all U.S. listed companies will be 
impacted by the Tick Size Pilot); Wells Fargo Letter at 4; and ICI 
Letter at 5. See also IAC Recommendations.
    \56\ See Ling Letter; Blecha Letter; and Runsdorf Letter.
    \57\ See Richardson Letter.
    \58\ See Richardson Letter; Ling Letter; Sosnoff Letter; Choffy 
Letter; and Bangura Letter. See also Greenblatt Letter (stating that 
expanding the tick sizes will only help market makers become 
wealthy).
---------------------------------------------------------------------------

    Generally, commenters opposing the Tick Size Pilot were concerned 
about its costs to investors and the complexity of its design.\59\ For 
example one commentator estimated ``that the [Tick] Pilot could cost 
investors hundreds of millions of dollars.'' \60\ Other commenters 
stated the Tick Size Pilot would ``make it more expensive for investors 
to buy and sell [P]ilot [S]ecurities.'' \61\ Commenters also opined 
that the Tick Size Pilot would increase operational risk, and heighten 
market complexity which would require ``a whole redesign of trading 
systems and algorithms.'' \62\ Another commenter stated that, ``while 
the purported benefits of the [Tick Size Pilot] are questionable, the 
costs are real and significant.'' \63\
---------------------------------------------------------------------------

    \59\ See DFA Letter at 2 (raising concerns that U.S. companies 
would incur a higher cost of capital); Vanguard Letter at 4 (stating 
that ``any program that increases the minimum quoting or trading 
increments will necessarily result in increased transaction costs to 
long-term investors''); MFA Letter II at 3 (expressing concern that 
the Tick Size Pilot would harm investors by creating unnecessary 
market complexities and systems risks); Wells Fargo Letter at 9 
(expressing concerns about both costs to investors and complexity); 
Fidelity Letter at 3-4 (citing concerns both about increased trading 
costs for retail investors and complexity and implementation costs); 
TD Ameritrade Letter at 2; and Citadel Letter II at 5 (citing 
concerns about implementation costs, systems risks, and investor 
costs). See also IAC Recommendations.
    \60\ See TD Ameritrade Letter at 2.
    \61\ See BenBrahim Letter; Greenblatt Letter; Bangura Letter; 
Wells Fargo Letter at 2 (expressing opposition to increased tick 
sizes and increased transaction costs); and MFA Letter II at 3 
(stating that artificially widening spreads and increasing trading 
costs would make it expensive for investors to buy and sell 
securities).
    \62\ See MFA Letter II at 3. See also infra note 74 and 
accompanying text.
    \63\ See Vanguard Letter at 4.
---------------------------------------------------------------------------

    Additionally, Tick Size Pilot opponents indicated that the 
underlying goals of the Tick Size Pilot were not properly defined and 
tenuous.\64\ For example, one commenter stated that the Tick Size 
Pilot's ``goal seems simply to find ways to drive higher profits to 
exchanges and some of their favored clients.'' \65\
---------------------------------------------------------------------------

    \64\ See Vanguard Letter at 1; Wells Fargo Letter at 6; Schwab 
Letter at 9; and Citadel Letter II at 2. See also IAC 
Recommendations.
    \65\ See Schwab Letter at 9.
---------------------------------------------------------------------------

    Seventeen commenters, while providing substantive analysis and 
opinion, did not specifically express support for, or, opposition to, 
the Tick Size Pilot.\66\ While the commenters generally focused on 
issues related to the proposed Tick Size Pilot, some also raised 
tangential or alternative market-based solutions such as those relating 
to access fees, maker-taker fee models, payment-for-order-flow, and 
high frequency trading.\67\ For instance, nine commenters stated that 
the Commission should test the elimination of exchange access fees, 
either independently or in conjunction with the Trade-At Prohibition; 
\68\ two commenters suggested the Commission implement a stand-alone 
trade-at pilot; \69\ and three commenters suggested that subpenny 
pricing should be explored and studied.\70\
---------------------------------------------------------------------------

    \66\ See Leary Letter; Adorney Letter; RGM Letter; CCMC Letter 
I; Wellington Shields Letter; ModernNetworks Letter (noting its 
agreement with the premise behind wider ticks, such as discouraging 
arbitrage, encouraging market making and longer holding periods); 
CoreOne Letter; JonesTrading Letter; CMR Letter II; Liquidnet 
Letter; FIF Letter; CCMC Letter II; Ye Letter; Angel Letter; Birch 
Bay Letter; ITG Letter; Albert Letter and Saito Letter.
    \67\ See Wellington Shields Letter at 2 (subpenny pricing should 
be eliminated and quotes should have a time-in-force); Virtu Letter 
at 2 (recommending the Commission study and establish specific 
market maker obligations through an NMS plan and eliminate access 
fees); Liquidnet Letter at 1-2 (asserting that Commission should 
pass Rule 10b-18 prior to the Tick Size Pilot and should conduct a 
simplified version of the Trade-At Prohibition independently along 
with other market structure issues such as removing access fees, and 
eliminating maker-taker pricing); BIO Letter at 5 (suggesting other 
measures to assist small capitalization companies such as an 
increase in the qualifying cap for accelerated filers and as well as 
an exception from XBRL reporting requirements); CFA Institute at 6; 
ICI Letter at 6 (stating other market initiatives, such as maker-
taker, should be addressed prior to the Tick Size Pilot); Birch Bay 
Letter at 1 (asserting all orders should have a minimum lifespan of 
at least one-second); Schwab Letter at 5 (stating that if the 
Commission wants to test order flow migration, it should reduce 
exchange access fees and liquidity rebates); Bright Trading Letter 
at 3 (suggesting that OTC market makers should be required to 
provide ``meaningful'' price improvement); Bloomberg Letter at 15 
(suggesting that reduced access fees should be the subject of a 
pilot); Ye Letter at 1 (suggesting that the maker-taker fees should 
be analyzed); Angel Letter at 11 (suggesting that a maker-taker 
pilot should be conducted); and KOR Letter II at 2.
    \68\ See Virtu Letter at 2; CFA Institute at 6; Liquidnet Letter 
at 2 (asserting a simplified version of the Trade-At Prohibition 
should be tested independently along with other market structure 
issues such as removing access fees, and eliminating maker-taker 
pricing); Schwab Letter at 5; Fidelity Letter at 5 (suggesting that 
a trade-at prohibition should also contemplate access fees, maker-
take, internalization, but noted that these were properly excluded 
from the Tick Size Pilot); Bright Trading Letter at 3; Bloomberg 
Letter at 15; Ye Letter at 1; Angel Letter at 11; and KOR Letter II 
at 5 (suggesting that the Trade-At Prohibition should be coupled 
with access fee reform or the elimination of rebates).
    \69\ See Vanguard Letter at 2 and ICI Letter at 4.
    \70\ See Greenblatt Letter; RGM Letter at 1; and MFA Letter II 
at 3. But see Wellington Shields Letter at 5 (stating subpenny 
pricing causes the front running of trades); Ye Letter at 2; and 
ModernNetworks Letter at 3 (arguing against studying subpenny 
pricing).
---------------------------------------------------------------------------

    Several commenters supported the Commission's use of ``data-
driven'' research to formulate market structure changes.\71\ 
Additionally, some commenters believed that, while the Tick Size Pilot 
may not achieve the goal of improved liquidity for small-

[[Page 27521]]

capitalization securities, it nonetheless should be tested.\72\ For 
example, one commenter stated, ``we believe it is worth the effort, 
time and money to test these ideas in the real world . . . as an 
important step in helping to improve the market for small 
capitalization companies in the future.'' \73\
---------------------------------------------------------------------------

    \71\ See RGM Letter at 1; ABC Letter at 3; ECFTF Letter at 1; 
Two Sigma Letter at 1; KCG Letter at 6; Virtu Letter at 2; BIO 
Letter at 4; CFA Institute Letter at 6; BlackRock Letter at 1; STANY 
Letter at 2; Bloomberg Letter at 3; Angel Letter at 2; KOR Letter II 
at 2; IMC Letter at 2; Nasdaq Letter at 4; and OTC Markets Letter at 
2.
    \72\ See Tabb Letter at 1; Angel Letter at 1-2 (arguing that 
corporate issuers should set their trading increments and supporting 
a data-driven approach); KOR Letter II at 4; and IMC Letter at 1.
    \73\ See CFA Institute Letter at 2.
---------------------------------------------------------------------------

A. Costs and Complexity of the Tick Size Pilot

    Several commenters expressed concerns related to the costs and 
complexity of the Tick Size Pilot.\74\ Some commenters expressed 
concern that trading costs of the wider tick size would be borne either 
by investors \75\ or the brokers and institutions representing customer 
interest.\76\ Two commenters suggested that investor costs related to 
the Tick Size Pilot would be at least $200 million annually.\77\ 
Certain commenters expressed concern that the Tick Size Pilot would 
inflate the cost of capital for the issuers of Pilot Securities.\78\
---------------------------------------------------------------------------

    \74\ See Duffy Letter at 2; DFA Letter at 2; Vanguard Letter at 
4; Fidelity Letter at 3-4; TD Ameritrade Letter at 2; MFA Letter II 
at 3; Wells Fargo Letter at 9; ITG Letter at 4-6; and Citadel Letter 
II at 5.
    \75\ See BenBrahim Letter; DFA Letter at 2; Vanguard Letter at 
1; KCG Letter at 2-3; Wells Fargo Letter at 5; and Citadel Letter II 
at 5.
    \76\ See DFA Letter at 1; Two Sigma Letter at 2; and TD 
Ameritrade Letter at 2.
    \77\ See Two Sigma Letter at 2 (estimating excess trading costs 
of implementing Test Group Two and Three of $200 million annually) 
and TD Ameritrade Letter at 2 (utilizing optimistic assumptions 
would be $273,149,484 annually).
    \78\ See DFA Letter at 2 and NVCA Letter at 7.
---------------------------------------------------------------------------

    Other commenters were concerned with the costs associated with the 
complexity of the Tick Size Pilot. Some commenters thought that the 
three Test Group design of the Tick Size Pilot would drive costs 
upward,\79\ but several commenters more directly attributed the 
potential costs to the complexity caused by the inclusion of Test Group 
Three and its Trade-At Prohibition.\80\ Some commenters opined that 
eliminating Test Group Three would eliminate much of the complexity 
related to the Tick Size Pilot.\81\ In particular, certain commenters 
stated that the complexity and costs of the Trade-At Prohibition result 
from the changes to technology and programming that would be necessary 
for effective implementation.\82\ Some commenters expressed concern 
that the Tick Size Pilot would lead to increased operational risks.\83\ 
However some commenters, while acknowledging that there would be costs 
associated with the Tick Size Pilot, believed the Commission should 
move forward because of the importance of testing the impact of wider 
tick increments on the liquidity and market quality of securities with 
smaller capitalization.\84\
---------------------------------------------------------------------------

    \79\ See DFA Letter at 2 (arguing that the Tick Size Pilot's 
four group design where each group has its own rules and exemptions 
increases both the risk and costs); MFA Letter II at 7-8 (asserting 
that the Tick Size Pilot ``will greatly increase complexity by 
creating four different trading schemes that will need to be 
implemented by trading centers and institutional investors . . . The 
financial cost for such significant systems development, coding, 
reprogramming and testing are likely to be meaningful.''); and Wells 
Fargo Letter at 9 (stating ``the costs and risks of the [Tick] Pilot 
would be lessened in a study involving only one control group and 
one test group without exceptions).
    \80\ See Tabb Letter at 1; ECFTF Letter at 2; CMR Letter II at 
7; KCG Letter at 14; FIF Letter at 3; and TD Ameritrade Letter at 2.
    \81\ See Tabb Letter at 1; Two Sigma Letter at 3; Vanguard 
Letter at 5; MFA Letter II at 6; and Wells Fargo Letter at 8.
    \82\ See Tabb Letter at 5-6 (stating ``[t]he programing for this 
. . . will be challenging, significant, and require massive 
testing.''); CoreOne Letter at 7; Wells Fargo Letter at 8; FIF 
Letter at 3; and ITG Letter at 5.
    \83\ See SIFMA Letter II at 5; Wells Fargo Letter at 3; ICI 
Letter at 5; and Citadel Letter II at 6 (stating ``it would be 
unfortunate if the Commission approved a pilot that imposed such an 
extraordinary degree of operational risk on the markets.'').
    \84\ See Tabb Letter at 8; CFA Institute Letter at 2; CHX Letter 
at 17 (this commenter provided an estimate of potential 
implementation costs for all three Test Groups of approximately 
$140,000 and suggested that such costs for all market centers could 
be in excess of $8.0 million); Nasdaq Letter at 5-6; and NYSE Letter 
at 3.
---------------------------------------------------------------------------

    Certain commenters believed that the Tick Size Pilot should be 
subject to a cost benefit analysis pursuant to the Commission 
rulemaking process.\85\ Some of these commenters questioned whether the 
costs of the Tick Size Pilot outweighed its benefits. Others commenters 
posited that a cost-benefit analysis, focused on the implementation 
costs of the Tick Size Pilot, should be completed.\86\ Other commenters 
suggested that an assessment of investor costs should be completed 
prior to the implementation of the Tick Size Pilot.\87\
---------------------------------------------------------------------------

    \85\ See Duffy Letter at 2; KCG Letter at 8-9; SIFMA Letter II 
at 7; MFA Letter II at 8; Wells Fargo Letter at 3; Citigroup Letter 
at 5; Schwab Letter at 8-9; STANY Letter at 9-10; Bloomberg Letter 
at 21-22; TD Ameritrade Letter at 4; ITG Letter at 4; Citadel Letter 
II at 3-4; Nasdaq Letter at 7; and OTC Markets Letter at 9.
    \86\ See BlackRock Letter at 4; FIF Letter at 6; and Citadel 
Letter II at 5.
    \87\ See Wells Fargo Letter at 9; SIFMA Letter II at 8; and 
Citadel Letter II at 5.
---------------------------------------------------------------------------

B. Duration of the Tick Size Pilot

    Twenty-three commenters discussed whether the Pilot Period should 
be extended, remain as proposed, or implemented on a provisional 
basis.\88\ Seventeen commenters opined that the Pilot Period should be 
longer than one-year.\89\ Some of these commenters indicated that the 
Pilot Period should be extended to justify the associated 
implementation costs.\90\ Others indicated that better data could be 
gathered with a longer Pilot Period.\91\ In particular, some of these 
commenters opined that the data generated from a longer Pilot Period 
would be less likely to be skewed by short-term or aberrational 
events.\92\ One commenter suggested that the one-year time period would 
make it easy to manipulate the data to produce negative outcomes.\93\ 
Other commenters stated that additional time is necessary to allow for 
market participants to adjust their behavior.\94\
---------------------------------------------------------------------------

    \88\ See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks 
Letter at 3; Tabb Letter at 1; ABC Letter at 2; ECFTF Letter at 1-2; 
Themis Letter at 6; CoreOne Letter at 2; CMR Letter II at 2; STA 
Letter II at 7; BIO Letter at 7; CFA Letter at 6; NVCA Letter at 3-
5; CFA Institute Letter at 3; BlackRock Letter at 6; Liquidnet 
Letter at 1; CCMC Letter II at 2; ICI Letter at 5; STANY Letter at 
9; Angel Letter at 7; KOR Letter II at 3; CHX Letter at 6; and 
Warner-Toomey Letter at 1. See also IAC Recommendations.
    \89\ See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks 
Letter at 3; Tabb Letter at 5-6; ABC Letter at 2; ECFTF Letter at 1-
2; Themis Letter at 6; CoreOne Letter at 2; CMR Letter II at 2; BIO 
Letter at 3; NVCA Letter at 3-5; CFA Institute Letter at 3; 
Liquidnet Letter at 1; STANY Letter at 9; KOR Letter II at 3; 
Warner-Toomey Letter at 1; and Vargas Letter at 1.
    \90\ See Duffy Letter at 1; IssuWorks Letter at 3; ABC Letter at 
3; NVCA Letter at 3; Liquidnet Letter at 3; STANY Letter at 9; 
Warner-Toomey Letter at 1; and Vargas Letter at 1. See also Tabb 
Letter at 8 (while not suggesting a longer duration, asserting that 
the one-year duration, which would require extensive technology 
development, may not be the best use of industry resources).
    \91\ See ECFTF Letter at 1 (arguing that ``[a] significantly 
longer time period is required to gather meaningful data around 
whether the changes to the market structure are having the desired 
effects''); CoreOne Letter at 2 (stating ``it remains unclear if the 
[Tick] Pilot could generate meaningful data . . . given the [Tick] 
Pilot's length among other things.''); NVCA Letter at 4; and STANY 
Letter at 9.
    \92\ See ECFTF Letter at 1-2; CMR Letter II at 2; NVCA Letter at 
4-5; and Vargas Letter at 1.
    \93\ See Duffy Letter at 1.
    \94\ See Duffy Letter at 2; ECFTF Letter at 1-2; Themis Letter 
at 6; CMR Letter II at 2; BIO Letter at 3; SIFMA Letter II at 5-6; 
CFA Institute Letter at 3; and KOR Letter II at 3.
---------------------------------------------------------------------------

    Some commenters also indicated that the relatively short Pilot 
Period could have a negative impact on participation. Several 
commenters indicated that due to, among other things, the complexity 
and cost relative to the short duration of the Pilot Period, some 
market participants would avoid trading Pilot Securities during the 
Tick Size Pilot.\95\

[[Page 27522]]

A number of commenters expressed concern that if market participants 
avoided trading Pilot Securities the assessment of the Tick Size Pilot 
would be frustrated by skewed data.\96\
---------------------------------------------------------------------------

    \95\ See IssuWorks Letter at 4; ECFTF Letter at 2; CMR Letter II 
at 7; STA Letter II at 11; NVCA Letter at 5; BATS Letter at 4; SIFMA 
Letter II at 6-7; FIF Letter at 6; ICI Letter at 6; Schwab Letter at 
5; STANY Letter at 9; Fidelity Letter at 4; Bloomberg Letter at 13; 
TD Ameritrade Letter at 3; CHX Letter at 7; Citadel Letter II at 6; 
Warner-Toomey Letter at 4; and Vargas Letter at 1.
    \96\ See IssuWorks Letter at 4; CoreOne Letter at 7; BATS Letter 
at 5; SIFMA Letter II at 6; Warner-Toomey Letter at 1; and Vargas 
Letter at 1.
---------------------------------------------------------------------------

    The recommended duration for the Tick Size Pilot varied among 
commenters advocating for a longer Pilot Period. Four commenters stated 
that the Pilot Period should be extended to five-years,\97\ while other 
commenters suggested either a two- \98\ or three-year duration.\99\ 
Some commenters opined that the Pilot Period should be longer, but did 
not provide a specific time period.\100\ Instead of a specific time 
period, others suggested a range of eighteen months to five years.\101\
---------------------------------------------------------------------------

    \97\ See Duffy Letter at 1; Galinskie Letter at 2; IssuWorks 
Letter at 3; and Themis Letter at 6.
    \98\ See KOR Letter II at 3.
    \99\ See ECFTF Letter at 1-2 and Liquidnet Letter at 1. See also 
Vargas Letter at 1 (advocating for a longer Tick Size Pilot and 
stating that many experts suggested a three-year duration.).
    \100\ See Tabb Letter at 1; ABC Letter at 2; CMR Letter II at 2 
(believing the Tick Size Pilot should be extended by one to two 
years); and CFA Institute Letter at 3.
    \101\ See CMR Letter II at 2; BIO Letter at 3 (stating a range 
of three to five years); NVCA Letter at 3-5 (stating the Pilot 
should last greater than three-years); and STANY Letter at 9 
(indicating a Pilot duration of eighteen months to five-years).
---------------------------------------------------------------------------

    Six commenters stated that the Pilot Period of the Tick Size Pilot 
should be one-year as proposed.\102\ One commenter, who advocated for a 
Tick Size Pilot with a one-year Pilot Period, asserted that sufficient 
data to analyze the effects of wider ticks could be generated within 
that timeframe.\103\ Another commenter stated that there would need to 
be greater confidence in the benefits of Tick Size Pilot in order to 
justify a longer Pilot Period.\104\
---------------------------------------------------------------------------

    \102\ See CCMC Letter II at 2; STA Letter II at 7; CFA Letter at 
6; BlackRock Letter at 6; ICI Letter at 5; and CHX Letter at 6.
    \103\ See CFA Letter at 6.
    \104\ See BlackRock Letter at 6. See also IAC Recommendations.
---------------------------------------------------------------------------

    Among the commenters advocating for a one-year Pilot Period, there 
was variance on whether the Tick Size Pilot should be cut off 
immediately after one-year \105\ or remain in operation while the 
results are assessed.\106\ One commenter stated that the Tick Size 
Pilot should be assessed following the first six months of the Pilot 
Period but that the Tick Size Pilot should still only operate for the 
one-year Pilot Period.\107\ Five commenters offered that the Pilot 
Period should initially operate for one-year with the possibility of an 
extension if such action is supported by the data.\108\ Five commenters 
stated that the Tick Size Pilot should continue during the final 
assessment of the data in order to mitigate unnecessary changes in the 
market.\109\ Another commenter stated that the Pilot Period should be 
at least one-year to gather preliminary results and, if deemed 
appropriate, extended for a ``full economic cycle'' thereafter to 
determine its impact on capital formation.\110\
---------------------------------------------------------------------------

    \105\ See CCMC Letter II at 2 (asserting the Pilot should end 
completely following a year). See also BlackRock Letter at 6 
(asserting that the Tick Size Pilot should have a ``finite duration 
and clear end date'').
    \106\ See STA Letter II at 7; FIF Letter at 6 (advocating for a 
preliminary assessment during the Tick Size Pilot to avoid 
unnecessary disruption); STANY Letter at 9 (noting that ending the 
Tick Size Pilot and possibly reintroducing it after the assessment 
would result in unnecessary risks and costs); KOR Letter II at 3; 
and CHX Letter at 6.
    \107\ See STA Letter II at 7.
    \108\ See STA Letter II at 7; ICI Letter at 5 (asserting that 
the Tick Size Pilot could only be extended for one-year if 
necessary); Angel Letter at 7; KOR Letter II at 3; and CHX Letter at 
6.
    \109\ See supra note 106 and accompanying text.
    \110\ See Angel Letter at 7.
---------------------------------------------------------------------------

C. Criteria for Pilot Securities

    The Commission received many comments with respect to the selection 
criteria for Pilot Securities. The commenters raised concerns about the 
proposed selection criteria, especially the market capitalization 
threshold, and suggested other criteria to be considered.\111\
---------------------------------------------------------------------------

    \111\ One commenter stated that the proposed Measurement Period 
should be extended to the previous twelve months to verify whether 
any unique circumstances created any unintentional biases. See CFA 
Institute Letter at 4. See also FIF Letter at 1 (suggesting that the 
Measurement Period should be redefined to conclude seven months 
before the effective date of the Tick Size Pilot). Another commenter 
argued that consideration be given to securities that are priced 
under $5.00 per share. See IssuWorks Letter at 4.
---------------------------------------------------------------------------

1. Market Capitalization of Pilot Securities
    Sixteen commenters argued that a $5 billion market capitalization 
threshold is too high.\112\ Commenters argued that the market 
capitalization threshold should be decreased because the $5 billion 
threshold would capture securities not traditionally considered small 
capitalization securities, which are the focus of the Tick Size 
Pilot.\113\ Two commenters believed that the $5 billion market 
capitalization threshold would include stocks that do not have the 
liquidity and market quality concerns that the Tick Size Pilot seeks to 
address.\114\ Various commenters recommended that the market 
capitalization threshold for Pilot Securities be lowered from $5 
billion to a range of $250 million to $2 billion.\115\
---------------------------------------------------------------------------

    \112\ See ECFTF Letter at 2; Themis Letter at 3; Vanguard Letter 
at 6; CMR Letter II at 5; CFA Letter at 3; NVCA Letter at 6; BATS 
Letter at 2-3; SIFMA Letter II at 8; MFA Letter II at 5-6; Wells 
Fargo Letter at 8; ICI Letter at 4; Schwab at 10-11; STANY Letter at 
7; Fidelity Letter at 3; Warner-Toomey Letter at 2; and OTC Markets 
Letter at 3-4.
    \113\ See MFA Letter II at 4; Wells Fargo Letter at 8; ICI 
Letter at 4; and Warner-Toomey Letter at 2 (stating ``re-examine . . 
. [the capitalization threshold] to remain consistent with goals of 
the Pilot''). Commenters stated the directive from Congress in the 
JOBS Act and also echoed by the Commission in the June 2014 Order 
was to address concerns of small capitalization securities. See MFA 
Letter II at 5-6 and KCG Letter at 10. One commenter also argued 
that small capitalization stocks would benefit the most from the 
Tick Size Pilot. See ECFTF Letter at 2.
    \114\ See Vanguard Letter at 6 and STA Letter II at 5.
    \115\ See ECFTF Letter at 2 (recommending lowering the threshold 
to $750 million); Themis Letter at 3 (recommending lowering the 
threshold to $2 billion); Vanguard Letter at 6 (recommending 
lowering the threshold to $500 million); CMR Letter II at 5 
(recommending lowering the threshold to $750 million); CFA Letter at 
3 (recommending lowering the threshold to $2 billion); NVCA Letter 
at 6 (recommending lowering the threshold to less than $1 billion); 
BATS Letter at 2-3 (recommending lowering the threshold to less than 
$1 billion); SIFMA Letter II at 8 (recommending lowering the 
threshold to less than $1 billion); MFA Letter II at 6 (recommending 
lowering the threshold to $750 million); Wells Fargo Letter at 8 
(recommending lowering the threshold to $1 billion); STANY Letter at 
7 (recommending lowering the threshold to $750 million); Fidelity 
Letter at 3 (recommending lowering the threshold to $750 million to 
$1 billion); and OTC Markets Letter at 3-4 (recommending lowering 
the threshold to $250 million).
---------------------------------------------------------------------------

2. Other Comments on the Selection Criteria
    Some commenters stated that the current volume threshold of CADV of 
one million shares should be altered. For example, one commenter 
suggested that the volume threshold should range from 300,000 shares to 
500,000 shares for illiquid securities.\116\ Another commenter stated 
that the volume threshold should be based upon the daily dollar trading 
value to focus on small capitalization securities.\117\ One commenter 
opined that the volume threshold should be based upon the volume 
relative to the public float.\118\
---------------------------------------------------------------------------

    \116\ See CFA Letter at 3.
    \117\ See NVCA Letter at 6 (stating an appropriate average daily 
dollar trading value for small capitalization stocks is less than 
$10 million).
    \118\ See Virtu Letter at 2.
---------------------------------------------------------------------------

3. Suggestions for Additional Selection Criteria
    A number of commenters recommended that additional selection 
criteria should be required and recommended additional thresholds for 
the selection of Pilot Securities. Nine commenters opined that an 
average weighted daily spread of five cents or greater should be a 
qualifying factor to avoid artificially widening the spread and 
increasing transaction costs for

[[Page 27523]]

investors.\119\ Other commenters stated that securities with an average 
spread of less than five cents would not benefit from the Tick Size 
Pilot because they are already very liquid.\120\ Finally, two 
commenters suggested that including the daily turnover of a security 
would be a useful qualifying criterion to help determine 
liquidity.\121\
---------------------------------------------------------------------------

    \119\ See CoreOne Letter at 3 (advocating for using the average 
displayed spread for the Measurement Period); Two Sigma Letter at 2 
(stating the securities meeting this criteria are approximately 25% 
of the NMS common stocks and would therefore be a large enough 
universe while minimizing the risk of increasing transaction costs 
to investors); CFA Letter at 3; MFA Letter II at 7 (asserting that 
the spread on some qualifying securities could increase by 500%); 
CFA Institute Letter at 4; Wells Fargo Letter at 9; Schwab Letter at 
10-11; and OTC Markets Letter at 3-4. See also KCG Letter at 10 
(arguing that artificially wider spreads will increase transaction 
costs).
    \120\ See CFA Letter at 3 (stating that ``securities with $0.01 
spreads are already highly liquid and actively traded''); MFA Letter 
II at 7; and Schwab Letter at 10-11.
    \121\ See CMR Letter II at 3-4 and STA Letter II at 4-5.
---------------------------------------------------------------------------

4. Securities Excluded from the Tick Size Pilot
    Two commenters raised the possibility of regulatory arbitrage and 
asserted that cross-listed securities from Canada should not be 
eligible for the Tick Size Pilot.\122\ Another commenter suggested that 
any security that trades below $1.00 during the Measurement Period 
should be eliminated from consideration as a Pilot Security. Further, 
the commenter stated that if a Pilot Security during the Pilot Period 
trades below $1.00 then its data should be removed from the Tick Size 
Pilot.\123\ Two commenters supported the exclusion of ETFs.\124\
---------------------------------------------------------------------------

    \122\ See STA Letter II at 9 and SIFMA Letter II at 10.
    \123\ See CHX Letter at 2.
    \124\ See CFA Institute at 4 (stating that the exclusion 
recognizes their different shareholder base) and ICI Letter at 4.
---------------------------------------------------------------------------

D. Control Group, Test Groups, and Trade-At Prohibition

    A number of commenters discussed the design of the Tick Size Pilot. 
Two commenters opined that there were too many Pilot Securities 
included in each Test Group.\125\ Some commenters indicated there were 
too many test groups, which would make the Tick Size Pilot complex to 
implement and difficult to assess.\126\ One commenter supported the 
Tick Size Pilot design opining that it represented ``logical steps'' by 
comparing the trading environments of the test groups, and adding that 
``[i]f there is an incremental effect that each change has on various 
quality of markets metrics, it should be apparent from the [Tick] Pilot 
data.'' \127\ Another commenter supported the inclusion of all three 
Test Groups in order to ``deepen [the] understanding of the various 
factors impacting liquidity in [today's] fragmented market.'' \128\
---------------------------------------------------------------------------

    \125\ See STA Letter II at 5-6 and BATS Letter at 3 (arguing 
that the number of Pilot Securities per Test Group should be reduced 
to 100 securities). But see CFA Institute at 4 (asserting that 400 
securities per Test Group are appropriate for ``more robust 
analysis'').
    \126\ See STA Letter II at 5 (arguing that the Tick Size Pilot 
should have only one test group); KCG Letter at 3 (asserting the 
Tick Size Pilot should include only Test Group One, but generally 
supports Test Groups One and Two); MFA Letter II at 6 (arguing that 
the Tick Size Pilot's ``broader scope will likely frustrate the 
Commission's ability to assess the impact of increased tick sizes on 
liquidity for small-cap[italization] stocks''). See also supra note 
81 and accompanying text (advocating for the elimination of Test 
Group Three). See also infra note 136 and accompanying text 
(asserting Test Group One should be eliminated).
    \127\ See CHX Letter at 11.
    \128\ See NYSE Letter at 3.
---------------------------------------------------------------------------

    Commenters suggested testing tick sizes other than the proposed 
$0.05 increment. Some commenters suggested that various tick size 
increments, both larger \129\ and smaller \130\ than the proposed $0.05 
increment, be concurrently tested. Other commenters suggested that 
subpenny increments should be tested.\131\ One commenter believed the 
$0.05 trade increment should apply to the opening and closing auctions 
and asked for this issue to be directly addressed in the Tick Size 
Pilot.\132\ Conversely, another commenter suggested that the opening 
and closing auctions should be exempt from the Tick Size Pilot.\133\
---------------------------------------------------------------------------

    \129\ See IssuWorks Letter at 3 (advocating to study $0.10 or 
larger trade increments); CoreOne Letter at 3 (suggesting testing 
$0.02 and $0.10 trade increments); and OTC Markets Letter at 4 
(stating the Commission should review trade increments of $0.10 and 
$0.25).
    \130\ See CoreOne Letter at 3.
    \131\ See Greenblatt Letter; RGM Letter at 2 (suggesting the 
Commission look into subpenny trade increments); and MFA Letter II 
at 3 (asserting that the Commission should test half-penny 
increments for highly liquid securities).
    \132\ See FIF Letter at 2.
    \133\ See Citigroup Letter at 6.
---------------------------------------------------------------------------

    One commenter asserted that, in order to avoid logistical and 
operational problems of rejecting non-conforming orders for brokers and 
customers, the Tick Size Pilot should permit orders that are received 
but not priced in $0.05 increments to be re-priced for display purposes 
to a permissible $0.05 increment.\134\ Another commenter requested 
clarification on the handling of orders and quotes that are not in a 
proper tick increment.\135\
---------------------------------------------------------------------------

    \134\ See ITG Letter at 6-7 (noting that for purposes of order 
display and regulatory compliance, ``price-sliding'' is permissible 
in the context of Rule 201 of Regulation SHO).
    \135\ See FIF Letter at 2.
---------------------------------------------------------------------------

1. Test Group One: Widened Quote Increment
    One commenter suggested that Test Group One should be eliminated in 
order to reduce the Tick Size Pilot's complexity.\136\ Four commenters 
theorized that Test Group One ``probably will drive more volume to the 
dark pools'' because the trade increment is less than $0.05.\137\ For 
example, one commenter stated, ``[w]ith no controls around trading 
increments, we will see a deterioration in market quality as more 
trading moves off-exchange, and lit market making is further 
disadvantaged.'' \138\ One commenter suggested that market participants 
should be permitted in Test Group One to accept or rank orders in penny 
increments because exchanges and agency ATSs would be at a competitive 
disadvantage vis-[agrave]-vis broker-owned proprietary execution 
systems that could trade, accept and rank orders at otherwise 
impermissible increments.\139\ One commenter stated that Test Group One 
should be eliminated because ``we should not be engaging in experiments 
that actively increase undisplayed liquidity.'' \140\
---------------------------------------------------------------------------

    \136\ See KOR Letter II at 3.
    \137\ See Wellington Shields Letter at 4 (arguing that market 
participants may be hesitant to display liquidity in instances where 
the quoting increment is changed without corresponding changes to 
the minimum trading increment); Tabb Letter at 3 (forecasting that 
off-exchange volume to rise to between 60-70% from its current range 
of lower to mid-40%); CFA Letter at 4; and KOR Letter II at 3 
(stating that ``as constructed, [Trade Group One] will simply divert 
flow from lit markets to dark pools and internalizers.'').
    \138\ See KOR Letter II at 3.
    \139\ See BATS Letter at 3.
    \140\ See CFA Letter at 4.
---------------------------------------------------------------------------

2. Test Group Two: Widened Quote and Trade Increment
    The comments on Test Group Two were mainly directed at the 
exception for Retail Investor Orders, which is also applicable to Test 
Group Three. Two commenters argued that the definition of Retail 
Investor Order should be broadened so that it would be less burdensome 
to implement and applicable to more individuals.\141\ Five commenters 
stated that an attestation should not be required, as it would be 
unwieldy for trading centers to surveil and attest that substantially 
all trades entered into the system originated from an individual.\142\
---------------------------------------------------------------------------

    \141\ See Wells Fargo Letter at 5 and FIF Letter at 2.
    \142\ See Tabb Letter at 5; Two Sigma Letter at 2; KCG Letter at 
9 (noting that the definition of Retail Investor Order was too 
complex and ambiguous and would lead to many of the largest retail 
firms to not sign the required attestations); STANY Letter at 6; and 
TD Ameritrade at 5.

---------------------------------------------------------------------------

[[Page 27524]]

    Other commenters requested clarification of the Retail Investor 
Order definition.\143\ One commenter questioned whether the definition 
of Retail Investor Order in the Tick Size Pilot was consistent with 
that of the Retail Liquidity Programs at various exchanges.\144\ 
Another commenter suggested that the Retail Investor Order definition 
should be based on the ``individual customer'' account type definition 
used by FINRA's OATS.\145\
---------------------------------------------------------------------------

    \143\ See Two Sigma Letter at 2; KCG Letter at 9; STANY Letter 
at 6; Fidelity Letter at 7 (seeking clarification on whether there 
is a restriction on who the contra party may be for a Retail 
Investor Order); and TD Ameritrade Letter at 5-6.
    \144\ See TD Ameritrade Letter at 7-8.
    \145\ FINRA's Order Audit Trail System (``OATS'') is a FINRA 
owned automated reporting system that captures order information in 
NMS stocks and OTC equity securities that is required for all FINRA 
members. See FINRA Rule 7410(k). OATS defines an individual customer 
account type as ``an account that does not meet the definition of 
FINRA Rule 4512(c) and is also not a proprietary account.'' See FIF 
Letter at 2.
---------------------------------------------------------------------------

    Other commenters supported the Tick Size Pilot's proposed exception 
for Retail Investor Orders.\146\ Two other commenters thought the 
exception for Retail Investor Orders should apply generally to all 
orders, including institutional orders.\147\ One commenter opined that 
the exception should be broadened to alleviate the implementation 
burden.\148\
---------------------------------------------------------------------------

    \146\ See Virtu Letter at 2 (supporting the mid-point, retail, 
block size, and single-priced transactions exceptions in the Tick 
Size Pilot) and CHX Letter at 13.
    \147\ See SIFMA Letter II at 9 and Citadel Letter II at 8-9.
    \148\ See SIFMA Letter II at 9.
---------------------------------------------------------------------------

    Seven commenters opposed the Retail Investor Order exception 
because the minimum price improvement required by the exception was not 
large enough.\149\ Some of these commenters were concerned that the 
relatively low level of required price improvement needed to qualify 
for the exception would encourage internalization.\150\ Some of these 
commenters also believed that the wider spread warranted a more 
significant amount of price improvement relative to the spread.\151\
---------------------------------------------------------------------------

    \149\ See Galinskie Letter at 2; CFA Letter at 5; Weaver Letter 
at 2; CFA Institute Letter at 6; STANY Letter at 6; IMC Letter at 2; 
and Birch Bay Letter at 1.
    \150\ See IMC Letter at 2 and Birch Bay Letter at 1 (asserting 
that the exception would also undermine the Trade-At Prohibition of 
Test Group 3). See also Wells Fargo Letter at note 19 (asserting 
that the number of exceptions, especially the retail price 
improvement exception, would render the data inconclusive).
    \151\ See Galinskie Letter at 2 (arguing for ``meaningful'' 
price improvement); CFA Letter at 5; IMC Letter at 2 (advocating for 
price improvement of fifty-percent of the tick size); and Birch Bay 
Letter at 1 (arguing that price improvement should be a full five-
cent improvement).
---------------------------------------------------------------------------

    Some commenters opposed the exception for Retail Investor Orders 
for other reasons.\152\ For instance, one commenter believed that all 
Tick Size Pilot pricing should be in $0.05 increments to effectively 
attract liquidity and market makers and thus the Retail Investor Order 
exception could undermine the validity of the Tick Size Pilot.\153\ 
Another commenter argued that in light of the highly desirable nature 
of retail order flow, the elimination of the exception would encourage 
more displayed liquidity.\154\ Another commenter was concerned that the 
Retail Investor Order exception would cause price competition to be 
prioritized, and negatively impact the Tick Size Pilot because of its 
view that markets that compete mostly on price are generally unable to 
compete on the value provided by, for instance, research, sales, and 
capital commitment.\155\ This commenter stated that the tick size must 
have ``integrity'' in order to attract investor interest, and did not 
think, among other things, that the Retail Investor Order exception 
made ``economic sense.'' \156\
---------------------------------------------------------------------------

    \152\ See Wellington Shields Letter at 4; IssuWorks Letter at 5; 
and KOR Letter II at 4. See also Galinskie Letter at 2 (arguing that 
subpenny trading should be eliminated across all markets).
    \153\ See Wellington Shields Letter at 4 (arguing that the 
midpoint exception should be eliminated because it provides price 
improvement to the liquidity taker but prevents public order 
interaction with a liquidity provider, which the commenter suggests 
is not necessarily a market benefit.). See also Bright Trading 
Letter at 2 (opining that the Retail Order exception will increase 
the toxicity of the order flow, which will result in market makers 
widening their quote spreads or not quoting at all).
    \154\ See KOR Letter II at 4. This commenter also opined that 
the retail price improvement exception would increase payment-for-
order-flow stating, ``With tick sizes at a penny, internalizers had 
little leeway in how much they could pay for orders, as they are 
generally only profiting at a fraction of the spread. By blowing out 
spreads but excluding retail trades at the midpoint, the result will 
be a dramatic increase in PFOF rates.''
    \155\ This commenter believes that pure price competition would 
not attract more liquidity. See IssuWorks Letter at 5.
    \156\ See IssuWorks Letter at 5.
---------------------------------------------------------------------------

3. Test Group Three: Widened Quote and Trade Increment With a Trade-At 
Prohibition
    The Commission received many comments on Test Group Three, and in 
particular, on the Trade-At Prohibition. Twenty-seven commenters 
opposed the Trade-At Prohibition.\157\ These commenters generally 
believed that the Trade-At Prohibition was overly complex \158\ and 
would be costly to implement and operate,\159\ and could induce market 
participants to opt-out of quoting and trading in Test Group Three 
Pilot Securities.\160\ Some of these commenters opined that the Tick 
Size Pilot data could be distorted if a number of market participants 
were to forego quoting and trading in the Test Group Three Pilot 
Securities because of the Trade-At Prohibition.\161\ Other commenters 
argued that the Trade-At Prohibition would increase costs for 
investors.\162\ One commenter pointed to Australian and Canadian 
rules\163\ as evidence that market quality would be adversely affected 
and as a justification to not implement trade-at domestically.\164\ 
Finally, three commenters supported testing the Trade-At Prohibition 
and encouraged

[[Page 27525]]

the Commission to simultaneously reduce the market access fee cap.\165\
---------------------------------------------------------------------------

    \157\ See STA Letter I at 3; Tabb Letter at 5-6; ECFTF Letter at 
2; Two Sigma Letter at 2-3; Vanguard Letter at 5 (stating that while 
it is opposed to including the Trade-At Prohibition in the Tick Size 
Pilot, it supports a trade-at prohibition for the overall market if 
it is coupled with the elimination of maker-taker pricing); CoreOne 
Letter at 7; JonesTrading Letter at 1 (stating that Trade-At 
Prohibition is not related to the purpose of the Tick Size Pilot); 
CMR Letter II 5-8; STA Letter II at 6; KCG Letter at 11-17; NVCA 
Letter at 7; BATS Letter at 4-6; SIFMA Letter II at 4; MFA Letter II 
at 7-8; Wells Fargo Letter at 5-6; Citigroup Letter at 2; BlackRock 
Letter 2-3; Liquidnet Letter at 2; ICI Letter at 3-4; Schwab Letter 
at 4; STANY Letter at 5-6; Fidelity Letter at 5; Bloomberg Letter at 
16; TD Ameritrade Letter 2-4; KOR Letter II at 4-5; ITG Letter at 4-
5; Citadel Letter II at 6; and OTC Markets Letter at 7-9.
    \158\ See Tabb Letter at 5 (noting that the Trade-At Prohibition 
would introduce significant market structure complexity); ECFTF 
Letter at 2 (stating the belief that Trade-At Prohibition introduces 
an unnecessary layer of complexity); STA Letter II at 6; ICI Letter 
at 4; ITG Letter at 3 (noting that the Trade-At Prohibition 
introduces unnecessary levels of complexity and associated 
unintended consequences); and Citadel Letter II at 6-7.
    \159\ See MFA Letter II at 7 (expressing concerns that Test 
Group Three would exponentially increase the complexity and cost of 
the Tick Size Pilot) and Citigroup Letter at 4 (noting that 
overwhelming majority of the cost of the Tick Size Pilot can be 
attributed to the Trade-At Prohibition).
    \160\ See CoreOne Letter at 7 (noting that an unintended 
consequence of Trade-At Prohibition is that a number of market 
participants will elect to trade using third parties or not trade at 
all in Test Group Three in order to avoid the cost of 
implementation).
    \161\ See Two Sigma Letter at 3 and CoreOne Letter at 7 (noting 
that opting-out would potentially compromise the validity of the 
results and cast doubt on whether the results could be extrapolated 
to a broader based, final rule).
    \162\ See CMR Letter II at 3 (noting that the inclusion of a 
Trade-At Prohibition without also addressing related issues like 
exchange access fees and backup systems could harm investors and 
increase the likelihood of extreme adverse market events); Schwab 
Letter at 2 (noting concerns that the Trade-At Prohibition will have 
on execution quality and cost for retail investors); and Citadel 
Letter II at 5.
    \163\ See Australian Securities and Investment Commission Market 
Integrity Rule 4.1.1 and Investment Industry Regulatory Organization 
of Canada Universal Market Integrity Notice 12-0130.
    \164\ See BlackRock Letter at 2. But see CFA Institute Letter at 
2-3 (asserting that despite the negative market quality effects of 
trade-at rules internationally, the NMS plan should be implemented 
domestically as it could lead to valuable information).
    \165\ See Virtu Letter at 2; CFA Institute Letter at 6; and 
Bright Trading Letter at 3. See also KOR Letter II at 5.
---------------------------------------------------------------------------

    Ten commenters that opposed the Trade-At Prohibition nevertheless 
recommended modifications related to the provision should the 
Commission approve the Tick Size Pilot with the Trade-At 
Prohibition.\166\ These other commenters' recommendations included, 
among other things, changing the scope of the Trade-At 
Prohibition,\167\ and changing the retail price improvement 
exception.\168\
---------------------------------------------------------------------------

    \166\ See KCG Letter at 11-17; NVCA Letter at 7; BATS Letter at 
5-6 (noting that Trade-At Prohibition should only apply to protected 
NBBO, not protected quotes and executing against nondisplayed orders 
when the market is crossed); SIFMA Letter II at 4; BlackRock Letter 
at 2-3; Liquidnet Letter at 2 (noting that the thirteen exceptions 
are too complex); STANY Letter at 5-6; Bloomberg Letter at 15 
(opining that there are less burdensome alternatives to the proposed 
Trade-At Prohibition, including reduced access fees, permitting 
issuers enter into contracts with market makers to set their own 
spreads, and implementing a trade-at prohibition that is more 
consistent with the June 2014 Order); KOR Letter II at 4-5; and 
Citadel Letter II at 7.
    \167\ See BATS Letter at 5 (noting that Trade-At Prohibition 
should only apply to protected NBBO, not protected quotes); SIFMA 
Letter II at 7 (noting that broker-dealers should be able to 
internalize without any size limitation if they are quoting at the 
NBBO); BlackRock Letter at 2 (stating that non-displayed liquidity 
at NBBO should be allowed to execute); KOR Letter II at 5 
(supporting a simplified Trade-At Prohibition independently); and 
Citadel Letter II at 7 (noting that the Trade-At Prohibition should 
not prohibit a trading center from executing more than displayed 
size).
    \168\ See KCG Letter at 9 (stating the proposed Retail Investor 
Order definition is too complex); STANY Letter at 6 (stating that 
the price improvement of the Retail Investor Order exception needs 
to be greater and the attestation should be amended); KOR Letter II 
at 4 (stating that the Retail Investor Order exception would offset 
the purpose of the Trade-At Prohibition to promote the execution of 
displayed liquidity and should be eliminated); and Citadel Letter II 
at 8-9 (noting that all orders should have price improvement 
exception and exchange retail programs should not receive special 
treatment).
---------------------------------------------------------------------------

    Fourteen commenters supported testing the Trade-At 
Prohibition.\169\ Five commenters supported the Trade-At Prohibition as 
proposed.\170\ Certain commenters expressed their belief that the 
Trade-At Prohibition could enhance displayed liquidity \171\ and 
provide valuable information to the Commission.\172\ Several commenters 
argued that the Trade-At Prohibition should apply to all securities not 
just Pilot Securities.\173\ One commenter suggested that interested 
parties should not prejudge the efficacy of the Trade-At Prohibition 
and stated that ``studying the impact of tick increments and display 
priority will benefit emerging growth companies regardless of whether 
the [Tick Size Pilot] leads to the permanent adoption of five-cent tick 
increments, national display priority, a Trade-At rule, or any other 
rule.'' \174\ Another commenter, while skeptical about the benefits of 
the Trade-At Prohibition, supported its inclusion in the Tick Size 
Pilot in order to ``gather hard evidence to help make the case . . . 
whether trade-at is a good idea.'' \175\ Several commenters believed 
that the Trade-At Prohibition would support the price discovery 
mechanism and mitigate the migration of displayed interest to off-
exchange trading venues.\176\ Many of these commenters argued that the 
Trade-At Prohibition should be included in the Tick Size Pilot in order 
to mitigate this potential migration of trading.\177\
---------------------------------------------------------------------------

    \169\ See Adorney Letter; Wellington Shields Letter at 5; Themis 
Letter at 2 (expressing concerns for the exceptions to Trade-At 
Prohibition as overly complex); Virtu Letter at 2; BIO Letter at 4; 
CFA Letter at 5-6; CFA Institute Letter at 5 (stating the Tick Size 
Pilot as well as the Trade-At Prohibition would be a ``useful 
exercise''); Bright Trading Letter at 2; Angel Letter at 10-11; CHX 
Letter at 17; IMC Letter at 2; Birch Bay Letter at 1 (stating strong 
support for the Trade-At Prohibition to curtail internalization); 
Nasdaq Letter at 4; and NYSE Letter at 3.
    \170\ See Adorney Letter; Wellington Shields Letter at 3; BIO 
Letter at 4; CHX Letter at 17; IMC Letter at 1; and Nasdaq Letter at 
4.
    \171\ See Wellington Shields Letter at 5; CHX Letter at 17; and 
IMC Letter at 2.
    \172\ See BIO Letter at 4.
    \173\ See Adorney Letter (``every time an order is executed away 
in a dark pool at the same price (or some cruel di minimis price 
like $15.997), it is 100% trading ahead of potential orders . . .'') 
and Vanguard Letter at 2.
    \174\ See Nasdaq Letter at 4.
    \175\ See Angel Letter at 10-11.
    \176\ See CHX Letter at 17 (expressing concern that ``if left 
unchecked migration could rise to a level where the price discovery 
mechanism provided by `lit' venues could be compromised.''); IMC 
Letter at 2; Nasdaq Letter at 5; and NYSE Letter at 3 (acknowledging 
speculation that larger ticks could lead to more internalization and 
harm liquidity, but believes the outcome is uncertain and it is 
important for the data to decide).
    \177\ See CHX Letter at 17; IMC Letter at 2; and NYSE Letter at 
3.
---------------------------------------------------------------------------

a. Protected Quotations Standard
    Several commenters discussed the use of the protected quotation 
standard rather than the NBBO for the Trade-At Prohibition. Some 
commenters were concerned that using the protected quotation standard 
would protect less competitive prices and undermine price competition 
\178\ or would be too onerous.\179\ While other commenters favored 
using the protected quotation standard as a means to encourage posting 
lit quotations.\180\ Two commenters requested that the protected 
quotation standard be clarified.\181\
---------------------------------------------------------------------------

    \178\ See CMR Letter II at 6.
    \179\ See CMR Letter a 6; BATS Letter at 5 (stating that use of 
protected quotes at the NBBO properly balances the goal of rewarding 
those who set lit prices while also preserving trading center 
competition); and Citigroup Letter at 2.
    \180\ See CFA Institute Letter 3 and CHX Letter at 18 (stating 
the protected quotation standard ``supports price discovery'' and is 
analogous to Rule 611 of Regulation NMS that would make it ``simple 
to understand and implement'').
    \181\ See FIF Letter at 3 (requesting clarification on what 
quotes would be subject to the Trade-At Prohibition--protected 
quotations or NBBO) and Bloomberg Letter at 21 (inquiring whether a 
matching engine could use the protected quotation standard for 
routing while using the NBBO standard for matching).
---------------------------------------------------------------------------

b. SRO Quotation Feed
    One commenter supported the use of an SRO Quotation Feed to post 
and execute trades at the protected quote.\182\ This commenter stated 
that this feature would assist trading centers which cannot publish 
their own protected quotation.
---------------------------------------------------------------------------

    \182\ See CHX Letter at 18.
---------------------------------------------------------------------------

c. Size Limitation
    Several commenters discussed the Tick Size Pilot's Size 
Limitation.\183\ Commenters specifically took issue with the 
restriction prohibiting a trading center from immediately accessing its 
hidden, reserve interest that is at a protected price.\184\ Several 
commenters were concerned the Size Limitation would inhibit execution 
quality and create risks of information leakage.\185\

[[Page 27526]]

Other commenters were concerned that the Size Limitation would add 
implementation complexity, among other things, due to additional 
routing obligations.\186\ Two commenters supported the Size Limitation 
arguing that without it the Trade-At Prohibition would do very little 
to promote displayed liquidity.\187\
---------------------------------------------------------------------------

    \183\ See Tabb Letter at 5; CMR Letter II at 6; STA Letter II at 
10; KCG Letter at 15 (stating that the Size Limitation is beyond the 
scope of the Commission's June 2014 Order); BATS Letter at 5-6; 
SIFMA Letter II at 7; Citigroup Letter at 2; BlackRock Letter at 3; 
Bloomberg Letter at 13; CHX Letter at 19; Citadel Letter II at 7; 
and NYSE Letter at 3.
    \184\ See STA Letter II at 10 (noting that the change in 
execution logic is highly complex and recommends that hidden orders 
be provided an exemption to satisfy incoming orders); SIFMA Letter 
II at 7 (stating that broker-dealers should be allowed to 
internalize order flow without a limitation on size if they are 
displaying a quote at the price of the NBB or NBO and execution 
quality of large orders primarily from institutions could be 
harmed); Bloomberg Letter at 13 (expressing lack of support for 
trading with all display before trading with reserve); and Citadel 
Letter II at 7 (noting that there is substantial un-displayed 
liquidity at exchanges through iceberg orders and other non-
displayed orders, and tapping this additional liquidity is very 
important to institutional and retail investors).
    \185\ See Tabb Letter at 5 (noting that execution certainty 
would be reduced); CMR Letter II at 6 (noting that information 
leakage risk would increase as investors with large orders would 
have to simultaneously execute against the BBO at multiple venues, 
thereby exposing the orders to significant signaling risk and market 
impact); BATS Letter at 5-6 (noting that not allowing execution of 
non-displayed order at a price equal to a protected quotation may 
disincent trading centers from quoting in the lit markets); SIFMA 
Letter II at 7 (stating that broker-dealers should be allowed to 
internalize order flow without a limitation on size if they are 
displaying a quote at the price of the NBB or NBO and execution 
quality of large orders primarily from institutions could be 
harmed); and BlackRock Letter at 3 (stating that the Size Limitation 
creates excessive delay in execution and sub-optimally broadcasts 
order flow in illiquid names to multiple venues when there might 
have been sufficient reserve or non-displayed interest to 
accommodate the order).
    \186\ See CMR Letter II at 6; STA Letter II at 10 (noting that 
the change in execution logic is highly complex and recommends that 
hidden orders be provided an exemption to satisfy incoming orders); 
Citigroup Letter at 2 (noting that the Size Limitation and Venue 
Limitation are more onerous than any version of trade-at and there 
is no real benefit to price discovery and to displayed order); and 
BlackRock Letter at 3.
    \187\ See CHX Letter at 19 (stating that without the Size 
Limitation, the Trade-At Prohibition would do little if anything to 
promote displayed liquidity and that it would reinforce the price 
discovery mechanism) and NYSE Letter at 3.
---------------------------------------------------------------------------

d. Venue Limitation
    Commenters generally opposed the Venue Limitation because it would 
restrict market makers' execution of incoming orders to lit 
exchanges.\188\ Commenters opined that the Venue Limitation offered 
little, if any, market quality enhancement, and was anti-
competitive.\189\ One commenter stated; ``[T]here is no real benefit to 
price discovery and no real benefit to the displayed order; therefore, 
there is no incentive for market participants to display additional 
liquidity. It is simply a way to subsidize the for-profit exchanges by 
forcing more orders to be routed to them.'' \190\ Two of the 
Participants, however, asserted that the Venue Limitation was an analog 
to the Size Limitation and is necessary to gauge the market impact of 
wider tick sizes.\191\
---------------------------------------------------------------------------

    \188\ See CMR Letter II at 7 (noting that the Venue Limitation 
would increase message traffic between exchanges and other trading 
centers, which may cause additional failures of systems); KCG Letter 
at 16; SIFMA Letter II at 7 (stating that broker-dealers should be 
allowed to internalize order flow without a limitation on size if 
they are displaying a quote at the price of the NBB or NBO); 
Citigroup Letter at 2; Citadel Letter II at 7; and OTC Markets 
Letter at 8.
    \189\ See KCG Letter at 16 (stating that the Venue Limitation is 
beyond the scope of the Commission's June 2014 Order and ``anti-
competitive on its face''); Citigroup Letter at 2 (noting that the 
Size Limitation and Venue Limitation are more onerous than any 
version of trade-at and there is no real benefit to price discovery 
and to displayed order); Citadel Letter II at 7 (stating that market 
makers should not be forced to route all of their orders to the 
exchanges who would then reap the full benefit of their 
unnecessarily high, but permitted, ``take'' fees); and OTC Markets 
Letter at 8 (stating that the Venue Limitation violates the most 
basic principles of competition and capitalism, under which a 
variety of venues should be able to compete to offer the best 
package of price and services to investors).
    \190\ See Citigroup Letter at 2.
    \191\ See CHX Letter at 20 (stating that the Venue Limitation is 
necessary for the same reason as the Size Limitation) and NYSE 
Letter at 3 (supporting the Venue Limitation to protect displayed 
quotes, strengthen the incentive for market makers to quote 
aggressively, and allow the ability to analyze the impact of a 
protected quote requirement on a wider tick size).
---------------------------------------------------------------------------

e. Block Size Orders
    Several commenters suggested that the Block Size definition be 
altered to more accurately reflect block size transactions of small 
capitalization securities.\192\ Two commenters recommended that the 
Block Size exception should be included in all Test Groups to help 
maintain institutional trading in Pilot Securities,\193\ while another 
commenter stated that block trades should have the same execution 
increments as Retail Investor Orders.\194\
---------------------------------------------------------------------------

    \192\ See SIFMA Letter II at 7 (stating that the block size 
definition should be decreased); BlackRock Letter at 3-4 (noting 
that ``[n]early a third of equities eligible for the [Tick] [P]ilot 
have average daily trading volumes which are lower than 50,000 
shares. A block of 10,000 shares would be incommensurate with the 
volume profile for these stocks as it represents a substantial 
percentage of the daily trading volume.''); and Fidelity Letter at 
7.
    \193\ See JonesTrading Letter at 2 (asserting that the 
Negotiated Trade Exception should also apply to al Test Groups to 
preserve institutional anonymity) and Citadel Letter II at 8 
(advocating for the exemption to preserve executive quality).
    \194\ See Liquidnet Letter at 2 (noting that block execution is 
important to institutional investors and that block orders should be 
allowed to execute at half-penny increments).
---------------------------------------------------------------------------

f. Other Test Group Three Exceptions
    Seven commenters, while supporting the Trade-At Prohibition, 
recommended that its exceptions be modified.\195\ Two commenters opined 
that the Trade-At Prohibition should not contain exceptions similar to 
Rule 611 of Regulation NMS because the Trade-At Prohibition would then 
replicate the complexity of Regulation NMS.\196\ Other commenters 
opined that the Retail Investor Order exception should be modified or 
eliminated.\197\ One commenter stated that the fractional shares 
exception to the Trade-At Prohibition was reasonable because fractional 
shares cannot be displayed and this exception would have a minimal 
effect on the market.\198\
---------------------------------------------------------------------------

    \195\ See Themis Letter at 4-5; CFA Letter; CFA Institute 
Letter; Bright Trading Letter; IMC Letter; Birch Bay Letter; and 
NYSE Letter (supporting certain limited exceptions to the Trade-At 
Prohibition in circumstances where the end customer is benefited by 
the exception). See also IssuWorks Letter at 5 (while not expressing 
support or opposition to the Trade-At Prohibition, the commenter 
suggested that odd-lot trades should be subject to the Trade-At 
Prohibition). But see CHX Letter at 18 (supporting the exceptions as 
proposed).
    \196\ See Themis Letter at 4-5 and CFA Letter at 5-6 (arguing 
that the exceptions should be eliminated and the price improvement 
for retail investors should be increased). But see FIF Letter at 3 
(while not expressing support or opposition to the Trade-At 
Prohibition, the commenter stated that it approved of mirroring the 
Regulation NMS exceptions).
    \197\ See CFA Letter at 5; CFA Institute Letter at 5-6 
(objecting to the retail price improvement amount as not sufficient 
to prevent market participants from stepping in front of displayed 
limit orders); Bright Trading Letter at 2 (objecting strongly to the 
retail exception because retail order flow would be more valuable on 
the exchanges); IMC Letter at 2 (noting that $0.005 hardly qualifies 
as meaningful price improvement and recommends at least half of the 
applicable tick); and Birch Bay Letter at 1 (believing that price 
improvement should be the full five cent tick increment for retail 
orders).
    \198\ See CHX Letter at 20.
---------------------------------------------------------------------------

g. Odd Lots
    Finally, several commenters made suggestions regarding odd lots. 
One commenter suggested that odd lots should be subject to the Trade-At 
Prohibition because current trading practices create a large number of 
odd lot trades that would circumvent the Tick Size Pilot.\199\ Another 
commenter, however, suggested that odd lot orders be excepted from the 
Trade-At Prohibition, as odd lots historically are often excluded from 
regulatory requirements.\200\ One commenter requested clarity on the 
treatment of odd lots.\201\
---------------------------------------------------------------------------

    \199\ See IssuWorks Letter at 5 (citing O'Hara, Yao, and Ye 
paper, What's Not There, The Odd-Lot Bias in TAQ Data, that asserted 
19% of trades are missing from the consolidated tape).
    \200\ See SIFMA Letter at 9 (asserting that larger orders 
divided up to create odd lots should not qualify for the exemption).
    \201\ See BATS Letter at 6.
---------------------------------------------------------------------------

E. Collection and Assessment of Tick Size Pilot Data

1. Trading Center Data
    Several commenters stated that the Tick Size Pilot should leverage 
existing reporting requirements to ease the implementation burden.\202\ 
Commenters suggested that existing data, such as data available through 
MIDAS,\203\ Rule

[[Page 27527]]

605,\204\ the SIPs,\205\ and OATS,\206\ could be used to lessen the 
burden of collection.\207\ One commenter stated the collected data 
should focus only on data that allows for centralized comparisons and 
analysis.\208\ This commenter also suggested that only data relevant to 
increased liquidity of Pilot Securities should be collected.\209\ Some 
commenters believed certain additional data metrics should be included 
to better facilitate the assessment of the Tick Size Pilot.\210\
---------------------------------------------------------------------------

    \202\ See CoreOne Letter at 6; STA Letter II at 3 (recommending 
a widely used quantitative market metrics to measure improvements 
and degradations in overall liquidity available); FIF Letter 3-4; 
SIFMA Letter II at 8; STANY Letter at 8-9; Nasdaq Letter at 6-7; and 
NYSE Letter at 2-3.
    \203\ Market Information Data and Analytics System (``MIDAS'') 
collects and processes data from the consolidated tapes as well as 
from separate proprietary feeds made individually available by each 
equity exchange. See https://www.sec.gov/marketstructure/midas.html.
    \204\ Rule 605, Disclosure of Order Execution Information 
(``Rule 605'') is a trading center monthly reporting requirement 
regarding covered orders in NMS stocks. See 17 CFR 242.605.
    \205\ Securities Information Processor (``SIP'') is any person 
engaged in the business of collecting, processing, or preparing for 
distribution information with respect to transactions or quotations. 
See 15 U.S.C. 78c(22).
    \206\ See supra note 145 and accompanying text.
    \207\ See CoreOne Letter at 6; STA Letter II at 4 (advocating 
for additional categories of data that can be obtained through 
MIDAS); SIFMA Letter II at 8; STANY Letter at 8-9; CHX Letter at 2; 
Nasdaq Letter at 6-7; and NYSE Letter at 2-3.
    \208\ See FIF Letter at 3.
    \209\ See FIF Letter at 3-4 (suggesting sixteen specific data 
requirements that would be relevant to assessing liquidity).
    \210\ See Bloomberg Letter at 17 (suggesting the NMS plan data 
include order type usage statistics, off-exchange trading 
information, and research coverage metrics); Weaver Letter at 2 
(requiring brokers to report the number of shares internalized). See 
also IAC Recommendations.
---------------------------------------------------------------------------

    Several commenters supported the public availability of data for 
potential analysis by academics and other interested parties.\211\
---------------------------------------------------------------------------

    \211\ See BIO Letter at 4 (stating an interest in reviewing the 
Tick Size Pilot results on an industry-by-industry basis); CFA 
Institute Letter at 6 (asserting that ``[p]ublic release ensures 
accountability and peer review of the data by enabling independent 
researchers to look for unique and potentially valuable bits of 
information within the data.''); Bloomberg Letter at 17; and KOR 
Letter II at 5-6 (urging the Commission to provide free and open 
access to Tick Size Pilot data to ensure broadened analysis from 
varied perspectives). Two commenters suggested that the data should 
be available in a downloadable format. See CFA Letter at 6; and FIF 
Letter at 2.
---------------------------------------------------------------------------

2. Market Maker Profitability Data
    Thirteen commenters discussed whether the Market Maker 
Profitability Data should be collected.\212\ Ten commenters opposed 
collecting the Market Maker Profitability Data \213\ because they 
believe gathering such data would be costly.\214\ One commenter noted 
that profitability information is highly confidential and 
proprietary.\215\ This commenter stated that profitability information 
is not currently disclosed except in a public company context, and 
requiring market makers to disclose their profitability to competitors 
(i.e., the exchanges) is anti-competitive. This commenter posited that 
market makers may opt-out of trading in Pilot Securities rather than 
disclose the profitability information.
---------------------------------------------------------------------------

    \212\ See Duffy Letter at 2; CoreOne Letter at 2 (noting that it 
is going to be very difficult to measure the impact on research 
coverage from market maker profitability); STA Letter II at 10; KCG 
Letter at 18; CFA Letter at 7; SIFMA Letter II at 9; Citigroup 
Letter at 4-5; FIF Letter at 5-6; STANY Letter at 8; TD Ameritrade 
Letter at 5; Angel Letter at 8; CHX Letter at 21-22; and NYSE Letter 
at 2.
    \213\ See Duffy Letter at 2; STA Letter II at 10; KCG Letter at 
18; SIFMA Letter II at 9; Citigroup Letter at 4-5; FIF Letter at 5-
6; STANY Letter at 8; TD Ameritrade Letter at 5; CHX Letter at 21-
22; and NYSE Letter at 2.
    \214\ See SIFMA Letter II at 8 (arguing the collection of market 
maker profitability unnecessarily increases the burden on market 
makers) and FIF Letter at 5-6 (asserting that the collection of 
market maker profitability would involve significant 
implementation). See also STANY Letter at 8 and NYSE Letter at 2 
(stating eliminating the collection of market maker profitability 
would reduce the cost of the Tick Size Pilot).
    \215\ See STANY Letter at 8.
---------------------------------------------------------------------------

    Additionally, two commenters stated that Market Maker Profitability 
Data is difficult to calculate and attribute to a specific 
activity.\216\ Other commenters argued that the Market Maker 
Profitability Data is not necessary or useful to the goals of the Tick 
Size Pilot and therefore should not be collected.\217\ Some commenters 
suggested that this data element was unnecessary and would provide the 
Participants with a competitive insight and advantage on market maker 
operations.\218\
---------------------------------------------------------------------------

    \216\ See Citigroup Letter at 4 (arguing it is not feasible, nor 
accurate, to measure market maker profitability on a symbol-by-
symbol basis) and FIF Letter at 6 (calculating profit includes 
access fees and rebates that are computed monthly and not on a 
trade-by-trade basis at the time of execution).
    \217\ See STA Letter II at 10; KCG Letter at 18; TD Ameritrade 
Letter at 5; and CHX Letter at 27. See also CoreOne Letter at 2 
(asserting the correlation between market maker profitability and 
research would be difficult to determine).
    \218\ See KCG Letter at 18 (stating that ``[e]xchanges compete 
directly with market makers for order flow and should not collect, 
review and interpret their competitors' profitability data'' and it 
would also place market makers at a disadvantage when negotiating 
for services provided by exchanges); Citigroup Letter at 5 (arguing 
that market maker profitability should not be published to a primary 
competitor); and STANY Letter at 8 (asserting that the collection of 
market maker profitability is ``anti-competitive and extremely 
disadvantageous to market makers'').
---------------------------------------------------------------------------

    Three commenters supported the collection of the Market Maker 
Profitability Data.\219\ One commenter stated that the collection of 
this data would help to identify the effect of the Tick Size Pilot on 
market maker business practices.\220\ Another commenter stated that 
Market Maker Profitability Data has analytical value for the Tick Size 
Pilot and indicated that the dissemination of the data on an aggregated 
basis would alleviate confidentiality concerns.\221\
---------------------------------------------------------------------------

    \219\ See CFA Letter at 6-7; CFA Institute Letter at 6; and 
Angel Letter at 8.
    \220\ See CFA Letter at 6-7.
    \221\ See Angel Letter at 8.
---------------------------------------------------------------------------

    One commenter stated the collection of the Market Maker 
Profitability Data should only be done if it is absolutely necessary 
for the Tick Size Pilot and, if so, then it should also be collected 
from ATSs and exchanges.\222\ As a potential alternative to Market 
Maker Profitability Data, one commenter suggested the use of a ``Market 
Maker/Investment Bank'' scorecard that includes metrics or important 
drivers of liquidity.\223\
---------------------------------------------------------------------------

    \222\ See TD Ameritrade at 5.
    \223\ See Fidelity Letter at 8.
---------------------------------------------------------------------------

    Two commenters expressed concerns related to the confidentiality of 
Market Maker Profitability Data because of the potential for such data 
to be reverse engineered and attributed to specific market participants 
after becoming publicly available.\224\
---------------------------------------------------------------------------

    \224\ See FIF Letter at 4 and STANY Letter at 8.
---------------------------------------------------------------------------

3. Assessment of Tick Size Pilot Data
    Many commenters stated that the NMS plan should clearly define what 
would constitute a successful Tick Size Pilot and warrant 
implementation on a permanent basis.\225\ Some commenters stated that 
it is important to quantify, within the metrics, specific data ranges 
that would be considered successful.\226\ Another commenter noted that 
``liquidity'' should be defined in order to facilitate the assessment 
of the Tick Size Pilot's impact on liquidity.\227\
---------------------------------------------------------------------------

    \225\ See ECFTF Letter at 3; CMR Letter II at 2; STA Letter II 
at 2; KCG Letter at 7; BATS Letter at 6; BlackRock Letter at 6; 
Schwab Letter at 10; STANY Letter at 4-5; Fidelity Letter at 5-6; 
and TD Ameritrade Letter at 5.
    \226\ See STA Letter II at 2 (stating the Tick Size Pilot's 
goals should be prioritized from the onset in the event a conflict 
among the specific goals developed.); KCG Letter at 8 (arguing that 
``the 200+ data collection items are susceptible to post-[Tick Size 
Pilot] use to build a story of ``success'' based on whatever 
criteria a given reviewer decides at that time''); BATS Letter at 6; 
BlackRock Letter at 6 (asserting that due to the associated costs of 
the Tick Size Pilot ``criteria for success should also be 
unambiguous''); Schwab Letter at 10; STANY Letter at 4-5 (stating 
that without a clear metrics to determine success ``[e]ach of the 
various business models will be able to lay a credible claim to 
success.''); and Fidelity Letter at 5 (asserting that success 
metrics need to be clearly defined from the onset ``to avoid post 
hoc justifications and arguments about success and failure.'').
    \227\ See Warner-Toomey Letter at 2.
---------------------------------------------------------------------------

    Other commenters suggested specific data that would indicate the 
Tick Size Pilot's success or failure.\228\ One

[[Page 27528]]

commenter, focused on issuers of small capitalization securities, 
stated that capital formation criteria should be used to gauge the 
success of the Tick Size Pilot.\229\ Another commenter, however, was 
concerned that the Tick Size Pilot would be prejudged if success 
metrics were defined before empirical data was gathered.\230\
---------------------------------------------------------------------------

    \228\ See ModernNetworks Letter at 2 (stating increasing the 
number of committed market-makers, more market participants, larger 
trade sizes and deeper displayed buy-sell interest should determine 
the success of the Tick Size Pilot); Tabb Letter at 2 (providing six 
metrics that indicate success: market efficiency, greater liquidity, 
larger transaction size, increased certainty of execution, less off-
exchange activity and greater price discovery, more market-making 
firms other than high-frequency firms); ECFTF Letter at 3 
(indicating that Tick Size Pilot success should be determined by 
increase in relative level of trading liquidity, increase in change 
of institutional ownership, higher rate of equity capital issuance); 
and STA Letter II at 3-4. See also IAC Recommendations.
    \229\ See ECFTF Letter at 3 (advocating for using higher rate of 
equity capital issuance as a metric for success).
    \230\ See Nasdaq Letter at 4.
---------------------------------------------------------------------------

    Three commenters stated that the Tick Size Pilot data should be 
analyzed on a more frequent periodic basis until the final assessment 
is conducted.\231\
---------------------------------------------------------------------------

    \231\ See FIF Letter at 6; KOR Letter II at 3; and CHX Letter at 
6. See also STANY Letter at 9 (requesting the Tick Size Pilot 
continue while its final assessment is conducted to avoid 
unnecessary costs, potential confusion, and greater risks of system 
errors).
---------------------------------------------------------------------------

F. Use of an NMS Plan

    Fourteen commenters indicated that the Tick Size Pilot should not 
be the subject of an NMS plan, but instead should be presented as, and 
adhere to the procedural requirements of, a formal Commission 
rulemaking that includes additional cost-benefit analysis.\232\ Some 
commenters believed that the Tick Size Pilot is a market structure 
initiative that is too significant and impactful to be delegated to the 
Participants through an NMS plan.\233\ A number of commenters 
questioned whether it was appropriate to have Participants formulate an 
NMS plan that would affect their competitors.\234\ Commenters were also 
concerned that not all affected market participants, such as market 
makers, broker-dealers, and institutional investors, were included in 
the process of establishing the terms of the Tick Size Pilot and the 
NMS plan.\235\ Additionally, some commenters intimated that a conflict 
of interest may exist by highlighting that the Participants who devised 
the NMS plan are now for-profit entities.\236\
---------------------------------------------------------------------------

    \232\ See Duffy Letter at 2; KCG Letter at 8-9; SIFMA Letter II 
at 7; MFA Letter II at 8; Wells Fargo Letter at 3; Citigroup Letter 
at 5; Schwab Letter at 8-9; STANY Letter at 9-10; Bloomberg Letter 
at 21-22; TD Ameritrade Letter at 4; ITG Letter at 4; Citadel Letter 
II at 3-4; Nasdaq Letter at 7; and OTC Markets Letter at 9.
    \233\ See Schwab Letter at Letter 8-9; Bloomberg Letter at 22 
(stating the Commission should not defer to Participants for such 
major policy decisions); ITG Letter at 4 (opining that the Tick Size 
Pilot would modify certain obligations under Regulation NMS, and 
that NMS plans should implement the Commission's policy directives 
but not amend existing regulations established under federal 
securities laws); and Citadel Letter II at 3 (asserting that the 
temporary nature of a significant pilot should not exempt it from 
traditional rulemaking).
    \234\ See SIFMA Letter II at 2-3 (asserting the NMS plan 
benefits Participants more than others); TD Ameritrade Letter at 4 
(stating the NMS plan unfairly gives more control of the Tick Size 
Pilot to one set of market participants over others); ITG Letter at 
4 (stating that the SROs devising the NMS plan have potential 
conflicts of interests with ATSs and market makers); and Citadel 
Letter II at 4 (claiming that exchanges are able implement an NMS 
plan while excluding broker-dealers, issuers, investment funds, and 
the general investing public from the process).
    \235\ See Schwab Letter at 7 (asserting that ``it is 
unacceptable for exchanges to design the [NMS] [p]lan without any 
input from other parts of the industry.''); TD Ameritrade Letter at 
4; and Citadel Letter II at 4.
    \236\ See KCG Letter at 8-9; Schwab Letter at 7; TD Ameritrade 
Letter 1; and Citadel Letter II at 5.
---------------------------------------------------------------------------

G. Issuer Participation

    A few commenters suggested that Pilot Security issuers should have 
discretion to set their own minimum increments.\237\ One commenter 
stated that companies should be empowered to determine their increments 
by contract with market makers.\238\ Another commenter stated there 
should be an ``Issuer Committee'' formed to advocate for the interests 
of issuers in the process.\239\ Another commenter suggested the 
formation of a ``Tick Size Pilot Advisory Committee'' that would be 
able to provide input after the completion of the Tick Size Pilot 
comment period.\240\
---------------------------------------------------------------------------

    \237\ See Bloomberg Letter at 16 and Angel Letter at 4.
    \238\ See Bloomberg Letter at 16 (citing certain European 
markets that allow for issuers to contract with market makers to 
determine the spread).
    \239\ See ModernNetworks Letter at 2.
    \240\ See NYSE Letter at 3.
---------------------------------------------------------------------------

    Three commenters favored allowing issuers of Pilot Securities to 
opt-out of participating in the Tick Size Pilot.\241\ One commenter 
stated that the decision to participate in the Tick Size Pilot should 
be determined by the Board of Directors or current shareholders of the 
company.\242\ Three commenters opposed the idea of allowing a Pilot 
Security issuer to opt-out of the Tick Size Pilot because it could skew 
the data.\243\
---------------------------------------------------------------------------

    \241\ See DFA Letter at 3; Themis Letter at 2; and CCMC Letter 
II at 3.
    \242\ See DFA Letter at 3.
    \243\ See STA Letter II at 9; ICI Letter at 4; and CHX Letter at 
9 (stating that an opt-out provision should be allowed only if there 
is also an opt-in provision; but either would be premature without 
data). See also IAC Recommendations.
---------------------------------------------------------------------------

H. Implementation of Tick Size Pilot

    Several commenters offered suggestions on how the Tick Size Pilot 
should be implemented. Two commenters suggested that the implementation 
period should be at least one-year, but could be reduced if the Tick 
Size Pilot was simplified.\244\ One commenter indicated that in order 
to adequately assess the burden and time necessary to implement the 
Tick Size Pilot, the requirements needed to be finalized prior to 
developing an implementation schedule.\245\ Other commenters stated 
that either the Commission, or the Participants, should release 
detailed frequently-asked-questions to assist implementation of the 
Tick Size Pilot to help alleviate confusion.\246\ One commenter 
requested that the list of securities be finalized prior to determining 
the implementation schedule.\247\
---------------------------------------------------------------------------

    \244\ See SIFMA Letter II at 10 (citing the rollout period 
required for other Commission actions and indicating that if the 
Trade-At Prohibition is removed a shorter time would be sufficient) 
and FIF Letter at 6 (asserting a twenty month implementation would 
be necessary for the current NMS plan, but if it was simplified only 
a twelve month period would be necessary).
    \245\ See CHX Letter at 1.
    \246\ See KCG Letter at 17; Liquidnet Letter at 2; and Bloomberg 
Letter at 20.
    \247\ See Bloomberg Letter at 20.
---------------------------------------------------------------------------

V. Discussion and Commission Findings

    In 1975, Congress directed the Commission, through the enactment of 
Section 11A of the Act,\248\ to facilitate the establishment of a 
national market system to link together the individual markets that 
trade securities. Congress found the development of a national market 
system to be in the public interest and appropriate for the protection 
of investors and the maintenance of fair and orderly markets to assure 
fair competition among brokers and dealers, among exchange markets, and 
between exchange markets and markets other than exchange markets.\249\ 
Section 11A(a)(3)(B) of the Act authorizes the Commission, ``by rule or 
order, to authorize or require self-regulatory organizations to act 
jointly with respect to matters as to which they share authority under 
this title in planning, developing, operating, or regulating a national 
market system (or a subsystem thereof) or one or more facilities.'' 
\250\ Rule 608 under Regulation NMS provides that the Commission's 
approval of a NMS plan is required to be based upon a finding that the 
plan is ``necessary or appropriate in the public interest, for the 
protection of investors and the maintenance of fair and orderly 
markets, to remove impediments to, and perfect

[[Page 27529]]

the mechanism of, a national market system, or otherwise in furtherance 
of the purposes of the Act.'' \251\ Further, Rule 608 provides the 
Commission with the authority to approve a NMS plan, ``with such 
changes or subject to such conditions as the Commission may deem 
necessary or appropriate.'' \252\
---------------------------------------------------------------------------

    \248\ 15 U.S.C. 78k-1.
    \249\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \250\ 15 U.S.C. 78k-1(a)(3)(B).
    \251\ 17 CFR 242.608(b)(2). See also 15 U.S.C. 78k-1(a).
    \252\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    While the Commission has reviewed certain aspects of decimalization 
and tick sizes over the years, the Commission has not tested whether a 
wider tick size for small capitalization stocks improves the market 
quality for these stocks.\253\ As noted above, the JOBS Act directed 
the Commission to conduct a study, which resulted in the Decimalization 
Report. The Decimalization Report further recommended a public 
roundtable, which in turn produced broad support among its panelists 
for a pilot program. Since issuing the June 2014 Order, the Commission 
has received 77 comment letters that relate to, among other things, the 
development, costs, and complexity of the Tick Size Pilot, and the 
Commission has carefully considered the comments and the issues raised. 
The Commission has conducted significant analysis relating to the 
development, costs, and complexity of the Tick Size Pilot. As noted in 
the June 2014 Order and reflected in several comment letters,\254\ it 
has been suggested that the minimum one penny tick size has had a 
detrimental impact on incentives for underwriters to pursue public 
offerings of smaller capitalization stocks, the production of sell-side 
research, and the incentives for broker-dealers to make markets in the 
securities of smaller capitalization companies. The Commission believes 
that it is in the public interest to gather objective evidence on the 
impact of the minimum tick size, and study a minimum of $0.05 tick 
size, on the trading, liquidity and market quality of securities of 
smaller capitalization companies.
---------------------------------------------------------------------------

    \253\ See supra note 56 and accompanying text. These commenters 
suggested that the Commission had already studied the impact of tick 
sizes. While the Commission staff did prepare the Decimalization 
Report, which summarized academic literature related to the impact 
of decimalization, the Commission has not studied the impact of 
wider ticks on small capitalization stocks. See Decimalization 
Report, supra note 14.
    \254\ See June 2014 Order, supra note 4. See also IssuWorks 
Letter at 2; ECFTF Letter at 1; BIO Letter at 2 (``The one-size-
fits-all tick size imposed by decimalization has hampered small 
company growth since it was implemented in 2000.''); BlackRock 
Letter at 1; and CCMC Letter II at 2.
---------------------------------------------------------------------------

    The Commission believes that the Tick Size Pilot set forth in the 
NMS plan is reasonably designed to provide measurable data that should 
facilitate the ability of the Commission, the public, and market 
participants to review and analyze the effect of tick size on the 
trading, liquidity, and market quality of securities of smaller 
capitalization companies. The Tick Size Pilot should provide a data-
driven approach to evaluate whether certain changes to the market 
structure for Pilot Securities would be consistent with the 
Commission's mission to protect investors, maintain fair, orderly and 
efficient markets and facilitate capital formation.
    As described in detail below, the Commission, consistent with Rule 
608, is modifying certain aspects of the NMS plan and the Tick Size 
Pilot. Specifically, the Commission is making the following changes to 
the NMS plan: (1) Extending the Pilot Period to two years; (2) lowering 
the market capitalization threshold criteria for identifying Pilot 
Securities to $3 billion or less; (3) modifying the Trade-At 
Prohibition by: (i) Amending the definition of trade-at to clarify that 
the provision would only be operative during Regular Trading Hours; 
(ii) removing the Venue Limitation, and (iii) lowering the thresholds 
in the Block Size definition; (4) modifying the data elements related 
to Market Maker Profitability Data by: (i) Removing the data element 
that would have required realized trading profits to be calculated net 
of fees and rebates, and (ii) requiring further aggregation of the 
Market Maker Profitability Data made publically available; (5) 
requiring Participants to provide an assessment on the impact of the 
Tick Size Pilot on market maker profitability; and (6) modifying the 
time when Participants must submit their assessments to the Commission.
    The Commission received comments on market structure issues other 
than the Tick Size Pilot, such as maker-taker fee structures, access 
fees, payment for order flow, high frequency trading, and subpenny 
quoting.\255\ The Tick Size Pilot is a targeted, limited-term pilot 
that is directed at analyzing discrete issues related to a segment of 
the equity markets. While the Commission appreciates market 
participants' views and opinions on these matters, the Commission 
believes that there would be substantial additional costs and 
complexity if the Tick Size Pilot were expanded to address these 
additional issues, and that they are broader than what the Commission 
wants to study in connection with the Tick Size Pilot. Therefore, the 
Commission is not expanding the Tick Size Pilot to assess these other 
market structure issues.
---------------------------------------------------------------------------

    \255\ See supra notes 67-70 and accompanying text.
---------------------------------------------------------------------------

A. Costs and Complexity of the Tick Size Pilot

    The Commission received numerous comments related to the costs and 
complexity of implementing and complying with the Tick Size Pilot in 
general, and Test Group Three in particular.\256\ Commenters also 
expressed concerns about the potential increased costs that might be 
incurred by market participants, investors, and issuers as a result of 
the wider minimum tick size mandated by the Tick Size Pilot.\257\
---------------------------------------------------------------------------

    \256\ See supra Section IV.A. See also infra Section V.D.4. for 
the discussion on Test Group Three and the Trade-At Prohibition.
    \257\ See supra Section IV.A.
---------------------------------------------------------------------------

    With respect to market participants, such as trading centers and 
routing brokers, commenters believed that those market participants 
would incur substantial costs to reprogram and/or implement and operate 
as brand new, their trading, order routing, compliance, and other 
systems to implement the Tick Size Pilot. Such reprogramming or new 
implementation of systems would also include additional testing and 
compliance costs. Concerns were particularly pronounced with respect to 
the costs and complexity of implementing Test Group Three and its 
Trade-At Prohibition and, as noted above, some commenters believed 
market participants might cease trading Test Group Three securities for 
the proposed one-year duration of the Tick Size Pilot rather than incur 
those implementation costs.\258\ Other commenters expressed concerns 
that the complexity of the Tick Size Pilot would lead to increased 
operational risks for market participants and the market as a whole. 
One commenter believed that the Tick Size Pilot would impede its 
ability to trade efficiently in Pilot Securities.
---------------------------------------------------------------------------

    \258\ For a full discussion of the change in the Pilot Period to 
two years to address these concerns, see infra Section V.B.
---------------------------------------------------------------------------

    The Tick Size Pilot, by design, is an objective, data-driven test 
intended to evaluate how a wider tick size would impact trading, 
liquidity, and market quality of securities of smaller capitalization 
companies. As noted above, the Commission cannot know in advance the 
full effects, whether positive or negative, of a wider tick size on the 
behavior of market participants in response to the Tick Size Pilot. 
While the effects of wider tick sizes for small capitalization stocks 
on trading, liquidity, and market quality are not clear, the Commission 
believes that the Tick Size Pilot will generate data to help

[[Page 27530]]

inform whether significant benefits, such as improved liquidity and 
market quality, could be realized by investors, issuers, and other 
market participants. The Tick Size Pilot will provide the Commission 
and interested parties with real-world data regarding the effects of 
wider tick sizes on trading, liquidity and market quality for small-
capitalization companies, and this empirical data will inform analyses 
and may serve as a basis for potential future regulatory actions to, 
among other things, capture any benefits from wider tick sizes on a 
permanent basis. The Commission, therefore, believes that the potential 
magnitude of the benefits that could be revealed by the Tick Size Pilot 
justify the costs of the Tick Size Pilot.
    The Commission acknowledges that implementation of the Tick Size 
Pilot would create costs for market participants and potential 
operational risks. The Commission has taken seriously the concerns 
about costs, complexity, and operational risks, and has tried to 
carefully balance those concerns with the objectives and goals of the 
Tick Size Pilot. As a result, in response to comments, the Commission 
has decided to exercise its authority under Rule 608(b)(2) \259\ to 
modify the Tick Size Pilot, as described below and elsewhere in this 
order. As noted by a one commenter, ``[a]ny systems change, no matter 
how thoroughly prepared and tested, creates a risk of error and 
negative impact to the market.'' \260\ The Commission acknowledges that 
implementation of the Tick Size Pilot may involve operational risks, 
but believes that the Tick Size Pilot's design will permit market 
participants to leverage the use of existing compliance systems, which 
have been tested and currently are in use, and that this should serve 
to mitigate operational risks. In addition, certain of the Commission 
modifications to the Tick Size Pilot will further align the Tick Size 
Pilot requirements with existing systems which should further mitigate 
operational risks. The Commission believes that these Tick Size Pilot 
modifications should lessen the costs, complexity, and operational 
risks of its implementation and compliance without impairing the 
quality and relevance of the data to be collected. The Commission also 
notes that it is approving a one-year implementation period, which 
should provide market participants with adequate time for the careful 
development and rigorous testing of their compliance systems for the 
Tick Size Pilot.
---------------------------------------------------------------------------

    \259\ 17 CFR 242.608(b)(2).
    \260\ See SIFMA Letter at 6.
---------------------------------------------------------------------------

    Trading centers (i.e., exchanges, alternative trading systems, and 
market makers and other internalizing broker-dealers), as well as non-
trading center broker-dealers that route orders for customers or 
themselves and certain institutional and other investors, would incur 
costs to implement and comply with the Tick Size Pilot. Market 
participants would need to modify systems to comply with the minimum 
$0.05 quoting and/or trading increment and applicable exceptions for 
all three Test Groups. While some systems changes would be required for 
the purposes of the Tick Size Pilot, market participants already have 
systems in place to comply with the existing minimum $0.01 quoting 
increment and applicable exemptions under Rule 612 of Regulation 
NMS.\261\ Rule 612 (``Subpenny Rule'') prohibits trading centers, among 
other things, from accepting, ranking or displaying an order priced 
greater than $1.00 per share in an increment smaller than $0.01, absent 
an applicable exemption. Consequently, the Commission believes that 
compliance with the quoting restrictions of the Tick Size Pilot would 
be implemented in a manner similar to the Subpenny Rule, so that 
trading centers and other market participants would be able to leverage 
existing Subpenny Rule compliance systems by, for example, adjusting 
their parameters from $0.01 to $0.05 as applicable. Nonetheless, the 
costs to market centers to implement the Tick Size Pilot could be 
substantial.\262\
---------------------------------------------------------------------------

    \261\ 17 CFR 242.612.
    \262\ See CHX Letter at 17 (Estimating that its potential 
implementation costs for all three Test Groups would be 
approximately $140,000, and suggesting that such costs for 
approximately 60 market centers could be in excess of $8.0 million). 
See also supra note84.
---------------------------------------------------------------------------

    As noted above, many commenters expressed concerns about the costs 
and complexity of implementing and complying with Test Group Three, and 
the Commission acknowledges the particular complexity of implementing 
and complying with the Trade-At Prohibition.\263\ Among other things, 
trading centers would need to monitor protected quotations on other 
trading centers and prevent an execution that would match the price of 
any such quotation unless the trading center itself was displaying a 
protected quotation at that price, and of at least that size, absent an 
applicable exception. While compliance with the Trade-At Prohibition 
would require systems changes by trading centers, the Commission 
believes that, as with the minimum quoting increment, trading centers 
should be able to leverage existing compliance systems when 
implementing this aspect of the Tick Size Pilot. Trading centers today 
already have systems in place to comply with the provisions of Rule 611 
under Regulation NMS (``Trade-Through Rule'') \264\ and applicable 
exceptions, which operates in a manner similar to the Trade-At 
Prohibition. In addition, as discussed below, the Trade-At Prohibition 
has been designed to closely parallel the operation of Rule 611 (e.g., 
by using protected quotations as the compliance benchmark rather than 
the NBBO, by mirroring most of the Rule 611 exceptions into the Trade-
At Prohibition, and, as modified by the Commission, by eliminating the 
Venue Limitation). Accordingly, the Commission believes that trading 
centers should be able to efficiently build upon their existing Rule 
611 compliance systems, which today monitor protected quotations on 
other trading centers and prevent an execution at a price worse than 
such quotations absent an applicable exception, to comply with the 
Trade-At Prohibition. In addition, the Commission acknowledges that 
certain non-trading center broker-dealers that desire to control the 
routing of their orders today monitor protected quotations and use 
``intermarket sweep orders'' to allow trading centers to rely on an 
exception from Rule 611. These broker-dealers also would need to make 
adjustments to their compliance systems if they desire to use the 
comparable intermarket sweep order exception to the Trade-At 
Prohibition but, as with trading centers, the Commission believes they 
should be able to efficiently leverage their existing Rule 611 
compliance systems to do so. Because compliance with the Trade-At 
Prohibition would be implemented in a manner similar to compliance with 
Regulation NMS, and by leveraging those longstanding systems, the 
Commission does not believe that compliance with the Trade-At 
Prohibition would create material additional operational risks or 
materially reduce the efficiency of trading in Pilot Securities as 
market participants already are complying with Regulation NMS.
---------------------------------------------------------------------------

    \263\ See supra Section IV.A. See also infra Section V.D.4. for 
the discussion on Test Group Three and the Trade-At Prohibition.
    \264\ 17 CFR 242.611.
---------------------------------------------------------------------------

    The Commission also acknowledges that trading centers would be 
required to produce specified data in connection with the Tick Size 
Pilot and there would

[[Page 27531]]

be some associated costs and burdens.\265\ Among other things, trading 
centers would have to produce certain data on market quality, orders, 
and market maker participation, and market makers additionally would be 
required to produce certain profitability data. The Commission believes 
that trading centers should be able to leverage existing systems for 
collecting and reporting execution quality data under Rule 605 of 
Regulation NMS for certain of the data relating to market quality and 
order information.\266\ With respect to producing Market Maker 
Profitability Data, the Commission notes that market makers may capture 
trading profit data for internal business purposes. As discussed 
further below, the Commission believes that the design of the Trading 
Center Data already mitigates concerns about confidentiality and has 
further modified the Market Maker Profitability Data requirements to 
address concerns regarding the confidentiality of that data.\267\
---------------------------------------------------------------------------

    \265\ See, e.g., FIF Letter at 5-6; SIFMA Letter at 8 (``the 
data collections specified in Appendices B and C of the Proposed 
Plan are extremely burdensome on broker-dealers and should be 
eliminated . . . The proposed collections of order and profitability 
data unnecessarily increase the burden on all trading centers, 
especially market makers who would be subject to both Appendix B and 
C.''); Nasdaq Letter at 6; and Citadel Letter at 8.
    \266\ 17 CFR 242.605.
    \267\ See infra Section V.E.2.
---------------------------------------------------------------------------

    The Commission recognizes that trading centers and market makers 
would be required to incur some additional costs to produce the 
specific data called for by the Tick Size Pilot. In particular, the 
Commission recognizes that trading centers and market makers would need 
to make changes to their systems to compile the data and that 
transmitting the data would entail costs as well. However, as discussed 
below, the Trading Center Data and Market Maker Profitability Data are 
necessary to examine specific components of the Tick Size Pilot. As 
such, the Tick Size Pilot will provide the Commission and interested 
parties with real-world data regarding the effects of wider tick sizes 
on trading, liquidity, and market quality for securities of small 
capitalization companies, and this empirical data will inform analyses 
and potential future regulatory actions to, among other things, capture 
any benefits from wider tick sizes on a permanent basis.
    As discussed below in Section V.E.2, the Commission is modifying 
certain aspects of the Tick Size Pilot to reduce the data production 
burdens and related concerns about the confidentiality thereof (e.g., 
by eliminating the requirement for market makers to report realized 
trading profits net of fees and rebates, and by requiring Market Maker 
Profitability Data that is made publicly available to be further 
aggregated).\268\ The Commission is not modifying the Trading Center 
Data to address confidentiality concerns. First, the order data and the 
market quality data would be available on a significant lag, mitigating 
potential risks about confidentiality. One concern is that order data 
and market quality data may reveal the trading intentions of market 
participants. However, this concern is mitigated if the data is 
disseminated with a significant lag because market participants may 
have completed their trades, rendering this information less sensitive. 
Second, the Commission does not believe that the order data would be 
sufficiently detailed to identify particular investors or their trading 
strategies. Further, current market quality data identifies the trading 
center producing the data, so any increases in risks regarding 
confidentiality are unlikely to be significant. The collection and 
analysis of relevant data, however, is the central purpose of the Tick 
Size Pilot. The effects of wider tick sizes for small capitalization 
stocks on trading, liquidity, and market quality are not clear and the 
Tick Size Pilot will provide data to allow the Commission to 
effectively test for the potential benefits and costs of permanently 
changed tick sizes. The Commission believes that the potential 
magnitude of the benefits that could be revealed by the Tick Size Pilot 
justify the costs of running the Tick Size Pilot.
---------------------------------------------------------------------------

    \268\ The Commission also notes that data production costs 
should also be reduced as a result of the modification of the market 
capitalization threshold which will reduce the universe of potential 
Pilot Securities. See infra Table 1 in Section V.C.1.
---------------------------------------------------------------------------

    Finally, the Commission acknowledges the concerns expressed by 
commenters about the potential increased costs that might be incurred 
by investors and issuers as a result of the wider minimum tick size 
mandated by the Tick Size Pilot.\269\ As noted above, several 
commenters expressed concern that the Tick Size Pilot would help market 
professionals at the expense of investors. In fact, two commenters 
believed that the increased costs to investors could exceed $200 
million per year. Other commenters expressed the view that the Tick 
Size Pilot could raise the cost of capital for issuers.\270\ Other 
commenters suggested that an assessment of investor costs should be 
completed prior to the implementation of the Tick Size Pilot.
---------------------------------------------------------------------------

    \269\ See supra note 59 and accompanying text. See also IAC 
Recommendations (expressing concern that a pilot would 
disproportionately harm retail investors because their trading costs 
would rise). The Commission has carefully considered the IAC 
Recommendations from January 2014. After careful deliberation and 
considering the IAC Recommendations, the Commission is approving the 
NMS plan, as modified.
    \270\ See supra note 78 and accompanying text.
---------------------------------------------------------------------------

    The Commission notes that the central purpose of the Tick Size 
Pilot is to assess the market quality impact of an increase in the tick 
size for the securities of smaller capitalization companies, which is 
comparable to assessing the impact of the Tick Size Pilot on investors. 
Notwithstanding the opinions of the commenters, whether an increased 
tick size would improve market quality, or increase or reduce execution 
costs for some or all investors, in some or all Pilot Securities, is 
not known at this time. As further discussed in Section V.C.1, the 
number of potential Pilot Securities that currently trade with a spread 
of greater than $0.05, and less than $0.05, is approximately equal. For 
Pilot Securities that currently trade with less than $0.05 spread, the 
costs for investors to trade smaller orders, typically placed by retail 
investors, at the quote may increase while the costs for investors to 
trade small orders in general may or may not increase, depending on the 
degree to which trades execute between the bid and the offer. The 
impact on larger orders, typically placed by institutional investors, 
however, is not clear. The impact on Pilot Securities that currently 
trade with a spread of greater than $0.05 similarly is not clear, as 
spreads in these securities may change as well depending on the impact 
of an increase in the tick size on market making incentives. The 
Commission notes that the exception for Retail Investor Orders was 
proposed by the Participants as a means to reduce the risk of the Tick 
Size Pilot having a detrimental impact on retail investor execution 
quality, and further, the Commission has made modifications to the 
proposal submitted by the Participants (e.g., lowering the market 
capitalization threshold to exclude securities that tend to have 
narrower spreads and, with respect to the Trade-At Prohibition, 
removing the Venue Limitation \271\ and liberalizing the Block Size 
definition).\272\
---------------------------------------------------------------------------

    \271\ The removal of the Venue Limitation should reduce the 
potential costs and complexity associated with the proposed Tick 
Size Pilot by not requiring liquidity that would have been affected 
by the Trade-At Prohibition to be routed from off exchange venues to 
lit venues. See infra Section V.D.4.d.
    \272\ The modification to liberalize the Block Size definition 
should serve to mitigate disruptions to the institutional trading of 
securities with smaller market capitalization. See infra Section 
V.D.4.e.

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[[Page 27532]]

    With respect to the specific cost estimates, the Commission 
appreciates the efforts of commenters to quantify costs and has 
carefully assessed the estimates. These estimates rely on historical 
trading data and reasonable assumptions on how retail execution quality 
may change with wider tick sizes. The Commission cannot know, however, 
the full impact of wider tick sizes on investors, before the Tick Size 
Pilot is underway. With the exception of the modifications and 
consideration for retail investors in the original design of the Tick 
Size Pilot, the Commission does not believe it can further reduce these 
costs without sacrificing the utility of the Tick Size Pilot. 
Specifically, the Commission would need to focus the Tick Size Pilot 
exclusively on stocks with higher transaction costs, which are 
determined by spreads. As noted in Section V.C.3. below, if the tick 
size mechanically affects a criterion for inclusion, then the Tick Size 
Pilot would be severely limited in its ability to inform any future 
rulemaking by the Commission. While the effects of wider tick sizes for 
small capitalization stocks on trading, liquidity, and market quality 
are not clear, the Commission believes that the Tick Size Pilot will 
generate data to help inform whether the significant benefits, such as 
improved liquidity and market quality, could be realized by investors, 
issuers, and other market participants. The Tick Size Pilot will 
provide the Commission and interested parties with real-world data 
regarding the effect of wider tick sizes on trading, liquidity, and 
market quality for small-capitalization companies and this empirical 
data will inform analyses and potential future regulatory actions to, 
among other things, capture any benefits from wider tick sizes on a 
permanent basis. The Commission, therefore, believes that the potential 
magnitude of the benefits that would be revealed by the Tick Size Pilot 
justify the costs of the Tick Size Pilot.
    Similarly, while the Commission recognizes the potential connection 
between tick size, liquidity, and cost of capital, the impact of an 
increased tick size on the costs and ability of issuers to raise 
capital, if any, is not known at this time. As noted above, the 
Commission believes that altering tick sizes could result in 
significant market-wide benefits and improvements to capital formation. 
In particular, if a wider tick size leads to more active market making 
and attracts more investors to small capitalization stocks, positive 
effects on trading, liquidity, and market quality as measured by 
metrics such as trading volume, displayed depth, effective spreads, or 
execution costs for small and large trades could be observed. Indeed, 
some advocates for a tick size pilot argue that a wider tick size would 
benefit issuer's capital formation and cost of capital.\273\ 
Nonetheless, the Commission recognizes that these benefits may not 
manifest in the manner or to the extent anticipated. Further, the 
Commission believes that the design of the Tick Size Pilot and the data 
in the Appendices will facilitate robust analyses to help assess the 
benefits and costs of wider tick sizes. Nevertheless, the Commission 
intends to carefully monitor implementation of the Tick Size Pilot and, 
should it appear that the protection of investors is compromised, the 
Tick Size Pilot can be modified or terminated early to protect them and 
integrity of the market.
---------------------------------------------------------------------------

    \273\ See, e.g., BIO Letter at 5.
---------------------------------------------------------------------------

    Some commenters expressed the view that the Tick Size Pilot should 
have been implemented through Commission rulemaking that includes a 
cost-benefit analysis or that the Commission should have conducted a 
cost-benefit analysis as part of the NMS plan process. The Commission 
reasonably concluded that proceeding with the Tick Size Pilot through 
an NMS plan was an appropriate way to gather information necessary to 
assess whether changes should ultimately be made through rulemaking or 
otherwise. As discussed in detail in the June 2014 Order, and noted 
above, consideration of issues related to minimum tick sizes has been 
ongoing for years.\274\ That history of study led the Commission to 
conclude that it could not adequately evaluate the need for additional 
regulatory action without empirical data that would be generated from a 
pilot implemented through an NMS plan. The Commission is modifying the 
NMS plan in response to comments, including comments with respect to 
the costs and benefits. Consideration of the potential costs and 
benefits of the Tick Size Pilot is reflected in the June 2014 Order, 
the Notice and this order which also addresses comments about the 
potential competitive impact and other economic consequences of the NMS 
plan.
---------------------------------------------------------------------------

    \274\ See supra Section II. See also June 2014 Order, supra note 
4 for a further discussion on the history of decimalization and tick 
sizes.
---------------------------------------------------------------------------

    The Commission's approval of the NMS plan is designed and intended 
to produce measurable data to study the impact of a wider tick size on 
the liquidity and trading in the securities of smaller capitalization 
companies, which should support an objective data-driven review of this 
important policy issue. Legitimate questions have been raised about the 
impact of decimalization on the market for small capitalization 
securities.\275\ The Tick Size Pilot, as modified, should produce 
valuable data to allow the Commission, the public, and market 
participants to assess the impact of a wider tick size on the trading, 
liquidity, and market quality of smaller company stocks. 
Notwithstanding, the Commission would, and expects the Participants to, 
actively monitor the operation of the Tick Size Pilot \276\ and, if 
necessary, the Tick Size Pilot can be modified or terminated early to 
ensure the protection of investors and integrity of the market.
---------------------------------------------------------------------------

    \275\ See supra note 9 and accompanying text.
    \276\ See June 2014 Order, 79 FR at note 50, supra note 4. As 
noted in the June 2014 Order, during the Pilot Period, the 
Commission believes that Participants should notify the Commission 
if they detect any broadly negative impact of the Tick Size Pilot on 
market quality.
---------------------------------------------------------------------------

    In addition, the Commission emphasizes that it welcomes the 
submission of additional comments and empirical evidence during the 
Pilot Period with respect to, among other things, the operation of the 
Tick Size Pilot, in particular the three Test Groups, and the costs 
associated therewith. The Commission would take such comments into 
account in its consideration of related future regulatory actions.

B. Tick Size Pilot Duration

    As proposed, consistent with the June 2014 Order, the Pilot Period 
would be for one year. In the June 2014 Order, the Commission noted 
that it preliminarily believed that a one-year Pilot Period would be 
sufficient to generate data to reliably analyze the effects and impact 
of wider tick sizes. Several commenters argued that the Pilot Period 
should be longer than one-year.\277\ Commenters suggested that the Tick 
Size Pilot would be too complex and costly to implement for a one-year 
Pilot Period, which could lead market participants to opt-out of 
quoting and trading in the Pilot Securities, especially in Test Group 
Three Pilot Securities.\278\ As noted by several commenters, the one-
year Pilot Period could lead some market participants to decide not to 
participate in the Tick Size Pilot.\279\ For example, one commenter 
suggested that a one-year Pilot Period would not be ``enough time to 
warrant start-up costs and other

[[Page 27533]]

investments to participate.'' \280\ Another commenter suggested that a 
longer Pilot Period would ``provide a better incentive for investments 
that market participants will need to make in order to increase their 
exposure to the small cap[italization] market.'' \281\ Some commenters 
suggested that a longer Pilot Period could also help justify its up-
front implementation costs. Commenters noted that if market 
participants did not participate in the Tick Size Pilot, the 
reliability of the data could be compromised.
---------------------------------------------------------------------------

    \277\ See supra note 89 and accompanying text.
    \278\ See supra note 90 and accompanying text.
    \279\ See supra notes 95-96 and accompanying text.
    \280\ See Duffy Letter at 1. See also ABC letter at 3.
    \281\ See ABC Letter at 3.
---------------------------------------------------------------------------

    The Commission recognizes that there would be start-up costs and 
other investments associated with participating in the Tick Size Pilot, 
and does not want the Pilot Period to be a disincentive to participate. 
The Commission believes that extending the Pilot Period to two years 
would help address some of those concerns in part by having those costs 
spread out over a longer period. The Commission expects that a longer 
Pilot Period should encourage wider participation (or remove incentives 
to opt-out of participation) and therefore help make the data more 
reliable, richer, and useful. \282\ Accordingly, after carefully 
considering the comments, the Commission is modifying the NMS plan by 
lengthening the Pilot Period from one-year to two-years.
---------------------------------------------------------------------------

    \282\ The Commission notes that market makers not trading in 
Pilot Securities would forgo the profits they could earn from 
trading in those securities. Those foregone potential profits would 
be larger over a longer time period. In addition, the larger 
potential profits that could be earned by market makers over the 
longer time period should help to offset any implementation and 
compliance costs associated with trading in the Pilot Securities.
---------------------------------------------------------------------------

    The Commission does not think it is necessary to extend the Tick 
Size Pilot beyond two years. As noted above, several commenters 
suggested a Pilot Period longer than two years.\283\ In the Order, the 
Commission noted its preliminary belief that a one-year period would 
generate sufficient data to reliably analyze the effects and impact of 
the wider tick size. The Commission continues to believe that 
meaningful data could be generated in a relatively short time period 
but believes that extending the Pilot Period for one additional year 
could encourage participation in the Tick Size Pilot, which further 
supports the goal of generating sufficient data. If a number of market 
participants decided to refrain from participating in the Tick Size 
Pilot, the ability to generate and collect data sufficient to study the 
impact of wider tick sizes would be frustrated. The Commission also 
notes that a longer Pilot Period should help to mitigate concerns that 
the data generated from the Tick Size Pilot could be susceptible to 
short term fluctuations as suggested by commenters. Therefore, the 
longer Pilot Period should also support representational 
faithfulness.\284\ The Commission understands that some commenters 
supported the one-year Pilot Period.\285\ However, the Commission 
believes that the longer Pilot Period is necessary for the reasons 
discussed above.
---------------------------------------------------------------------------

    \283\ See supra Section IV.B.
    \284\ In this respect, the Commission notes that the costs of 
implementing the Tick Size Pilot should be justified not by a longer 
duration per se, but by the benefits that a longer Tick Size Pilot 
would bring in generating useful data that could guide potential 
future tick size rulemaking. The Commission notes that one commenter 
suggested that the proposed one-year time period would make the data 
easy to manipulate. See Duffy Letter at 1. As noted, the Commission 
believes that the longer Pilot Period should support data integrity.
    \285\ See supra Section IV.B.
---------------------------------------------------------------------------

    The Commission received comments on whether the Tick Size Pilot 
should cease at the end of the Pilot Period or continue to operate 
while the data are assessed.\286\ As described below, the Participants 
will be required to submit their assessment 18 months after the start 
of the Tick Size Pilot, based on data generated during the first 12 
months.\287\ This timing is consistent with the timing set forth in the 
June 2014 Order,\288\ but would provide the Commission and the public 
with valuable information about the Tick Size Pilot's impact during the 
Pilot Period. In addition, the Trading Center Data and Market Maker 
Profitability Data would be publically available during the Pilot 
Period, which would allow market participants and the public to conduct 
analysis during the Pilot Period.
---------------------------------------------------------------------------

    \286\ See supra notes 105-108.
    \287\ Therefore, the modification to the Pilot Period will not 
delay assessment of the Tick Size Pilot.
    \288\ The June 2014 Order and proposed NMS plan provided that 
Participants should submit their assessment six months after the end 
of the Tick Size Pilot, which would have been 18-months after the 
start of the Tick Size Pilot.
---------------------------------------------------------------------------

    The Commission, however, is only approving a Pilot Period of two 
years in this order. Any proposal to extend the Tick Size Pilot beyond 
the two-year term would be considered and evaluated at a later date. 
Therefore, the modification to the Pilot Period of the Tick Size Pilot, 
extending its duration to two-years, is appropriate.

C. Criteria for Pilot Securities

    The Tick Size Pilot sets forth five criteria for determining which 
NMS common stocks would be included: (1) Market capitalization of $5 
billion or less; (2) Closing Price of at least $2.00 on the last day of 
the Measurement Period; (3) Closing Price of at least $1.50 on every 
trading day during the Measurement Period; (4) CADV of one million 
shares or less; and (5) VWAP of at least $2.00.
1. Market Capitalization for Pilot Securities
    Many commenters noted that the market capitalization threshold was 
too high and recommended that the threshold be lowered.\289\ Commenters 
expressed views that the $5 billion market capitalization threshold 
would include many securities not considered as small capitalization 
stocks. Certain comments recommended that the market capitalization 
threshold be as low as $250 million to $2 billion. After carefully 
considering the comments and reviewing prior staff analysis,\290\ the 
Commission deems it appropriate to change the NMS plan by lowering the 
market capitalization threshold for Pilot Securities from $5 billion or 
less to $3 billion or less. In the June 2014 Order, the Commission 
preliminary believed that a market capitalization of $5 billion or less 
would capture the securities of smaller and middle capitalization 
companies with low liquidity and trading activity, and would provide 
the Tick Size Pilot with a broad sample. However, in response to the 
comments received, the Commission staff reviewed its analysis of stocks 
from a period of July 1, 2013 to August 31, 2013,\291\ and found that 
lowering the market capitalization threshold from $5 billion or less to 
$3 billion or less should ensure that there would be a sufficient 
sampling of stocks to support the analysis of the Tick Size Pilot, 
including as it relates to a variability in effective spreads, 
particularly effective spreads greater than 5 cents per share for Pilot 
Securities. Table 1 reflects staff's analysis.
---------------------------------------------------------------------------

    \289\ See supra Section IV.C.1.
    \290\ See June 2014 Order, supra note 4.
    \291\ See June 2014 Order, supra note 4.

[[Page 27534]]



                                  Table 1--Effective Spread Distribution \292\
----------------------------------------------------------------------------------------------------------------
                                                                   Effective spreads (in cents)     Percent of
                                                     Number of   --------------------------------   stocks with
        Market capitalization categories              stocks           90th            10th          effective
                                                                    percentile      percentile     spread >$0.05
----------------------------------------------------------------------------------------------------------------
Less than $1 billion............................           1,979           25.33            1.42           53.97
Less than $2 billion............................           2,376           23.10            1.43           50.04
Less than $3 billion............................           2,574           22.31            1.43           48.10
Less than $5 billion............................           2,758           21.93            1.43           46.63
----------------------------------------------------------------------------------------------------------------

    Overall, Table 1 provides evidence that the selection of a market 
capitalization threshold involves trading-off potential sample size, 
which affects statistical power,\293\ and the potential negative impact 
of the Tick Size Pilot on stocks with low current effective spreads. 
The analysis in Table 1 shows that no single threshold can produce a 
clear-cut sample of securities for the Tick Size Pilot. In particular, 
for each potential market capitalization threshold in the table, 
approximately 10% of stocks have effective spreads of 1.43[cent] or 
less. Further, for stocks in the lower thresholds, more stocks have 
higher effective spreads. This shows that the range of effective 
spreads is greater for lower market capitalization stocks. However, the 
number of stocks in the potential sample declines with market 
capitalization as well. Table 1 also shows that lowering the market 
capitalization threshold from $5 billion or less to $3 billion or less 
would reduce the universe of potential Pilot Securities by only 184 
stocks, which suggests that the threshold of $3 billion or less would 
restrict the Tick Size Pilot to smaller stocks while still assuring a 
sufficiently large sample.
---------------------------------------------------------------------------

    \292\ Data in this table covers common stocks with average price 
greater than $2 per share and average daily trading volume smaller 
or equal than one million shares during the period of July 1, 2013-
August 31, 2013. Data comes from the NYSE's Trade and Quote Data.
    \293\ Statistical power is the ability to detect an effect, if 
the effect actually exists.
---------------------------------------------------------------------------

    Therefore, the Commission believes that it is necessary and 
appropriate to change the NMS plan by lowering the market 
capitalization threshold to $3 billion or less. The Commission notes 
that this change would result in fewer securities eligible to be 
included in the Tick Size Pilot, but this reduction should not 
materially impact the Tick Size Pilot's goal of generating useful data. 
Further, the lowered threshold should lessen the impact of the Tick 
Size Pilot on the overall market, in that stocks included in the Test 
Groups would be smaller and less liquid; and their combined trading 
volume as a proportion of the overall market volume would also be 
lowered.
    Many commenters recommended lowering the market capitalization 
threshold to $1 billion or less (or to an even lower threshold).\294\ 
However, Table 1 shows that further reducing the market capitalization 
threshold from $3 billion or less to $1 billion or less would reduce 
the number of Pilot Securities by additional 595 stocks. The Commission 
believes that such a reduction in market capitalization would result in 
a sample size that is too small (1,979 stocks, including the Control 
Group), significantly reducing the power of a statistical analysis of 
the Tick Size Pilot. Moreover, the threshold of $1 billion or less 
would limit the ability to assess the impact of the widened ticks on 
stocks with different market capitalizations and hence the utility of 
the Tick Size Pilot in assessing possible market capitalization 
thresholds for a potential future tick size rulemaking.\295\
---------------------------------------------------------------------------

    \294\ See supra note 115 and accompanying text.
    \295\ Two commenters recommended lowering the market 
capitalization threshold to $2 billion or less see supra note 115 
and accompanying text. That threshold would suffer from the same 
disadvantages as the threshold of $1 billion or less, although to a 
lesser extent. In particular, Table 1 shows that reducing the market 
capitalization threshold from $3 billion or less to $2 billion or 
less would reduce the number of Pilot Securities by additional 198 
stocks. See supra Table 1 in Section V.C.1. The threshold of $2 
billion or less would also limit the ability to assess the impact of 
the widened ticks on stocks with different market capitalizations.
---------------------------------------------------------------------------

2. Other Proposed Selection Criteria for Pilot Securities
    The Commission received a few comments on the other proposed 
selection criteria.\296\ For example, one commenter suggested that the 
volume threshold should range from 300,000 to 500,000 for illiquid 
shares. The Commission has considered these comments but does not 
believe it is necessary to modify the Tick Size Pilot any further in 
response. First, by having a floor of 300,000 shares, many small 
capitalization firms would be excluded from the Tick Size Pilot. 
Second, the upper threshold of 500,000 would reduce the sample size and 
limit the variation in stock characteristics in the Tick Size Pilot. 
The goal of the Tick Size Pilot is to study the effect of tick size on 
the liquidity and trading of small capitalization stocks. Therefore, 
the Commission believes that the universe of Pilot Securities should 
include a variety of stock characteristics in the sample to facilitate 
the ability to conduct fulsome assessments.
---------------------------------------------------------------------------

    \296\ See supra Section IV.C.2.
---------------------------------------------------------------------------

    Other commenters suggested that the CADV be lowered or that it 
should be based on the dollar trading value or that it should be based 
relative to public float. The Commission has considered these comments 
but does not believe it is necessary to modify the Tick Size Pilot any 
further in response. In particular, it is widely known that these 
volume measures are highly correlated with each other and therefore 
would most likely produce similar samples of Pilot Securities. Further, 
share volume is less correlated with market capitalization than other 
volume measures, so it would add the most as a separate criterion.
3. Additional Criteria for Pilot Securities
    Commenters also suggested additional criteria for selecting the 
Pilot Securities.\297\ For example, several commenters suggested that 
the average weighted daily spread of five cents or greater should be a 
criterion because some securities with spreads less than five cents 
would not benefit from the Tick Size Pilot. After careful review, the 
Commission believes that the selection criteria as proposed in the NMS 
plan, and modified by the Commission, are appropriate. In particular, 
the Commission believes that the selection criteria should provide an 
appropriate number of securities to test while also minimizing 
potential concerns about costs to investors and issuers. Further, tick 
size does not mechanically affect the approved criteria set forth in 
the Tick Size Pilot, making it more informative for any potential 
future tick size rulemaking.
---------------------------------------------------------------------------

    \297\ See supra Section IV.C.3.
---------------------------------------------------------------------------

    The Commission does not believe that a spread criterion should be 
included. Tick size mechanically affects alternative criteria such as 
bid-ask spreads and effective spreads, such that

[[Page 27535]]

using such criteria to determine Pilot Securities would make the Tick 
Size Pilot less informative on when the tick size in a stock should be 
smaller. In addition, researchers should be better positioned, without 
spread criteria that is set forth by the NMS plan, to use Tick Size 
Pilot data to independently suggest tick size criteria for securities 
with smaller capitalization.
4. Securities Excluded From the Tick Size Pilot
    The Tick Size Pilot, as proposed, excludes securities that have had 
an IPO within six months of the start of the Pilot Period. Commenters 
expressed views on other securities that should be excluded from the 
Tick Size Pilot, including securities that are cross-listed in Canada 
and securities that trade below $1.00 per share during the Pilot 
Period. The Commission notes that securities that are cross-listed in 
Canada are included in other NMS provisions and plans; accordingly the 
Commission believes that such securities should also be included in the 
Tick Size Pilot. The Commission also notes that researchers may choose 
not to include all securities in the Test Groups when they undertake 
their analyses. In particular, researchers may choose not to include 
securities that are cross-listed with Canada if they think the results 
of their analyses may be significantly affected.
    The Commission believes that the exclusion of securities that have 
participated in a recent IPO is necessary because such stocks would not 
have a full data set prior the start of the Tick Size Pilot, which 
would limit the ability of the Commission and the public to analyze the 
effects of the Tick Size Pilot against a sufficient baseline.
    One commenter suggested that the NMS plan specifically eliminate 
Pilot Securities that trade at $1.00 or less during the Pilot Period. 
The Commission notes that the Participants proposed additional 
selection criteria to minimize the likelihood that securities that 
trade with a share price of $1.00 or less would be included in the Tick 
Size Pilot. Specifically, there are three criteria that seek to 
evaluate the share price of potential Pilot Securities: (1) a closing 
price of at least $2.00 on the last day of the Measurement Period; (2) 
a closing price on every U.S. trading day during the Measurement Period 
that is not less than $1.50; and (3) a Measurement Period VWAP of at 
least $2.00 per share. The Participants stated that these criteria were 
designed to avoid having securities priced $1.00 or less selected as 
Pilot Securities but the Participants state that Pilot Securities would 
not be excluded from the Tick Size Pilot if their share price falls to 
$1.00 or less during the Pilot Period. The commenter has not suggested 
that these criteria are not sufficient for this purpose but states that 
it is ``reasonable to expect a small number of Pilot Securities to 
trade below $1.00 during the Pilot.'' The Commission believes that once 
established, the universe of Pilot Securities should stay as consistent 
as possible so that the analysis and data can be accurate throughout 
the Pilot Period.
    Finally, the Commission received a few comments supporting the 
exclusion of ETFs from the Tick Size Pilot. The Commission agrees that 
these securities should be excluded because their pricing is derivative 
of the value of their component securities.
5. Assignment of Pilot Securities
    The NMS plan contains procedures for stratified random sampling in 
which the Participants would assign the Pilot Securities into 27 
categories, and then randomly assign Pilot Securities into the Tick 
Size Pilot groups (Control Group and three Test Groups), based on the 
percentages of Pilot Securities in each category. The Commission did 
not receive comments with respect to this aspect of the NMS plan.
    In the June 2014 Order, the Commission stated that the assignment 
of Pilot Securities into each test group should involve stratified 
sampling by market capitalization and price. The Participants proposed 
to add the CADV to the market capitalization and price. The Commission 
believes that the addition of CADV should ensure that each test group 
contains a representative of the total universe of Pilot Securities. 
Specifically, this should help ensure that the four groups of 
securities are comparable to each other in terms of stock 
characteristics and therefore should provide an ideal experimental 
setting for robust analysis of the Tick Size Pilot.\298\
---------------------------------------------------------------------------

    \298\ Ideally, researchers would want to have identical stocks 
in each group to isolate the effects of the different treatments in 
the four groups. However, because this is not possible, researchers 
employ techniques to make the stocks in the four groups as similar 
as possible. The SROs have proposed such a technique.
---------------------------------------------------------------------------

D. Control Group and Test Groups

    The Tick Size Pilot would have a Control Group and three Test 
Groups, comprised of 400 Pilot Securities per test group. Test Group 
One Pilot Securities would quote in $0.05 per share increments and 
would trade at any currently permitted increments. Test Group Two Pilot 
Securities would quote in $0.05 per share increments like those in Test 
Group One, but would only be permitted to trade in $0.05 per share 
increments, subject to three exceptions. Finally, Test Group Three 
Pilot Securities would quote in $0.05 per share increments and trade at 
$0.05 per share increments consistent with Test Group Two, and be 
subject to the Trade-At Prohibition. Pilot Securities in the Control 
Group would continue to quote and trade at the pricing increments that 
are currently permitted.
    Several commenters opined about the design of the Tick Size Pilot. 
For example, some commenters suggested that the Tick Size Pilot should 
be narrower, with only one or two test groups which would lessen the 
cost and complexity of the Tick Size Pilot.\299\ Other commenters 
supported the incremental design of the Tick Size Pilot.
---------------------------------------------------------------------------

    \299\ See supra note 126 and accompanying text.
---------------------------------------------------------------------------

    The Commission notes that the NMS plan has been designed to 
incrementally assess potential changes to the Tick Size Pilot, such 
that Test Group One would only add a wider quoting increment, while 
Test Group Two would also add a wider trading increment, and finally 
Test Group Three would add the Trade-At Prohibition. The Commission 
believes that constructing the Tick Size Pilot in this manner should 
generate the most meaningful and measurable data that should allow the 
Commission and other interested parties to conduct studies.
    Commenters also expressed their views that other tick sizes, both 
larger and smaller than the proposed $0.05 tick size increment, should 
be included and tested concurrently within the Tick Size Pilot.\300\ In 
the June 2014 Order, the Commission stated its preliminary belief that 
$0.05 is an appropriate minimum increment, due to the significant 
percentage of Pilot Securities with a bid-ask spread of greater than 
$0.05. As noted above, the Commission modified and analyzed potential 
Pilot Securities based on the $3 billion market capitalization 
threshold, for a period of July 1, 2013 to August 31, 2013 and found 
that 48.1 percent of these securities had effective spreads greater 
than $0.05.\301\ For these securities, the impact on costs to investors 
of an increase of the minimum price increment to $0.05 is not clear, as 
effective spreads in these securities may change as well depending on 
the impact of an increase in the tick size on market making incentives. 
For securities with effective spreads smaller than $0.05, the

[[Page 27536]]

effective spread may or may not rise due to the increase in the minimum 
increment, depending on the degree to which trades execute between the 
bid and the offer. Increased effective spreads, holding everything else 
equal, would represent increased costs to investors. However, the Tick 
Size Pilot will be able to address whether the increased minimum 
increment will lead to more market maker participation and ultimately, 
to more liquidity in small capitalization stocks, which may counteract 
increased costs due to higher effective spreads. The Commission 
believes that the data supports the conclusion that, on balance, the 
$0.05 increment is appropriate for the Tick Size Pilot because it 
should mitigate cost increases to investors while supporting a robust 
test. While commenters suggested additional increments to test along 
with the $0.05 increment, the Commission believes that additional 
increments could increase the Tick Size Pilot's complexity by, for 
example, increasing the number of test groups in the Tick Size Pilot, 
which in turn would require more programming development and system 
changes by market participants.\302\
---------------------------------------------------------------------------

    \300\ See supra notes 129-131 and accompanying text.
    \301\ See supra Table 1 in Section V.C.1.
    \302\ While additional increments would provide additional data 
and would allow for additional tests, the Commission believes that 
the Tick Size Pilot with one increment will allow for a 
comprehensive analysis of the effects of an increased tick size and 
the added complexity would not be justified. In addition, the added 
complexity of additional increments may not only make analyses more 
complicated, but rather may even reduce the statistical power of 
such analyses and increase the operational risk of implementing the 
Tick Size Pilot.
---------------------------------------------------------------------------

    In the NMS plan, the Participants proposed 400 Pilot Securities per 
Test Group positing that the increased size of each Test Group would 
help to ensure a sufficient data yield for the completion of required 
assessments even in the event of the removal or exclusion of Pilot 
Securities. The Commission received three comments on this aspect of 
the Tick Size Pilot, two of which said the Test Groups should be 
smaller and one who thought 400 was appropriate.\303\ The Commission 
believes 400 Pilot Securities per Test Group should be large enough to 
generate data to reliably test for the effects of larger tick size, and 
should make the Tick Size Pilot more resilient in the event of the 
unforeseen removal or exclusion of Pilot Securities. Therefore, the 
Commission believes that assigning 400 Pilot Securities to each Test 
Group is appropriate.
---------------------------------------------------------------------------

    \303\ See supra note 125 and accompanying text.
---------------------------------------------------------------------------

    The Commission received a few other comments related to the 
operation of the Tick Size Pilot. Specifically, two commenters offered 
differing opinions with respect to whether the Tick Size Pilot should 
operate during opening and closing auctions.\304\ The Commission notes 
that the NMS plan provides that the Tick Size Pilot would be 
operational during and outside of Regular Trading Hours, which is 
defined in the NMS plan as consistent with Rule 600(b)(64) of 
Regulation NMS.\305\ If the Participants find that further 
clarification or modification is needed to address the opening and 
closing auctions, they may utilize the procedures set forth in Rule 608 
to amend the NMS plan. However, the Commission notes that switching to 
penny increments during these auctions may cause additional complexity 
and would be different than how these auctions are currently run. 
Specifically, opening and closing auctions typically do not operate 
with increments different than the increments used during Regular 
Trading Hours.
---------------------------------------------------------------------------

    \304\ See supra notes 132-133 and accompanying text.
    \305\ See NMS plan Section I(CC) and 17 CFR 242.600(b)(64) 
defines Regular Trading Hours as the time between 9:30 a.m. and 4:00 
p.m. Eastern Time.
---------------------------------------------------------------------------

    In addition, two commenters requested clarification on how to 
handle orders that do not conform to the quoting increments.\306\ The 
Commission notes that the Participants, as required under the NMS plan, 
would be required to adopt rules that are needed for compliance by the 
Participants and their members with the provisions of the Tick Size 
Pilot.\307\ In addition, the Participants, as required under the NMS 
plan would be required to develop written policies and procedures that 
are reasonably designed to comply with the quoting and trading 
requirements of the Tick Size Pilot. Therefore, the Participants should 
ensure that they address issues and questions related to the operation 
of the Tick Size Pilot during the implementation period.
---------------------------------------------------------------------------

    \306\ See supra notes 134-135 and accompanying text.
    \307\ Any new rules or changes to existing rules of the 
Participants would be subject to Section 19 of the Act. See 15 
U.S.C. 78s.
---------------------------------------------------------------------------

1. Control Group
    The Pilot Securities in the Control Group would be quoted and 
traded in any increment currently permitted. Any Pilot Securities that 
are not selected to be included in a test group would be placed in the 
Control Group. The Commission believes that the Control Group should 
provide a baseline for the analysis of the effect of the Tick Size 
Pilot on liquidity and market quality data.
2. Test Group One: Widened Quote Increment
    As discussed above, Pilot Securities in Test Group One would have a 
quoting increment restriction of $0.05 but could continue to trade at 
any currently permitted price increment. The Participants would be 
required to adopt rules that would prohibit the Participants or any 
member of a Participant from displaying, ranking, or accepting from any 
person any displayable or non-displayable bids or offers, orders, or 
indications of interest in increments other than $0.05. Orders priced 
to execute pegged to the midpoint of the NBBO and orders entered in a 
Participant's retail liquidity program could be quoted at less than the 
$0.05 increment. The Commission notes that Test Group One would be 
different from the Control Group in only one manner--the quoting 
increment would be widened.
    Several commenters argued that Test Group One should be eliminated 
because trading for Test Group One Pilot Securities would migrate to 
non-displaying trading centers.\308\ One commenter also suggested 
eliminating Test Group One to reduce the complexity of the Tick Size 
Pilot.\309\ This commenter believed that eliminating Test Group One 
would reduce the costs of implementing the Tick Size Pilot and posited 
that ``there is little disagreement'' that Test Group One would divert 
order flow to unlit markets.\310\
---------------------------------------------------------------------------

    \308\ See supra Section IV.D.1.
    \309\ See supra note 136 and accompanying text.
    \310\ The Commenter did however acknowledge that removing Test 
Group One from the Tick Size Pilot would be a significant change. 
See KOR Letter II at 3.
---------------------------------------------------------------------------

    The Commission, however, believes, as noted above, that Test Group 
One is necessary as an initial incremental change to test the impact of 
the Tick Size Pilot on market quality and liquidity of this market 
segment. The Commission believes that Test Group One is reasonably 
designed to generate data on how trading characteristics and liquidity 
would change if the quoting increment alone is widened. One commenter 
suggested that exchanges and agency ATSs would be at a competitive 
disadvantage vis-[agrave]-vis broker-owned proprietary execution 
systems which can execute orders at any increment without accepting or 
ranking an order at an impermissible increment. This commenter 
recommended that market participants be permitted to accept and rank, 
but not display, orders in one penny increments for Test Group

[[Page 27537]]

One.\311\ The Commission notes the quoting restrictions of Test Group 
One would be implemented in a manner similar to Rule 612, the Subpenny 
Rule.\312\ Further, the Commission notes that the issue raised by the 
commenter is present in the current trading environment with Rule 612, 
where brokers may execute trades in increments finer than $0.01 so long 
as they do not accept, rank, or display orders in such increments. The 
Commission believes it is important to test and evaluate Test Group One 
with a design that is similar to the current trading environment and 
within the context of the Tick Size Pilot's incremental design that 
should permit qualitative comparison with Test Group Two and Test Group 
Three. Accordingly, the Commission does not believe it is necessary to 
modify the Tick Plan to address the distinction raised by the 
commenter.
---------------------------------------------------------------------------

    \311\ See BATS Letter at 3.
    \312\ 17 CFR 242.612.
---------------------------------------------------------------------------

    While commenters have raised counterpoints, the Commission believes 
that it is necessary to initially test this incremental change to 
generate data to analyze the impact, if any, on market quality for the 
Pilot Securities in Test Group One. The Commission notes that Test 
Group One would only test how a wider quoting increment implemented 
using the current regulatory framework, reflected in Rule 612, could 
impact the liquidity and trading of smaller capitalization securities. 
Test Group One is not designed to favor one group of market 
participants over other groups of market participants any more than the 
existing regulatory framework. In particular, including Test Group One 
would allow the Tick Size Pilot to examine each change incrementally to 
identify the changes that are economically most important. Further, the 
Commission recognizes that the design of the Test Groups create 
differing incentives for the display and execution of orders which may 
result in the migration of order flow,\313\ which is why the inclusion 
of Test Group One is vital. This Test Group could potentially generate 
data on the degree to which widening the quoting increment alone 
results in a migration to non-displaying trading centers.
---------------------------------------------------------------------------

    \313\ For example, if a larger minimum quoting increment leads 
to wider bid-ask spreads, but the trading increment remains 
unchanged, it would produce an incentive to internalize order flow 
and execute off-exchange because price improvement would be 
relatively cheaper to provide.
---------------------------------------------------------------------------

    Specifically, Test Group One should enhance the ability of the Tick 
Size Pilot to generate data on the effects of wider ticks and any 
resulting order flow migration on liquidity, execution quality, 
volatility, market maker profitability, competition, and transparency.
3. Test Group Two: Widened Quote and Trade Increment
    Pilot Securities in Test Group Two would be required to be quoted 
in a $0.05 increment, like Test Group One, but trading would be limited 
to the $0.05 increment subject to three exceptions. Specifically, 
executions could occur at a price other than a $0.05 increment in the 
following circumstances: (1) midpoint executions at the NBBO or best 
protected bid and best protected offer; (2) retail price improvement of 
at least $0.005 better than the best protected bid or offer; and (3) 
Negotiated Trades.
    After carefully weighing comments, the Commission believes that 
Test Group Two and the exceptions, including the exception for retail 
price improvement, are reasonably designed to generate data on how 
trading characteristics and liquidity would incrementally change 
relative to Test Group One if the trading increment is widened. The 
Commission believes it is important to measure the incremental impact 
of a trading increment on market quality for small capitalization 
stocks and it would be useful to compare the data generated by this 
Test Group against the data in Test Group One. As the Commission noted 
in the June 2014 Order, if the minimum quoting increment is changed 
without corresponding changes to the minimum trading increment, market 
participants may be hesitant to display liquidity in larger $0.05 
increments if other market participants could easily trade ahead of 
them in smaller increments.
    As noted above, commenters raised concerns with respect to the 
retail price improvement exception.\314\ Some commenters argued that 
the exception should be broadened to include all orders as a means to 
alleviate implementation burdens. Some commenters argued that the level 
of price improvement should be increased to more than the proposed 
$0.005. Another commenter expressed its opposition to the retail 
exception because it believes that the exception would undermine the 
Tick Size Pilot.\315\
---------------------------------------------------------------------------

    \314\ See supra Section IV.D.2.
    \315\ See supra notes 155-156 and accompanying text.
---------------------------------------------------------------------------

    By allowing Retail Investor Orders to trade at certain prices other 
than the $0.05 trading increment and receive price improvement, the 
Commission believes that some of concerns related to costs for retail 
investors could be minimized. As noted earlier in Section V.A., retail 
investors may incur costs due to the Tick Size Pilot in the form of 
wider bid-ask spreads, which imply less favorable prices and high 
transaction costs if retail investors were required to trade only at 
the displayed quotation. As noted above, many potential Pilot 
Securities would have bid-ask spreads of greater than $0.05, although 
an equal number may have spreads less than $0.05. Therefore, the Tick 
Size Pilot could potentially widen bid-ask spreads of some Pilot 
Securities, which could increase costs for retail investors. The 
ability to receive price improvement, therefore, should reduce some 
retail investor costs. Further, the Commission does not believe that 
the exception for Retail Investor Orders would undermine the Tick Size 
Pilot and believes it is appropriate to provide this exception for 
retail investors.
    The Commission, however, does not believe that it is necessary or 
appropriate to expand the price improvement exception to all orders. 
The Commission believes that such a modification could undermine the 
purpose of Test Group Two, which is to assess the impact of a trading 
increment on trading and liquidity. As noted above, this exception was 
designed to mitigate cost concerns for retail investors that typically 
receive price improvement under current trading conditions.\316\
---------------------------------------------------------------------------

    \316\ See June 2014 Order supra note 4.
---------------------------------------------------------------------------

    Commenters stated that the attestation should not be required 
because it would be unwieldy for trading centers to conduct 
surveillance to ensure that only bona fide retail orders qualify.\317\ 
The Commission notes that certain Participants have approved retail 
liquidity programs that require market participants to submit an 
attestation. Thus, many market participants must currently comply with 
an attestation requirement, and should already have the appropriate 
policies and procedures in place. While it should not be unwieldy for 
these trading centers to conduct surveillance for the attestation 
requirement, the Commission acknowledges that there would be additional 
costs for trading centers and their market participants that are not

[[Page 27538]]

currently required to comply with the attestation requirements. 
However, the Commission believes that the attestation requirement is 
necessary to promote the integrity and goals of the Tick Size Pilot by 
helping to ensure that only bona fide retail orders entered by market 
participants are eligible for the retail price improvement exception.
---------------------------------------------------------------------------

    \317\ See supra Section IV.D.2. See also Tabb Letter at 5; Two 
Sigma Letter at 2 (``It is unclear how a trading center receiving 
order flow from large numbers of natural persons can design 
surveillance programs that would allow them to confidently make this 
attestation.''); KCG Letter at 9 (noting that the definition of 
Retail Investor Order was too complex and ambiguous and would lead 
to many of the largest retail firms to not sign the required 
attestations); STANY Letter at 6; and TD Ameritrade at 5.
---------------------------------------------------------------------------

    The Commission acknowledges that there are potential downsides to 
widening the quoting and trade increment to $0.05 but believes that the 
Tick Size Pilot is designed to reasonably balance the need to generate 
data and the potential higher costs for investors. The Commission also 
recognizes that the $0.05 quoting and trading increment for Test Group 
Two could have an effect on competition between exchanges and non-
exchange trading centers, including the potential migration of order 
flow. The extent of any such potential order flow migration or other 
competitive impact is not known at this time. The Commission believes 
that the data analysis from the results of Test Group Two should 
provide information on the potential competitive impact and the 
incremental economic effects of a wider trading increment, including 
any incremental effects on the incentives for the display and execution 
of orders that may result in the migration of order flow relative to 
the other Test Groups and the Control Group. This should better inform 
the Commission and interested parties of the impact of a wider tick 
increment.
4. Test Group Three: Widened Quote and Trade Increment With a Trade-At 
Prohibition
    Pilot Securities in Test Group Three would be quoted and traded in 
$0.05 increment like Test Group Two and provided with the same trading 
exceptions. In addition, Test Group Three would introduce another 
incremental change--the Trade-At Prohibition. In the June 2014 Order, 
the Commission described a trade-at prohibition as requiring a trading 
center that was not displaying at the NBBO at the time the trading 
center received an incoming marketable order to either: (1) execute the 
order with significant price improvement ($0.05 or the midpoint of the 
NBBO); (2) execute the order at the NBBO if the size of the incoming 
order is of block size; or (3) route intermarket sweep orders to 
execute against the full displayed size of the protected quotations at 
the NBBO and the execute the balance of the order at the NBBO price. In 
the Notice, the Commission noted that, in the context of the Tick Size 
Pilot, an important purpose of a trade-at requirement would be to test 
whether, in a wider tick environment, the ability of market 
participants to match displayed quotes, without quoting, would 
negatively affect market makers' quoting practices. The Commission 
further noted that if quoting practices were affected negatively, then 
it could undermine one of the central purposes of the Tick Size Pilot, 
namely to determine whether wider tick sizes positively affect market 
maker participation and pre-trade transparency. For example, if the 
results of Test Groups One and Two were to show an improvement in 
liquidity with wider tick increments but a loss to transparency because 
of an order flow migration to the OTC market, perhaps Test Group Three 
would show similar improvements to liquidity but without the loss to 
transparency.
    The Participants proposed to define ``trade-at'' in the NMS plan as 
``the execution by a trading center of a sell order for a Pilot 
Security at the price of a protected bid or the execution of a buy 
order for a Pilot Security at the price of a protected offer.'' \318\ 
The Commission notes that the proposed definition of trade-at set forth 
in the NMS plan would require compliance with the Trade-At Prohibition 
outside of Regular Trading Hours. In particular, the NMS plan states 
that the Tick Size Pilot would be applicable during and outside of 
Regular Trading Hours.\319\ The application of the Trade-At Prohibition 
outside of Regular Trading Hours would extend its application beyond 
what is currently required for the Trade-Through Rule under Regulation 
NMS.\320\ As noted above, the Commission expects that market 
participants would be able to leverage existing Rule 611 systems for 
implementing and complying with the Tick Size Pilot, which currently do 
not apply outside of Regular Trading Hours. The application of the 
Trade-At Prohibition outside of Regular Trading Hours would be broader 
than what the Commission envisioned for trade-at and could increase 
implementation and compliance burdens for market participants. 
Therefore, the Commission has deemed it necessary to modify the 
definition of trade-at under the NMS plan to provide that it is only 
applicable during Regular Trading Hours.
---------------------------------------------------------------------------

    \318\ See NMS plan Section (I)(LL).
    \319\ See NMS plan Section (IX).
    \320\ The definition of ``trade-through'' in Rule 600(b)(77) of 
Regulation NMS provides that it is applicable during Regular Trading 
Hours. See 17 CFR 242.600(b)(77).
---------------------------------------------------------------------------

    Under the proposed Trade-At Prohibition, trading centers that are 
not quoting cannot match protected quotations and a trading center 
quoting at the protected quotation can execute orders but only up to 
the size of its displayed quotation. The Tick Size Pilot included 
thirteen exceptions to the Trade-At Prohibition, when trading centers 
may trade at a protected quotation or price match.
    The Commission received several comments that opposed the inclusion 
of the Trade-At Prohibition.\321\ Commenters raised concerns about the 
complexity and costs of implementing Test Group Three which they 
concluded could lead market participants to forego participation in 
Test Group Three and distort the resulting data. Other commenters 
suggested that the Trade-At Prohibition would increase operational 
risks. Several commenters suggested that Test Group Three should be 
eliminated to reduce the complexity related to the Tick Size Pilot. 
Other commenters suggested that the Trade-At Prohibition would increase 
investor costs if off-exchange venues are restricted in their ability 
to compete for executions. One commenter pointed to Australian and 
Canadian rules as evidence that market quality would be adversely 
affected and as a justification to not implement trade-at domestically.
---------------------------------------------------------------------------

    \321\ See supra note 157 and accompanying text. See also Section 
IV.A.
---------------------------------------------------------------------------

    Several commenters, however, supported the inclusion of the Trade-
At Prohibition.\322\ Commenters raised concerns that Test Group One and 
Test Group Two could provide less incentive for market participants to 
display liquidity and result in trades migrating to dark venues. As 
noted by several commenters, wider spreads, and the potential increased 
profits derived therefrom, could incentivize market participants to 
execute more transactions in Pilot Securities on dark venues.\323\ Some 
commenters, therefore, supported including the Trade-At Prohibition to 
test its impact on displayed liquidity and market quality.
---------------------------------------------------------------------------

    \322\ See supra note 169 and accompanying text.
    \323\ See supra note 176 and accompanying text.
---------------------------------------------------------------------------

    The data generated by this test group should inform the Commission, 
the public, and market participants on the incremental impact of the 
Trade-At Prohibition on trading characteristics and liquidity of Pilot 
Securities when the quoting and trading increments are widened. The 
Trade-At Prohibition should test whether market participants are 
incentivized to display more liquidity in a wider tick environment. 
Therefore, the Commission believes that the inclusion of the Trade-At 
Prohibition should enhance the utility of the Tick Size Pilot. Further, 
the data generated by Test Group Three would

[[Page 27539]]

allow the Commission and the public to test the incremental impact on 
displayed liquidity and market quality in a wider tick environment when 
compared to Test Group One and Test Group Two. As noted, several 
commenters stated that trading in Test Groups One and Two could migrate 
to non-displayed venues. As a control measure, the Commission believes 
that it is important to test whether given larger quoting and trading 
increments, market quality could be enhanced by an incentive to display 
liquidity such as the Trade-At Prohibition.\324\
---------------------------------------------------------------------------

    \324\ The Commission notes that the inclusion of Test Group 
Three would not necessarily provide data that could examine whether 
a broader trade-at prohibition, applied to all securities with all 
tick sizes and fewer exceptions, would benefit investors.
---------------------------------------------------------------------------

    However, the Commission acknowledges commenters' concerns about the 
cost and complexity of the Trade-At Prohibition. The Commission is 
therefore modifying the Trade-At Prohibition, as described below, to 
mitigate and address some of these concerns. The Commission believes 
that the modifications to the Trade-At Prohibition should reduce the 
complexity of the provision while maintaining its utility in the Tick 
Size Pilot. The modified Trade-At Prohibition, as well as the 
modification to extend the Tick Size Pilot's duration, should work in 
tandem to ensure that there is wider participation in the Tick Size 
Pilot.
    The Commission recognizes that the Trade-At Prohibition may have 
some effect on competition between exchanges and non-exchange trading 
centers. However, the Commission does not believe that this modified 
Trade-At Prohibition should have significant effects on this 
competition. Non-exchange trading centers should continue to be able to 
compete with exchanges for order flow, albeit either in a displayed 
manner or by providing price improvement. Further, the Commission 
believes that the exceptions to the modified Trade-At Prohibition, such 
as the exception for Retail Investor Orders and Block Size orders, 
should exclude the types of transactions that occur primarily off-
exchange.\325\ As a result, the Trade-At Prohibition should not result 
in a migration to exchanges of transactions not likely to occur on 
exchanges in the Control Group. In addition, the Tick Size Pilot data 
should facilitate tests on the effect of a conditional Trade-At 
Prohibition on investors and the effect on competition of any resulting 
migration to exchanges. Finally, the Commission notes that the market 
structure and regulatory framework in Australia and Canada are very 
different from the U.S. market structure and regulatory framework. For 
example, the U.S. equity market structure includes higher levels of 
off-exchange trading and trading is dispersed among a large number of 
market centers.\326\ Accordingly, the Commission believes the 
experiences of those jurisdictions with a trade-at prohibition are not 
clearly relevant when considering a trade-at prohibition in the context 
of the Tick Size Pilot. As discussed above, the Commission believes 
that the Trade-At Prohibition is necessary to fully study the impact on 
the liquidity and trading of smaller capitalization securities.
---------------------------------------------------------------------------

    \325\ See Laura Tuttle, SEC Staff Paper, OTC Trading: 
Description of Non-ATS Trading in National Market System Stocks, 
(March 2014) available at https://www.sec.gov/marketstructure/research/otc_trading_march_2014.pdf.
    \326\ See Securities Exchange Act Release No. 61358 (January 14, 
2010), 75 FR 3593 (January 21, 2010) (``Concept Release on Equity 
Market Structure'').
---------------------------------------------------------------------------

    The Participants proposed deviations from, or additions to, the 
trade-at prohibition set forth in the June 2014 Order, as follows: (1) 
the proposed Trade-At Prohibition would apply to any protected bid or 
protected offer, rather than just the NBBO; (2) trading centers 
displaying a quote at the price of a protected quote on an SRO 
proprietary quote feed could execute an incoming order at that 
displayed price; (3) a trading center could only execute up to its 
displayed size (i.e., Size Limitation); (4) a trading center must 
execute where the protected quotation is displayed (i.e., Venue 
Limitation); (5) nine exceptions to the Trade-at Prohibition modeled 
after the exceptions found in Rule 611 of Regulation NMS; and (6) an 
exception for fractional shares.
a. Protected Quotations Standard
    The Participants proposed to use a protected quotation standard 
rather than the NBBO for the Trade-At Prohibition. As described in the 
Notice, the protected quotation standard would give broader protection 
to aggressively displayed quotes because the protected quotation 
standard encompasses the aggregate of the most aggressively priced 
displayed liquidity on all trading centers, while the NBBO standard is 
limited to the single best order in the market.\327\
---------------------------------------------------------------------------

    \327\ See 17 CFR. 242.600(b)(42). When two or more market 
centers transmit to the plan processor identical bids or offers for 
an NMS security, the best bid or best offer is determined by ranking 
the identical bids or offers by size and then time. As a result, 
while two market centers may display identical prices, only one 
market center will display the national best bid or national best 
offer. Moreover, the Commission notes that the NBBO could contain 
manual quotations.
---------------------------------------------------------------------------

    A few commenters opposed expanding the Trade-At Prohibition to 
protected quotations. One commenter suggested that protecting less 
competitive prices than the NBBO would undermine price competition and 
increase complexity,\328\ while other commenters supported the 
protected quotation standard because it would encourage more aggressive 
quoting on multiple trading centers.\329\
---------------------------------------------------------------------------

    \328\ See supra Section IV.D.3.a.
    \329\ Two other commenters requested clarification related to 
the protected quotation standard. The Commission notes that specific 
clarification questions should be addressed by the Participants 
during the implementation period. See supra note 181 and 
accompanying text.
---------------------------------------------------------------------------

    After careful consideration, the Commission believes that using 
protected quotations as the basis for the Trade-At Prohibition is 
appropriate. The protected quotations standard should further enhance 
displayed liquidity by providing incentives for market participants and 
trading centers to display additional liquidity. The Commission does 
not believe that using protected quotations for the Trade-At 
Prohibition would necessarily result in less price competition. The 
Commission expects that market participants would continue to compete 
to provide liquidity via the best priced orders under the Tick Size 
Pilot.\330\ Further, the Commission believes that using the protected 
quotations standard should help to alleviate concerns that the Tick 
Size Pilot is complex and costly to implement, as it would allow more 
displaying trading centers to execute orders at their displayed price 
and because market participants currently use the same standard to 
comply with Rule 611 of Regulation NMS.
---------------------------------------------------------------------------

    \330\ The Commission notes that Rule 611 of Regulation NMS would 
apply to transactions executed under the Tick Size Pilot.
---------------------------------------------------------------------------

b. SRO Quotation Feed
    The Participants proposed to allow price matching by trading 
centers that have displayed a quote at the price of a protected quote 
through an SRO proprietary data feed. One commenter stated this feature 
would assist a trading center that cannot publish its own protected 
quotation.\331\ The Commission believes that the use of an SRO 
proprietary data feed is appropriate. Trading centers displaying a 
quote on an SRO proprietary data feed have contributed to displayed 
liquidity, and therefore should be able to trade at these displayed 
prices, subject to the Size Limitation.
---------------------------------------------------------------------------

    \331\ See supra Section IV.D.3.b.

---------------------------------------------------------------------------

[[Page 27540]]

c. Size Limitation
    The Participants proposed to limit the price matching by trading 
centers that have displayed a protected quote with the Size Limitation. 
Under the Size Limitation, displaying trading centers would only be 
permitted to execute an incoming order up to the size of its protected 
quotation, and executions against undisplayed interest at that price 
level could not occur unless other protected quotations at that price 
are satisfied. Several commenters opposed the Size Limitation.\332\ 
Commenters suggested that hidden reserve orders at the protected 
quotation price level should be allowed to execute without satisfying 
the other protected quotations. A few commenters believed that the Size 
Limitation would reduce execution certainty or cause delays in 
executions. Other commenters stated that the Size Limitation would lead 
to information leakage for larger sized orders because of the need to 
route to multiple venues to execute against protected quotes. Further, 
commenters stated that undisplayed liquidity, both on- and off-
exchange, is important to retail and institutional investors.
---------------------------------------------------------------------------

    \332\ See supra Section IV.D.3.c.
---------------------------------------------------------------------------

    While the June 2014 Order did not specify the Size Limitation, the 
Commission believes that it supports one of the reasons for testing 
trade-at in the Tick Size Pilot--to determine its impact on displayed 
liquidity and market quality in a wider tick environment. As one 
commenter noted, the Size Limitation should create a strong incentive 
to display liquidity.\333\ The Commission notes that some commenters 
suggested that allowing hidden reserve orders to execute before same-
priced protected quotations could incentivize market participants to 
display a quote for a nominal size. The Trade-At Prohibition is 
intended to test whether a trade-at is needed to encourage the display 
of limit orders with depth greater than a nominal size in a wider tick 
environment. During the Tick Size Pilot, Test Group Three should allow 
researchers to measure whether this structure results in increases in 
displayed liquidity, and if so, whether it has a positive impact on 
market quality. The Commission believes that without the Size 
Limitation, the incentive to display liquidity could be reduced, which 
in turn would undermine a primary rationale for testing trade-at in a 
wider tick environment. Commenters also raised concerns with respect to 
execution certainty and execution delay. The Commission believes that 
the Size Limitation could potentially increase execution certainty by 
providing incentives to display additional liquidity. The Commission 
believes that the Size Limitation's effect on execution delay is 
uncertain due to the potential increase in routing to execute against 
protected quotations, and would monitor results of the Tick Size Pilot 
to determine if there is significant execution delay.
---------------------------------------------------------------------------

    \333\ See CHX Letter at 19. See also supra note 187 and 
accompanying text.
---------------------------------------------------------------------------

    The Commission also notes that the modification to the Block Size 
definition should mitigate and address some commenter concerns related 
to execution certainty and information leakage that some commenters 
believe could occur as a result of the Size Limitation. The reduced 
threshold for Block Size orders should lower the risk of market 
exposure for investors trading with size. The liberalized Block Size 
definition should permit more orders to trade without being restricted 
by the Trade-At Prohibition.
d. Venue Limitation
    The Participants proposed the Venue Limitation that would restrict 
where a trading center that is displaying a quotation at the price of a 
protected quotation could execute incoming orders. Commenters stated 
that the inclusion of the Venue Limitation would protect displayed 
quotations, strengthen incentives for market making and gauge the 
impact of tick size increments.\334\ Several other commenters, however, 
expressed concern that the Venue Limitation would increase the 
implementation costs and burdens for Test Group Three.\335\ For 
example, one commenter noted that the Venue Limitation would increase 
message traffic and potentially cause systems failures.\336\ Commenters 
also argued that the Venue Limitation was anti-competitive.\337\ In 
particular, commenters stated that off-exchange trading centers should 
not be forced to route orders to the exchanges.
---------------------------------------------------------------------------

    \334\ See supra Section IV.D.3.d.
    \335\ See supra Section IV.D.3.d.
    \336\ See CMR Letter II at 7.
    \337\ See supra note 189 and accompanying text.
---------------------------------------------------------------------------

    After carefully considering the comments, the Commission is 
modifying the Trade-At Prohibition to remove the Venue Limitation. The 
Commission notes that the Venue Limitation was not prescribed in the 
June 2014 Order. The Commission believes that the Venue Limitation 
would have unnecessarily restricted the ability of off-exchange market 
participants to execute orders in the Pilot Securities of Test Group 
Three.\338\ Further, the Commission believes that the Venue Limitation 
would not have created additional incentives to display liquidity and 
thus is not necessary to support the purposes of the Trade-At 
Prohibition.\339\ The Commission believes that the Size Limitation, as 
discussed above, should be sufficient to incentivize displayed 
liquidity because price matching generally would be permitted only if 
the market participant otherwise was publicly displaying an order in a 
size at least as large as the size of the matching transaction. The 
Commission does not believe the Venue Limitation would incentivize any 
material amount of additional displayed liquidity, and thus would not 
have provided additional economic information for the Tick Size Pilot.
---------------------------------------------------------------------------

    \338\ A potential cost of the Venue Limitation would have been 
that a broker-dealer would need to connect to the ADF to display 
off-exchange, thereby incurring initial set-up costs for 
connectivity and costs to maintain that connectivity. In addition, 
each quote displayed on the ADF, in addition to an exchange, would 
result in costs to the broker-dealer related to message and 
recordkeeping capacity and fees and associated quoting activity 
costs to be paid to FINRA.
    \339\ The incremental effect of the Venue Limitation would be to 
encourage those who display on an exchange to display off-exchange.
---------------------------------------------------------------------------

    Further, the Commission believes that removing the Venue Limitation 
should mitigate commenter concerns about the complexity and cost of 
implementing the Trade-At Prohibition by reducing the need for off-
exchange trading centers to route orders to the exchanges. Therefore, 
the Commission deems it appropriate to change the NMS plan by removing 
the Venue Limitation.\340\
---------------------------------------------------------------------------

    \340\ The Commission notes that the NMS plan includes three 
examples for how the Trade-At Prohibition would operate. Those 
examples do not implicate the Venue Limitation and therefore the 
Commission is not modifying the examples. See NMS plan supra note 3.
---------------------------------------------------------------------------

e. Modifying the Definition of Block Size
    The Trade-At Prohibition proposed by the Participants included a 
Block Size order exception whereby the price matching of orders of a 
``block size'' would be permitted. The Participants, consistent with 
the June 2014 Order, proposed to use the ``block size'' definition set 
forth in Regulation NMS, which is an order (1) of at least 10,000 
shares or (2) with a market value of at least $200,000.\341\ Several 
commenters explained that a block size order for small capitalization 
stocks is generally considered to be substantially smaller than that 
for large capitalization stocks, and thus the Trade-At Prohibition 
included in the proposed Tick Size Pilot

[[Page 27541]]

would unduly restrict institutional trading.\342\
---------------------------------------------------------------------------

    \341\ 17 CFR 242.600(a)(9).
    \342\ See supra Section IV.D.3.e.
---------------------------------------------------------------------------

    In light of the views expressed by the commenters and after 
supplemental staff analysis, the Commission deems it is appropriate to 
modify the definition of ``block size,'' for purposes of the Tick Size 
Pilot. Specifically, an order (1) of at least 5,000 shares or (2) with 
a market value of at least $100,000 will be considered a block size for 
purposes of the Tick Size Pilot. This block size adjustment aligns with 
commenters' request for a smaller block size to reflect trading 
characteristics for potential Pilot Securities, and is consistent with 
the Commission staff analysis which indicates that, based on the 
modified selection criteria, the potential Pilot Securities, on 
average, trade at comparatively smaller sizes than securities with 
larger market capitalization. The following table reflects staff 
analysis:

                                Table 2 \343\--Trade Size Distribution Statistics
----------------------------------------------------------------------------------------------------------------
                                                                      Percent of     Percent  of   Percent  of $
                          Shares/Dollars                                trades      share  volume      volume
----------------------------------------------------------------------------------------------------------------
                                           Panel A: All NMS securities
----------------------------------------------------------------------------------------------------------------
>=10,000 shares or >=$200,000.....................................            0.24          13.04          16.27
----------------------------------------------------------------------------------------------------------------
                                Panel B: Stocks eligible for the Tick Size Pilot
----------------------------------------------------------------------------------------------------------------
>=1,000 shares or >=$20,000.......................................            2.08          26.61          23.37
>=3,000 shares or >=$60,000.......................................            0.38          15.44          13.91
>=5,000 shares or >=$100,000......................................            0.18          12.03          11.24
>=10,000 shares or >=$200,000.....................................            0.07           8.68           8.61
----------------------------------------------------------------------------------------------------------------

    In particular, Table 2 indicates that among all NMS securities, 
trades with at least 10,000 shares or with a market value of at least 
$200,000 constitute 0.24 percent of all trades, 13.04 percent of traded 
share volume, and 16.27 percent of traded dollar volume. In contrast, 
among stocks eligible for the Tick Size Pilot, trades with at least 
10,000 shares or with a market value of at least $200,000 constitute 
only 0.07 percent of all trades, 8.68 percent of traded share volume, 
and 8.61 percent of traded dollar volume.
---------------------------------------------------------------------------

    \343\ Data in Panel A covers all securities in the NYSE's Trade 
and Quote database, which consists of all NMS securities except 
options. Data in Panel B covers common stocks with average price 
greater than $2 per share, average daily trading volume smaller or 
equal than one million shares, and market capitalization smaller or 
equal than $3 billion. All data covers the period of July 1, 2013--
August 31, 2013 and comes from the NYSE's Trade and Quote Data.
---------------------------------------------------------------------------

    The Commission received one comment suggesting that Block Size 
orders should be able to execute in subpenny increments in a manner 
similar to Retail Investor Orders that receive price improvement.\344\ 
However, to avoid undermining the incremental design of the Tick Size 
Pilot, the Commission does not believe that Block Size orders in the 
Tick Size Pilot should have the same execution increments as Retail 
Investor Orders.
---------------------------------------------------------------------------

    \344\ See supra note 194 and accompanying text.
---------------------------------------------------------------------------

    The Commission also notes that the modified Block Size definition 
should ease some of the burden related to the Trade-At Prohibition. 
Specifically, the modified Block Size definition should mitigate any 
potential disruption to the institutional trading of Pilot Securities 
by allowing more of such orders to match protected quotes. Therefore, 
the Commission deems it appropriate to modify the definition of Block 
Size to lower the thresholds.
f. Addressing Other Test Group Three Exceptions
    The Participants proposed nine exceptions (numbers 4 through 12) to 
the Trade-At Prohibition that were not specified in the June 2014 
Order. These exceptions were based on the exceptions to Rule 611.\345\ 
Commenters raised concerns that the exceptions were too numerous and 
added to the complexity of the Tick Size Pilot.\346\ One commenter, 
however, agreed with the rationale for using the Rule 611 
exceptions.\347\
---------------------------------------------------------------------------

    \345\ 17 CFR 242.611(b)(2).
    \346\ See supra Section IV.D.3.f.
    \347\ See CHX Letter at 18 (supporting the exceptions as 
proposed).
---------------------------------------------------------------------------

    The Commission believes that these exceptions are appropriate. The 
Commission notes that market participants currently have rules, 
procedures, and systems in place to comply with Rule 611. Therefore, 
the Commission believes that the consistency with Rule 611 should 
alleviate concerns regarding the costs and burdens of implementing the 
Tick Size Pilot because market participants should be able to leverage 
existing systems.
    The Commission recognizes the concerns related to modeling the 
Trade-At Prohibition exceptions on the Rule 611 exceptions. 
Specifically, the Commission notes that two commenters argued that the 
rationale for the Rule 611 exceptions should not be necessarily applied 
to the Trade-At Prohibition.\348\ The Commission notes that approval of 
the Trade-At Prohibition is limited solely to the instant NMS plan and 
the Tick Size Pilot, and believes that utilizing current rules, 
procedures and systems should facilitate the implementation of the Tick 
Size Pilot.
---------------------------------------------------------------------------

    \348\ See supra note 196 and accompanying text.
---------------------------------------------------------------------------

    The Participants also proposed an exception to the Trade-At 
Prohibition for fractional shares where fractional shares do not the 
result from dividing an order for one or more whole shares. One 
commenter supported this exception.\349\ The Commission notes that 
there could be potential difficulty in the routing and executing of 
fractional shares and believes that such a limited exception is 
appropriate.
---------------------------------------------------------------------------

    \349\ See supra Section IV.D.3.f.
---------------------------------------------------------------------------

g. Odd Lots
    The Commission notes that several commenters requested 
clarification on how odd lot orders would be treated under the Trade-At 
Prohibition.\350\ Under Regulation NMS, odd lot orders are not 
considered protected quotations.\351\ Since the Trade-At

[[Page 27542]]

Prohibition only applies to protected quotations, odd lot orders and 
the odd lot portion of mixed lot orders would therefore not be covered 
by the Trade-At Prohibition. On the other hand, if a trading center 
that is not displaying a quotation at the price equal to the traded-at 
protected quotation and then receives an odd lot order or the odd lot 
portion of a mixed lot order, the trading center would be prevented 
from executing the odd lot order at the price of the protected 
quotation unless an exception applies.\352\
---------------------------------------------------------------------------

    \350\ See supra Section IV.D.3.g.
    \351\ See Rule 600(b)(8) defines a bid or offer as the bid price 
or offer price communicated by a member of a national securities 
exchange or member of a national securities association to any 
broker or dealer, or to any customer, at which it is willing to buy 
or sell one or more round lots of any NMS security, as either 
principal or agent, but shall not include indications of interest. 
This definition of bid or offer is embedded in the definition of 
``quotation'' in Rule 600(b)(62), as well as the definition of 
``protected bid'' or ``protected offer'' in Rule 600(b)(57). See 
``Frequently Asked Questions Concerning Rule 611 and Rule 610, 
Question 7.03'', available at https://www.sec.gov/divisions/marketreg/nmsfaq610-11.htm#sec7.
    \352\ See Data Highlight 2014-01: Odd Lot Rates in a Post-
Transparency World, (January 9, 2014), available at https://www.sec.gov/marketstructure/research/sec_data_highlight_2014-01.pdf.
---------------------------------------------------------------------------

E. Collection and Assessment of Tick Size Pilot Data

    The Participants proposed Trading Center Data and Market Maker 
Profitability Data elements that were consistent with the June 2014 
Order. Several commenters suggested that the data elements should be 
based solely on currently available data, such as the data reported to 
the processors, SRO proprietary data feeds, or under Rule 605, which 
would ease reporting burdens and costs.\353\ However, as discussed 
below, the Commission believes that the Trading Center Data and Market 
Maker Profitability Data are necessary to provide the Commission and 
the public with measurable data on which to assess the Tick Size 
Pilot's impact.
---------------------------------------------------------------------------

    \353\ See supra Section IV.E.1.
---------------------------------------------------------------------------

1. Trading Center Data
    The Tick Size Pilot would require the Participants to collect 
market quality statistics, data on specific orders, and data on market 
makers. The data would be publicly available on a monthly basis. Some 
commenters suggested that the Commission should rely on currently 
available data as this would reduce the implementation costs while 
still providing sufficient information to study the effects of the Tick 
Size Pilot.\354\ However, the Commission believes that it is necessary 
to collect the Trading Center Data in order to fully analyze the Tick 
Size Pilot. These new data elements are important for assessing the 
Tick Size Pilot's impact on liquidity, execution quality, market maker 
activity, competition, and transparency and are not included currently 
in the publicly available data.\355\
---------------------------------------------------------------------------

    \354\ Id.
    \355\ Some commenters suggested that the data-collection 
requirements should be limited to data elements needed to assess the 
impact of the Tick Size Pilot on liquidity. While recognizing the 
importance of liquidity, as discussed throughout this order, 
measuring changes in liquidity is not the only goal of the Tick Size 
Pilot. Therefore, a broader range of data elements needs to be 
available for a full analysis of the Tick Size Pilot.
---------------------------------------------------------------------------

    In particular, the market quality statistics in the Trading Center 
Data expand in several important ways on the data reported under Rule 
605. For example, compared to Rule 605 data, the market structure 
statistics are daily instead of monthly and will be publicly available 
more centrally, contain a broader set of orders, contain additional 
information on cancelations and hidden orders, and contain additional 
categories on order size and time to execution. As described in more 
detail below, the Trading Center Data are intended to build on an 
infrastructure that already exists for the collection of Rule 605 data 
and tailors the data from that infrastructure to the purposes of the 
Tick Size Pilot.
    Requiring daily data and making it available more centrally should 
improve the feasibility of studying the Tick Size Pilot. Many liquidity 
and execution quality statistics using SIP data can be calculated, but 
these statistics are imperfect because they focus on trades instead of 
orders. For the purposes of assessing the Tick Size Pilot, execution 
quality of orders is more relevant. Rule 605 data, on the other hand, 
focuses on orders, but are available on a monthly aggregated basis and 
are from each of hundreds of trading centers. The daily frequency of 
the market quality statistics should allow for the study of the time 
series of metrics in a manner that provides a greater ability to 
statistically detect changes in market quality resulting from the Tick 
Size Pilot because it allows for the analysis of effects on a daily 
basis.\356\ Requesting data that can be collected using existing Rule 
605 infrastructure should reduce the incidence of data errors that 
result from creating a dataset from scratch which should increase the 
reliability of the data and reduce costs.
---------------------------------------------------------------------------

    \356\ Statistically, a daily time series provides greater 
ability for tests to detect changes resulting from the Tick Size 
Pilot.
---------------------------------------------------------------------------

    Including additional orders and reducing duplication could help to 
tailor the market quality statistics to the purposes of the Tick Size 
Pilot. The market quality statistics include a broader set of orders 
than Rule 605 statistics, with reduced double counting. In particular, 
the Tick Size Pilot requires producing market quality statistics on all 
orders regardless of inclusion in Rule 605 statistics, but includes 
only statistics on orders that the execution venue executes in part or 
full. The market quality statistics categorize some of the orders not 
included in Rule 605 data. In particular, the market quality statistics 
include categories for resting intermarket sweep orders, retail 
liquidity providing orders and midpoint passive liquidity orders and 
separates statistics by whether the statistics are for orders included 
in Rule 605 data or not. In addition, the market quality statistics 
include an order size category to capture orders of 10,000 shares or 
more, which are excluded from Rule 605. Because the purpose of Rule 605 
differs from that of the Tick Size Pilot, studies of the Tick Size 
Pilot necessarily benefit from the inclusion of all orders that could 
be impacted by wider tick sizes. The Trading Center Data does not 
include the Rule 605 data on orders that are routed away in their 
entirety. The Rule 605 data for a particular trading center includes 
orders that a trading center routed away in their entirety. If this 
data was aggregated, it would produce double counting of these orders. 
Because Commission staff intends to aggregate the Trading Center Data 
across the trading centers, the Commission has decided to not require 
this information to prevent the likely double counting that could occur 
when such orders are routed in their entirety.\357\
---------------------------------------------------------------------------

    \357\ In addition, such orders would be attributed to the market 
center that routed them away and execution quality metrics for that 
market center would contain such orders that were not executed on 
the market center.
---------------------------------------------------------------------------

    Including additional data elements and categories in market quality 
statistics compared to Rule 605 allows for the study of key issues and 
helps to supplement other existing public data such as the data on the 
Commission's Market Structure Web site.\358\ The additional market 
quality statistics include information on displayed or hidden order 
status, which would provide a more fulsome view of transparency than 
other sources of information on hidden orders including those on the 
Commission's Market Structure Web site.\359\ The market structure 
statistics include significantly more refined time interval categories

[[Page 27543]]

(starting with microseconds rather than seconds) to measure speed of 
order executions and additional order categories. These changes allow 
for comparability to the statistics available on the Commission's 
Market Structure Web site. The Trading Center Data adds information on 
speed of order cancellations.\360\ Because the Tick Size Pilot may 
affect investors' behavior regarding cancellations, the ability to 
observe those changes would help to better understand the effects of 
the Tick Size Pilot.
---------------------------------------------------------------------------

    \358\ The Commission's Market Structure Web site (https://www.sec.gov/marketstructure/) allows the public access to data 
derived from the Commission's MIDAS, which several commenters 
suggested as an alternative to the Trading Center Data. See supra 
Section IV.E.1.
    \359\ The Commission's Market Structure Web site provides data 
on hidden orders for only a subset of exchanges because not all 
exchanges provide hidden order information in their proprietary data 
feeds, which supply data to MIDAS.
    \360\ A wider tick size may change the composition of the market 
participants for a given stock and it may also change their 
behavior. For example, ``pinging'' the market, which results in 
frequent and fast cancellations, becomes more expensive and 
therefore less attractive. As a result, the practice may be used 
less in stocks with a wider tick size.
---------------------------------------------------------------------------

    The Trading Center Data on specific orders provides disaggregated 
execution, cancellation and routing statistics for individual market 
and marketable limit orders. This type of information is not available 
from any public source or from any raw data source that, as a practical 
matter, is available in an easily and publicly accessible manner to 
meet the needs of the Tick Size Pilot. As noted above, order 
information is more relevant for studies of the Tick Size Pilot than 
SIP data because order information can consider the full order size. 
The data on specific orders improves on the market quality statistics 
by allowing researchers to more directly test hypotheses on the effect 
of the Tick Size Pilot on quote competition and transparency, for 
example. Researchers can also supplement statistics they derive from 
this data with statistics on limit orders from the Commission's Market 
Structure Web site.
    Finally, the Trading Center Data includes daily statistics on 
registration and participation of market makers. Information on market 
maker registration and participation is necessary to test the 
hypothesis that widening the tick size could encourage market making in 
such a way to improve the liquidity and trading of small capitalization 
stocks, which could potentially allow such issuers to raise capital 
more easily. Such data is not available publicly, except from a few 
exchanges.
    Because of these enhancements, the Commission believes that 
collections of Trading Center Data should facilitate a significantly 
richer analysis than the public data of the effects of the Tick Size 
Pilot on liquidity (e.g., transaction costs by order size), execution 
quality (e.g., speed of order executions), market maker activity, 
competition between trading venues (e.g., routing frequency of market 
orders), transparency (e.g., choice between displayed and hidden 
orders), and market dynamics (e.g., rates and speed of order 
cancellations), and thus is necessary to fully assess the impact of the 
Tick Size Pilot.
2. Market Maker Profitability Data
    The Tick Size Pilot would require market makers to produce the 
Market Maker Profitability Data, which relates to daily trading profits 
on the Pilot Securities. Several commenters opposed the collection of 
Market Maker Profitability Data.\361\ Commenters raised concerns about 
the costs of collecting the data as well as concerns related to the 
confidentiality and the competitive impact of the data. Commenters 
suggested that market makers would forego participation in the Tick 
Size Pilot if they were required to submit their Market Maker 
Profitability Data.
---------------------------------------------------------------------------

    \361\ See supra Section IV.E.2.
---------------------------------------------------------------------------

    The Commission notes that one of the premises behind the Tick Size 
Pilot is that a widened tick increment could increase market maker 
profits and that the increased profits could foster a more robust 
secondary market for small capitalization stocks (and ultimately a more 
robust primary market) by, for example, increasing liquidity, enhancing 
the attractiveness of acting as a market maker, and possibly increasing 
the provision of sell-side research. Without the Market Maker 
Profitability Data, the Commission and the public would not be able to 
test this hypothesis. In light of the comments on the costs of 
producing the Market Maker Profitability Data and the confidentiality 
of the data, however, the Commission deems it necessary to modify this 
data-collection requirement in two ways.
    First, the Commission is eliminating the data element which 
required realized trading profits net of fees and rebates from the list 
of the required market maker profitability statistics and the data 
element that would have required the DEA to calculate the volume-
weighted average of market maker realized traded profits net of fees 
and rebates. Some commenters expressed concern that because fees and 
rebates are charged monthly and in an aggregate form, the fees and 
rebates could be difficult to assign to daily trades in specific 
securities. As a result, data on market maker realized trading profits 
net of fees and rebates could be difficult to produce accurately and in 
a cost effective manner.
    After carefully considering these comments, the Commission is 
eliminating these data elements from the list of the required Market 
Maker Profitability Data because of the difficulties in calculating the 
data and the concerns about the costs related to the calculation. 
Eliminating this data element should ease the implementation burdens 
and costs to produce the data. Further, the Commission recognizes that 
changes in raw realized trading profits may be more relevant for the 
economic relation the Tick Size Pilot is addressing. The Commission 
believes that the data on realized raw trading profits and unrealized 
raw trading profits should be sufficient to support robust 
analysis.\362\
---------------------------------------------------------------------------

    \362\ The Commission believes that the costs of producing the 
modified Market Maker Data may not be high and the Commission 
understands that market makers may capture trading profit data for 
internal business purposes. One commenter suggested that measuring 
market maker profitability for each security may be difficult 
because ``costs [of market making] are typically allocated to 
trading across the board, rather than on a symbol-by-symbol basis.'' 
In response to this comment, the Commission notes that the modified 
Market Maker Data is limited to measures of gross trading 
profitability, which do not require information on general operating 
costs (or allocation of these costs to specific securities). Another 
commenter mentioned that some market makers may not currently 
compute their profits on a LIFO basis. However, the Commission 
believes that even for these market makers it should be fairly easy 
to implement a LIFO-like method for computing their profits as 
required by the Tick Size Pilot. Independent of which specific 
method, e.g., LIFO, FIFO, or average cost basis, is used to compute 
profits, the same information has to be collected, processed, and 
stored. The only difference is the formula for computation. The 
Commission recognizes that there will be costs associated with 
computing profits in a manner different than current profit 
calculations. However, the requirement to produce profitability 
figures for the Tick Size Pilot does not mean that market makers are 
required to change how they currently compute trading profits for 
internal business purposes. For example, a market maker may continue 
to use a FIFO-like method for internal profit computations and only 
report profits on a LIFO basis for the purpose of the Tick Size 
Pilot. This would alleviate the risk for disruptions due to a change 
in their practices.
---------------------------------------------------------------------------

    Second, to address confidentiality concerns the Commission is 
modifying the NMS plan to require further aggregation of all Market 
Maker Profitability Data for public dissemination. Some commenters 
expressed concern about dissemination of Market Maker Profitability 
Data (even in aggregate form for each security) and opined that some 
designated market makers could deregister from Pilot Securities to 
avoid providing profitability data. The Commission recognizes that some 
Pilot Securities may have a relatively small number of designated 
market makers, and that in these cases aggregating profitability data 
across market makers may be insufficient to fully protect the 
confidentiality of profits of individual

[[Page 27544]]

market makers. For example, some smaller market makers may be able to 
use aggregate data to infer the profitability of their larger 
competitors, which could give them an unfair competitive advantage. To 
address the confidentiality concerns raised by commenters and to ensure 
that public dissemination of the Market Maker Data does not adversely 
impact competition between market makers, the Commission has determined 
that the DEA should further aggregate the Market Maker Profitability 
Data by each Test Group and Control Group such that the public data 
will not contain profitability measures for each security. The 
Commission notes that the data available to Participants and the 
Commission would continue to identify the market maker profits in 
individual stocks.\363\ As a result of this change, the public would 
not have the ability to match individual stocks in the Test Groups with 
stocks from the Control Group and compare changes in profitability 
between stocks from the Test Groups and the matched stocks. The 
Commission, however, believes this modification should adequately 
address confidentiality concerns related the dissemination of detailed 
Market Maker Profitability Data. Therefore, the Commission deems it 
appropriate to modify the Market Maker Profitability Data as described 
above.
---------------------------------------------------------------------------

    \363\ The Commission notes that it will keep this information 
confidential, subject to the provisions of applicable law. 
Additionally, as noted below, because the Participants will have 
data that is more detailed than the public, the Commission has 
determined that the SROs should provide an assessment of Market 
Maker Profitability Data. See infra Section V.E.3.
---------------------------------------------------------------------------

    Some commenters suggested that the disclosure of Market Maker 
Profitability Data to DEAs may be anti-competitive, as market makers 
would essentially have to disclose sensitive, proprietary information 
to their exchange competitors. In response to these comments, the 
Commission notes that many market makers are already required to 
provide profitability information to their DEAs as part of their 
registration requirements and by virtue of their membership with a 
national securities exchange or association. Thus, the Commission 
believes that the additional impact of the disclosing Market Maker Data 
is not likely to be significant. Moreover, the Commission emphasizes 
that the Participants are expected to collect and use Tick Size Pilot 
data, including Market Maker Profitability Data, for legitimate 
regulatory purposes, and not for inappropriate, anti-competitive 
purposes.
3. Assessment of Tick Size Pilot Data
    The Tick Size Pilot would require the Participants to provide a 
joint assessment on the impact of the Tick Size Pilot, no later than 
six months after the end of the Pilot Period. In the June 2014 Order, 
the Commission identified certain assessments that the Participants 
were to conduct and to submit to the Commission. However, the 
Participants did not include the assessment related to the impact of 
quoting and trading increments on the profitability of market makers in 
the proposed Tick Size Pilot because, in their view, the market makers 
would be better positioned, compared to the Participants, to analyze 
such data.\364\
---------------------------------------------------------------------------

    \364\ See Notice, 79 FR at 66428, supra note 5.
---------------------------------------------------------------------------

    As previously noted, the impact of a wider tick size on market 
maker profitability is an important assessment to be conducted. In 
addition, the Commission has modified the Market Maker Profitability 
Data to require further aggregation of publically released data. While 
the public will still be able to study this aggregated profitability 
data, the public is limited in its ability to conduct an independent 
assessment based on the more granular profitability data available to 
the Participants and the Commission. Therefore, the Commission is 
modifying the NMS plan to reflect that the Participants are required to 
conduct and submit this assessment. The Commission deems it appropriate 
to modify the NMS plan to require this assessment.
    The Commission is also modifying the timing when the impact 
assessments should be prepared by the Participants and submitted to the 
Commission. In particular, the Commission is modifying the NMS plan to 
require the Participants to submit their assessments 18-months after 
the Tick Size Pilot begins based on data generated during the first 
year of the Tick Size Pilot or a subset of which that represents the 
impact of the Tick Size Pilot. The Commission notes that the timing for 
when the assessments are due to the Commission has not changed. As 
proposed, the Participants would have submitted their assessment six 
months after the end of the Pilot Period (which would have been 18-
months after the Tick Size Pilot was implemented). This modification 
has been made in relation to the modified Pilot Period. As a result, 
the Commission will receive the impact assessment of the Tick Size 
Pilot six months prior to its completion. The Commission is not 
modifying the NMS plan to require the Participants to conduct more 
frequent periodic impact assessments as some commenters' suggested 
\365\ because it does not believe that the incremental benefit of such 
additional assessment would justify the increased burdens and costs on 
the Participants. The Commission deems it appropriate to modify the 
timing of the Participant assessments because it would provide the 
Commission and the public with relevant data on the impact of the Tick 
Size Pilot before the Pilot Period ends.
---------------------------------------------------------------------------

    \365\ See supra Section IV.E.3.
---------------------------------------------------------------------------

    Commenters also stated that the Commission should define success 
metrics for the Tick Size Pilot and what would warrant it being adopted 
on a permanent basis.\366\ The Commission has carefully considered 
these comments but believes that defining the success metrics before 
the Tick Size Pilot begins could unduly influence behavior by market 
participants. The Tick Size Pilot is intended to be a test to inform 
the Commission and the public about the possible impacts of a wider 
tick size in small capitalization securities. The NMS plan sets forth 
the data elements that the Commission believes would be informative and 
support broad analysis. The Commission has described the questions that 
it believes the data should be able to address. In particular, the 
Commission believes that the Tick Size Pilot as designed should 
generate data that would support analysis and studies of the effect of 
increased tick size on liquidity, execution quality for investors, 
volatility, market maker profitability, competition, transparency and 
institutional ownership. The results of the Tick Size Pilot could 
reveal tradeoffs among these and other considerations and the potential 
permutations in the results are likely to be too extensive to define 
success at this point.
---------------------------------------------------------------------------

    \366\ Id.
---------------------------------------------------------------------------

F. Use of an NMS Plan

    Certain commenters suggested that the Tick Size Pilot should be 
implemented via Commission rulemaking, rather than through the NMS plan 
process.\367\ Some commenters suggested that the Tick Size Pilot was 
too significant to be delegated to the Participants and raised concerns 
that not all market participants, including market makers, broker-
dealers and institutional investors, were included in the development 
of the Tick Size Pilot. Certain commenters were concerned about 
potential conflict of interests that could arise in the Participants'

[[Page 27545]]

development of the NMS plan. A number of commenters questioned whether 
it was appropriate to have Participants formulate an NMS plan that 
would affect their competitors. Additionally, some commenters intimated 
that a conflict of interest may exist by highlighting the Participants' 
for-profit status.
---------------------------------------------------------------------------

    \367\ See supra Section IV.F.
---------------------------------------------------------------------------

    As discussed above, the Commission has reasons to proceed with the 
Tick Size Pilot as an NMS plan.\368\ The process for an NMS plan has 
some similarities to a rulemaking. Like a Commission rulemaking, an NMS 
plan is subject to public notice and comment, which provides all 
interested parties, including market makers, broker-dealers, investors, 
and issuers, an opportunity to offer substantive comment on the plan 
prior to Commission consideration of whether to approve it. The 
Commission published this NMS plan and therefore, it was subject to 
notice and comment.\369\ In addition, the process is subject to 
Commission's oversight and approval authority. In this regard, Rule 
608(b)(2) provides that the Commission shall approve an NMS plan, with 
such changes or subject to such conditions as the Commission may deem 
necessary or appropriate, if it finds that such plan or amendment is 
necessary or appropriate in the public interest, for the protection of 
investors and the maintenance of fair and orderly markets, to remove 
impediments to, and perfect the mechanisms of, a national market 
system, or otherwise in furtherance of the purposes of the Act.\370\ As 
discussed throughout this order, the Commission believes the NMS plan 
meets the standard for approval and has exercised its authority to 
modify this NMS plan consistent with the standard.
---------------------------------------------------------------------------

    \368\ See supra Section V.A.
    \369\ See Notice supra note 5.
    \370\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    Certain commenters raised concerns related to the role of the 
Participants, and of potential conflicts of interest, in the 
development of the Tick Size Pilot. The Commission recognizes that most 
of the Participants are for-profit exchanges that compete in various 
respects with their broker-dealer members. However, the Participants 
also are self-regulatory organizations, with specified regulatory 
obligations under the Act and Commission rules. Among other things, 
Section 11A(a)(3) of the Act, and Rule 608 thereunder, contemplate that 
SROs may act jointly in furtherance of their regulatory obligations by 
developing and filing proposed NMS plans with the Commission and, if 
approved, operating them subject to the Commission's oversight and 
authority.\371\ The Commission recognizes that certain provisions of 
the NMS plan could have a competitive impact on broker-dealer members 
and other market participants. The Rule 608 process, however, requires 
that proposed NMS plans be published for public comment and subject to 
Commission review and approval. As discussed above, the Commission has 
reviewed the NMS plan and thoroughly evaluated commenters' concerns, 
including those relating to the impact of the Tick Size Pilot on 
competition. The Commission has modified the NMS plan by removing the 
Venue Limitation, which it believes would have placed an unnecessary 
burden on competition, and the Commission exercised its authority to 
make other modifications to address other concerns.
---------------------------------------------------------------------------

    \371\ 15 U.S.C. 78k-1(a)(3). See 17 CFR 242.608.
---------------------------------------------------------------------------

G. Issuer Participation

    Commenters suggested that issuers should have the ability to opt-in 
or opt-out of the Tick Size Pilot,\372\ or establish committees that 
represent the interests of issuers during the Tick Size Pilot. One 
commenter believed that instead of approving the Tick Size Pilot, the 
Commission should permit issuers to contract with market makers for the 
purpose of determining their spreads. The Commission has carefully 
considered these comments but believes that in order to generate useful 
and reliable data from the Tick Size Pilot, issuers should not be able 
to opt-in or opt-out. Allowing such an option would introduce a 
selection bias that would make the results of the Tick Size Pilot 
applicable only to the participating securities and limit the ability 
of researchers to draw specific conclusions about the impact of wider 
tick sizes on market for small capitalization stocks. The Commission 
believes that permitting issuers to contract with market makers for the 
purpose of determining spreads would similarly introduce selection bias 
and undermine the goal of the Tick Size Pilot.\373\
---------------------------------------------------------------------------

    \372\ See supra Section IV.G.
    \373\ In addition, the Commission notes that certain exchanges 
currently operate pilot programs that permit issuers to, indirectly 
through the exchange, compensate market makers to provide liquidity 
in the issuers' securities. See, e.g., NYSE Arca Equities Rule 8.800 
(NYSE Arca Equities ETP Incentive Program); BATS Rule 11.8.02 (BATS 
Competitive Liquidity Provider Program); and Nasdaq Rule 5950 
(Market Quality Program).
---------------------------------------------------------------------------

H. Implementation

    Commenters noted that a one-year implementation period could be 
appropriate if the Tick Size Pilot was simplified, by among other 
things, removing the Trade-At Prohibition. \374\ While the Commission 
has not removed the Trade-At Prohibition, the Commission believes that 
the modifications to the Tick Size Pilot, such as restricting the 
Trade-At Prohibition to Regular Trading Hours, removing the Venue 
Limitation and removing realized trading profits net of fees and 
rebates from the Market Maker Profitability Data, should lessen some of 
the implementation burdens.
---------------------------------------------------------------------------

    \374\ See supra note 244 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, the Commission believes that he Tick Size Pilot should 
be implemented within one year after the publication of this order. The 
Commission believes that the one year period for implementation should 
provide adequate time for the development and testing of applicable 
trading and compliance systems, the filing and approval of SRO rules 
related to the Tick Size Pilot's quoting and trading requirements, and 
the development and implementation of the written policies and 
procedures by Participants and their members that are reasonably 
designed to comply with the applicable quoting and trading increments.
    Certain commenters requested that the Commission, or the 
Participants, release detailed frequently-asked-questions (``FAQs'') to 
assist implementation of the Tick Size Pilot.\375\ As the 
implementation period progresses, should questions arise, the 
Commission and the Participants will consider whether to issue FAQs to 
address any such questions.
---------------------------------------------------------------------------

    \375\ See KCG Letter at 17; Liquidnet Letter at 2; and Bloomberg 
Letter at 20.
---------------------------------------------------------------------------

    One commenter requested that the list of securities be finalized 
prior to determining the implementation schedule.\376\ The Commission 
does not believe it is necessary to finalize the list of securities 
prior to determining the implementation schedule. The Commission notes 
that the list of securities would be finalized based on data collected 
during the Measurement Period. \377\ To avoid including Pilot 
Securities whose characteristics would not meet the defined selection 
criteria, the time gap between the Measurement Period and the beginning 
of the Pilot Period should be as short as possible. For example, the 
NMS plan includes price as one criterion in the selection of securities 
such that the closing price be at least $1.50 on every trading day

[[Page 27546]]

during the Measurement Period. If the Measurement Period ended six 
months before the start of the Tick Size Pilot, the risk that 
securities may have prices below $1.00 during the Tick Size Pilot would 
be higher than the risk with a later Measurement Period.
---------------------------------------------------------------------------

    \376\ See Bloomberg Letter at 20.
    \377\ See NMS plan Section (I)(N), which defines the Measurement 
Period as the U.S. trading days during the three-calendar-month 
period ending at least 30 days prior to the effective date of the 
Pilot Period.
---------------------------------------------------------------------------

VI. Conclusion

    For the reasons discussed above, the Commission finds that the NMS 
Plan to Implement a Tick Size Pilot Program is necessary or appropriate 
in the public interest, for the protection of investors and the 
maintenance of fair and orderly markets, to remove impediments to, and 
perfect the mechanism of, a national market system, or otherwise in 
furtherance of the purposes of the Act.
    It is therefore ordered, that pursuant to Section 11A of the Act, 
and the rules and regulations thereunder, that the NMS plan (File No. 
4-657), as modified, be and it hereby is approved and declared 
effective, and the Participants are authorized to act jointly to 
implement the NMS plan and its Tick Size Pilot as a means of 
facilitating a national market system.

    By the Commission.
Brent J. Fields,
Secretary.

Exhibit A

Plan To Implement a Tick Size Pilot Program Submitted to the Securities 
and Exchange Commission Pursuant to Rule 608 of Regulation NMS Under 
the Securities Exchange Act of 1934 (As Modified by the Commission; 
additions are in underline and deletions are in [brackets])

Table of Contents

------------------------------------------------------------------------
                           Section
------------------------------------------------------------------------
Preamble....................................................           1
I. Definitions..............................................           2
II. Parties.................................................           7
III. Amendments to Plan.....................................           9
IV. Policies and Procedures.................................          10
V. Identification of Pilot Securities.......................          11
VI. Pilot Test Groups.......................................          14
VII. Collection of Pilot Data...............................          20
VIII. Assessment of Pilot...................................          22
IX. Implementation..........................................          23
X. Withdrawal from Plan.....................................          23
XI. Counterparts and Signatures.............................          24
Appendix A--Publication of Pilot Securities.................          26
Appendix B--Data Collected by Participants and Trading                28
 Centers....................................................
Appendix C--Data Collected by Market Makers.................          37
------------------------------------------------------------------------

Preamble

    Pursuant to Section 11A(a)(3)(B) of the Exchange Act, which 
authorizes the SEC to require by order self-regulatory organizations to 
act jointly with respect to matters as to which they share authority in 
planning, developing, operating, or regulating a national market 
system, the SEC issued an order directing the Participants to submit a 
Tick Size Pilot Plan as a national market system plan pursuant to Rule 
608(a)(3) of Regulation NMS under the Exchange Act. In response, the 
Participants submit this Plan to implement a Tick Size Pilot Program 
that will allow the Commission, market participants, and the public to 
study and assess the impact of increment conventions on the liquidity 
and trading of the common stocks of small capitalization companies. To 
do so, the Plan provides for the widening of quoting and trading 
increments for a group of Pilot Securities. As detailed herein, the 
Pilot Securities will be subdivided into three Test Groups and a 
Control Group, each with its own requirements and exceptions relating 
to quoting and trading increments to facilitate the referenced 
analysis.

I. Definitions

    (A) ``Average effective spread'' has the meaning provided in Rule 
600(b)(5) of Regulation NMS under the Exchange Act.
    (B) ``Average realized spread'' has the meaning provided in Rule 
600(b)(6) of Regulation NMS under the Exchange Act.
    (C) ``Benchmark trade'' means the execution of an order at a price 
that was not based, directly or indirectly, on the quoted price of a 
Pilot Security at the time of execution and for which the material 
terms were not reasonably determinable at the time the commitment to 
execute the order was made.
    (D) ``Best protected bid'' means the highest priced protected bid.
    (E) ``Best protected offer'' means the lowest priced protected 
offer.
    (F) ``Block Size'' means for purposes of this Tick Size Pilot 
Program, an order (1) of at least 5,000 shares or (2) for a quantity of 
stock having a market value of at least $100,000 [has the meaning 
provided in Rule 600(b)(9) of Regulation NMS under the Exchange Act].
    (G) ``Brokered cross trade'' means a trade that a broker-dealer 
that is a member of a Participant executes directly by matching 
simultaneous buy and sell orders for a Pilot Security.
    (H) ``Closing Price'' means the closing auction price on the 
primary listing exchange, or if not available, then the last regular-
way trade reported by the processor prior to 4:00 p.m. ET.
    (I) ``Designated Examining Authority'' means, with respect to a 
member of two or more self-regulatory organizations, the self-
regulatory organization responsible for (i) examining such member for 
compliance with the financial responsibility requirements imposed by 
the Exchange Act, or by Commission or self-regulatory organization 
rules, (ii) receiving regulatory reports from such member, (iii) 
examining such member for compliance with, and enforcing compliance 
with, specified provisions of the Exchange Act, the rules and 
regulations thereunder, and self-regulatory organization rules, and 
(iv) carrying out any other specified regulatory functions with respect 
to such member.
    (J) ``Exchange Act'' means the Securities Exchange Act of 1934, as 
amended.
    (K) ``Inside-the-quote limit order,'' ``at-the-quote limit order,'' 
and ``near-the-quote limit order'' mean non-marketable buy orders that 
are ranked at a price, respectively, higher than, equal to, and lower 
by $0.10 or less than the National Best Bid at the time of order 
receipt, and non-marketable sell orders that are ranked at a price, 
respectively, lower than, equal to, and higher by

[[Page 27547]]

$0.10 or less than the National Best Offer at the time of order 
receipt.
    (L) ``Market Maker'' means a dealer registered with any self-
regulatory organization, in accordance with the rules thereof, as (i) a 
market maker or (ii) a liquidity provider with an obligation to 
maintain continuous, two-sided trading interest.
    (M) ``Marketable limit order'' means any buy order with a limit 
price equal to or greater than the National Best Offer at the time of 
order receipt, or any sell order with a limit price equal to or less 
than the National Best Bid at the time of order receipt. For price 
sliding, pegged, discretionary, or similar order types where the ranked 
price is different from the limit price, the ranked price will 
determine marketability.
    (N) ``Measurement Period'' means the U.S. trading days during the 
three-calendar- month period ending at least 30 days prior to the 
effective date of the Pilot Period.
    (O) ``National Best Bid'' and ``National Best Offer'' have the 
meanings provided in Rule 600(b)(42) of Regulation NMS under the 
Exchange Act.
    (P) ``Negotiated Trade'' means (i) a Benchmark trade, including, 
but not limited to, a Volume-Weighted Average Price trade or a Time-
Weighted Average Price trade, provided that, if such a trade is 
composed of two or more component trades, each component trade complies 
with the quoting and trading increment requirements of the Plan, or 
with an exception to such requirements, or (ii) a Pilot Qualified 
Contingent Trade.
    (Q) ``NMS common stock'' means an NMS stock that is common stock of 
an operating company.
    (R) ``NMS stock'' has the meaning provided in Rule 600(b)(47) of 
Regulation NMS under the Exchange Act.
    (S) ``Operating Committee'' has the meaning provided in Section 
III(C) of the Plan.
    (T) ``Participant'' means a party to the Plan.
    (U) ``Pilot Period'' means the operative period of the Tick Size 
Pilot Program, lasting [one] two years from the date of implementation.
    (V) ``Pilot Qualified Contingent Trade'' means a transaction 
consisting of two or more component orders, executed as agent or 
principal, where: (1) at least one component order is in an NMS common 
stock; (2) all components are effected with a product or price 
contingency that either has been agreed to by the respective 
counterparties or arranged for by a broker-dealer as principal or 
agent; (3) the execution of one component is contingent upon the 
execution of all other components at or near the same time; (4) the 
specific relationship between the component orders (e.g., the spread 
between the prices of the component orders) is determined at the time 
the contingent order is placed; (5) the component orders bear a 
derivative relationship to one another, represent different classes of 
shares of the same issuer, or involve the securities of participants in 
mergers or with intentions to merge that have been announced or since 
canceled; and (6) the transaction is fully hedged (without regard to 
any prior existing position) as a result of the other components of the 
contingent trade.
    (W) ``Pilot Securities'' means those securities that satisfy the 
criteria established in Section V.
    (X) ``Plan'' means the plan set forth in this instrument, as 
amended from time to time in accordance with its provisions.
    (Y) ``Processor'' means the single plan processor responsible for 
the consolidation of information for an NMS stock pursuant to Rule 
603(b) of Regulation NMS under the Exchange Act.
    (Z) ``Protected bid'' and ``protected offer'' have the meanings 
provided in Rule 600(b)(57) of Regulation NMS under the Exchange Act.
    (AA) ``Protected quotation'' has the meaning provided in Rule 
600(b)(58) of Regulation NMS under the Exchange Act.
    (BB) ``Quotation'' has the meaning provided in Rule 600(b)(62) of 
Regulation NMS under the Exchange Act.
    (CC) ``Regular Trading Hours'' has the meaning provided in Rule 
600(b)(64) of Regulation NMS under the Exchange Act. For purposes of 
the Plan, Regular Trading Hours can end earlier than 4:00p.m. ET in the 
case of an early scheduled close.
    (DD) ``Retail Investor Order'' means an agency order or a riskless 
principal order originating from a natural person, provided that, prior 
to submission, no change is made to the terms of the order with respect 
to price or side of market and the order does not originate from a 
trading algorithm or any other computerized methodology. The 
Participant that is the Designated Examining Authority of a member of a 
Participant operating a trading center executing a Retail Investor 
Order will require such trading center to sign an attestation that 
substantially all orders to be executed as Retail Investor Orders will 
qualify as such under the Plan.
    (EE) ``Retail liquidity providing order'' means an order entered 
into a Participant-operated retail liquidity program to execute against 
Retail Investor Orders.
    (FF) ``SEC'' means the United States Securities and Exchange 
Commission.
    (GG) ``SRO quotation feed'' means any market data feed disseminated 
by a self-regulatory organization.
    (HH) ``Tick Size Pilot Program'' means the program established by 
this Plan and by the corresponding rules of the Participants.
    (II) ``Time of order execution'' means the time (to the second, or 
to such smaller increments as are available) that an order was executed 
at any venue.
    (JJ) ``Time of order receipt'' means the time (to the second, or to 
such smaller increments as are available) that an order was received by 
a trading center for execution.
    (KK) ``Time-Weighted Average Price'' means the price calculated as 
the average price of a security over a specified period of time.
    (LL) ``Trade-at'' means the execution by a trading center of a sell 
order for a Pilot Security at the price of a protected bid or the 
execution of a buy order for a Pilot Security at the price of a 
protected offer during Regular Trading Hours.
    (MM) ``Trade-at Intermarket Sweep Order'' means a limit order for a 
Pilot Security that meets the following requirements:
    (1) When routed to a trading center, the limit order is identified 
as an Intermarket Sweep Order; and
    (2) Simultaneously with the routing of the limit order identified 
as an Intermarket Sweep Order, one or more additional limit orders, as 
necessary, are routed to execute against the full displayed size of any 
protected bid, in the case of a limit order to sell, or the full 
displayed size of any protected offer, in the case of a limit order to 
buy, for the Pilot Security with a price that is equal to the limit 
price of the limit order identified as an Intermarket Sweep Order. 
These additional routed orders also must be marked as Intermarket Sweep 
Orders.
    (NN) ``Trading center'' has the meaning provided in Rule 600(b)(78) 
of Regulation NMS under the Exchange Act.
    (OO) ``Volume-Weighted Average Price'' means the price calculated 
by summing up the products of the number of single-counted shares 
traded and the respective share price, and dividing by the total number 
of single-counted shares traded.

II. Parties

(A) List of Parties

    The parties to the Plan are as follows:


[[Page 27548]]


(1) BATS Exchange, Inc., 8050 Marshall Drive, Lenexa, Kansas 66214
(2) BATS Y-Exchange, Inc., 8050 Marshall Drive, Lenexa, Kansas 66214
(3) Chicago Stock Exchange, Inc., 440 South LaSalle Street, Chicago, 
Illinois 60605
(4) EDGA Exchange, Inc., 545 Washington Boulevard, Sixth Floor, Jersey 
City, NJ 07310
(5) EDGX Exchange, Inc., 545 Washington Boulevard, Sixth Floor, Jersey 
City, NJ 07310
(6) Financial Industry Regulatory Authority, Inc., 1735 K Street NW., 
Washington, DC 20006
(7) NASDAQ OMX BX, Inc., One Liberty Plaza, New York, NY 10006
(8) NASDAQ OMX PHLX LLC, 1900 Market Street, Philadelphia, PA 19103
(9) The Nasdaq Stock Market LLC, 1 Liberty Plaza, 165 Broadway, New 
York, NY 10006
(10) New York Stock Exchange LLC, 11 Wall Street, New York, NY 10005
(11) NYSE MKT LLC, 11 Wall Street, New York, NY 10005
(12) NYSE Area, Inc., 11 Wall Street, New York, NY 10005

(B) Compliance Undertaking

    By subscribing to and submitting the Plan for approval by the SEC, 
each Participant agrees to comply with, and to enforce compliance by 
its members, as applicable, with the provisions of the Plan as required 
by Rule 608(c) of Regulation NMS under the Exchange Act. To this end, 
each Participant will adopt rules requiring compliance by its members 
with the provisions of the Plan, as applicable, and adopt such other 
rules as are needed for such compliance.

(C) New Participants

    The Participants agree that any entity registered as a national 
securities exchange or national securities association under the 
Exchange Act may become a Participant by: (1) executing a copy of the 
Plan, as then in effect; (2) providing each then-current Participant 
with a copy of such executed Plan; and (3) effecting an amendment to 
the Plan as specified in Section III(B) of the Plan.

III. Amendments to Plan

(A) General Amendments

    Except with respect to the addition of new Participants to the 
Plan, any proposed change in, addition to, or deletion from the Plan 
will be effected by means of a written amendment to the Plan that: (1) 
sets forth the change, addition, or deletion; (2) is executed on behalf 
of each Participant; and (3) is approved by the SEC pursuant to Rule 
608 of Regulation NMS under the Exchange Act, or otherwise becomes 
effective under Rule 608 of Regulation NMS under the Exchange Act.

(B) New Participants

    With respect to new Participants, an amendment to the Plan may be 
effected by the new national securities exchange or national securities 
association executing a copy of the Plan, as then in effect (with the 
only changes being the addition of the new Participant's name in 
Section II(A) of the Plan) and submitting such executed Plan to the SEC 
for approval. The amendment will be effective when it is approved by 
the SEC in accordance with Rule 608 of Regulation NMS under the 
Exchange Act, or otherwise becomes effective pursuant to Rule 608 of 
Regulation NMS under the Exchange Act.

(C) Operating Committee

    (1) Each Participant will select from its staff one individual to 
represent the Participant as a member of an Operating Committee, 
together with a substitute for such individual. The substitute may 
participate in deliberations of the Operating Committee and will be 
considered a voting member thereof only in the absence of the primary 
representative. Each Participant will have one vote on all matters 
considered by the Operating Committee. No later than the initial date 
of Plan operations, the Operating Committee will designate one member 
of the Operating Committee to act as the Chair of the Operating 
Committee.
    (2) The Operating Committee will monitor the procedures established 
pursuant to this Plan and advise the Participants with respect to any 
deficiencies, problems, or recommendations as the Operating Committee 
may deem appropriate. The Operating Committee will establish 
specifications and procedures for the implementation and operation of 
the Plan that are consistent with the provisions of this Plan. With 
respect to matters in this paragraph, Operating Committee decisions 
must be approved by a simple majority vote.
    (3) Any recommendation for an amendment to the Plan from the 
Operating Committee that receives an affirmative vote of at least two-
thirds of the Participants, but is less than unanimous, will be 
submitted to the SEC as a request for an amendment to the Plan 
initiated by the Commission under Rule 608 of Regulation NMS.

IV. Policies and Procedures

    Consistent with the compliance undertakings set out in Section 
II(B), all Participants and members of Participants will be required to 
establish, maintain, and enforce written policies and procedures that 
are reasonably designed to comply with applicable quoting and trading 
requirements specified in Section VI for the Pilot Securities.
    Each Participant, as applicable, will develop appropriate policies 
and procedures that provide for collecting and reporting to the SEC the 
data described in Appendix B. In addition, each Participant that is the 
Designated Examining Authority of a member of a Participant operating a 
trading center will require such member to develop appropriate policies 
and procedures for collecting and reporting the data described in Items 
I and II of Appendix B, as applicable, to the Designated Examining 
Authority. Each Participant that is the Designated Examining Authority 
of a member of a Participant operating a trading center will develop 
appropriate policies and procedures, as applicable, that provide for 
collecting and reporting such data to the SEC. The data collection and 
reporting obligations are described below in Section VII.
    Each Participant that is the Designated Examining Authority of a 
Market Maker will require such Market Maker to develop policies and 
procedures for collecting the data set out in Appendix C and reporting 
it to the Designated Examining Authority. Each Participant that is the 
Designated Examining Authority of a Market Maker will develop 
appropriate policies and procedures that provide for collecting and 
reporting such data to the SEC on an aggregated basis. The Designated 
Examining Authority will also develop policies and procedures 
reasonably designed to ensure the confidentiality of the non-aggregated 
data it receives from Market Makers. The data collection and reporting 
obligations are described below in Section VII.

V. Identification of Pilot Securities

(A) Criteria for Selection of Pilot Securities

    Pilot Securities will consist of those NMS common stocks that 
satisfy the following criteria:
    (1) A market capitalization of $[5]3 billion or less on the last 
day of the Measurement Period, where market capitalization is 
calculated by multiplying the total number of shares outstanding on 
such day by the Closing Price of the security on such day;
    (2) A Closing Price of at least $2.00 on the last day of the 
Measurement Period;

[[Page 27549]]

    (3) A Closing Price on every U.S. trading day during the 
Measurement Period that is not less than $1.50;
    (4) A Consolidated Average Daily Volume (``CADV'') during the 
Measurement Period of one million shares or less, where the CADV is 
calculated by adding the single-counted share volume of all reported 
transactions in the Pilot Security during the Measurement Period and 
dividing by the total number of U.S. trading days during the 
Measurement Period; and
    (5) A Measurement Period Volume-Weighted Average Price 
(``Measurement Period VWAP'') of at least $2.00, where the Measurement 
Period VWAP is determined by calculating the VWAP for each U.S. trading 
day during the Measurement Period, summing the daily VWAP across the 
Measurement Period, and dividing by the total number of U.S. trading 
days during the Measurement Period.
    For purposes of the CADV and Measurement Period VWAP calculations 
described in Sections V(A)(4) and V(A)(5), U.S. trading days during the 
Measurement Period with early closes will be excluded. An NMS common 
stock that had its initial public offering within six months of the 
start of the Pilot Period will not be eligible to be a Pilot Security.

(B) Grouping of Pilot Securities

    The Operating Committee will oversee the Pilot Security grouping 
process in accordance with the methodology and criteria set out in this 
subsection. Once the population of Pilot Securities has been determined 
based on the criteria in Section V(A), the Operating Committee will 
select the Pilot Securities to be placed into three Test Groups by 
means of a stratified random sampling process. To effect this sampling, 
each of the Pilot Securities will be categorized as having (1) a low, 
medium, or high share price based on the Measurement Period VWAP, (2) 
low, medium, or high market capitalization based on the last day of the 
Measurement Period, and (3) low, medium, or high trading volume based 
on the CADV during the Measurement Period, yielding 27 possible 
categories. Low, medium, and high subcategories will be established by 
dividing the categories into three parts, each containing a third of 
the population.
    Pilot Securities will be randomly selected from each of the 27 
categories for inclusion into the Test Groups. If, however, a single 
category of Pilot Securities contains fewer than 10 securities, it will 
be combined with another of the 27 categories that contains at least 10 
securities. If two or more categories of Pilot Securities contain fewer 
than 10 securities, those categories will be combined, provided the 
combined category contains at least 10 securities. If the combined 
category contains fewer than 10 securities, then the category will be 
combined with another of the 27 categories that contains at least 10 
securities.
    Pilot Securities will be randomly selected from each category for 
inclusion in the three Test Groups based on the percentage of Pilot 
Securities comprised of that category. As a result, each category will 
be represented in the three Test Groups based on its relative 
proportion to the population of Pilot Securities. Further, a primary 
listing market's securities will be selected from each category and 
included in the three Test Groups in the same proportion as that 
primary listing market's securities comprise each category of Pilot 
Securities. Each Test Group will consist of 400 Pilot Securities. Those 
Pilot Securities not placed into the three Test Groups will constitute 
the Control Group.

(C) Publication of Pilot Securities and Groups

    Each primary listing exchange will make publicly available for free 
on its Web site a list of those Pilot Securities listed on that 
exchange and included in the Control Group and each Test Group, 
adjusting for ticker symbol changes and relevant corporate actions. The 
list of Pilot Securities will contain the data specified in Appendix A.

VI. Pilot Test Groups

    As described in Section V(B), the Pilot Securities will be divided 
into four groups: a Control Group and three Test Groups. Each Test 
Group will consist of 400 Pilot Securities. The Control Group will 
consist of the Pilot Securities not placed into a Test Group.

(A) Control Group

    Pilot Securities in the Control Group may be quoted and traded at 
any price increment that is currently permitted.

(B) Test Group One

    Pilot Securities in Test Group One will be quoted in $0.05 minimum 
increments, but may continue to trade at any price increment that is 
currently permitted. Participants will adopt rules prohibiting 
Participants or any member of a Participant from displaying, ranking, 
or accepting from any person any displayable or non-displayable bids or 
offers, orders, or indications of interest in any Pilot Security in 
Test Group One in price increments other than $0.05. However, orders 
priced to execute at the midpoint and orders entered in a Participant-
operated retail liquidity program may be ranked and accepted in 
increments of less than $0.05.

(C) Test Group Two

    Pilot Securities in Test Group Two will be subject to the same 
quoting requirements as Test Group One, along with the applicable 
quoting exceptions. In addition, Pilot Securities in Test Group Two may 
only be traded in $0.05 minimum increments. Participants will adopt 
rules prohibiting trading centers operated by Participants and members 
of Participants from executing orders in any Pilot Security in Test 
Group Two in price increments other than $0.05. The $0.05 minimum 
trading increment applies to brokered cross trades. Pilot Securities in 
Test Group Two may trade in increments less than $0.05, however, under 
the following circumstances:
    (1) Trading may occur at the midpoint between the National Best Bid 
and the National Best Offer or the midpoint between the best protected 
bid and the best protected offer;
    (2) Retail Investor Orders may be provided with price improvement 
that is at least $0.005 better than the best protected bid or the best 
protected offer; and
    (3) Negotiated Trades may trade in increments less than $0.05.

(D) Test Group Three

    Pilot Securities in Test Group Three will be subject to the same 
quoting and trading requirements as Test Group Two, along with the 
applicable quoting and trading exceptions. In addition, Pilot 
Securities in Test Group Three will be subject to a trade-at 
prohibition.
    Trade-at Prohibition. Under the trade-at prohibition, the Plan will 
(1) prevent a trading center that was not quoting from price-matching 
protected quotations and (2) permit a trading center that was quoting 
at a protected quotation to execute orders at that level, but only up 
to the amount of its displayed size.
    In accordance with the trade-at prohibition, Participants will 
adopt rules prohibiting trading centers operated by Participants and 
members of Participants from executing a sell order for a Pilot 
Security at the price of a protected bid or from executing a buy order 
for a Pilot Security at the price of a protected offer unless such 
executions fall within an exception set forth below.
    Trade-at Prohibition Exceptions. Trading centers will be permitted 
to execute an order for a Pilot Security at a price equal to a 
protected bid or

[[Page 27550]]

protected offer under the following circumstances:
    (1) The order is executed by a trading center that is displaying a 
quotation, via either a processor or an SRO quotation feed, at a price 
equal to the traded-at protected quotation but only up to the trading 
center's full displayed size [. Where the quotation is displayed 
through a national securities exchange, the execution at the size of 
the order must occur against the displayed size on that national 
securities exchange. Where the quotation is displayed through the 
Alternative Display Facility or another facility approved by the 
Commission that does not provide execution functionality, the execution 
at the size of the order must occur against the displayed size in 
accordance with the rules of the Alternative Display Facility or such 
approved facility];
    (2) The order is of Block Size;
    (3) The order is a Retail Investor Order executed with at least 
$0.005 price improvement;
    (4) The order is executed when the trading center displaying the 
protected quotation that was traded at was experiencing a failure, 
material delay, or malfunction of its systems or equipment;
    (5) The order is executed as part of a transaction that was not a 
``regular way'' contract;
    (6) The order is executed as part of a single-priced opening, 
reopening, or closing transaction by the trading center;
    (7) The order is executed when a protected bid was priced higher 
than a protected offer in the Pilot Security;
    (8) The order is identified as an Intermarket Sweep Order;
    (9) The order is executed by a trading center that simultaneously 
routed Trade-at Intermarket Sweep Orders to execute against the full 
displayed size of the protected quotation that was traded at;
    (10) The order is executed as part of a Negotiated Trade;
    (11) The order is executed when the trading center displaying the 
protected quotation that was traded at had displayed, within one second 
prior to execution of the transaction that constituted the trade-at, a 
best bid or best offer, as applicable, for the Pilot Security with a 
price that was inferior to the price of the trade-at transaction.
    (12) The order is executed by a trading center which, at the time 
of order receipt, the trading center had guaranteed an execution at no 
worse than a specified price (a ``stopped order''), where:
    a. The stopped order was for the account of a customer;
    b. The customer agreed to the specified price on an order-by-order 
basis; and
    c. The price of the trade-at transaction was, for a stopped buy 
order, equal to the national best bid in the Pilot Security at the time 
of execution or, for a stopped sell order, equal to the national best 
offer in the Pilot Security at the time of execution; or
    (13) The order is for a fractional share of a Pilot Security, 
provided that such fractional share order was not the result of 
breaking an order for one or more whole shares of a Pilot Security into 
orders for fractional shares or was not otherwise effected to evade the 
requirements of the trade-at prohibition or any other provisions of the 
Plan.
    The following examples illustrate the basic operation of the trade-
at prohibition:
Example 1
    The NBBO for Pilot Security ABC is $20.00 x $20.10. Trading Center 
1 is displaying a 100-share protected bid at $20.00. Trading Center 2 
is displaying a 100-share protected bid at $19.95. There are no other 
protected bids. Trading Center 3 is not displaying any shares in Pilot 
Security ABC but has 100 shares hidden at $20.00 and has 100 shares 
hidden at $19.95. Trading Center 3 receives an incoming order to sell 
for 400 shares. To execute the 100 shares hidden at $20.00, Trading 
Center 3 must respect the protected bid on Trading Center 1 at $20.00. 
Trading Center 3 must route a Trade-at Intermarket Sweep Order to 
Trading Center 1 to execute against the full displayed size of the 
protected bid, at which point Trading Center 3 is permitted to execute 
against the 100 shares hidden at $20.00. To execute the 100 shares 
hidden at $19.95, Trading Center 3 must respect the protected bid on 
Trading Center 2 at $19.95. Trading Center 3 must route a Trade-at 
Intermarket Sweep Order to Trading Center 2 to execute against the full 
displayed size of the protected bid, at which point Trading Center 3 is 
permitted to execute against the 100 shares hidden at $19.95.
Example 2
    The NBBO for Pilot Security ABC is $20.00 x $20.10. Trading Center 
1 is displaying a 100-share protected bid at $20.00. Trading Center 2 
is displaying a 100-share protected bid at $20.00. Trading Center 2 
also has 300 shares hidden at $20.00 and has 300 shares hidden at 
$19.95. Trading Center 3 is displaying a 100-share protected bid at 
$19.95. There are no other protected bids. Trading Center 2 receives an 
incoming order to sell for 900 shares. Trading Center 2 may execute 100 
shares against its full displayed size at the protected bid at $20.00. 
To execute the 300 shares hidden at $20.00, Trading Center 2 must 
respect the protected bid on Trading Center 1 at $20.00. Trading Center 
2 must route a Trade-at Intermarket Sweep Order to Trading Center 1 to 
execute against the full displayed size of Trading Center 1's protected 
bid, at which point Trading Center 2 is permitted to execute against 
the 300 shares hidden at $20.00. To execute the 300 shares hidden at 
$19.95, Trading Center 2 must respect the protected bid on Trading 
Center 3 at $19.95. Trading Center 2 must route a Trade-at Intermarket 
Sweep Order to Trading Center 3 to execute against the full displayed 
size of Trading Center 3's protected bid, at which point Trading Center 
2 is permitted to execute against the 300 shares hidden at $19.95.
Example 3
    The NBBO for Pilot Security ABC is $20.00 x $20.10. Trading Center 
1 is displaying a 100-share protected bid at $20.00. Trading Center 1 
is also displaying 300 shares at $19.90 on an SRO quotation feed. 
Trading Center 2 is displaying a 100-share protected bid at $19.95. 
Trading Center 2 is also displaying 200 shares at $19.90 on an SRO 
quotation feed and has 200 shares hidden at $19.90. Trading Center 3 is 
displaying a 100-share protected bid at $19.90. There are no other 
protected bids. Trading Center 2 receives an incoming order to sell for 
700 shares. To execute against its protected bid at $19.95, Trading 
Center 2 must comply with the trade-through restrictions in Rule 611 of 
Regulation NMS and route an intermarket sweep order to Trading Center 1 
to execute against the full displayed size of Trading Center 1's 
protected bid at $20.00. Trading Center 2 is then permitted to execute 
against its 100-share protected bid at $19.95. Trading Center 2 may 
then execute 200 shares against its full displayed size at the price of 
Trading Center 3's protected bid. To execute the 200 shares hidden at 
$19.90, Trading Center 2 must respect the protected bid on Trading 
Center 3 at $19.90. Trading Center 2 must route a Trade-at Intermarket 
Sweep Order to Trading Center 3 to execute against the full displayed 
size of Trading Center 3's protected bid, at which point Trading Center 
2 is permitted to execute against the 200 shares hidden at $19.90. 
Trading Center 2 does not have to respect Trading Center 1's displayed 
size at $19.90 for trade-at purposes because it is not a protected 
quotation.

[[Page 27551]]

VII. Collection of Pilot Data

(A) Collection of Trading Center Pilot Data

    Throughout the Pilot Period, the Participants will collect the 
following data with respect to Pilot Securities (as set forth in 
Appendix B):
    (1) Daily market quality statistics of orders by security, order 
type, original order size (as observed by the trading center), hidden 
status (as applicable), and coverage under Rule 605 of Regulation NMS;
    (2) Specified data regarding market orders and marketable limit 
orders;
    (3) Daily number of registered Market Makers; and
    (4) Daily Market Maker participation statistics. Each Participant 
that is the Designated Examining Authority of a member of a Participant 
operating a trading center will require such member to collect and 
provide to the Designated Examining Authority the data described in 
subparagraphs (1) and (2) above, as applicable, subject to the terms 
and conditions in Appendix B. The Participants and each member of a 
Participant operating a trading center will also be required to collect 
such data for dates starting six months prior to the Pilot Period 
through six months after the end of the Pilot Period. Each Participant 
will make available to other Participants a list of members designated 
as Market Makers on that Participant's trading center.
    On a monthly basis, the Participants and the Designated Examining 
Authority for each member of a Participant operating a trading center 
will make the data in the applicable subparagraphs specified above 
publicly available on their Web sites for free and will report such 
data to the SEC on a disaggregated basis by trading center. The data 
made publicly available will not identify the trading center that 
generated the data.

(B) Collection of Market Maker Profitability Data

    Each Participant that is the Designated Examining Authority of a 
Market Maker will require such Market Maker to provide to the 
Designated Examining Authority the data specified in Appendix C 
regarding daily Market Maker trading profits with respect to Pilot 
Securities on a monthly basis. Each Market Maker will also be required 
to provide to its Designated Examining Authority such daily data for 
dates starting six months prior to the Pilot Period through six months 
after the end of the Pilot Period. On a monthly basis, the Designated 
Examining Authority will aggregate such data related to Market Makers 
categorized by the Control Group and each Test Group and make the 
aggregated data publicly available on its Web site for free and will 
report such data to the SEC, provided, however, the data reported to 
the SEC shall include the profitability statistics categorized by 
security. The data made publicly available will not identify the Market 
Makers that generated the data or the individual securities.

VIII. Assessment of Pilot

    No later than [six] eighteen months after the [end] start of the 
Pilot Period, the Participants will provide to the Commission and make 
publicly available a joint assessment of the impact of the Pilot. The 
assessment will be conducted using data generated during the first 
twelve months of the Pilot Period, or a subset of which that represents 
the impact of the Pilot. The assessment will include:
    (1) An assessment of the statistical and economic impact of an 
increase in the quoting increment on market quality;
    (2) An assessment of the statistical and economic impact of an 
increase in the quoting increment on the number of Market Makers;
    (3) An assessment of the statistical and economic impact of an 
increase in the quoting increment on Market Maker participation;
    (4) An assessment of the statistical and economic impact of an 
increase in the quoting increment on Market Maker profits;
    ([4]5) An assessment of the statistical and economic impact of an 
increase in the quoting increment on market transparency;
    ([5]6) An evaluation whether any market capitalization, daily 
trading volume, or other thresholds can differentiate the results of 
the above assessments across stocks (e.g., does the quoting increment 
impact differently those stocks with daily trading volume below a 
certain threshold);
    ([6]7) An assessment of the statistical and economic impact of the 
above assessments for the incremental impact of a trading increment and 
for the joint effect of an increase in a quoting increment with the 
addition of a trading increment;
    ([7]8) An assessment of the statistical and economic impact of the 
above assessments for the incremental impact of a trade-at prohibition 
and for the joint effect of an increase in a quoting increment with the 
addition of a trading increment and a trade-at prohibition; and
    (8) An assessment of any other economic issues that the 
Participants believe the SEC should consider in any rulemaking that may 
follow the Pilot. Participants may individually submit to the SEC and 
make publicly available additional supplemental assessments of the 
impact of the Pilot.

IX. Implementation

    The Tick Size Pilot Program will be implemented on a [one]two-year 
pilot basis. The Tick Size Pilot Program will be applicable during and 
outside of Regular Trading Hours.

X. Withdrawal from Plan

    If a Participant obtains SEC approval to withdraw from the Plan, 
such Participant may withdraw from the Plan at any time on not less 
than 30 days' prior written notice to each of the other Participants. 
At such time, the withdrawing Participant will have no further rights 
or obligations under the Plan.

XI. Counterparts and Signatures

    The Plan may be executed in any number of counterparts, no one of 
which need contain all signatures of all Participants, and as many of 
such counterparts as will together contain all such signatures will 
constitute one and the same instrument.
    IN WITNESS THEREOF, this Plan has been executed as of the _day of 
_[2014] 2015 by each of the parties hereto.

BATS EXCHANGE, INC.

BY:--------------------------------------------------------------------

BATS Y-EXCHANGE, INC.

BY:--------------------------------------------------------------------

CHICAGO STOCK EXCHANGE, INC.

BY:--------------------------------------------------------------------

EDGA EXCHANGE, INC.

BY:--------------------------------------------------------------------

EDGX EXCHANGE, INC.

BY:--------------------------------------------------------------------

FINANCIAL INDUSTRY REGULATORY AUTHORITY, INC.

BY:--------------------------------------------------------------------

NASDAQ OMX BX, INC.

BY:--------------------------------------------------------------------

NASDAQ OMX PHLX LLC

BY:--------------------------------------------------------------------

THE NASDAQ STOCK MARKET LLC

BY:--------------------------------------------------------------------

NEW YORK STOCK EXCHANGE LLC

BY:--------------------------------------------------------------------

NYSE MKT LLC

BY:--------------------------------------------------------------------

NYSE ARCA, INC.

BY:--------------------------------------------------------------------


[[Page 27552]]

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Appendix A--Publication of Pilot Securities

    The following data will be made publicly available in a pipe 
delimited format regarding the list of Pilot Securities included in 
the Control Group and each Test Group. Each primary listing exchange 
will be responsible for making publicly available for free on its 
Web site the following data with respect to the Pilot Securities 
listed on that exchange and included in the Control Group and each 
Test Group.

I. Identification of Pilot Securities

a. Ticker Symbol
b. Security Name
c. Listing Exchange
d. Date
e. Tick Size Pilot Program Group- character value of
    i. ``C'' for Pilot Securities in the Control Group
    ii. ``G1'' for Pilot Securities in Test Group One
    iii. ``G2'' for Pilot Securities in Test Group Two
    iv. ``G3'' for Pilot Securities in Test Group Three

II. Change in Pilot Securities' Ticker Symbols

a. Ticker Symbol
b. Security Name
c. Listing Exchange
d. Effective Date
e. Deleted Date
f. Tick Size Pilot Program Group--character value of
    i. ``C'' for Pilot Securities in the Control Group
    ii. ``G1'' for Pilot Securities in Test Group One
    iii. ``G2'' for Pilot Securities in Test Group Two
    iv. ``G3'' for Pilot Securities in Test Group Three
g. Old Ticker Symbol(s)
h. Reason for the change

Appendix B--Data Collected by Participants and Trading Centers

    Each Participant, as applicable, will collect and transmit the 
data described in Items I-IV with respect to Pilot Securities to the 
SEC in a pipe delimited format on a monthly basis. In addition, each 
Participant that is the Designated Examining Authority of a member 
of a Participant operating a trading center will require such 
member, as applicable, to collect and transmit the data described in 
Items I and II with respect to Pilot Securities to the Designated 
Examining Authority in a pipe delimited format on a monthly basis. 
Each Designated Examining Authority will transmit the data on a 
disaggregated basis to the SEC, i.e., by trading center. The data 
will be provided to the SEC within 30 calendar days following month 
end. All trading centers, including Participants, will report the 
data described in Items I.a(28) and I.b with respect to only those 
orders executed, in whole or part, on that trading center. All 
trading centers will report the remaining data described in Items 
I.a with respect to any order received by that trading center. The 
data described in Item I will only be collected for orders received 
during Regular Trading Hours. All trading centers, including 
Participants, will report the data described in Item II with respect 
to any market or marketable limit orders received by that trading 
center. The data described in Item II will be collected for orders 
received during and outside of Regular Trading Hours. Orders entered 
while a trading halt is in effect will be excluded from the data. 
The data will be provided for dates starting six months prior to the 
Pilot Period through six months after the end of the Pilot Period.
    I. Market Quality Statistics--Daily market quality statistics 
categorized by security, order type, original order size, hidden 
status, and coverage under Rule 605, including the following columns 
of information:
    a. For regular hours orders which are market orders (10), 
marketable limit orders (11), inside-the-quote resting limit orders 
(12), at-the-quote resting limit orders (13), near-the-quote resting 
limit orders (within .10 from the NBBO) (14), resting intermarket 
sweep orders (15), retail liquidity providing orders (16), and 
midpoint passive liquidity orders (17) executed on the trading 
center:
    (1) Exchange code or trading center identifier;
    (2) Ticker Symbol;
    (3) Order Type, as defined in the Plan or in I.a of this 
Appendix;
    (4) Original Order size with the following modified categories 
from Rule 605 reports:
    a. Less than 100 shares;
    b. 100 to 499 shares;
    c. 500 to 1999 shares;
    d. 2000 to 4999 shares;
    e. 5000 to 9999 shares; and
    f. 10000 or more shares;
    (5) Hidden Status Category--indicates whether the orders fall 
into the following categories:
    a. Entirely Displayable;
    b. Partially Displayable; and
    c. Not Displayable;
    (6) Rule 605 Coverage--indicates whether the orders are covered 
in Rule 605 (Y/N);
    (7) The cumulative number of orders;
    (8) The cumulative number of shares of orders;
    (9) The cumulative number of shares of orders canceled;
    (10) The cumulative number of shares of orders executed on the 
receiving trading center;
    (11) The cumulative number of orders with special handling 
instructions (for example, slide, discretion, eligible counterparty, 
minimum quantity) excluded from price improvement and effective 
spread statistics;
    (12) The cumulative number of shares of orders with special 
handling instructions (for example slide, discretion, eligible 
counterparty, minimum quantity) excluded from price improvement and 
effective spread statistics;
    (13) The cumulative number of shares of orders executed at any 
other trading center;
    (14) The cumulative number of shares of orders executed from 0 
to less than 100 microseconds after the time of order receipt;
    (15) The cumulative number of shares of orders executed from 100 
microseconds to less than 100 milliseconds after the time of order 
receipt;
    (16) The cumulative number of shares of orders executed from 100 
milliseconds to less than 1 second after the time of order receipt;
    (17) The cumulative number of shares of orders executed from 1 
second to less than 30 seconds after the time of order receipt;
    (18) The cumulative number of shares of orders executed from 30 
seconds to less than 60 seconds after the time of order receipt;
    (19) The cumulative number of shares of orders executed from 60 
seconds to less than 5 minutes after the time of order receipt;
    (20) The cumulative number of shares of orders executed from 5 
minutes to 30 minutes after the time of order receipt;
    (21) The cumulative number of shares of orders canceled from 0 
to less than 100 microseconds after the time of order receipt;
    (22) The cumulative number of shares of orders canceled from 100 
microseconds to less than 100 milliseconds after the time of order 
receipt;
    (23) The cumulative number of shares of orders canceled from 100 
milliseconds to less than 1 second after the time of order receipt;
    (24) The cumulative number of shares of orders canceled from 1 
second to less than 30 seconds after the time of order receipt;
    (25) The cumulative number of shares of orders canceled from 30 
seconds to less than 60 seconds after the time of order receipt;
    (26) The cumulative number of shares of orders canceled from 60 
seconds to less than 5 minutes after the time of order receipt;
    (27) The cumulative number of shares of orders canceled from 5 
minutes to 30 minutes;
    (28) The share-weighted average realized spread for executions 
of orders;
    (29) Original Percentage Hidden--the received share-weighted 
average percentage of shares not displayable as of order receipt;
    (30) Final Percentage Hidden--the received share-weighted 
average percentage of shares not displayed prior to final order 
execution or cancellation;
    (31) Quoted Size at the National Best Bid and National Best 
Offer -the share weighted average of the consolidated quoted size at 
the inside price at the time of order execution;
    (32) Share-weighted average NBBO Spread at the time of order 
execution; and
    (33) Share-weighted average BBO Spread of reporting exchange at 
the time of order execution.
    b. For market orders and marketable limit orders, except those 
noted as excluded:
    (1) The share-weighted average effective spread for executions 
of orders;
    (2) The cumulative number of shares of orders executed with 
price improvement;
    (3) For shares executed with price improvement, the share-
weighted average amount per share that prices were improved;
    (4) For shares executed with price improvement, the share-
weighted average period from the time of order receipt to the time 
of order execution;
    (5) The cumulative number of shares of orders executed at the 
quote;
    (6) For shares executed at the quote, the share-weighted average 
period from the time of order receipt to the time of order 
execution;
    (7) The cumulative number of shares of orders executed outside 
the quote;

[[Page 27553]]

    (8) For shares executed outside the quote, the share-weighted 
average amount per share that prices were outside the quote; and
    (9) For shares executed outside the quote, the share-weighted 
average period from the time of order receipt to the time of order 
execution.
    II. Market and Marketable Limit Order Data--The following 
columns of information with respect to Market Orders and non-booked 
portions of Marketable Limit Orders:
    a. Exchange code or trading center identifier;
    b. Ticker Symbol;
    c. Date;
    d. Time of order receipt;
    e. Order Type;
    f. Order Size in Shares;
    g. Order side- ``B'', ``S'' (including sell short exempt), 
``SS'';
    h. Order price (if marketable limit);
    i. NBBO quoted price;
    j. NBBO quoted depth in lots;
    k. Receiving market offer for buy or bid for sell (as 
applicable);
    l. Receiving market depth (offer for buy and bid for sell) (as 
applicable);
    m. ISO flag (Y/N);
    n. Retail Investor Order flag (Y/N);
    o. Routable flag (Y/N);
    p. IOC (Y/N);
    q. Indicator for quote leader- ``1'' if the receiving market is 
the first market to post the NBB for a sell or NBO for a buy (as 
applicable);
    r. Average execution price-share-weighted average that includes 
only executions on the receiving market;
    s. Average execution time-share-weighted average period that 
includes only executions on the receiving market;
    t. Executed shares-the number of shares in the order that are 
executed;
    u. Canceled shares--the number of shares in the order that are 
canceled;
    v. Routed shares-the number of shares in the order that are 
routed to another exchange or market;
    w. Routed average execution price-share-weighted average that 
includes only shares routed away from the receiving market;
    x. Average routed execution time-share-weighted average period 
that includes only executions on the routed markets; and
    y. Indicator for special handling instructions (for example, 
slide, discretion, eligible counterparty, minimum quantity)- 
identifies orders that contain instructions that could result in 
delayed execution or an execution price other than the quote.
    III. Daily Market Maker Registration Statistics--Each 
Participant that is a National Securities Exchange will collect 
daily Market Maker registration statistics categorized by security, 
including the following columns of information:
    a. Ticker Symbol;
    b. SRO;
    c. Number of registered market makers; and
    d. Number of other registered liquidity suppliers.
    IV. Daily Market Maker Participation Statistics--Each 
Participant will collect daily Market Maker participation statistics 
with respect to each Market Maker engaging in trading activity on 
the trading center operated by the Participant. With respect to each 
Market Maker, the Participant will collect such statistics 
irrespective of whether the Market Maker is registered with the 
Participant. The participation statistics will be categorized by 
security, including the columns of information listed below, except 
that a Participant that is a national securities association will 
not be required to collect such statistics unless a Market Maker 
registers with its Alternative Display Facility prior to or during 
the Pilot Period:
    a. Ticker Symbol;
    b. Share participation--the number of shares purchased or sold 
by Market Makers in a principal trade, not including riskless 
principal. When aggregating across Market Makers, share 
participation will be an executed share-weighted average per Market 
Maker;
    c. Trade participation--the number of purchases and sales by 
Market Makers in a principal trade, not including riskless 
principal. When aggregating across Market Makers, trade 
participation will be a trade-weighted average per Market Maker;
    d. Cross-quote share (trade) participation-the number of shares 
purchased (the number of purchases) at or above the NBO and the 
number of shares sold (the number of sales) at or below the NBB at 
the time of the trade;
    e. Inside-the-quote share (trade) participation-the number of 
shares purchased (the number of purchases) and the number of shares 
sold (the number of sales) between the NBBO at the time of the 
trade;
    f. At-the-quote share (trade) participation-the number of shares 
purchased (the number of purchases) that are equal to the National 
Best Bid price and the number of shares sold (the number of sales) 
that are equal to the National Best Offer price at the time of or 
immediately before the trade. In the case of a downward moving 
National Best Bid or Offer, the National Best Bid or National Best 
Offer price immediately before the trade will be used; and
    g. Outside-the-quote share (trade) participation-the number of 
shares purchased (the number of purchases) that are less than the 
National Best Bid price and the number of shares sold (the number of 
sales) that are greater than the National Best Offer price at the 
time of or immediately before the trade. In the case of a downward 
moving National Best Bid or Offer, the National Best Bid or National 
Best Offer price immediately before the trade will be used.

Appendix C--Data Collected by Market Makers

    Each Participant that is the Designated Examining Authority of a 
Market Maker will require such Market Maker to collect the data 
described in Item I with respect to orders and executions in Pilot 
Securities on any trading center and to transmit such data in a pipe 
delimited format to the Designated Examining Authority on a monthly 
basis, to be provided within 30 calendar days following month end. 
Data will only be collected with respect to those orders and 
executions occurring during Regular Trading Hours. The data will be 
provided for dates starting six months prior to the Pilot Period 
through six months after the end of the Pilot Period. Each 
Designated Examining Authority will be responsible for aggregating 
the data provided by the Market Makers under Item I and providing 
the data described in Item II in a pipe delimited format to the SEC.
    I. Market Maker Profitability--Daily Market Maker profitability 
statistics categorized by security, including the following columns 
of information:
    a. Total number of shares of orders executed by the Market 
Maker;
    b. Raw Market Maker realized trading profits--the difference 
between the market value of Market Maker sales (shares sold x price) 
and the market value of Market Maker purchases (shares purchased x 
price). A LIFO-like method will be used for determining which share 
prices to use in the calculation; and
    c. [Market Maker realized trading profits net of fees and 
rebates--realized trading profits plus rebates the Market Maker 
collects from trading on that day minus access fees the Market Maker 
pays for trading on that day (if estimated before allocation of 
rebates and fees, use expected rebates and fees); and]
    [d.] Raw Market Maker unrealized trading profits--the difference 
between the purchase or sale price of the end-of-day inventory 
position of the Market Maker and the Closing Price. In case of a 
short position, the Closing Price from the sale will be subtracted. 
In the case of a long position, the purchase price will be 
subtracted from the Closing Price.
    II. Aggregated Market Maker Profitability--Total Daily Market 
Maker profitability statistics categorized by security as well as 
categorized by the Control Group and each Test Group, including the 
following columns of information:
    a. Total Raw Market Maker realized trading profits--the 
difference between the market value of Market Maker sales (shares 
sold x price) and the market value of Market Maker purchases (shares 
purchased x price). A LIFO-like method will be used for determining 
which share prices to use in the calculation;
    b. Volume-weighted average of Raw Market Maker realized trading 
profits;
    [c. Total Market Maker realized trading profits net of fees and 
rebates--realized trading profits plus rebates the Market Maker 
collects from trading on that day minus access fees the Market Maker 
pays for trading on that day (if estimated before allocation of 
rebates and fees, use expected rebates and fees);
    d. Volume-weighted average of Market Maker realized trading 
profits net of fees and rebates;]
    c.[e.] Total Raw Market Maker unrealized trading profits--the 
difference between the purchase or sale price of the end-of-day 
inventory position of the Market Maker and the Closing Price. In 
case of a short position, the Closing Price from the sale will be 
subtracted. In the case of a long position, the purchase price will 
be subtracted from the Closing Price; and
    d.[f.] Volume-weighted average of Market Maker unrealized 
trading profits.

[FR Doc. 2015-11425 Filed 5-12-15; 8:45 am]
 BILLING CODE 8011-01-P

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