Market Data Infrastructure, 16726-16886 [2020-03760]

Download as PDF 16726 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240, 242, and 249 [Release No. 34–88216; File No. S7–03–20] RIN 3235–AM61 Market Data Infrastructure Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) is proposing to amend 17 CFR 242, Rules 600 and 603 and to adopt new Rule 614 of Regulation National Market System (‘‘Regulation NMS’’) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to update the national market system for the collection, consolidation, and dissemination of information with respect to quotations for and transactions in national market system (‘‘NMS’’) stocks (‘‘NMS information’’). Specifically, the Commission proposes to expand the content of NMS information that is required to be collected, consolidated, and disseminated as part of the national market system under Regulation NMS and proposes to amend the method by which such NMS information is collected, calculated, and disseminated by introducing a decentralized consolidation model where competing consolidators replace the exclusive securities information processors. DATES: Comments should be received on or before May 26, 2020. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ rules/proposed.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 03–20 on the subject line. lotter on DSKBCFDHB2PROD with PROPOSALS2 Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–03–20. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/rules/ proposed.shtml). Comments are also VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549–1090 on official business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received will be posted without change; we do not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any materials will be made available on the Commission’s website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Kelly Riley, Senior Special Counsel, at (202) 551–6772; Ted Uliassi, Senior Special Counsel, at (202) 551–6095; Elizabeth C. Badawy, Senior Accountant, at (202) 551–5612; Leigh Duffy, Special Counsel, at (202) 551– 5928; Yvonne Fraticelli, Special Counsel, at (202) 551–5654; Steve Kuan, Special Counsel, at (202) 551–5624; or Joshua Nimmo, Attorney-Advisor, at (202) 551–5452, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549. SUPPLEMENTARY INFORMATION: The Commission is proposing to expand the content of NMS information that is required to be collected, consolidated, and disseminated as part of the national market system under Regulation NMS by proposing several new defined terms under Rule 600 of Regulation NMS, including ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘regulatory data,’’ ‘‘administrative data,’’ and ‘‘exchangespecific program data.’’ To implement the decentralized consolidation model, the Commission is proposing to amend Rule 603 under Regulation NMS to remove the requirement that all consolidated information for individual NMS stocks be disseminated through a single plan processor and to require each national securities exchange and national securities association to make available its NMS information in the same manner and using the same methods, including all methods of access and the same format, as the exchange or association makes available any quotation or transaction information for NMS stocks to any person. In addition, the Commission is proposing to add new Rule 614 and a new Form CC to govern the registration and responsibilities of competing PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 consolidators. Further, the Commission is proposing that the effective national market system plan(s) for NMS stocks be amended to reflect the decentralized consolidation model. Finally, the Commission is proposing to amend Regulation SCI to expand the definition of ‘‘SCI entities’’ to include competing consolidators. In particular, the Commission is proposing: (1) Amendments to Rule 600 [17 CFR 242.600] to add new definitions of ‘‘administrative data,’’ ‘‘auction information,’’ ‘‘competing consolidator,’’ ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘depth of book data,’’ ‘‘exchange-specific program data,’’ ‘‘primary listing exchange,’’ ‘‘regulatory data,’’ ‘‘round lot,’’ and ‘‘self-aggregator;’’ (2) amendments to Rule 603 [17 CFR 242.603] to require national securities exchanges and national securities associations to make available NMS information to competing consolidators and selfaggregators and to remove the requirement that all consolidated information for individual NMS stocks be disseminated through a single plan processor; (3) adoption of Rule 614 [17 CFR 242.614] and Form CC to require registration of competing consolidators; (4) that the participants to the effective national market system plan(s) relating to NMS stocks amend such plan(s) to reflect the definition of ‘‘consolidated market data’’ and the implementation of a decentralized consolidation model; (5) amendments to Rule 1000 [17 CFR 242.1000] to include competing consolidators in the definition of ‘‘SCI entities;’’ and (6) conforming changes and updating cross-references in Rule 201(a)(3) [17 CFR 242.201(a)(3)], Rule 201(b)(1)(ii) [17 CFR 242.201(b)(1)(ii)], Rule 201(b)(3) [17 CFR 242.201(b)(3)], Rule 600(b)(43) [17 CFR 242.600(b)(43)], Rule 600(b)(61) [17 CFR 242.600(b)(61)], and Rule 602 [17 CFR 242.602]. Table of Contents I. Introduction II. Current Market Data Infrastructure under Regulation NMS and the Equity Data Plans A. Consolidated Market Data and Proprietary Data B. NMS Regulatory Framework C. Other Regulatory Data 1. Regulation SHO 2. Limit-Up Limit-Down Plan 3. Market-Wide Circuit Breakers 4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders III. Proposed Enhancements to NMS Information A. Introduction B. Proposed Definition of ‘‘Consolidated Market Data’’ C. Proposed Definition of ‘‘Core Data’’ 1. Round Lot Size E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 2. Depth of Book Data 3. Auction Information D. Proposed Definition of ‘‘Regulatory Data’’ 1. Regulation SHO 2. Limit Up-Limit Down Plan 3. Market-Wide Circuit Breakers 4. Other Regulatory Data E. Proposed Definition of ‘‘Administrative Data’’ F. Proposed Definition of ‘‘ExchangeSpecific Program Data’’ IV. Need for and Proposed Enhancements to Provision of Consolidated Market Data A. Existing Centralized Consolidation Model B. Proposed Decentralized Consolidation Model 1. Access to Data 2. Competing Consolidators 3. Self-Aggregators 4. Amendment to the Effective National Market System Plan(s) for NMS Stocks 5. Effects on the National Market System Plan Governing the Consolidated Audit Trail 6. Transition Period C. Alternatives to the Centralized Consolidation Model 1. Distributed SIP Alternative 2. Single SIP Alternative V. Paperwork Reduction Act A. Summary of Collection of Information 1. Registration Requirements and Form CC 2. Competing Consolidator Duties and Data Collection 3. Recordkeeping 4. Reports and Reviews 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations B. Proposed Use of Information 1. Registration Requirements and Form CC 2. Competing Consolidator Duties and Data Collection 3. Recordkeeping 4. Reports and Reviews 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations C. Respondents D. Total Annual Reporting and Recordkeeping Burden 1. Registration Requirements and Form CC 2. Competing Consolidator Duties and Data Collection 3. Recordkeeping 4. Reports and Reviews 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations E. Collection of Information is Mandatory F. Confidentiality 1. Registration Requirements and Form CC 2. Competing Consolidator Duties and Data Collection and Maintenance 3. Recordkeeping VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 4. Reports and Reviews 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations G. Revisions to Current Regulation SCI Burden Estimates H. Request for Comments VI. Economic Analysis A. Introduction and Market Failures 1. Introduction 2. Market Failures B. Baseline 1. Current Regulatory Process for Equity Data Plans and SIP Data 2. Current Process for Collecting, Consolidating, and Disseminating Market Data 3. Competition Baseline 4. Request for Comments on Baseline C. Economic Effects of the Rule 1. Core Data and Consolidated Market Data 2. Decentralized Consolidation Model 3. Economic Effects of Form CC 4. Economic Effects From the Interaction of Changes to Core Data and the Decentralized Consolidation Model 5. Request for Comments on the Economic Effects of the Proposed Rule D. Impact on Efficiency, Competition, and Capital Formation 1. Efficiency 2. Competition 3. Capital Formation 4. Request for Comments on Impact on Efficiency, Competition, and Capital Formation E. Alternatives 1. Introduce Decentralized Consolidation Model With Additional Changes in Core Data Definition 2. Introduce Changes in Core Data and Introduce a Distributed SIP Model 3. Require Competing Consolidators’ Fees be Subject to the Commission’s Approval 4. Do Not Extend Regulation SCI to Include Competing Consolidators 5. Require Competing Consolidators to Submit Form CC in the EDGAR System Using the Inline XBRL Format 6. Require Competing Consolidators to Submit Monthly Disclosures in the EDGAR System Using the Inline XBRL Format 7. Prescribing the Format of NMS Information 8. Request for Comments on Alternatives F. Request for Comments on the Economic Analysis VII. Consideration of Impact on the Economy VIII. Regulatory Flexibility Certification IX. Statutory Authority I. Introduction The widespread availability of NMS information 1 has been an essential element in the success of the U.S. securities markets. Congress recognized the importance of market information to the U.S. securities markets with the 1 See infra Section II.A for a discussion of the NMS information that is consolidated and disseminated in the U.S. securities markets. PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 16727 enactment of Section 11A of the Exchange Act. Section 11A(a)(2) of the Exchange Act 2 directs the Commission, having due regard for the public interest, the protection of investors, and the maintenance of fair and orderly markets, to use its authority under the Exchange Act to facilitate the establishment of a national market system for securities in accordance with the Congressional findings and objectives set forth in Section 11A(a)(1) of the Exchange Act.3 Among the findings and objectives in Section 11A(a)(1) are that ‘‘[n]ew data processing and communications techniques create the opportunity for more efficient and effective market operations’’ 4 and ‘‘[i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities . . . ’’ 5 As discussed below, the Commission exercised its authority under Section 11A of the Exchange Act through the adoption of a series of rules that have been incorporated into Regulation NMS. Those rules address both the content of, and the means by which, NMS information is collected, consolidated, and disseminated.6 In particular, Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission to prescribe rules, as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act, that ‘‘assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information.’’ 7 Among other 2 15 U.S.C. 78k–1(a)(2). U.S.C. 78k–1(a)(1). 4 15 U.S.C. 78k–1(a)(1)(B). 5 15 U.S.C. 78k–1(a)(1)(C). The Senate Report for the enactment of Section 11A stated that ‘‘it is critical for those who trade to have access to accurate, up-to-the-second information as to the prices at which transactions in particular securities are taking place (i.e., last sale reports) and the prices at which other traders have expressed their willingness to buy or sell (i.e., quotations).’’ S. Rep. No. 94–75 at 8 (1975) (‘‘Senate Report’’). The Senate Report continued that ‘‘[f]or this reason, communications systems designed to provide automated dissemination of last sale and quotation information with respect to securities will form the heart of the national market system.’’ Id. at 6. 6 See 17 CFR 242.601–603; infra Section II.B. 7 See 15 U.S.C. 78k–1(c)(1)(B); Senate Report, supra note 5, at 189 (‘‘Examples of the types of subjects as to which the SEC would have the 3 15 E:\FR\FM\24MRP2.SGM Continued 24MRP2 16728 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 things, the Commission required the self-regulatory organizations (‘‘SROs’’) to act jointly pursuant to NMS plans 8 to disseminate, through a single plan processor, a consolidated national best bid and national best offer, along with last sale data, for each NMS stock.9 While the Commission has periodically revised certain of its NMS rules with the goal of ensuring that the regulatory framework continues to fulfill the goals of Section 11A of the Exchange Act,10 the Commission has not significantly updated the rules that govern the content and distribution of NMS authority to promulgate rules under these provisions include: The hours of operation of any type or quotation system, trading halts, what and how information is displayed and qualifications for the securities to be included on any tape or within any quotation system.’’). 8 On January 8, 2020, the Commission issued a notice of proposed order directing the SROs to submit a new, single NMS plan for NMS stocks (‘‘New Consolidated Data Plan’’). See Securities Exchange Act Release No. 87906 (Jan. 8, 2020), 85 FR 2164 (Jan. 14, 2020) (‘‘Proposed Governance Order’’). The existing NMS plans for NMS stocks are: (1) The Consolidated Trade Association (‘‘CTA’’) Plan; (2) the Consolidated Quotation (‘‘CQ’’) Plan; and (3) the Nasdaq Unlisted Trading Privileges (‘‘Nasdaq UTP’’) Plan (collectively the ‘‘Equity Data Plans’’). See infra note 13 and Section II.A. The Commission is proposing provisions in new Rule 614 that would require the participants to amend the effective national market system plan(s) for NMS stocks. See infra Section IV.B.4. If adopted, the proposed amendments would apply to any effective national market system plan for NMS stocks. In response to the Proposed Governance Order, the NYSE submitted a comment letter that also discussed a number of market structure issues that are addressed in this release (e.g., expanding SIP data content and modernizing SIP data delivery such as through a potential competing consolidator model). See Letter from Elizabeth K. King, Chief Regulatory Officer, ICE, and General Counsel and Corporate Secretary, NYSE, to Vanessa Countryman, Secretary, Commission, 5 (Feb. 5, 2020) (‘‘NYSE Governance Letter’’). As with various other comments referenced herein, including, without limitation, comments received in connection with the Roundtable on Market Data and Market Access, see infra note 17, the NYSE Governance Letter was not provided with reference to the specific proposals discussed in this release. To the extent that the NYSE or other commenters wish to modify or supplement their prior comments to reflect the particulars of the proposals discussed herein, the Commission welcomes such comments. 9 See Exchange Act Rule 11Aa3–1 (renumbered and renamed as Exchange Act Rule 601, Dissemination of transaction reports and last sale data with respect to transactions in NMS stocks); Exchange Act Rule 11Ac1–1 (renumbered and renamed as Exchange Act Rule 602, Dissemination of quotations in NMS securities); Exchange Act Rule 11Ac1–2 (renumbered and renamed as Exchange Act Rule 603, Distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks.). 10 See, e.g., Securities Exchange Act Release Nos. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’); 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (adopting amendments to Rule 606 to require additional disclosures by broker-dealers to customers regarding the handling of their orders). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 information since their initial implementation in the late 1970s. The widespread availability of timely market information promotes fair and efficient markets and facilitates the ability of brokers and dealers to provide best execution to their customers.11 The structure of the equity markets has changed dramatically since the Commission adopted the rules now known as Regulation NMS in 2005 and approved the three existing Equity Data Plans under Rule 608 12 of Regulation NMS.13 In 2005, a substantial amount of trading was conducted on relatively slow manual markets, and for any given stock, concentrated on its listing exchange. Today, the U.S. equity markets have evolved into high-speed, latency-sensitive electronic markets where trading is dispersed among a wide range of competing market centers 14 and even small degrees of latency affect trading strategies.15 11 Section 11A(a)(1) of the Exchange Act, 15 U.S.C. 78k–1(a)(1). See also Senate Report supra note 5, at 8; Securities Exchange Act Release No. 42208 (Dec. 9, 1999), 64 FR 70613, 70614 (Dec. 17, 1999) (‘‘Market Information Concept Release’’); Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3593, 3600 (Jan. 21, 2010) (‘‘Equity Market Structure Concept Release’’). 12 17 CFR 242.608. 13 The Equity Data Plans are effective national market system plans as defined in Rule 600(b)(22) for NMS stocks. See Second Restatement of the Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Aa3–1 under the Securities Exchange Act of 1934, composite as of Dec. 6, 2019, available at https://www.ctaplan.com/ publicdocs/ctaplan/notifications/trader-update/ CTA_Plan_Composite_as_of_December_6_2019.pdf; Restatement of Plan Submitted to the Securities and Exchange Commission Pursuant to Rule 11Ac1–1 under the Securities Exchange Act of 1934, composite as of Dec. 6, 2019, available at https:// www.ctaplan.com/publicdocs/ctaplan/ notifications/trader-update/CQ_Plan_Composite_ as_of_December_6_2019.pdf; Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-listed Securities Traded on Exchanges on an Unlisted Trading Privilege Basis, available at https:// www.utpplan.com/DOC/Nasdaq-UTPPlan_after_ 46th_Amendment-Excluding_21st_36th_38th_ 42nd_44th_45th_Amendments.pdf; Proposed Governance Order, supra note 8. 14 Rule 600(b)(38) defines a market center as ‘‘any exchange market maker, OTC market maker, alternative trading system, national securities exchange, or national securities association.’’ 17 CFR 242.600(b)(38). 15 See Eric Budish, et al., Will the Market Fix the Market? A Theory of Stock Exchange Competition and Innovation, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2019–72 (May 2019), available at SSRN: https:// ssrn.com/abstract=3391461; Andriy Shkilko and Konstantin Sokolov, Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs (Apr. 2019), available at https:// ssrn.com/abstract=2848562; Equity Market Structure Concept Release, supra note 11 (‘‘NYSElisted stocks were traded primarily on the floor of the NYSE in a manual fashion until October 2006. At that time, NYSE began to offer fully automated PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 Sophisticated order routing algorithms dependent on low-latency, high-quality market information are widely used to execute securities transactions.16 Despite the evolution of latencysensitive markets, the provision of NMS information that is centrally consolidated and disseminated by the Equity Data Plans is meaningfully slower than certain proprietary market data products distributed by the exchanges.17 Today, the exchanges sell access to its displayed quotations.’’). In contrast to NYSE, stocks on the Nasdaq Stock Market LLC (‘‘Nasdaq’’) traded in a highly automated fashion at many different trading centers following the introduction of SuperMontage in 2002. See Securities Exchange Act Release No. 46429 (Aug. 29, 2002), 67 FR 56862 (Sept. 5, 2002); Steven Quirk, Senior Vice President, Trader Group, TD Ameritrade, Testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, Hearing on ‘‘Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets’’ (June 17, 2014), available at https://www.hsgac.senate.gov/imo/ media/doc/STMT%20-%20Quirk%20%20TD%20Ameritrade%20(June%2017%202014) .pdf%20 (citing statistics that average execution speed has improved by 90% since 2004—from 7 seconds to 0.7 seconds in 2014). Today, trading speed is measured in microseconds and is moving towards nanoseconds. See, e.g., Vera Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall Street Journal (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-techaccelerates-toward-speed-of-light-1470559173; Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech Upgrade, Wall Street Journal (Aug. 5, 2019), available at https:// www.wsj.com/articles/nyse-aims-to-speed-uptrading-with-core-tech-upgrade-11565002800. 16 See, e.g., Equity Market Structure Concept Release, supra note 11; Eric Budish, et al., supra note 15; Andrew Morgan, The impact of high frequency trading on algorithms and smart order routing, Algorithmic Trading & Smart Order Routing, 3d. ed. (2009), available at https:// pdfs.semanticscholar.org/ba0b/ 5e952b27cc48513825cb7e4f6d15803e6973.pdf. 17 See infra Section II.A. In addition, as discussed more fully below, on October 25–26, 2018, the Division of Trading and Markets hosted roundtables to gather information on market data and market access. See generally Equity Market Structure Roundtables, Oct. 25–26, 2018: Roundtable on Market Data and Market Access, https:// www.sec.gov/spotlight/equity-market-structureroundtables (‘‘Roundtable’’). Transcripts for both days of the Roundtable are available at https:// www.sec.gov/spotlight/equity-market-structureroundtables/roundtable-market-data-marketaccess-102518-transcript.pdf (‘‘Roundtable Day One Transcript’’) and https://www.sec.gov/spotlight/ equity-market-structure-roundtables/roundtablemarket-data-market-access-102618-transcript.pdf (‘‘Roundtable Day Two Transcript’’). Panelists at the Roundtable noted that the geographical delays inherent in the nature of a centralized processor results in significant latencies between the Equity Data Plans’ feeds and proprietary data feeds that cannot be eliminated in the current infrastructure. Roundtable Day One Transcript at 145 (Simon Emrich, Norges Bank Investment Management) (‘‘And part of that, the most interesting part of the delay for me is really the location of the consolidator, the geographical delay that’s introduced, and the data connection element to the consolidator. Right? So from our perspective, the latency of the consolidator itself, the consolidation E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 proprietary data products that are fast, low-latency products designed for automated trading systems and include content, such as depth of book 18 and order imbalance information for opening and closing auctions (‘‘proprietary DOB products’’) that are not provided under the Equity Data Plans.19 The Commission believes that engine, the improvements that we’ve made are remarkable over the years. But it just doesn’t measure the physical reality of the brokers that we’re using.’’); 148 (Michael Blaugrund, NYSE) (‘‘[T]he method of transmission of that information and the timing of the aggregation of that information into a consolidated feed plays a role. As I think we all acknowledge, the aggregation time has improved dramatically. As we’ve seen that decline, it highlights the fact that the geographic latency becomes a more meaningful portion of the overall time line.’’). See also Ivy Schmerken, Speeding Up the SIP Isn’t Enough, Say Market Pros at Baruch Conference, InformationWeek: Wall Street & Technology (Oct. 17, 2014), available at https://www.wallstreetandtech.com/infrastructure/ speeding-up-the-sip-isnt-enough-say-market-prosat-baruch-conference/d/d-id/1316724.html (‘‘Since the SIP is slower than proprietary data feeds that firms can obtain directly from exchanges, critics have said that the SIP enables ‘latency arbitrage’ between high-speed traders using fast data and those trading off of stale quotes from the consolidated feed.’’). 18 ‘‘Depth of book,’’ or ‘‘DOB,’’ refers to open buy and sell orders resting on a limit order book at prices away from the top of book (i.e., orders to buy at prices that are below the best bid and orders to sell that are higher than the best offer). 19 See, e.g., Nasdaq, Data Products, available at https://www.nasdaqtrader.com/ Trader.aspx?id=DPSpecs (last accessed Jan. 7, 2020) (describing low-latency DOB data products); NYSE, Real-Time Data, available at https://www.nyse.com/ market-data/real-time (last accessed Jan. 7, 2020) (describing low-latency DOB data products); Cboe, Market Data Services: U.S. Equities, available at https://markets.cboe.com/us/equities/market_data_ services/ (last accessed Jan. 7, 2020) (describing low-latency DOB data products). Particularly when aggregated, proprietary DOB market data products provide a consolidated view of the market with greater content and lower latency. The exchanges also sell other data products that are limited in content, such as an exchange’s top of book (‘‘TOB’’) quotation information and transaction information, that are designed largely for the non-automated segment of the market (e.g., retail investors and wealth managers) that is less sensitive to latency (‘‘proprietary TOB products’’). Examples of such proprietary TOB products include NYSE BBO (https://www.nyse.com/market-data/real-time/bbo), NASDAQ Basic (https://business.nasdaq.com/intel/ GIS/nasdaq-basic.html), and Cboe One Feed (https://markets.cboe.com/us/equities/market_ data_services/cboe_one). NYSE BBO provides TOB data. Nasdaq Basic and Cboe One’s Summary Feed provide TOB and last sale information. Nasdaq Basic also provides Nasdaq Opening and Closing Prices and other information, including Emergency Market Condition event messages, System Status, and trading halt information. Cboe One, however, also offers a Premium Feed that includes DOB data. Each of these products is sold separately by the relevant exchange group. See Letter from Matthew J. Billings, Managing Director, Market Data Strategy, TD Ameritrade, 5–8 (Oct. 24, 2018) (‘‘TD Ameritrade Letter’’), available at https:// www.sec.gov/comments/4-729/4729-4560068176205.pdf (stating that the lower cost of exchange TOB products, coupled with costs associated with the process to differentiate between retail professionals and non-professionals imposed by the VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 the content and operating model under which NMS information is collected, consolidated, and disseminated have not kept pace with technological and market developments and are no longer satisfying the needs of many investors. Today, the dissemination of NMS information relies upon a centralized consolidation model, where the SROs provide certain NMS information for each NMS stock to an exclusive processor (‘‘exclusive SIP’’).20 The exclusive SIP then consolidates this NMS information and makes it available to market participants.21 Market participants also may independently consolidate NMS information by purchasing individual exchange proprietary market data products 22 and consolidating that information for their own use, or obtain NMS information that has been consolidated by a vendor that provides a data aggregation service. As discussed further below, proprietary DOB products collected through this decentralized consolidation model typically contain enhanced information compared to the market information provided through the Equity Data Plans, such as information about all orders on an individual exchange’s order book.23 Equity Data Plans, and associated audit risk, favors retail broker-dealer use of exchange TOB products). 20 An ‘‘exclusive processor’’ is defined in Section 3(a)(22)(B) of the Exchange Act as ‘‘any [SIP] or [SRO] which, directly or indirectly, engages on an exclusive basis on behalf of any national securities exchange or registered securities association, or any national securities exchange or registered securities association which engages on an exclusive basis on its own behalf, in collecting, processing, or preparing for distribution or publication any information with respect to (i) transactions or quotations on or effected or made by means of any facility of such exchange or (ii) quotations distributed or published by means of any electronic system operated or controlled by such association.’’ 15 U.S.C. 78c(a)(22)(B). A securities information processor (‘‘SIP’’) is defined in Section 3(a)(22)(A) of the Exchange Act as ‘‘any person engaged in the business of (i) collecting, processing, or preparing for distribution or publication, or assisting, participating in, or coordinating the distribution or publication of, information with respect to transactions in or quotations for any security (other than an exempted security) or (ii) distributing or publishing (whether by means of a ticker tape, a communications network, a terminal display device, or otherwise) on a current and continuing basis, information with respect to such transactions or quotations.’’ 15 U.S.C. 78c(a)(22)(A). See infra note 42 and accompanying text. 21 See Rule 603(b) of Regulation NMS. Rule 603(b) provides that all information for an individual NMS stock must be disseminated through a single plan processor. 17 CFR 242.603(b). See Rule 600(b)(59), which defines a plan processor as ‘‘any selfregulatory organization or securities information processor acting as an exclusive processor in connection with the development, implementation and/or operation of any facility contemplated by an effective national market system plan.’’ 17 CFR 242.600(b)(59). 22 See infra Section II.A (discussing proprietary DOB and proprietary TOB). 23 See supra note 19. PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 16729 Market participants also are able to consolidate and use the data obtained in this manner more quickly than market participants relying on NMS information provided through the Equity Data Plans. As noted above, Section 11A of the Exchange Act specifically highlights the importance of making information with respect to quotations for and transactions in securities available to brokers, dealers, and investors in a prompt, accurate, reliable, and fair manner and directs the Commission to act in accordance with this finding. Accordingly, the Commission proposes to amend Regulation NMS to better achieve the goal of assuring ‘‘the availability to brokers, dealers and investors of information with respect to quotations for and transactions in securities’’ 24 that is prompt, accurate, reliable, and fair.25 The Commission preliminarily believes that the proposals described herein would promote fair and efficient markets and would facilitate the best execution of investor orders, and reduce information asymmetries between market participants who currently rely on market data provided through the exclusive SIPs and those who purchase the proprietary market data products offered by the national securities exchanges.26 The proposed amendments include two key parts, and the Commission preliminarily believes that the proposals are complementary, but can be independently justified. First, the amendments would update the content of the information with respect to quotations for and transactions in NMS stocks that must be made available under Regulation NMS. In particular, the Commission proposes to expand the NMS information that is required to be collected, consolidated, and 24 Section 11A(a)(1)(C)(iii), 15 U.S.C. 78k– 1(a)(1)(C)(iii). 25 Section 11A(c)(1)(B), 15 U.S.C. 78k–1(c)(1)(B). Section 11A(c)(1)(B) provides the Commission with the authority to prescribe rules and regulations as necessary or appropriate in the public interest, for the protection of investors or otherwise in furtherance of the purposes of the Exchange Act to ‘‘assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information.’’ Id. 26 See Section 11A(a)(1)(C), 15 U.S.C. 78k– 1(a)(1)(C) (stating that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure ‘‘fair competition among brokers and dealers,’’ ‘‘the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities,’’ and ‘‘the practicability of brokers executing investors’ orders in the best market’’). E:\FR\FM\24MRP2.SGM 24MRP2 16730 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 disseminated under Regulation NMS to include: (1) Information about orders in sizes smaller than the current round lot size for certain higher priced stocks; 27 (2) information about certain orders that are outside of the best bid and best offer (i.e., certain depth of book data); and (3) information about orders that are participating in opening, closing, and other auctions. The Commission preliminarily believes that enhancing the content of NMS information in this manner should help ensure that all market participants have ready access to that market information in order to facilitate participation in today’s markets. Second, the amendments introduce a decentralized consolidation model whereby competing consolidators would assume responsibility for the collection, consolidation, and dissemination functions currently performed by the exclusive SIPs.28 To facilitate this decentralized consolidation model, the Commission proposes that each SRO would be required to make all of its market data that is necessary to generate consolidated market data (as proposed to be defined) directly available to two new categories of entities: (1) Competing consolidators and (2) self-aggregators. Competing consolidators would be either SROs or SIPs registered with the Commission pursuant to proposed Rule 614, and would be responsible for collecting, consolidating, and disseminating consolidated market data to the public. Self-aggregators would be brokers or dealers that elect to collect and generate consolidated market data for their own internal use. Non-SRO competing consolidators would be required to register with the Commission.29 All competing consolidators, SRO and non-SRO, would be subject to appropriate standards with respect to the 27 See proposed Rule 600(b)(81) (defining ‘‘round lot’’ as 100 shares, 20 shares, 10 shares, 2 shares, or 1 share depending upon the prior calendar month’s average closing price for each NMS stock). 28 The Commission is proposing to include competing consolidators in the definition of ‘‘SCI entities;’’ therefore, competing consolidators would be subject to the requirements of Regulation SCI. See Rule 1000(a) of Regulation SCI, 17 CFR 242.1000(a). See Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (‘‘Regulation SCI Adopting Release’’). See also infra Section IV.B.2(f). 29 As discussed further below, only those entities that are SIPs would be required to register with the Commission pursuant to proposed Rule 614 and proposed Form CC. SROs that wish to act as competing consolidators would not be required to register pursuant to proposed Rule 614 and proposed Form CC but would be required to comply with the competing consolidator obligations set forth in proposed Rule 614(d). See infra Section IV.B. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 promptness, accuracy, reliability, and fairness of their consolidated market data distribution. While self-aggregators would not be subject to a separate registration requirement, as registered broker-dealers, they would be subject to the full broker-dealer regulatory regime.30 To support this proposed decentralized consolidation model, each SRO would be required to make all of its own data that is necessary to generate consolidated market data available to competing consolidators and self-aggregators directly from its data center, and in the same manner and using the same methods, including all methods of access and the same format, as it makes its proprietary market data products available to any market participant. Under the proposed structure, the effective national market system plan(s) would continue to serve an important role in the national market system by, among other things, governing the SROs’ provision of the data necessary to generate consolidated market data, including setting fees for the provision of such SRO data to competing consolidators and self-aggregators.31 The Commission preliminarily believes that, by introducing competition and market forces into the collection, consolidation, and dissemination process, the decentralized consolidation model would help ensure that consolidated market data is delivered to market participants in a more timely, efficient, and cost-effective manner than the current centralized consolidation model.32 II. Current Market Data Infrastructure Under Regulation NMS and the Equity Data Plans A. Consolidated Market Data and Proprietary Data Today, in accordance with the centralized consolidation model, the SROs act jointly pursuant to the three Equity Data Plans to collect, consolidate, and publicly disseminate real-time, NMS information.33 For each NMS stock, the SROs are required, pursuant to Regulation NMS and the Equity Data Plans, to provide certain quotation 34 and transaction 35 data to the designated exclusive SIP for each Equity Data Plan.36 Each exclusive SIP 30 See infra Section IV.B.3. Proposed Governance Order, supra note 8. 32 See infra Section IV.B. 33 See supra note 13. 34 See Rule 602 of Regulation NMS, 17 CFR 242.602. 35 See Rule 601 of Regulation NMS, 17 CFR 242.601. 36 Rule 603(b) of Regulation NMS provides that ‘‘the dissemination of all consolidated information 31 See PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 collects, consolidates, and disseminates NMS information to the public on the consolidated tape, described below. The NMS information that is consolidated and made available under the Equity Data Plans generally includes: ‘‘(1) The price, size, and exchange of the last sale; (2) each exchange’s current highest bid and lowest offer, and the shares available at those prices; and (3) the national best bid and offer (i.e., the highest bid and lowest offer currently available on any exchange).’’ 37 In general, these data elements form what historically has commonly been referred to as ‘‘core data.’’ In addition to disseminating core data, the exclusive SIPs collect, calculate, and disseminate certain regulatory data, including information required by the NMS Plan to Address Extraordinary Market Volatility (‘‘LULD Plan’’),38 information relating to regulatory halts and market-wide circuit breakers (‘‘MWCBs’’),39 and information regarding short sale circuit breakers pursuant to Rule 201.40 The exclusive SIPs also collect and disseminate other NMS stock data and disseminate certain administrative messages.41 For purposes for an individual NMS stock’’ shall be through a single plan processor (i.e., exclusive SIP). 17 CFR 242.603(b). 37 See In the Matter of the Application of Bloomberg L.P., Securities Exchange Act Release No. 83755 at 3 (July 31, 2018) (‘‘Bloomberg Decision’’), available at https://www.sec.gov/ litigation/opinions/2018/34-83755.pdf; accord In the Matter of the Application of Sec. Indus. & Fin. Markets Ass’n for Review of Action Taken by Nyse Arca, Inc., & Nasdaq Stock Mkt. LLC, Securities Exchange Act Release No. 84432 (Oct. 16, 2018) (‘‘In the Matter of the Application of SIFMA’’) (citing NetCoalition v. SEC., 615 F.3d 525, 529 (DC Cir. 2010)); Securities Exchange Act Release No. 87193 (Oct. 1, 2019), 84 FR 54794, 54795 (Oct. 11, 2019) (‘‘Effective on Filing Proposal’’). 38 See Securities Exchange Act Release Nos. 85623 (Apr. 11, 2019), 84 FR 16086 (Apr. 17, 2019) (approving LULD Plan on a permanent basis); 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) (approving LULD Plan, as modified by Amendment No. 1, on a pilot basis); Limit Up Limit Down Plan: Overview, available at https://www.luldplan.com/ index.html (last accessed Dec. 16, 2019). 39 See Securities Exchange Act Release No. 67090 (May 31, 2012), 77 FR 33531 (June 6, 2012) (SR– BATS–2011–038; SR–BYX–2011–025; SR–BX– 2011–068; SR–CBOE–2011–087; SR–C2–2011–024; SR–CHX–2011–30; SR–EDGA–2011–31; SR–EDGX– 2011–30; SR–FINRA–2011–054; SR–ISE–2011–61; SR–NASDAQ–2011–131; SR–NSX–2011–11; SR– NYSE–2011–48; SR–NYSEAmex–2011–73; SR– NYSEArca–2011–68; SR–Phlx–2011–129). 40 See Rule 201(b)(3) of Regulation SHO, 17 CFR 242.201(b)(3). 41 The exclusive SIPs also provide other data regarding NMS stocks pursuant to SRO rules that are described in the Equity Data Plans’ technical specifications, such as data relating to retail liquidity programs, market and settlement conditions, and the financial condition of the issuer. In addition, the Nasdaq UTP SIP separately provides Over-the-Counter Bulletin Board (‘‘OTCBB’’) data, and the CTA Plan allows participants to use the CTA/CQ SIP to disseminate E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 of this release, these existing market data elements, together with the historical ‘‘core data’’ described above, are referred to as ‘‘SIP data.’’ The Equity Data Plans set the terms for the operation of the exclusive SIPs.42 There are two exclusive SIPs, each of which is physically located in a different data center. The exclusive SIP for the CTA and CQ Plans, which covers Tape A (i.e., securities listed on the New York Stock Exchange (‘‘NYSE’’)) and Tape B (i.e., securities listed on exchanges other than NYSE or Nasdaq),43 is located in Mahwah, New Jersey (‘‘CTA/CQ SIP’’), while the Nasdaq UTP Plan exclusive SIP, which covers Tape C (i.e., Nasdaq-listed securities), is located in Carteret, New Jersey (‘‘Nasdaq UTP SIP’’). Tapes A, B, and C are commonly referred to as the ‘‘consolidated tapes.’’ The exchanges’ primary data centers are in four different physical locations, namely Mahwah, Carteret, Secaucus, and Weehawken, New Jersey, and they all have back-up data centers in Chicago.44 Broker-dealers may report transactions effected otherwise than on an exchange (i.e., ‘‘over-the-counter’’ or ‘‘OTC’’) to trade reporting facilities (‘‘TRFs’’), which are facilities of FINRA. There are currently three active TRFs: FINRA/Nasdaq TRF in Carteret, FINRA/ Nasdaq TRF in Chicago, and FINRA/ NYSE TRF in Mahwah.45 last sale prices for corporate bonds and information about indices. 42 See supra note 20. The exclusive SIPs are the plan processors for the Equity Data Plans. The Securities Industry Automation Corporation (‘‘SIAC’’), a wholly owned, indirect subsidiary of Intercontinental Exchange (‘‘ICE’’), of which the NYSE is also a subsidiary, is the plan processor for Tapes A and B; Nasdaq is the plan processor for Tape C. 43 Tape B includes securities listed on exchanges other than NYSE or Nasdaq, including Cboe, NYSE Arca, and NYSE American. 44 See NYSE Trader Update: NYSE and NYSE MKT Equity Emergency Procedures and New DR Plans (Sept. 9, 2016), available at https:// www.nyse.com/publicdocs/nyse/markets/nyse/ NYSE_and_NYSE_MKT_DR_Trader_Update_ Final.pdf; UTP Plan Administration Data Policies (Oct. 2018), available at https://www.utpplan.com/ DOC/Datapolicies.pdf; NYSE Chicago Disaster Recovery FAQs (July 2019), available at https:// www.nyse.com/publicdocs/nyse/markets/nysechicago/NYSE_Chicago_Disaster_Recovery_ FAQs.pdf; Cboe: US Equities/Options Connectivity Manual, Version 10.0.0 (Oct. 7, 2019), available at https://cdn.cboe.com/resources/membership/US_ Equities_Options_Connectivity_Manual.pdf; Securities Exchange Act Release No. 78101 (June 17, 2016), 81 FR 41142, 41154 (June 23, 2016). 45 See FINRA, Trade Reporting Facility (TRF), available at https://www.finra.org/filing-reporting/ trade-reporting-facility-trf (last accessed Jan. 22, 2020). As of October 2019, the FINRA/Nasdaq TRF in Carteret handled approximately 30% of the share volume in OTC reported transactions. See Cboe Global Markets, U.S. Equities Market Volume Summary (month-to-date), available at https:// markets.cboe.com/us/equities/market_share/ (last accessed Oct. 21, 2019). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 With this centralized consolidation model, each exchange and FINRA must first transmit its quotation and transaction information 46 from its own data center to the appropriate exclusive SIP’s data center for consolidation, at which point SIP data is then further transmitted to market data end-users, which are often located in other data centers. The SROs today typically transmit their market data through fiber optic cables to the exclusive SIPs and, in the case of the CTA/CQ SIP, through infrastructure owned and mandated by the NYSE.47 In addition to the provision of SIP data pursuant to the Equity Data Plans, the national securities exchanges separately sell their individual proprietary market data products, which include the SIP data elements as well as a variety of additional data elements.48 As noted above, the proprietary DOB products are generally characterized as fast, low-latency products designed for automated trading systems that include additional content.49 In addition to SIP 46 See supra notes 34–35 and accompanying text. NYSE operates the CTA/CQ SIP and has required that access to the CTA/CQ SIP be through the use of the NYSE’s IP local area network. The NYSE represents that this access requirement was mandated due to the IP network’s security, resiliency, and redundancy. See Securities Exchange Act Release No. 86865 (Sept. 4, 2019), 84 FR 47592, 47594, n.12 (Sept. 10, 2019) (‘‘NYSE Low-Latency SIP Filing’’). See also Consolidated Tape System (CTS) Participant Input Binary Specification, 60, available at https:// www.ctaplan.com/publicdocs/ctaplan/ notifications/trader-update/CTS_BINARY_INPUT_ SPECIFICATION.pdf, and Consolidated Quotation System (CQS) Participant Input Binary Specification, 42, available at https:// www.ctaplan.com/publicdocs/ctaplan/ notifications/trader-update/CQS_BINARY_INPUT_ SPECIFICATION.pdf (both depicting that the participants of those plans use ICE Data Services’ Secure Financial Transaction Infrastructure (‘‘SFTI’’) network to transmit data to those exclusive SIPs). SFTI provides connectivity to the individual ICE and NYSE Group markets including NYSE and NYSE Arca equities. SFTI also provides connectivity to the data center for the CTA and CQ Plans in Mahwah. 48 In adopting Regulation NMS in 2005, the Commission determined not to require that DOB information be included in core data, reasoning that investors who needed DOB information would be able to obtain such information from markets or third-party vendors. See Regulation NMS Adopting Release, supra note 10, at 37567. In making that determination, the Commission stated that this would be ‘‘a competition-driven outcome [that] would benefit investors and the markets in general.’’ See id. at 37530. 49 In contrast, proprietary TOB products are generally limited in content, such as the exchange’s top of book quotation information and transaction information and are designed largely for the nonautomated segment of the market (e.g., retail or nonprofessional investors and wealth managers that access market data visually). But see CBOE One Feed Specification, CBOE, available at https:// cdn.cboe.com/resources/membership/Cboe_US_ Equities_Cboe_One_Feed_Specification.pdf (highlighting that CBOE offers a non-automated product with a five-level depth of book option). 47 The PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 16731 data, proprietary DOB products typically include odd-lot quotations; orders at prices above and below the best prices (i.e., depth of book data); and information about orders participating in auctions, including auction order imbalances.50 In addition to proprietary DOB products, the exchanges offer a variety of connectivity options, such as colocation at primary data centers, fiber optic connectivity, wireless connectivity, and point-of-presence connectivity at third-party data centers.51 Typically, the data for proprietary DOB products is transmitted directly from each exchange to the data center of the subscriber, where the subscriber’s broker-dealer or vendor (or the subscriber itself) privately may consolidate such data with the proprietary data of the other exchanges. Furthermore, for many market participants, proprietary data is transmitted using wireless connectivity (often provided by the exchanges), such as microwave or laser technology,52 that allows faster data transmission than the fiber optic cables that are typically used by the exclusive SIPs for the purposes of transmitting SIP data. The exchanges charge fees for these proprietary data products,53 as well as for each of their connectivity options for co-location (e.g., physical ports, cross-connects, and field programmable gate array (‘‘FPGA’’) services) and for communications services providing connectivity between data centers (e.g., microwave and fiber optics). In the context of the Division of Trading and Markets’ Roundtable on Market Data and Market Access in October 2018, some market participants commented that, in their view, they need the more content-rich proprietary data feeds and low latency connectivity to provide best execution to their clients 50 See, e.g., Nasdaq TotalView and NYSE Integrated. 51 The exchanges have an inherent competitive advantage in the provision of connectivity services within exchange facilities, while connectivity options made available elsewhere, such as point-ofpresence connectivity at third-party data centers, are fully competitive. 52 See, e.g., Nasdaq, Trade Management Services: Wireless Connectivity Suite, available at https:// n.nasdaq.com/WirelessConnectivitySuite (last accessed Dec. 16, 2019); ICE Global Network, New Jersey Metro, available at https://www.theice.com/ market-data/connectivity-and-feeds/wireless/newjersey-metro (last accessed Dec. 16, 2019). 53 See, e.g., Letter to Vanessa Countryman, Secretary, Commission, from Robert Toomey, Managing Director and Associate General Counsel, SIFMA, 1–2 (Jan. 13, 2020) (stating that exchange market data products are ‘‘complementary’’ and result in ‘‘not only supra-competitive prices, but supra-monopoly prices’’). E:\FR\FM\24MRP2.SGM 24MRP2 16732 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules and to competitively participate in the markets.54 lotter on DSKBCFDHB2PROD with PROPOSALS2 B. NMS Regulatory Framework The Commission exercised its authority under Section 11A of the Exchange Act to facilitate the collection, consolidation, and dissemination of NMS information primarily by adopting five rules under Regulation NMS.55 Rule 601 of Regulation NMS governs the dissemination of transaction reports 56 and last sale data 57 with respect to transactions in NMS stocks. In particular, Rule 601 requires each national securities exchange and association to file a transaction reporting plan with the Commission that, among other things, must specify the manner of collecting, processing, sequencing, making available, and disseminating transaction reports and last sale data.58 Rule 602 of Regulation NMS governs the dissemination of quotations in NMS securities. Specifically, under Rule 602 each national securities exchange and association is required to collect, process, and make available certain quotation data to vendors,59 including the best bid, best offer,60 quotation sizes,61 and aggregate quotation sizes.62 54 See, e.g., Roundtable Day One Transcript at 27 (Doug Cifu, Virtu Financial). See also Sections III.C.1(c), III.C.2(c), and III.C.3(b). 55 See also supra Section I (discussing Section 11A of the Exchange Act). 56 Rule 600(b)(84) defines a transaction report as ‘‘a report containing the price and volume associated with a transaction involving the purchase or sale of one or more round lots of a security.’’ 17 CFR 242.600(b)(84). 57 Rule 600(b)(34) defines last sale data as ‘‘any price or volume data associated with a transaction.’’ 17 CFR 242.600(b)(34). 58 17 CFR 242.601(a)(2). 59 Rule 600(b)(87) defines a vendor as ‘‘any securities information processor engaged in the business of disseminating transaction reports, last sale data, or quotations with respect to NMS securities to brokers, dealers, or investors on a realtime or other current and continuing basis, whether through an electronic communications network, moving ticker, or interrogation device.’’ 17 CFR 242.600(b)(87). 60 Rule 600(b)(8) defines best bid and best offer as ‘‘the highest priced bid and the lowest priced offer.’’ 17 CFR 242.600(b)(8). 61 Under Rule 600(b)(67), quotation size, ‘‘when used with respect to a responsible broker’s or dealer’s bid or offer for an NMS security, means: (i) [T]he number of shares (or units of trading) of that security which such responsible broker or dealer has specified, for purposes of dissemination to vendors, that it is willing to buy at the bid price or sell at the offer price comprising its bid or offer, as either principle or agent; or (ii) [i]n the event such responsible broker or dealer has not so specified, a normal unit of trading for that NMS security.’’ 17 CFR 242.600(b)(67). 62 Rule 600(b)(2) defines aggregate quotation size as ‘‘the sum of the quotation sizes of all responsible brokers or dealers who have communicated on any national securities exchange bids or offers for an NMS security at the same price.’’ 17 CFR 242.600(b)(2). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 Rule 603 of Regulation NMS governs the distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks. Specifically, Rule 603(a)(1) requires any exclusive processor,63 or any broker or dealer with respect to information for which it is the exclusive source, that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor 64 to do so on terms that are fair and reasonable. Rule 603(a)(2) requires any national securities exchange, national securities association, broker, or dealer that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor, broker, dealer, or other persons to do so on terms that are not unreasonably discriminatory.65 Rule 603(b) requires each national securities exchange and association to act jointly pursuant to one or more NMS plans to disseminate consolidated information, including an NBBO,66 on quotations for and transactions in NMS stocks.67 Further, the rule states that such plan or plans shall provide for the dissemination of all consolidated information for an individual NMS stock through a single plan processor. Rule 608 of Regulation NMS governs the procedures for the filing and Commission approval of NMS plans and plan amendments. The Commission approved the Equity Data Plans under Rule 608. Finally, Rule 609 of Regulation NMS governs the registration of exclusive SIPs. C. Other Regulatory Data As noted above, certain regulatory data is required—pursuant to Commission and exchange rules and NMS plans—to be generated by primary listing exchanges and the exclusive SIPs and included in the current SIP data. The availability of this data is critical to 63 See supra note 20. 64 Id. 65 See 17 CFR 242.603(a)(2). Proprietary data cannot be made available sooner than current core data is transmitted to the exclusive SIPs. See Regulation NMS Adopting Release, supra note 10, at 37567 (‘‘[I]ndependently distributed data could not be made available on a more timely basis than core data is made available to a Network processor. Stated another way, adopted Rule 603(a) prohibits an SRO or broker-dealer from transmitting data to a vendor or user any sooner than it transmits the data to a Network processor.’’). 66 Rule 600(b)(43) defines national best bid and national best offer (‘‘NBBO’’) as ‘‘with respect to quotations for an NMS security, the best bid and best offer for such security that are calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan . . .’’ 17 CFR 242.600(b)(43). 67 17 CFR 242.603(b). PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 allowing market participants to understand when and where permissible trading may occur. 1. Regulation SHO Rule 201(b)(1)(i) of Regulation SHO 68 requires a trading center 69 to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security 70 at a price that is less than or equal to the current national best bid,71 if the price of that covered security decreases by 10% or more from the covered security’s closing price, as determined by the listing market 72 for the covered security as of the end of regular trading hours 73 on the prior day (the ‘‘Short Sale Circuit Breaker’’). The rule requires that the trading center impose the Short Sale Circuit Breaker for the remainder of the day and the following day when a national best bid for the covered security is calculated and disseminated on a current and continuing basis by a ‘‘plan processor’’ 74 pursuant to an effective national market system plan.75 68 17 CFR 242.201(b)(1)(i). 201(a)(9) states the term trading center shall have the same meaning as in 242.600(b)(82). 17 CFR 242.201(a)(9). 70 Rule 201(a)(1) states the term covered security shall mean any NMS stock as defined in 242.600(b)(48). 17 CFR 242.201(a)(1). 71 Rule 201(a)(4) states the term national best bid shall have the same meaning as in 242.600(b)(43). 17 CFR 242.201(a)(4). 72 Rule 201(a)(3) states the term listing market shall have the same meaning as the term ‘‘listing market’’ as defined in the effective transaction reporting plan for the covered security. Rule 201(a)(2) states the term effective transaction reporting plan for a covered security shall have the same meaning as in 242.600(b)(23). 17 CFR 242.201(a)(2)–(3). 73 Rule 201(a)(7) states the term regular trading hours shall have the same meaning as in 242.600(b)(68). 17 CFR 242.201(a)(7). 74 Rule 201(a)(6) states the term plan processor shall have the same meaning as in 242.600(b)(59). 17 CFR 242.201(a)(6). 75 Rule 201(c) provides an exception for a brokerdealer that has adopted and enforces its own such policies and procedures. More specifically, if such broker-dealer identifies a short sale order as being at a price above the current national best bid at the time of submission, such broker-dealer may mark the order as ‘‘short exempt.’’ However, such brokerdealer must establish, maintain, and enforce written policies and procedures reasonably designed to prevent incorrect identification of orders for purposes of the ‘‘short exempt’’ exception. Policies and procedures designed to create the appearance of technical compliance with Rule 201 but which otherwise are designed to circumvent, or assist others in circumventing, the Rule, would not be compliant. For example, any arrangement between market participants in which the execution price appears to be compliant with the Short Sale Circuit Breaker, but also includes a post-trade payment (i.e., fee, commission, or other payment) that effectively renders the execution price noncompliant with the Short Sale Circuit Breaker, would not be consistent with the Rule’s requirements. Further, in the Adopting Release for Rule 201, the Commission stated that, ‘‘any conduct 69 Rule E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Rule 201(b)(3) of Regulation SHO provides that the determination regarding whether the Short Sale Circuit Breaker has been triggered shall be made by the listing market for the covered security, and, if the Short Sale Circuit Breaker has been triggered, the listing market shall immediately notify the ‘‘single plan processor’’ (i.e., the exclusive SIP responsible for consolidation of information for the covered security pursuant to Section 242.603(b)). The exclusive SIP must then disseminate this information. lotter on DSKBCFDHB2PROD with PROPOSALS2 2. Limit-Up Limit-Down Plan The LULD Plan 76 sets forth procedures that provide for market-wide limit up-limit down (‘‘LULD’’) requirements to prevent trades in individual NMS stocks from occurring outside of specified price bands and reduce the negative impacts of extraordinary volatility in NMS stocks caused by momentary gaps in liquidity or erroneous trades. These price bands are coupled with the provision of trading pauses to accommodate more fundamental price moves. Under the LULD Plan, the applicable exclusive SIP for an NMS stock is required to perform certain key functions, including: (1) Calculating the applicable price bands,77 (2) disseminating flags identifying quotes that are not executable,78 (3) by trading centers, or other market participants, that facilitates short sales in violation of Rule 201 could also lead to liability for aiding and abetting or causing a violation of Regulation SHO, as well as potential liability under the anti-fraud and antimanipulation provisions of the Federal securities laws, including Sections 9(a), 10(b), and 15(c) of the Exchange Act, and Rule 10b–5 thereunder.’’ Securities Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 11232, 11260 (Mar. 10, 2010). 76 See Securities Exchange Act Release Nos. 85623, supra note 38; 67091, supra note 38. 77 During regular trading hours for an NMS stock, the exclusive SIP for that stock uses a reference price, which it also calculates, to calculate and disseminate to the public a lower and upper price band. The reference price for each NMS stock equals the arithmetic mean price of eligible reported transactions for the NMS stock over the immediately preceding five-minute period (see LULD Plan Section V(A)(1)) and must remain in effect for at least 30 seconds. See LULD Plan Section V(A)(2). The exclusive SIP calculates a proforma reference price on a continuous basis during regular trading hours, and when that price has moved by 1% or more from the reference price currently in effect, the pro-forma reference price becomes the reference price, and the plan processor disseminates new price bands based on the new reference price. See LULD Plan Section V(A)(2). The price bands for an NMS stock are calculated by applying the appropriate percentage parameter for the stock, specified by the LULD Plan, to the stock’s reference price, with the lower price band as a percentage parameter below the reference price and the upper price band as a percentage parameter above the reference price. See LULD Plan Section V(A)(1). 78 When a national best bid is below the lower price band or a national best offer is above the VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 disseminating flags identifying quotes that are in a ‘‘limit state,’’ 79 (4) disseminating trading pause messages received from the primary listing exchanges,80 and (5) disseminating reopening auction information from the primary listing exchanges.81 3. Market-Wide Circuit Breakers All of the equity exchanges and FINRA have adopted uniform rules, on a pilot basis, relating to MWCBs.82 The purpose of an MWCB is to address extraordinary market-wide volatility by halting trading across the markets when price declines reach certain specified levels.83 These levels are reached when the S&P 500 Index declines a specified percentage from the prior day’s closing price. Currently, there are three thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level 3). A Level 1 or Level 2 market decline after 9:30 a.m. ET and before 3:25 p.m. ET would halt the equity and options markets for 15 minutes, while Level 1 and 2 declines at or after 3:25 p.m. ET would not halt trading. A Level 3 market decline at any time during the trading day would halt equity and options trading until the upper price band for an NMS stock, the exclusive SIP is required to disseminate the national best bid or national best offer with an appropriate flag identifying it as non-executable. See LULD Plan Section VI(A)(2). 79 When a national best bid is equal to the lower price band or a national best offer is equal to the upper price band for an NMS stock, the exclusive SIP is required to distribute the national best bid or national best offer with an appropriate flag identifying it as a ‘‘Limit State Quotation.’’ See id.; LULD Plan Section VI(B)(2). 80 If trading for an NMS stock does not exit a limit state within 15 seconds of entry during regular trading hours, then the primary listing exchange is required to declare a trading pause in that NMS stock and notify the exclusive SIP. See LULD Plan Section VII(A)(1). The exclusive SIP is required to disseminate trading pause information to the public. See LULD Plan Section VII(A)(3). 81 Five minutes after declaring a trading pause for an NMS stock, if the primary listing exchange has not declared a regulatory halt, the primary listing exchange is required to attempt to reopen trading using its established reopening procedures. The exclusive SIP publishes the following information that the primary listing exchange provides to the exclusive SIP in connection with such reopening: Auction reference price; auction collars; and number of extensions to the reopening auction. See LULD Plan Section VII(B)(1). In addition, the applicable exclusive SIP for an NMS stock is required to receive and disseminate to the public information from primary listing exchanges regarding their inability to reopen trading due to a systems or technology issue. Specifically, the primary listing exchange is required to notify the exclusive SIP if it is unable to reopen trading in an NMS stock due to a systems or technology issue and if it has not declared a regulatory halt. The exclusive SIP is required to disseminate this information to the public. See LULD Plan Section VII(B)(2). 82 See supra note 39. 83 Id. PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 16733 primary listing exchange opens the next trading day. The primary listing exchanges and the exclusive SIPs work together to implement the MWCB rules. The CTA/ CQ SIP monitors the S&P 500 Index throughout the trading day and would send a message to the primary listing exchanges and the Nasdaq UTP SIP in the event a Level 1, Level 2, or Level 3 circuit breaker was triggered. Upon receipt of such a message, the applicable primary listing exchange would impose a regulatory halt by sending the appropriate message to the applicable exclusive SIP, which would then disseminate the regulatory halt message to market participants. Trade resumption messages would be generated at the appropriate time by the primary listing exchange and similarly disseminated to market participants through the applicable exclusive SIP. 4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders As discussed further below, while Regulation NMS only requires NMS stock quotation and transaction data in round lots to be reported to the exclusive SIPs, SRO rules and the Equity Data Plans include some odd-lot information in the SIP data.84 Pursuant to exchange rules, odd-lot quotations that, when aggregated, equal or exceed a round lot are reported to the exclusive SIPs as round lots.85 Moreover, the Equity Data Plans were amended in 2013 to include odd-lot transaction reports in the SIP data.86 III. Proposed Enhancements to NMS Information A. Introduction The Commission is proposing to expand the content of the NMS information that would be required to be collected, consolidated, and disseminated under the rules of the national market system to better meet the needs of today’s investors and other market participants. Specifically, the Commission proposes to amend Regulation NMS by introducing, in Rule 600, new defined terms for ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘regulatory data,’’ ‘‘administrative data,’’ ‘‘exchangespecific program data,’’ ‘‘round lot,’’ ‘‘depth of book data,’’ and ‘‘auction information’’ and by amending the current definitions of ‘‘national best bid and national best offer’’ and ‘‘protected 84 See 85 See infra Section III.C.1. infra notes 159–160 and accompanying text. 86 See infra notes 160–161 and accompanying text. E:\FR\FM\24MRP2.SGM 24MRP2 16734 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules bid or protected offer.’’ The Commission preliminarily believes that these amendments will enhance the availability and usefulness of the NMS information that is required to be provided under the rules of the national market system for a wide variety of market participants. The Commission also preliminarily believes that expanding the content of NMS information would help to reduce information asymmetries between market participants who rely upon current SIP data and those who purchase proprietary data feeds from the national securities exchanges.87 The Commission’s objectives in expanding and modernizing the content of NMS information that would be collected, consolidated, and disseminated under the rules of the national market system reflect that different market participants and different trading applications have different needs for NMS information. For example, the needs of some retail investors that visually consume NMS information (e.g., humans looking at quotes on a screen) differ from those of institutional trading systems that electronically consume NMS information (e.g., algorithmic trading systems or smart order routers (‘‘SORs’’).88 This proposal to expand and modernize the content of NMS information is not intended solely to meet the needs of a narrow segment of the NMS information market; rather, the proposal is intended to address the needs of a broad cross-section of market participants.89 The Commission intends for the NMS information to promote both fair and efficient markets, be useful to a broad cross-section of market participants, reduce information asymmetries, and facilitate best execution.90 B. Proposed Definition of ‘‘Consolidated Market Data’’ The Commission is proposing to amend Rule 600(b) to add a definition 87 See supra note 26. employ the use of algorithms (e.g., by broker-dealers on behalf of a client) designed to optimally send parts of an order (child orders) to various market centers (e.g., exchange and ATSs) so as to optimally access market liquidity while minimizing execution costs. 89 This proposal is also not designed to expand the content of NMS information to meet all needs of all market participants; the proprietary data market, which includes information that is not included in the proposed definition of core data, is expected to continue to fulfill additional needs beyond those that are met by the proposed definition of core data. 90 While this proposal is intended to facilitate best execution, the Commission is not specifying minimum data elements needed to achieve best execution. lotter on DSKBCFDHB2PROD with PROPOSALS2 88 SORs VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 of ‘‘consolidated market data’’ that would include information that is currently disseminated by the exclusive SIPs as well as additional new information. Specifically, under proposed Rule 600(b)(19), consolidated market data would be defined as the following data, consolidated across all national securities exchanges and national securities associations: (1) Core data; (2) regulatory data; (3) administrative data; (4) exchangespecific program data; and (5) additional regulatory, administrative, or exchangespecific program data elements defined as such pursuant to the effective national market system plan or plans required under Rule 603(b). As discussed below, the Commission proposes to add definitions of the terms ‘‘core data,’’ ‘‘regulatory data,’’ ‘‘administrative data,’’ and ‘‘exchangespecific program data.’’ The proposed definition of core data would include those data elements that are currently considered core data 91 as well as reflect additional information that would be required to be collected, consolidated, and disseminated under Regulation NMS, including certain depth of book, odd-lot, and auction information, which would improve the usefulness of core data for market participants. The proposed definition of regulatory data would specify certain regulatory messages that must be provided under Regulation NMS, which would facilitate compliance with Commission, NMS plan, or SRO requirements. The proposed definition of administrative data would refer to the administrative or technical messages that are currently required by the Equity Data Plans, or their technical specifications, and would facilitate the efficient utilization of proposed consolidated market data. The proposed definition of ‘‘exchangespecific program data’’ would include information currently included in SIP data related to retail liquidity programs that certain exchanges have established, as well as information related to new programs that individual exchanges may develop in the future,92 but only if the effective national market system plan or plans required under Rule 603(b) are amended to include data elements related to any such new programs in consolidated market data.93 Finally, the Commission proposes to include a provision that would allow for additional regulatory, administrative, or exchange-specific program data 91 See supra note 37 and accompanying text. new exchange programs would have to be filed with the Commission pursuant to Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), and Rule 19b–4 thereunder, 17 CFR 240.19b–4. 93 See infra Section III.F. 92 Any PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 elements 94 to be included within ‘‘consolidated market data’’ pursuant to amendments to the effective national market system plan(s).95 The Commission preliminarily believes that this provision would help to ensure that additional information in these specific categories may be proposed to be included in consolidated market data in the future in response to market and regulatory developments and that such additional information would be required to be made available by the SROs to competing consolidators and self-aggregators, and as a result, competing consolidators would be required to, among other things, calculate and generate consolidated market data that includes this additional information. The Commission preliminarily believes that new administrative, regulatory, and exchange-specific program data elements may emerge from time to time, and that the proposed definition of consolidated market data should provide flexibility for such data elements to be included by NMS plan amendment. This provision would also maintain the current practice whereby SIP data of this type can be expanded through the NMS plan amendment process. National market system plans and amendments thereto must be filed with, and typically are not effective unless they are approved by, the Commission under Rule 608 of Regulation NMS.96 94 Amendments to the proposed definition of core data would only be able to be made by the Commission. To the extent that there are changes in the national market system, such as, in the provision of trading services, that suggest that the definition of core data should be updated, the Commission could exercise its authority to propose amendments to the proposed definition. See, e.g., Section 11A(c)(1)(B) of the Exchange Act which provides that the Commission shall prescribe rules as necessary or appropriate in the public interest, for the protection of investors or otherwise to assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to NMS information and the fairness and usefulness of the form and content of such information. 95 Pursuant to Rule 608(a)(1), any two or more SROs, acting jointly, may propose an amendment to an NMS plan. 17 CFR 242.608(a)(1). The Equity Data Plans also have provisions regarding the proposal of amendments to the Plans, which currently require a vote of the Plans’ operating committee. See CTA Plan, supra note 13, at Section IV(b)(i); CQ Plan supra note 13, at Section IV.(c)(i) of the CQ Plan; Nasdaq UTP Plan, supra note 13, at Sections IV.C.1.a. and XVI. 96 A proposed NMS plan amendment may be put into effect upon filing if designated by the sponsors as: ‘‘(i) Establishing or changing a fee or other charge collected on behalf of all of the sponsors and/or participants in connection with access to, or use of, any facility contemplated by the plan or amendment (including changes in any provision with respect to distribution of any net proceeds from such fees or other charges to the sponsors and/ or participants); (ii) Concerned solely with the E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 Pursuant to Rule 608(b), the Commission would publish for comment an amendment to add new consolidated market data elements, and thereafter, the Commission would evaluate any such proposed amendment and approve it if the Commission finds the amendment is ‘‘necessary or appropriate in the public interest, for the protection of investors and the maintenance of fair and orderly markets, to remove impediments to, and perfect the mechanisms of, a national market system, or otherwise in furtherance of the purposes of the [Exchange] Act.’’ 97 The Commission preliminarily believes that the proposed definition of consolidated market data, as well as the other definitions included therein, would, by expanding the NMS information that is required to be provided under the rules of the national market system, support more informed trading and investment decisions by market participants in today’s markets and facilitate the best execution of customer orders by the full range of broker-dealers.98 In addition, the proposed definition would be referenced in the amendments to Rule 603(b) and proposed Rule 614, both of which propose to implement the decentralized consolidation model.99 The Commission requests comment on the proposed definition of consolidated market data under proposed Rule 600(b)(19). Throughout this release, we request comment from the points of view of all interested parties. With regard to any comments, we note that such comments are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments. In particular, the Commission solicits comment on the following: 1. Do commenters believe that the Commission should adopt a definition of consolidated market data? Why or administration of the plan, or involving the governing or constituent documents relating to any person (other than a self-regulatory organization) authorized to implement or administer such plan on behalf of its sponsors; or (iii) Involving solely technical or ministerial matters.’’ 17 CFR 242.608(b)(3). As stated above, the Commission has proposed amendments to this provision. Effective on Filing Proposal, supra note 37 (proposing to rescind the provision of Rule 608 that allows a proposed amendment to an effective national market system plan(s) to become effective upon filing if the proposed amendment establishes or changes a fee or other charge). 97 17 CFR 242.608(b)(2). 98 As discussed below, the Commission is not requiring broker-dealers to subscribe to or utilize every component of proposed consolidated market data to meet their regulatory obligations. See infra notes 306–309 and accompanying text. 99 See infra Sections IV.B.1 and IV.B.2(e)(ii). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 why not? Should the Commission take an alternative approach? Why or why not? 2. Does the proposed definition of consolidated market data capture the market data that would be useful to market participants for trading and regulatory compliance purposes? Please explain. Does the proposed definition of consolidated market data include any market data that should not be included? Please explain. The Commission is seeking input from commenters on whether the proposed definition of consolidated market data should include additional market data or whether the definition should otherwise be modified. 3. Should the definition of consolidated market data be set forth in an effective national market system plan(s) instead of, or in addition to, Rule 600(b)? Please explain. Do commenters have views on the most appropriate process through which the content of proposed consolidated market data should be expanded or modified? Do commenters believe that the proposed definition of consolidated market data should include a provision stating that additional regulatory, administrative, or exchange-specific program data elements can be defined pursuant to the effective national market system plan or plans required under Section 242.603(b)? Please explain. Should the proposed definition of core data be able to be amended through the effective national market system plan process (for example, should the term ‘‘core data’’ be included in proposed Rule 600(b)(19)(v))? Why or why not? Do commenters believe that any data elements should not require an amendment to the effective national market system plan(s) to be added to consolidated market data? Please explain and describe what process would be appropriate for adding any such data elements. C. Proposed Definition of ‘‘Core Data’’ Regulation NMS does not currently define core data. Rather, today, core data generally refers to the price, size, and exchange of the last sale; each exchange’s highest bid and lowest offer (‘‘BBO’’) and the number of shares available at those prices; and the NBBO.100 The core data that is provided today by the exclusive SIPs is of considerable utility to some market participants for certain purposes.101 However, it is of 100 See supra note 37 and accompanying text. example, current core data includes the NBBO, which is useful to market participants for informational purposes and to inform trading and 101 For PO 00000 Frm 00011 Fmt 4701 Sfmt 4702 16735 limited use to other market participants for other purposes (e.g., as the primary data source for automated trading systems) because of its limited content. The Commission preliminarily believes that the content of current core data has not kept pace with market developments. For example, decimalization in 2001 improved prices and narrowed spreads but also reduced the size of the top of book liquidity that is displayed and disseminated as part of current core data.102 Further, individual odd-lot quotations, especially for stocks with share prices that have risen substantially,103 have become more important to market participants as oddlot quotations can represent significant amounts of liquidity that are not reflected in current core data.104 Finally, an increasing proportion of total trading volume is executed during opening and closing auctions, which are significant liquidity events every trading day, but important information about auctions is not included within current core data provided by the exclusive SIPs.105 Because the content of current core data does not reflect these important market developments,106 many market participants state that they are unable to rely solely on SIP data to trade competitively and provide best execution to customer orders in today’s markets.107 The Commission preliminarily believes that the data that is required to be collected, consolidated, and disseminated under the rules of the national market system is no longer fulfilling the goals of Section 11A of the investment decisions. See, e.g., Roundtable Day One Transcript at 57 (Doug Cifu, Virtu Financial) (‘‘. . . the SIP is an eyeball product.’’); Roundtable Day One Transcript at 65 (Mehmet Kinak, T. Rowe Price) (‘‘So the SIP for us is kind of what we look at. Obviously, investment decisions are probably made by eyeballs and looking at the SIP itself from either our Bloomberg or FactSet terminals.’’). It is also used as a back-up for automated trading systems that otherwise rely on proprietary data feeds from the exchanges and to support less sophisticated automated trading systems. See, e.g., Roundtable Day One Transcript at 140 (Mark Skalabrin, Redline Trading Solutions) (‘‘the SIP . . . has been relegated to a backup feed, really. It’s a fail-over to the real feed you need to do the job.’’). 102 See infra notes 276–279. 103 See infra note 162. 104 As explained below, odd-lot quotations are only reflected in SIP data to the extent that they are aggregated into round lots pursuant to exchange rules. See infra notes 157–158 and accompanying text. 105 See infra notes 330–332. 106 As discussed below, the existing centralized consolidation model for collecting, consolidating, and disseminating SIP data also has not kept pace with the needs of today’s investors and market participants. See infra Section IV.A. 107 See several of the Roundtable comments summarized below in Sections III.C.1, III.C.2, and III.C.3. E:\FR\FM\24MRP2.SGM 24MRP2 16736 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Exchange Act.108 The Commission is proposing a definition of core data that would incorporate the information that is currently provided in SIP data as well as additional information, including quotation data for smaller-sized orders for higher-priced stocks, certain depth of book data, and additional auction information.109 As explained below, the Commission preliminarily believes that each of the new elements of core data, as proposed, would enhance the usefulness of the content of the NMS information that is collected, consolidated, and disseminated under the rules of the national market system.110 The Commission is proposing to define core data in Rule 600(b) to include all of the elements that currently are referred to as core data,111 as well as the following data elements that are not currently provided by the exclusive SIPs: (1) Quotation data for smaller-sized orders for higher-priced stocks (pursuant to a new definition of ‘‘round lot’’), (2) data on certain quotations below the best bid or above the best offer (pursuant to a new definition of ‘‘depth of book data’’), and (3) information about orders participating in auctions (pursuant to a new definition of ‘‘auction information’’). As discussed below, certain OTCBB and corporate bond and index data that are currently provided by the exclusive SIPs would not be included in the proposed definition of core data.112 Further, as noted above, the proposed term core data is reflected in the proposed definition of consolidated market data, which is referenced in proposed Rule 603(b) and proposed Rule 614.113 Specifically, under proposed Rule 600(b)(20), core data would be defined as the following information with respect to quotations for and transactions in NMS stocks: (1) Quotation sizes; (2) aggregate quotation sizes; (3) best bid and best offer; (4) 108 See supra notes 2–5 and accompanying text. infra Sections III.C.1–III.C.3 for detailed discussions of the proposed definitions of ‘‘round lot,’’ ‘‘depth of book data,’’ and ‘‘auction information.’’ 110 Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k–1(c)(1)(B). 111 See supra note 37 and accompanying text. 112 See infra notes 122–127 and accompanying text. 113 As explained below, pursuant to Rule 603(b), as proposed to be amended, national securities exchanges and associations would be required to make available to competing consolidators and selfaggregators, as proposed to be defined, all data necessary to generate consolidated market data. See infra Section IV.B.1. Competing consolidators would be required to calculate and generate consolidated market data and make it available to subscribers. See proposed Rule 614(d). lotter on DSKBCFDHB2PROD with PROPOSALS2 109 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 national best bid and national best offer; (5) protected bid and protected offer; (6) transaction reports; (7) last sale data; (8) odd-lot transaction data disseminated pursuant to the effective national market system plan or plans required under Rule 603(b) as of [date of Commission approval of this proposal]; (9) depth of book data; and (10) auction information. For purposes of the calculation and dissemination of core data by competing consolidators, and the calculation of core data by self-aggregators, the best bid and best offer, national best bid and national best offer, and depth of book data would include odd-lots that when aggregated are equal to or greater than a round lot, with such aggregation occurring across multiple prices and disseminated at the least aggressive price.114 Protected quotations, however, would only include odd-lots at a single price that when aggregated are equal to or greater than 100 shares.115 Some of the components of the proposed definition of core data— namely, quotation sizes, aggregate quotation sizes, BBO, NBBO, protected quotations, transaction reports, last sale data, and odd-lot transaction data 116— are already defined in Regulation NMS or are currently included in SIP data.117 114 See infra notes 157–158 and accompanying text (discussing odd-lot aggregation). 115 Id. A protected quotation is defined as ‘‘a protected bid or a protected offer.’’ See Rule 600(b)(62) of Regulation NMS, 17 CFR 242.600(b)(62). A protected bid or protected offer is defined as ‘‘a quotation in an NMS stock that: (i) [i]s displayed by an automated trading center; (ii) [i]s disseminated pursuant to an effective national market system plan; and (iii) [i]s an automated quotation that is the best bid or best offer of a national securities exchange, the best bid or best offer of The Nasdaq Stock Market, Inc., or the best bid or best offer of a national securities association other than the best bid or best offer of The Nasdaq Stock Market, Inc.’’ See Rule 600(b)(61) of Regulation NMS, 17 CFR 242.600(b)(61). 116 See infra notes 159–161 and accompanying text (discussing the addition of odd-lot transaction data to SIP data through NMS plan amendments approved in 2013). 117 As discussed below, some of these proposed data elements—namely, the BBO and NBBO—will be derived from smaller sized quotations as a result of the Commission’s proposed definition of round lot, and the Commission is proposing amendments to the definitions of protected bid and protected offer and national best bid and offer to accommodate its proposed amendments to expand consolidated market data and implement a decentralized consolidation model with competing consolidators and self-aggregators. In addition, today, the exclusive SIPs collect, consolidate, and disseminate protected quotations, which in almost all cases, are the best bid or best offer of a trading center. Accordingly, the NBBO today reflects protected quotations. As discussed below, the Commission is proposing to amend the definition of ‘‘protected bid or protected offer’’ to require that protected bids and protected offers be at least 100 shares. In addition, the Commission is proposing a new round lot size definition, which would be less than 100 shares for higher-priced NMS stocks. See infra Section III.C.1(d)(i). PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 The Commission preliminarily believes that these data elements continue to be necessary and useful for informed market participation. This baseline information about the best quotations and recent transactions across the national market system provides the foundation of transparency and price discovery in the U.S. securities markets, and the Commission preliminarily believes investors and other market participants need it today to make informed trading and investment decisions.118 Therefore, the Commission preliminarily believes that these data elements should be included in the definition of core data as proposed. As discussed in detail below, the Commission is proposing to include certain depth of book data and auction information in the proposed definition of core data. Because of the dispersion of liquidity to prices away from the best bids and best offers 119 and the increasing proportion of orders that are executed during auctions,120 the Commission preliminarily believes that market participants need depth of book data and auction information to fully participate in the markets and the information would facilitate best execution.121 The Commission preliminarily believes that the proposed depth of book data and auction information would enhance the usefulness of proposed core data. As discussed above, SIP data currently includes certain data that would not be included in the definition of core data under the Commission’s proposed definition.122 Currently, Nasdaq UTP Plan Level 1 subscribers can obtain OTCBB quotation and transaction feeds for unlisted stocks.123 Similarly, the CTA Plan permits the dissemination of ‘‘concurrent use’’ data relating to corporate bonds and indexes.124 This information would not be included in the proposed definitions of core data or consolidated market data. OTCBB stocks, corporate bonds, and Accordingly, if adopted, there would be an increase in instances where the best bid or best offer and the NBBO would not be protected quotations. See infra Section III.C.1(d)(ii). 118 See supra note 101. 119 See infra notes 276–279 and accompanying text. 120 See infra notes 330, 348 and accompanying text. 121 See infra Sections III.C.2(d) and III.C.3(c). 122 In addition, because this data does not fall under the proposed definitions of regulatory data or administrative data, it would not be part of proposed ‘‘consolidated market data’’ either. 123 See Nasdaq UTP DataFeed Approval Request, available at https://www.utpplan.com/datafeed_ approval (last accessed Sept. 8, 2019); supra note 41. 124 See CTA Plan, supra note 13, at Section XIII; supra note 41. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 indices are not NMS securities as defined in Regulation NMS 125 and, therefore, the Regulation NMS rules related to the collection, consolidation, and dissemination of information regarding NMS securities, and the NMS plan(s) required under Rule 603(b) for NMS stocks,126 do not apply. Accordingly, this information is not included in the proposed definition of core data.127 However, the Commission’s proposed definitions of core data and consolidated market data would not prohibit the independent provision of other types of market data by the SROs, and, as discussed below, under the decentralized consolidation model, competing consolidators would be permitted to collect data from the SROs and offer data products to subscribers that go beyond what is proposed to be defined as core data or consolidated market data. Therefore, the exclusion of OTCBB and concurrent use data from the proposed definitions of core data and consolidated market data does not preclude the provision of this data to market participants who wish to receive it. Finally, the proposed definition of core data requires that the BBO, NBBO, and the proposed depth of book data include odd-lots that when aggregated are equal to or greater than a round lot, and that such aggregation would occur across multiple prices and be disseminated at the least aggressive price of all such aggregated odd-lots. Several national securities exchanges today have rules that provide for a similar odd-lot aggregation procedure for purposes of providing quotation data to the exclusive SIPs.128 Although not currently required by Regulation NMS, 125 ‘‘NMS security’’ is defined as ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.’’ 17 CFR 242.600(b)(47). ‘‘Effective transaction reporting plan’’ is defined as ‘‘any transaction reporting plan approved by the Commission pursuant to § 242.601.’’ 17 CFR 242.600(b)(23). Rule 601 requires a transaction reporting plan to be filed and approved pursuant to Rule 608 and to specify ‘‘[t]he listed equity and Nasdaq securities or classes of such securities for which transaction reports shall be required by the plan.’’ 17 CFR 242.601(a)(2). Therefore, OTCBB securities are not NMS securities. 126 ‘‘NMS stock’’ is defined as ‘‘any NMS security other than an option.’’ 17 CFR 242.600(b)(48). See also 17 CFR 242.600(b)(47) (defining NMS security). 127 One commenter suggested that this ‘‘extraneous’’ data should be removed from the exclusive SIPs. See Nasdaq, Total Markets: A Blueprint for a Better Tomorrow, 18 (‘‘Nasdaq Total Markets Report’’), available at https:// www.nasdaq.com/docs/Nasdaq_TotalMarkets_ 2019_2.pdf. 128 See infra note 157 and accompanying text. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 odd-lot aggregation increases the amount of quotation data that is included in SIP data and provides transparency into trading interest would not otherwise have been represented in such data. The Commission preliminarily believes that this information is important and should uniformly be included in the proposed core data disseminated to investors and market participants.129 In addition, for similar reasons, the Commission proposes to include odd-lots that, when aggregated, form a round lot for purposes of the new proposed definition of depth of book data.130 The Commission preliminarily believes, however, that the proposed definition of core data should require a different procedure with respect to the aggregation of odd-lots for purposes of protected quotations.131 For the reasons discussed below, the scope of Rule 611 would not be extended to protected quotations of less than 100 shares.132 The Commission preliminarily believes that aggregating odd-lots across multiple price points for purposes of determining protected quotations would effectively extend trade-through protection to quotes of less than 100 shares at different prices.133 Therefore, the proposed definition of core data provides that, for purposes of the 129 As discussed below, SROs may make the data necessary to generate consolidated market data available to competing consolidators and selfaggregators through their existing proprietary data products. See infra Section IV.B.1. Accordingly, any odd-lot quotations that are aggregated in an SRO’s existing proprietary data products would be required to be aggregated in a manner consistent with the method set forth in the proposed definition of core data. See also proposed Rule 603(b). However, self-aggregators would only be required to aggregate odd-lots as prescribed in Rule 600(b)(20) to the extent that generating a particular component of proposed core data is necessary for that selfaggregator to comply with applicable regulatory requirements. For example, to the extent that a selfaggregator’s activities require the self-aggregator to generate the NBBO, the self-aggregator shall do so as described in Rule 600(b)(20). 130 Today, odd-lots are only aggregated into round lots for purposes of providing an exchange’s best bids and offers to the exclusive SIPs. See infra note 157. 131 See supra note 115 for the definition of ‘‘protected quotation.’’ Odd-lot quotations are not protected quotations under Rule 611. However, as explained below, many exchanges, pursuant to their own rules, aggregate odd-lots across multiple price points into round lots for purposes of providing protected quotations to the exclusive SIPs. See infra notes 157–158 and accompanying text. Although not required by Rule 611 or contemplated upon adoption of Regulation NMS, this has become the prevailing practice. The odd-lot aggregation methodology set forth in the Commission’s proposed definition of core data would modify this practice. See infra Section VI.C.1(c)(i). 132 See infra Section III.C.1(d)(ii). 133 See infra Section III.C.1(d)(ii) for a discussion of the proposed changes to protected bid and protected offer. PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 16737 calculation and dissemination of proposed core data by competing consolidators, and the calculation of proposed core data by self-aggregators, protected quotations would only include odd-lots at a single price that, when aggregated, are equal to or greater than 100 shares. However, the Commission is seeking comment on whether and how odd-lots should be aggregated and the specific proposed core data elements to which such aggregation should apply. The Commission requests comment on the proposed amendment to Rule 600(b)(20) to introduce a definition of core data. In particular, the Commission solicits comment on the following: 4. Do commenters believe Rule 600 should be amended to include a definition of core data? Why or why not? 5. Do commenters believe that the Commission’s proposed definition of core data captures the key components of information with respect to quotations for and transactions in NMS stocks that are useful for participating in today’s markets? Are there any other useful market data elements that should be included in the proposed definition? Does the proposed definition include any elements that are not useful for trading? Please explain. 6. Do commenters believe that there is sufficient demand for OTCBB, concurrent use, or other data currently provided by the exclusive SIPs that would not fall within the proposed definition of core data such that an independent market for the provision of this data would develop? Why or why not? Would the SROs or other entities that currently disseminate this data through the exclusive SIPs provide it through other means (i.e., to competing consolidators or directly to interested market participants)? Please explain. 7. The Commission is proposing to include protected quotations in the proposed definition of core data. Do commenters believe that there is a need for a ‘‘national protected best bid or offer’’ analogous to the NBBO that would represent a snapshot of the single best protected bid and single best protected offer from among all the protected bids and offers of each SRO? Would this be a useful metric for competing consolidators to calculate and disseminate for market participants for either routing or regulatory compliance (e.g., the order execution disclosures required under Rule 605) purposes? Would firms that intend to self-aggregate produce such a metric on their own? Please explain. E:\FR\FM\24MRP2.SGM 24MRP2 16738 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 1. Round Lot Size Today, SIP data includes quotation information in round lots and transaction information in both round lots and odd-lots. Market participants interested in quotation data for individual odd-lot orders must purchase it from exchange proprietary feeds. As share prices for many widely-held stocks have risen, individual odd-lot orders now often represent economically significant trading opportunities at prices that are better than the prices of displayed and disseminated round lots.134 Accordingly, information about individual odd-lot orders has gained increased importance with investors and market participants, and some have suggested that odd-lot orders should be included in SIP data.135 The Commission is proposing to include certain information about quotations that are currently defined as odd-lots 136 in proposed core data by introducing a tiered definition of the term ‘‘round lot.’’ As proposed, the definition of round lot would assign different round lot sizes to individual NMS stocks depending upon their stock price. The Commission preliminarily believes this would improve the usefulness of proposed consolidated market data, promote fair competition,137 and, like the addition of odd-lot transaction data to SIP data, would provide important information to investors and other market participants that would enhance transparency and price discovery.138 Moreover, since oddlot quotes often represent opportunities to trade at prices that are superior to the prices disseminated by the Equity Data Plans,139 the inclusion of more of these quotes in proposed core data would facilitate the best execution analyses of broker-dealers who do not subscribe to proprietary data feeds that include all odd-lot information.140 Further, it 134 See infra note 166 and accompanying text, and infra text accompanying notes 166–170 for staff analysis of odd-lot activity for the top 500 securities by dollar volume. 135 See infra notes 170–177. 136 Rule 600(b)(51) defines odd-lot as ‘‘an order for the purchase or sale of an NMS stock in an amount less than a round lot.’’ 137 See 15 U.S.C. 78k–1(a)(1)(C)(ii) (‘‘The Congress finds that . . . [i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets.’’). 138 See infra notes 159–160 and accompanying text. 139 See infra notes 166–170 and accompanying text. 140 Statements made by market participants suggest that a significant number of broker-dealers VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 would facilitate the ability of investors to use proposed core data to verify that their broker-dealers are providing best execution by providing investors with additional information on the pricing of smaller-sized orders. (a) Regulatory Background Round lot, though not defined in the Exchange Act or Regulation NMS, typically refers to orders or quotes for 100 shares or multiples thereof. Exchange rules typically define a round lot as 100 shares, but they also allow the exchange discretion to define it otherwise.141 The technical specifications for the Equity Data Plans provide similar definitions. For example, the CTA Plan defines round lot as ‘‘[t]ypically 100 shares of stock or any number of shares that is a multiple of 100 (i.e., 100, 600, 1,600, etc.).’’ 142 The exclusive SIP feeds also disseminate quotation and transaction information for stocks that have a round lot size of 10 or 1.143 Regulation NMS defines ‘‘odd-lot’’ as ‘‘an order for the purchase or sale of an NMS stock in an amount less than a round lot.’’ 144 Exchange definitions of odd-lot are similar, as is the definition do not subscribe to all proprietary market data products. See Roundtable Day One Transcript at 178 (James Brooks, ICE Data Services) (‘‘[R]oughly half of the global investment banks take the most comprehensive New York Stock Exchange order-byorder feed, the other half do not.’’); Roundtable Day One Transcript at 181 (Michael Friedman, Trillium Management) (‘‘[T]he big fish . . . are the major consumers of depth-of-book data. I think there was some evidence . . . that there were only 50 to 100 firms, period who buy all of the depth-of-book feeds.’’). 141 See, e.g., NYSE Rule 55 (‘‘Securities traded on the Exchange shall be quoted in round lots (generally 100 shares), except that in the case of certain stocks designated by the Exchange the round lot shall be such lesser number of shares as may be determined by the Exchange, with respect to each stock so designated.’’); Nasdaq Rule 5005(a)(39) (‘‘‘Round Lot’ or ‘Normal Unit of Trading’ means 100 shares of a security unless, with respect to a particular security, Nasdaq determines that a normal unit of trading shall constitute other than 100 shares.’’). According to NYSE Trade and Quote (‘‘TAQ’’) Data, as of August 2019, twelve stocks, all of which are listed on NYSE or NYSE American, had a round lot size other than 100. Ten stocks had a round lot of ten and two stocks had a round lot of one. 142 Consolidated Tape System, Multicast Output Binary Specification, 85 (May 8, 2018), available at https://www.ctaplan.com/publicdocs/ctaplan/ notifications/trader-update/CTS_BINARY_ OUTPUT_SPECIFICATION.pdf. The technical specifications for the Nasdaq UTP Plan note that ‘‘[f]or most NASDAQ issues, the round lot size is 100 shares.’’ UTP Data Feed Services Specification, 22, available at https://www.utpplan.com/DOC/ UtpBinaryOutputSpec.pdf (last accessed Jan. 7, 2020). 143 See supra note 141. 144 17 CFR 242.600(b)(51). PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 of odd-lot in the technical specifications for the CTA Plan.145 Despite the absence of a round lot definition, other key defined terms in Regulation NMS—such as ‘‘bid or offer,’’ ‘‘best bid and best offer,’’ and ‘‘quotation’’—refer, directly or indirectly, to round lot. The effect of these references to round lot is that oddlot quotation information is not currently collected or disseminated under Regulation NMS.146 For example, Rule 601 refers to ‘‘transaction reports,’’ 147 the definition of which refers to round lot.148 Rule 602 refers to ‘‘bids’’ and ‘‘offers,’’ 149 the definition of which also refer to round lot.150 Rule 603 refers to a ‘‘national best bid and national best offer,’’ 151 which ultimately refers back to round lot.152 Rules 610 (access to quotations) 153 and 611 (order protection rule) 154 do not apply to odd-lot orders. Rule 604 (display of customer limit orders) also refers to bids and offers 155 and specifically excludes odd-lot orders.156 Several exchanges, however, pursuant to their own rules, aggregate odd-lot orders into round lots and report such aggregated odd-lot orders as quotation information to the exclusive SIPs. Exchange rules specify how the 145 See, e.g., Cboe BZX Rule 11.10 (‘‘One hundred (100) shares shall constitute a ‘round lot,’ any amount less than 100 shares shall constitute an ‘odd lot,’ and any amount greater than 100 shares that is not a multiple of a round lot shall constitute a ‘mixed lot.’ ’’); Consolidated Tape System, Multicast Output Binary Specification, 84 (May 8, 2018), available at https://www.ctaplan.com/publicdocs/ ctaplan/notifications/trader-update/CTS_BINARY_ OUTPUT_SPECIFICATION.pdf (defining ‘‘odd lot’’ as ‘‘[a]n order amount for a security that is less than the normal unit of trading for that particular asset. Odd lots are considered to be anything less than the standard units of trade of 1, 10 or 100 shares.’’). 146 The Commission’s proposal to add a definition of round lot will result in the inclusion of additional quotation data for smaller-sized orders in proposed core data, and, as discussed below in Section III.C.1(d)(i), will also affect the firm quote requirements of Rule 602(b), the customer limit order display requirements of Rule 604, the order execution disclosures required under Rule 605, the requirements under Rule 610(c) regarding fees for accessing quotations, and the Short Sale Circuit Breaker requirements of Rule 201. As discussed below in Section III.C.1(d)(ii), the Commission is also proposing certain amendments to the definition of ‘‘protected bid or protected offer’’ so that the scope of the order protection requirements of Rule 611 and the locked and crossed market prevention requirements of Rule 610(c) are not extended to the proposed smaller round lot sizes. 147 See Rule 601, 17 CFR 242.601. 148 See Rule 600(b)(84), 17 CFR 242.600(b)(84). 149 See Rule 602, 17 CFR 242.602. 150 See Rule 600(b)(9), 17 CFR 242.600(b)(9). 151 See Rule 603, 17 CFR 242.603. 152 See Rule 600(b)(43), 17 CFR 242.600(b)(43); Rule 600(b)(9), 17 CFR 242.600(b)(9). 153 See Rule 610, 17 CFR 242.610. 154 See Rule 611, 17 CFR 242.611. 155 See Rule 604, 17 CFR 242.604. 156 See Rule 604(b)(3), 17 CFR 242.604(b)(3). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 aggregation process works in different terms and with different levels of specificity,157 but many exchanges aggregate odd-lots across multiple prices and provide them to the exclusive SIPs at the least aggressive price if the combined odd-lot interest is equal to or greater than a round lot.158 In 2013, the participants to the Equity Data Plans filed proposed amendments to the Plans to add odd-lot transactions to SIP data.159 In support of the proposed amendments, the participants to the Equity Data Plans noted that ‘‘odd-lot transactions account for a not insignificant percentage of trading volume, [and] the Participants have determined that including odd-lot transactions on the consolidated tape . . . would add post-trade transparency to the marketplace.’’ 160 In approving the 157 See, e.g., NYSE Rule 7.36 (‘‘The best-ranked non-marketable displayed Limit Order(s) to buy and the best ranked non-marketable displayed Limit Order(s) to sell in the Exchange Book and the aggregate displayed size of such orders associated with such prices will be collected and made available to quotation vendors for dissemination pursuant to the requirements of Rule 602 of Regulation NMS under the Exchange Act. If nonmarketable odd-lot sized orders at multiple price levels can be aggregated to equal at least a round lot, such odd-lot sized orders will be displayed as the best ranked displayed orders to sell (buy) at the least aggressive price at which such odd-lot sized orders can be aggregated to equal at least a round lot.’’); Nasdaq Rule 4756 (‘‘Pursuant to Rule 602 of Regulation NMS under the Exchange Act, Nasdaq will transmit for display to the appropriate network processor for each System Security: (i) The highest price to buy wherein the aggregate size of all displayed buy interest in the System greater than or equal to that price is one round lot or greater; (ii) the aggregate size of all displayed buy interest in the System greater than or equal to the price in (i), rounded down to the nearest round lot; (iii) the lowest price to sell wherein the aggregate size of all displayed sell interest in the System less than or equal to that price is one round lot or greater; and (iv) the aggregate size of all displayed sell interest in the System less than or equal to the price in (iii), rounded down to the nearest round lot.’’); Cboe BZX Rule 11.9(c)(2) (‘‘Odd Lot Orders are only eligible to be Protected Quotations if aggregated to form a round lot.’’); supra Section III.C for a discussion of odd-lot aggregation. As noted above, the proposed definition of core data sets forth a methodology for odd-lot aggregation for the components of core data. Any odd-lot quotations that are aggregated in an SRO’s existing proprietary data products would be required to be aggregated in a manner consistent with the method set forth in the proposed definition of core data. See supra note 129. 158 See id. For example, if there are three sell orders on an exchange for a particular NMS stock— 30 shares at $10.08, 20 shares at $10.09, and 50 shares at $10.10—the exchange will post 100 shares at $10.10 as a protected round lot quote to the exclusive SIP. See infra Section VI.C.1(c)(i). 159 Odd-lot transaction data that is required to be collected, consolidated, and disseminated pursuant to the Equity Data Plans would be included in the proposed definition of consolidated market data pursuant to proposed Rule 600(b)(20)(viii). 160 Securities Exchange Act Release Nos. 70793 (Oct. 31, 2013), 78 FR 66788 (Nov. 6, 2013) (order approving Amendment No. 30 to the UTP Plan to require odd-lot transactions to be reported to VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 amendments, the Commission agreed that ‘‘odd-lot transactions comprise a noteworthy percentage of total trading volume,’’ and stated that ‘‘including odd-lot transactions on the consolidated tape will enhance post-trade transparency, as well as price discovery, and consequently would further the goals of the [Exchange] Act,’’ and that ‘‘information about odd-lot transactions would provide important information to investors and other market participants and therefore represents a positive development in the provision of market data.’’ 161 (b) Market Evolution In recent years, the share prices of some of the most widely-held stocks have increased substantially.162 As a result of higher share prices, odd-lot orders in many securities have a high dollar, or notional, value. Because SIP data does not currently include odd-lot quotation information except to the extent that cumulative odd-lot interest equals or exceeds a round lot, the best quote reflected in proprietary data products, especially for many highpriced stocks, may be an odd-lot order that is at a price that is better than the best bid or best offer that is disseminated by the exclusive SIPs. Indeed, as discussed below, an analysis of odd-lot transaction data and comments made in connection with the Roundtable indicate that odd-lot orders are frequently priced better than the quotation prices that are disseminated by the exclusive SIPs, yet these orders are not seen by investors or market participants that rely solely on SIP data.163 The importance of increasing the transparency of odd-lot quotation information is supported by odd-lot quotation and transaction data. First, odd-lot transactions make up a significant proportion of transaction volume in NMS stocks, including exchange-traded products (‘‘ETPs’’). Based on data from the SEC’s MIDAS consolidated tape); 70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 2013) (order approving Eighteenth Substantive Amendment to the Second Restatement of the CTA Plan to require odd-lot transactions to be reported to consolidated tape). 161 Id. at 66789–66790. 162 For example, between 2004 and 2019, the average price of a stock in the Dow Jones Industrial Average nearly quadrupled. 163 See Roundtable Day Two Transcript at 66 (Paul O’Donnell, Morgan Stanley) (‘‘We all know that, for high-price stocks, there is a market inside the NBBO’’); Roundtable Day One Transcript at 116 (Michael Blaugrund, NYSE) (recommending the inclusion in core data of odd-lots priced better than the BBO); Healthy Markets Association Letter II; staff odd-lot analysis, infra (observing that 43% of odd-lot transactions in September of 2019 occurred at prices better than the NBBO). PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 16739 analytics tool,164 the daily exchange odd-lot rate (i.e., the number of exchange odd-lot trades as a proportion of the number of all exchange trades) for all corporate stocks ranged from approximately 29% to 42% of trades and the daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of trades in 2018. More recently, in June 2019, the daily exchange odd-lot rate for all corporate stocks exceeded 50% several times (and exceeded 65% several times for the top decile by price) and reached almost 30% for all ETPs in the same period.165 Exchange odd-lot volume as a proportion of total exchange-traded volume also rose in June 2019, reaching approximately 15% for all corporate stocks (and over 30% for the top decile by price) and approximately 4% for all ETPs.166 Staff examined odd-lot trade and message volume, duration on the inside,167 order-book distribution, and quoted spreads for the top 500 securities by dollar volume during the week of September 10–14, 2018, using the exclusive SIP trades, exclusive SIP quotes, off-exchange data from FINRA’s TRFs, and all of the exchanges’ proprietary data feeds. Staff found that a significant portion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, highpriced securities.168 Staff compared the bid-ask spread when using exclusive SIP quotation information (which is in round lots) vs. quotation information in the proprietary feeds (which includes odd-lots). On average, the measure of bid-ask spread, an important metric in understanding market liquidity and quote competition, widens (i.e., degrades) significantly when calculated using only round lots relative to the odd-lot quotations displayed on proprietary feeds. In addition, as average stock share prices 164 Staff accessed consolidated data from the Equity Data Plans and exchange depth of book data, both of which staff receive through the SEC’s MIDAS platform. See Market Data Analytics System (‘‘MIDAS’’), available at https://www.sec.gov/ marketstructure/midas.html. This data is commercially available. 165 Id. See also Alexander Osipovich, Tiny ‘OddLot’ Trades Reach Record Share of U.S. Stock Market, Wall Street Journal (Oct. 23, 2019) (‘‘The share of trades in odd-lot sizes hit a record 48.9% on Oct. 7 and has stayed above 40% ever since, according to the NYSE data, which cover all U.S. equity trades, not just those on the Big Board.’’). 166 See supra note 164. 167 Duration on the inside is the percent of the day the aggregate size at the best price (bid, offer, or both) is less than 100 shares based on the exchange proprietary data feeds. 168 For example, staff observed that over 86% of the trades that occurred in the two largest securities by market capitalization that have share prices greater than $1,000 occurred in odd-lot share amounts. E:\FR\FM\24MRP2.SGM 24MRP2 16740 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules rose, bid-ask spreads based only on round lots generally widened by a greater amount than did spreads based on round lots and odd-lots. During the period staff analyzed, for the 500 most frequently traded securities by dollar volume, the average bid-ask spread of the 50 securities with the highest share prices decreased (improved or tightened) by $.05970 when calculated using the proprietary feeds relative to the exclusive SIP feed. Bid-ask spreads for the 50 securities with the lowest share prices showed less improvement when using the proprietary feeds relative to the exclusive SIP feed, decreasing (or tightening) on average by $.00017. Staff also evaluated the frequency of trades in odd-lot sizes for the top 500 securities by dollar volume and found that frequently traded, high priced securities are likely to have a substantial portion of executions occur in odd-lot sizes. More than 25 percent of the onexchange share volume of the 50 securities with the highest share prices occurred in odd-lot sizes. In comparison, less than 2% of the onexchange share volume of the 50 securities with the lowest share prices occurred in odd-lot sizes. In addition, as noted above,169 statements made by Roundtable panelists and commenters suggest that odd-lot orders can reflect prices that are better than the quotation prices that are disseminated by the exclusive SIPs. These observations are consistent with staff observations of odd-lot transaction pricing reflected in recent trading data. During the month of September 2019, a substantial proportion of odd-lot trades occurred at prices that are better than the prevailing NBBO. Specifically, approximately 51% of all trades executed on exchange and approximately 14% of all volume executed on exchange in corporate stocks (3,930 unique symbols) occurred in odd-lot sizes (i.e., less than 100 shares), and 43% of those odd-lot transactions (representing approximately 39% of all odd-lot volume) occurred at a price better than the NBBO. lotter on DSKBCFDHB2PROD with PROPOSALS2 (c) Roundtable Discussion, Comments, and Alternative Proposals In connection with the Roundtable, one commenter presented data showing increased odd-lot trading and quoting rates over the last several years, as well as the existence of quotes on proprietary feeds that are at prices better than the NBBO disseminated by the exclusive 169 See supra note 163. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 SIPs.170 Several panelists at the Roundtable were supportive of adding odd-lot quotation information to SIP data.171 One panelist who supported adding odd-lot orders to SIP data noted that the application of order protection under Rule 611 to odd-lot quotes would need to be considered and added that he would likely be in favor of applying Rule 611 to odd-lot quotes.172 Finally, one panelist emphasized the importance of odd-lot quotation data to market participants, stating that content that exists only in the proprietary feeds— such as odd-lots—is needed to make effective decisions in trading applications and to fill client orders effectively.173 In addition, several comment letters submitted in connection with the Roundtable supported adding odd-lot quotation information to SIP data or otherwise highlighted negative consequences of its exclusion from SIP data.174 One commenter stated that the 170 Letter to Brent J. Fields, Secretary, Commission, from Tyler Gellasch, Executive Director, Healthy Markets Association, 5–11 (Mar. 5, 2019) (‘‘Healthy Markets Association Letter II’’). See also Letter to Brent J. Fields, Secretary, Commission, from Rich Steiner, Head of Client Advocacy and Market Innovation, RBC Capital Markets, LLC (Oct. 25, 2019) (‘‘RBC Letter’’) (stating that internal research suggested exclusive SIPs should display odd-lot quotes). 171 See Roundtable Day One Transcript at 98–99 (Stacey Cunningham, NYSE); Roundtable Day One Transcript at 116–17 (Michael Blaugrund, NYSE); Roundtable Day Two Transcript at 72 (Michael Blaugrund, NYSE) (recommending expanding consolidated market data to include odd-lot orders priced better than the BBO); Roundtable Day One Transcript at 157–59 (Oliver Albers, Nasdaq) (stating that over 50% of the notional value of Nasdaq-listed names is in high priced stocks); Roundtable Day One Transcript at 226–27 (Chris Isaacson, Cboe); Roundtable Day Two Transcript at 73 (Prof. Robert Bartlett, UC Berkeley) (stating that including odd-lots in the trade data has been incredibly useful and including it in the quote data would be also helpful). 172 See Roundtable Day One Transcript at 226–27 (Chris Isaacson, Cboe). In addition, another panelist suggested that revisiting Rule 611 for odd-lots has merit. See Roundtable Day One Transcript at 231– 32 (Vlad Khandros, UBS). See also Robert Battalio, et al., Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks, The Journal of Trading (Winter 2017), available at https://jot.pm-research.com/content/iijtrade/12/1/ 35.full.pdf (‘‘[T]he exclusion of odd lot orders from the protected NBBO quote produces cases in which trades fill at prices worse than available oppositeside trading interests.’’). 173 See Roundtable Day One Transcript at 127–28 (Mark Skalabrin, Redline Trading Solutions). 174 See Letter to Brent J. Fields, Secretary, Commission, from NYSE Group, 6, 13 (Oct. 24, 2018) (‘‘NYSE Group Letter’’) (stating that ‘‘[o]ddlot quoting, particularly in high-priced securities, has become more prevalent in today’s markets and its exclusion from SIP feeds seems anachronistic’’; recommending that core data be expanded to include ‘‘the best bid and offer of any quantity’’; and stating that ‘‘Main Street would benefit if the prices disseminated by the SIPs included odd-lot quotes’’); Letter to Vanessa Countryman, Acting Secretary, Commission, from Theodore R. Lazo, PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 Commission should consider rulemaking to expand SIP data to include odd-lot information during which the Commission could gather data and determine whether odd-lots are valuable for price discovery for all securities.175 Commenters asserted that having to purchase ‘‘relatively basic data such as odd-lots’’ through exchange proprietary offerings goes against one of the main purposes of the national market system: Enabling investors’ orders to be executed without the participation of a dealer.176 Another commenter provided data showing that proprietary feeds that include odd-lot quotes reflect superior pricing compared to the SIP data disseminated by the Equity Data Plans and indicated its support for adding odd-lot quotes to SIP data.177 Similarly, another commenter stated that as stock prices overall have risen and average trade sizes have fallen, odd-lots are becoming more important in the trading process, and the commenter presented data showing that stock price has a meaningful impact on odd-lot frequency and trade size and that high-priced stocks frequently trade in smaller quantities.178 Some Roundtable panelists, however, pointed out complications that might arise from the addition of more odd-lot information to the SIP data. One panelist stated that an issue with adding odd-lot quotations to the Equity Data Plans is that they are not protected quotations under Rule 611, so, in the view of the panelist, there would be uncertainty as to whether a brokerdealer has to access odd-lot quotations to meet regulatory obligations. This panelist added that there will need to be clarity as to how odd-lots are reported to the exclusive SIPs and represented in the consolidated tapes (e.g., whether 50 shares at $10 and 100 shares at $10 will be shown separately or as 150 shares at $10).179 Another panelist stated that caution should be exercised in adding odd-lots to SIP data to avoid Managing Director and Associate General Counsel, SIFMA (Sept. 18, 2019) (‘‘SIFMA Letter II’’); Letter to Brent J. Fields, Secretary, Commission, from Richard H. Baker, President and CEO, Global Head of Government Affairs Managed Funds Association and Jirı´ Kro´l, Deputy CEO, Global Head of Government Affairs, AIMA, 3–4 (Dec. 20, 2018) (‘‘MFA and AIMA Letter’’); Healthy Markets Association Letter II. 175 See SIFMA Letter II at 3. 176 See MFA and AIMA Letter at 3–4. 177 See Healthy Markets Association Letter II. 178 See RBC Letter at 1–2 (highlighting that approximately 50% of all odd-lot trades in stocks priced between $50 and $250 are in 20 shares or less). 179 See Roundtable Day One Transcript at 159–60 (Adam Inzirillo, BAML) (stating that the different display options could result in a change from current practices). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 overwhelming market participants with information. This panelist suggested that a ‘‘price level metric,’’ such as including odd-lot orders with a value in excess of a specified price, might make sense.180 On October 2, 2019, the Equity Data Plans published an ‘‘initial proposal’’ for public comment regarding the addition of odd-lot quotes to the Equity Data Plans for dissemination by the respective exclusive SIPs.181 Under this proposal, the addition of odd-lot quotes would not change how the NBBO is calculated, nor would such quotes be ‘‘protected quotations’’ 182 under Regulation NMS. Rather, the odd-lot quote data would be ‘‘ancillary’’ data available to exclusive SIP customers.183 Each exchange would send its top of book odd-lot quotes to the exclusive SIPs in the same form in which it currently sends its top of book round lot quotes.184 An ‘‘odd-lot best bid and offer’’ would be calculated in the same manner as the round lot NBBO, but would not be disseminated when it is worse than the NBBO.185 Additionally, on January 21, 2020, Cboe Global Markets, Inc. (‘‘Cboe’’) published a report detailing its recommendations for U.S. equity market structure.186 In the report, Cboe recommended that top of book odd-lot quotations be included in the exclusive SIP feeds.187 Furthermore, Cboe recommended redefining round lot with 180 See Roundtable Day One Transcript at 160–61 (Matt Billings, TD Ameritrade). 181 See CTA Plan and UTP Plan, Odd Lots Initial Proposal (‘‘SIP Odd Lot Initial Proposals’’), available at https://www.utpplan.com/DOC/Odd_ Lots_Proposal.pdf, https://ctaplan.com/publicdocs/ CTA_Odd_Lots_Proposal.pdf; CTA Plan and UTP Plan Operating Committees, SIP Operating Committees Seek Comment on Proposal to Add Odd Lot Quotes to SIP Data Feeds (Oct. 2, 2019) (‘‘SIP Odd Lots Proposal Press Release’’), available at https://www.globenewswire.com/news-release/ 2019/10/02/1924016/0/en/SIP-OperatingCommittees-Seek-Comment-on-Proposal-to-AddOdd-Lot-Quotes-to-SIP-Data-Feeds.html; Letter from Robert Books, Chairman, UTP and CTA Operating Committees, to industry members and investors, 1 (Jan. 6, 2020) (‘‘CTA and UTP Annual Letter’’), available at https://forefrontcomms.com/wpcontent/uploads/2020/01/2020-Annual-Letter_ FINAL_.pdf. The SIP Odd Lot Initial Proposals are the subject of continuing consideration by the operating committees. Comments are available at https://www.ctaplan.com/oddlots. 182 See supra note 115. 183 See SIP Odd Lot Initial Proposals, supra note 181, at 1. 184 See id. 185 See id. 186 Cboe, Cboe’s Vision: Equity Market Structure Reform (Jan. 21, 2020) (‘‘Cboe Report’’), available at https://www.cboe.com/aboutcboe/governmentrelations/pdf/cboes-vision-equity-market-structurereform-2020.pdf. 187 See id. at 3. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 lower numbers for higher priced securities.188 (d) Commission Discussion and Proposal (i) Proposed Definition of Round Lot Data on odd-lot trading and quoting activity evaluated by staff,189 and the remarks and comments of market participants, suggest that SIP data omits a substantial amount of economically significant trading interest. Furthermore, bid-ask spreads calculated using round lot orders do not include some odd-lot quotations that may be at prices better than round lot orders, particularly for higher priced securities.190 The Commission is concerned that information about significant trading interest in odd-lot orders is only available to market participants who have purchased proprietary market data products from exchanges and remains unavailable to those that rely solely on SIP data. This creates a potentially significant information asymmetry between SIP data and proprietary data.191 Further, the Commission is concerned about the view expressed by some market participants that achieving best execution may be difficult for brokerdealers that rely solely on SIP data. The Commission preliminarily believes that, to address these and other concerns, certain odd-lot quotation data should be required to be disseminated as part of proposed core data so that it is made more readily available to investors and market participants. The Commission is proposing that this be accomplished by defining the term ‘‘round lot’’ to include certain orders that currently are defined as ‘‘odd-lots.’’ Given the prevalence of odd-lot quoting and trading, particularly in higherpriced stocks, the absence of odd-lot quotation data significantly reduces the comprehensiveness and usefulness of SIP data. 188 See id. at 2–3. supra Section III.C.1(b) (discussing staff odd-lot analysis). 190 Id. 191 Specifically, larger or better resourced brokerdealers may be more capable of paying the fees for multiple proprietary data feeds to obtain odd-lot quotations from several markets and consolidating these feeds to create a more complete picture of the market. See infra Sections VI.B.2(c), VI.B.3(a), and VI.B.3(b). In addition, the proposed definition of round lot would help ensure that market participants, including retail investors, would receive information on smaller-sized orders in higher-priced stocks in a context in which a trading or order routing decision can be implemented and would receive more informative order execution quality information. See infra Section III.C.1(d)(i) (discussing the effect of the proposed definition of round lot on Rules 603(c) and 605). 189 See PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 16741 The Commission preliminarily believes that the inclusion of odd-lot quotations in proposed core data should be reasonably calibrated. The Commission is preliminarily concerned that including all odd-lot quotations could, as some Roundtable commenters suggested,192 burden systems, increase complexity, and degrade the usefulness of information in a manner that may not be warranted by the relative benefits of the additional information to investors and market participants.193 Accordingly, under proposed Rule 600(b)(81) of Regulation NMS, a ‘‘round lot’’ would be defined as: (1) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange 194 was $50.00 or less per share, an order for the purchase or sale of an NMS stock of 100 shares; (2) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $50.01 to $100.00 per share, an order for the purchase or sale of an NMS stock of 20 shares; (3) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $100.01 to $500.00 per share, an order for the purchase or sale of an NMS stock of 10 shares; (4) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $500.01 to $1,000.00 per share, an order for the purchase or sale of an NMS stock of 2 shares; and (5) for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $1,000.01 or more per share, an order 192 See supra note 180 and accompanying text. infra note 195. Further, attempting to access orders of insignificant notional value—the share price multiplied by the number of shares in the order—could result in a situation where the benefit associated with accessing additional liquidity may be offset by the cost associated with signaling to other market participants the presence of a large incoming order. See Securities Exchange Act Release No. 78309 (July 13, 2016), 81 FR 49432, 49440 (July 27, 2016) (‘‘[S]ophisticated market participants closely monitor order and execution activity throughout the markets, looking for patterns that signal the existence of a large institutional order, so that they can use that information to their trading advantage . . . Indeed, institutional customers have expressed concern that excessive routing of their orders may increase the risk of information leakage without a commensurate benefit to execution quality.’’). By limiting the quotation information that is added to the proposed core data to orders of $1,000 dollars notional value or more, as explained below, the proposed definition of round lot will increase transparency into smaller-sized orders while reducing the likelihood of information leakage. 194 The IPO price would be used in lieu of the prior calendar month’s average closing price on the primary listing exchange for newly issued stocks. See proposed Rule 600(b)(81). 193 See E:\FR\FM\24MRP2.SGM 24MRP2 16742 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules for the purchase or sale of an NMS stock of 1 share. Table 1, below, shows the number of NMS stocks that would be in each proposed round lot tier based on monthly average closing prices in September of 2019, as well as the percent of overall average daily volume (‘‘ADV’’) and notional value (‘‘$ADV’’) of each price group: TABLE 1 Number of stocks in stock price group Stock price group lotter on DSKBCFDHB2PROD with PROPOSALS2 $0.00–$50.00 ............................................................................................................................... $50.01–$100.00 ........................................................................................................................... $100.01–$500.00 ......................................................................................................................... $500.01–$1,000.00 ...................................................................................................................... $1,000.01 + .................................................................................................................................. 7,188 1,094 575 14 15 Percent of ADV, by price group (%) 75.02 13.64 11.20 0.05 0.09 Percent of $ADV, by price group (%) 31.70 21.06 43.40 0.64 3.19 The Commission’s proposed definition of round lot attempts to balance the benefits of adding more quotation data regarding smaller-sized orders to proposed core data against the concerns raised by some Roundtable panelists and commenters that adding all odd-lot quotes to proposed core data could increase its complexity and undermine its usefulness.195 The proposed definition, in effect, limits the quotation data that would be added to proposed core data to quotations that represent a notional value of at least $1,000, which the Commission preliminarily believes to be meaningful order size for today’s market participants.196 A round lot is a standard unit of trading that traditionally has reflected an order of meaningful size to market participants. Given the per share price increases of certain securities, and the large number of orders in sub-100 share sizes in today’s market,197 the Commission preliminarily believes that the current round lot size of 100 shares no longer captures many orders of meaningful size. The number of shares in an order, on its own, has become a less accurate way of distinguishing orders of meaningful size from those of de minimis size. For example, a 100- share order for an $11 stock and a 10 share order for a $110 stock both have a notional value of $1,100, but, under exchange rules and NMS plans, only the former may be a round lot currently. The Commission preliminarily believes that defining round lots based on a dollar value would better reflect orders of meaningful size.198 Furthermore, higher odd-lot trading rates are associated with higher-priced stocks,199 and, according to data provided in connection with the Roundtable, odd-lot transaction sizes go down as share price goes up.200 The proposed tiered, price-based round lot definition is intended to reflect these market dynamics. More specifically, a significant odd-lot transaction market— measured by odd-lot trade frequency— emerges at approximately a $50 share price, and 50% of the odd-lots traded in stocks priced between $50 and $250 are 20 shares or less.201 This corresponds, approximately, with the proposed 20 share round lot category for stocks priced between $50.01 and $100.00 per share. Moreover, according to data provided in connection with the Roundtable, 20, 10, 2, and 1 share oddlot trade sizes are among the most common, with approximately 2.8%, 5.1%, 5.3%, and 11.7%, of odd-lot executions, respectively.202 The proposed definition of round lot is intended to broadly reflect these key data points in the context of a relatively simple, intuitive framework for establishing round lot sizes and associated price thresholds. Moreover, a significant portion of the odd-lot transactions that occur at a price better than the NBBO 203 would be captured by the proposed definition of round lot. Specifically, of the odd-lot transactions executing at a price better than the NBBO during all of the trading days in September 2019, approximately 38% of such transactions and 61% of the odd-lot volume were in sizes that would be round lots under proposed Rule 600(b)(81). For example, for those stocks with an average prior calendar month’s closing price on the primary listing exchange equal to or greater than $500.01 and less than $1,000, approximately 77% of all trades (99% of volume) in sizes less than 100 shares that occurred at a price better than the prevailing NBBO had a transaction size of 2 shares or more. Table 2 and Table 3, below, show the portion of odd-lot trades and volume, respectively, executed a price better than the prevailing NBBO that would be defined as round lots under the proposal: 195 The proposed definition of round lot only includes a subset of all odd-lot quotation data, namely, orders with a notional value of at least $1,000. This would limit the number of data messages that would be provided to market participants when compared to providing all oddlot quotation data. The Commission preliminarily believes that the proposed definition would address concerns regarding additional complexity and degradation of the usefulness of the data. See infra Section VI.C.1(b)(i). 196 See infra Section VI.C.1. 197 See supra notes 163–169 and accompanying text. 198 Commenters to the SIP Odd Lot Initial Proposals have suggested defining round lots based on share price. See Letter to SIP Operating Committees from Hubert De Jesus, Managing Director, Global Head of Market Structure and Electronic Trading, Blackrock, and Joanne Medero, Managing Director, Global Public Policy Group, Blackrock, regarding Odd Lots Proposal, 2 (Dec. 3, 2019), available at https://www.theice.com/ publicdocs/BlackRock_Odd_Lot_Proposal_ December_3_2019.pdf (‘‘The sizing of round lots provides an intuitive mechanism for expanding odd lot coverage because its designation as the normal unit of trading is embedded in exchange rulebooks and market regulations. . . . BlackRock believes that a data-driven redefinition of round lots to scale lot size relative to security price would improve transparency and promote fairer and more efficient markets.’’); Letter from Benjamin Connault, Economist, IEX Group, Inc., and Lucy Malcolm, Associate General Counsel, IEX Group, Inc., to Operating Committees, regarding Odd Lots Proposal and Round Lot Proposal, 2 (Nov. 18, 2019), available at https://www.theice.com/publicdocs/ IEX_Letter_re-CTA–UTP_Odd-Lots_Proposal_ 20191118.pdf (‘‘IEX strongly supports reducing the round lot size for higher-priced securities.’’). 199 See supra Section III.C.1(b) (stating that the daily exchange odd-lot rate for the top decile of corporate stocks by price exceeds the rate for all corporate stocks). 200 See RBC Letter at 5. 201 Id. 202 Deutsche Bank, Global Equities, There’s More to Odd Lots than High-Priced Stocks (June 25, 2019). 203 See supra Section III.C.1(b). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00018 Fmt 4701 Sfmt 4702 E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 16743 TABLE 2 Portion of all trades less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal (%) Stock price group Proposed round lot definition $0.00–$50.00 ............................................................ $50.01–$100.00 ........................................................ $100.01–$500.00 ...................................................... $500.01–$1000.00 .................................................... $1,000.01 or more .................................................... 100 shares ............................................................... 20 shares ................................................................. 10 shares ................................................................. 2 shares ................................................................... 1 share ..................................................................... 0 46 59 77 100 TABLE 3 Stock price group Proposed round lot definition $0.00–$50.00 ............................................................ $50.01–$100.00 ........................................................ $100.01–$500.00 ...................................................... $500.01–$1000.00 .................................................... $1,000.01 or more .................................................... 100 Shares ............................................................... 20 Shares ................................................................. 10 Shares ................................................................. 2 Shares ................................................................... 1 Share .................................................................... The proposed definition of round lot requires the round lot size of an NMS stock to be based on the prior calendar month’s average closing price on the primary listing exchange for that stock (or the IPO price if the prior calendar month’s average closing price on the primary listing exchange is not available).204 The Commission preliminarily believes that the prior calendar month’s average closing price on the primary listing exchange is a reasonable metric to assess an NMS stock’s share price for purposes of determining the applicable round lot size. The daily closing price is a widely followed indicator of a stock’s value that is often used to measure performance over time.205 Moreover, using a monthly average (rather than, e.g., each trading day’s closing price or a weekly average), would help ensure that round lot sizes are based on current pricing information, while preventing short- lotter on DSKBCFDHB2PROD with PROPOSALS2 Portion of all volume transacted in a quantity less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal (%) 204 Specifically, the prior calendar month’s average closing price on the primary listing exchange would be the mean of the daily closing prices on the primary listing exchange for all trading days in the prior calendar month. For each NMS stock, the prior calendar month’s average closing price on the primary listing exchange would only need to be computed at the beginning of each calendar month and would be in effect for the rest of the month (i.e., it would not be a ‘‘rolling’’ average requiring computation more frequently than once per calendar month). 205 See Christopher Ting, Which Daily Price Is Less Noisy?, Financial Management 35, no. 3 (2006): 81–95 (describing daily closing price as a popular reference price, including for fund managers to compute net asset values). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 term price fluctuations from impacting the round lot size, thereby avoiding unnecessary complexity and cost. The proposed definition of round lot would impact other terms that are currently defined in Regulation NMS, as well as the proposed definition of core data (and its included terms), so that quotation information in the proposed round lot sizes would be included in the proposed definition of core data. Specifically, the definition of ‘‘bid or offer’’ 206 is based on round lots, and the definition of ‘‘bid or offer’’ is reflected in the definition of ‘‘best bid and best offer.’’ 207 Similarly, the definition of ‘‘best bid and best offer’’ is reflected in the definition of ‘‘national best bid and national best offer.’’ 208 Therefore, the addition of the proposed definition of round lot would impact the calculation of the NBBO by requiring that it be calculated based upon the BBOs in the new round lot sizes. In addition, the proposed definition of depth of book data refers to ‘‘quotation size,’’ which refers to ‘‘bid or offer,’’ so the quotation data at the price levels that are proposed to be included in depth of book data would include quotations in the new proposed round lot sizes.209 206 See 17 CFR 242.600(b)(9). 17 CFR 242.600(b)(8). 208 See 17 CFR 242.600(b)(43). 209 Similarly, since ‘‘transaction report’’ is defined as ‘‘a report containing the price and volume associated with a transaction involving the purchase or sale of one or more round lots of a security,’’ core data, as proposed, would include 207 See PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 0 89 95 99 100 The proposed definition of ‘‘round lot’’ would also affect Rules 602, 603, 604, 605, 606, and 610 of Regulation NMS. Rule 602 governs the dissemination of quotations in NMS securities. Specifically, Rule 602(a), among other things, requires SROs to have procedures to collect and make available certain quotation information from their members and make available their best bids and offers to vendors. As a result of the proposed definition of ‘‘round lot,’’ the SROs would be required to collect and make available quotations in the smaller round lot sizes depending on the price of the NMS stock. The Commission preliminarily believes the bids and offers collected and made available under Rule 602(a) should be in the proposed round lot sizes. As discussed above, the Commission preliminarily believes that the proposed round lot sizes represent orders of meaningful size to market participants and should be collected, consolidated, and disseminated in proposed core data. To effectively implement this, exchanges must be required to collect and make available transaction reports based on the new proposed round lot sizes. The Equity Data Plans already collect and disseminate all odd-lot transaction reports and last sale data. See supra notes 160–161 and accompanying text. Accordingly, under proposed Rule 600(b)(19)(iv), which incorporates data elements required by the NMS plan(s) into the proposed consolidated market data, the SROs would continue to be required to provide all oddlot transaction reports and last sale data as part of the proposed consolidated market data. E:\FR\FM\24MRP2.SGM 24MRP2 16744 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 quotations in these sizes under Rule 602(a). In addition, Rule 602(b) provides that each ‘‘responsible broker or dealer’’ shall communicate to its SROs its best bids and offers and quotation sizes for a ‘‘subject security.’’ 210 Thereafter, each responsible broker or dealer is obligated to execute an order to buy or sell a subject security, other than an odd-lot order, that is presented to that responsible broker or dealer at a price at least as favorable to such buyer or seller as the responsible broker’s or dealer’s ‘‘published bid or published offer.’’ 211 In other words, the responsible broker or dealer must be firm for its ‘‘published bid or published offer.’’ 212 As a result of the proposed definition of round lot, responsible brokers or dealers will be required to communicate bids and offers in the proposed round lot sizes and be firm for such bids and offers. The Commission preliminarily believes that the proposed round lot definition should apply to the obligations of responsible brokers or dealers under Rule 602(b). As explained above, the Commission preliminarily believes that the proposed round lot sizes better reflect orders of meaningful size in today’s markets. The Commission also preliminarily believes that the 210 ‘‘Subject security’’ means ‘‘(i) With respect to a national securities exchange: (A) Any exchangetraded security other than a security for which the executed volume of such exchange, during the most recent calendar quarter, comprised one percent or less of the aggregate trading volume for such security as reported pursuant to an effective transaction reporting plan or effective national market system plan; and (B) Any other NMS security for which such exchange has in effect an election, pursuant to 242.602(a)(5)(i), to collect, process, and make available to a vendor bids, offers, quotation sizes, and aggregate quotation sizes communicated on such exchange; and (ii) With respect to a member of a national securities association: (A) Any exchange-traded security for which such member acts in the capacity of an OTC market maker unless the executed volume of such member, during the most recent calendar quarter, comprised one percent or less of the aggregate trading volume for such security as reported pursuant to an effective transaction reporting plan or effective national market system plan; and (B) Any other NMS security for which such member acts in the capacity of an OTC market maker and has in effect an election, pursuant to 242.602(a)(5)(ii), to communicate to its association bids, offers, and quotation sizes for the purpose of making such bids, offers, and quotation sizes available to a vendor.’’ 17 CFR 242.600(b)(77). 211 See Rule 602(b)(2), 17 CFR 242.602(b)(2); Regulation NMS Adopting Release, supra note 10, at 37538. ‘‘Published bid and published offer means the bid or offer of a responsible broker or dealer for an NMS security communicated by it to its national securities exchange or association pursuant to § 242.602 and displayed by a vendor on a terminal or other display device at the time an order is presented for execution to such responsible broker or dealer.’’ 17 CFR 242.600(b)(64). 212 17 CFR 242.602(b)(2). See also Rule 600(b)(64) which defines ‘‘published bid and published offer.’’ 17 CFR 242.600(b)(64). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 objectives of Rule 602(b) of ensuring that broker-dealers disseminate their best quotes, and are firm for such quotes, would be furthered by applying the proposed definition of round lots such that those obligations would apply to quotes of meaningful size. Rule 603(c) governs the display of information with respect to quotations for and transactions in NMS stocks. Specifically, Rule 603(c)(1) states that no securities information processor, broker, or dealer shall provide, in a context in which a trading or order routing decision can be implemented, a display of any information with respect to quotations for or transactions in an NMS stock without also providing, in an equivalent manner, a consolidated display—i.e., the NBBO and consolidated last sale information 213— for such stock.214 As a result of the proposed definition of ‘‘round lot,’’ a securities information processor, broker, or dealer would be required to provide a consolidated display that reflects smaller-sized orders in higher-priced stocks. As discussed above, the Commission preliminarily believes that the proposed round lot sizes represent orders of meaningful size to market participants. The Commission also preliminarily believes that the objective of Rule 603(c) of ensuring that market participants receive basic quotation and transaction information in a context in which a trading or order routing decision can be implemented would be furthered to the extent that such information is based on orders of meaningful size such as round lots as proposed to be defined in this proposal. Rule 604, which governs the display of customer limit orders for NMS stocks, would also be affected by the proposed definition of round lot. Rule 604(a)(1) requires each member of a national securities exchange that is registered with that exchange as a specialist, or is authorized by that exchange to perform functions substantially similar to those of a specialist, to publish immediately a bid or offer that reflects: (i) The price and the full size of each customer limit order held by the specialist that is at a price that would improve the bid or offer of such specialist in such security; 213 Rule 600(b)(14) defines ‘‘consolidated display’’ as ‘‘(i) The prices, sizes, and market identifications of the national best bid and national best offer for a security; and (ii) Consolidated last sale information for a security.’’ 17 CFR 242.600(b)(14). 214 Rule 603(c)(2) further states that this provision does not apply to a display of information on the trading floor or through the facilities of a national securities exchange or to a display in connection with the operation of a market linkage system implemented in accordance with an effective national market system plan. 17 CFR 242.603(c)(2). PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 and (ii) the full size of each customer limit order held by the specialist that is priced equal to the bid or offer of such specialist for such security, is priced equal to the national best bid or national best offer, and represents more than a de minimis change in relation to the size associated with the specialist’s bid or offer. Rule 604(a)(2) imposes similar requirements on OTC market makers with respect to their customer limit orders. The requirements of Rule 604 do not apply to customer limit orders that, among other things, are odd-lots.215 Under the proposed definition of round lot, a specialist or OTC market maker would have to include customer limit orders in the new round lot sizes within its published bids and offers. Rule 604 currently applies to round lots and the Commission preliminarily believes that Rule 604 should continue to use round lots, as proposed to be defined, as the measure for customer limit orders that must be reflected in a specialist or OTC market maker’s published bid or offer. The Commission preliminarily believes that the objectives of Rule 604 of ensuring that customers have the ability to effectively seek price improvement through the dissemination of their limit orders by specialists or OTC market makers would be furthered by applying the proposed definition of round lot such that those obligations would apply to customer limit orders of meaningful size. Therefore, the Commission preliminarily believes that the customer limit order display requirements of Rule 604 should apply to orders in the new proposed round lot sizes. Rule 605, which governs the disclosure of order execution quality information, would also be affected by the proposed definition of round lot because of the effect on the definition of NBBO. Rule 605 requires market centers to publish monthly reports containing execution statistics 216 for certain NMS stock orders, including, but not limited to, the ‘‘average realized spread,’’ 217 215 See 17 CFR 242.604(b)(3). other things, these reports must be ‘‘categorized by order size,’’ which means ‘‘dividing orders into separate categories for sizes from 100 to 499 shares, from 500 to 1999 shares, from 2000 to 4999 shares, and 5000 or greater shares.’’ 17 CFR 242.600(b)(11). 217 Rule 600(b)(7) defines ‘‘average realized spread’’ as ‘‘the share-weighted average of realized spreads for order executions calculated, for buy orders, as double the amount of difference between the execution price and the midpoint of the national best bid and national best offer five minutes after the time of order execution and, for sell orders, as double the amount of difference between the midpoint of the national best bid and national best offer five minutes after the time of order execution and the execution price; provided, however, that the midpoint of the final national best 216 Among E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 ‘‘average effective spread,’’ 218 data on shares ‘‘executed with price improvement,’’ 219 and data on shares ‘‘executed outside the quote.’’ 220 The calculations of average realized spread and average effective spread rely on the mid-point of the NBBO. Similarly, the benchmark for price improvement statistics, as reflected in the definitions of ‘‘executed at the quote,’’ 221 ‘‘executed with price improvement,’’ 222 and ‘‘executed outside the quote,’’ 223 is the NBBO. As discussed above, since the NBBO will be based on the proposed round lot sizes, any Rule 605 execution quality statistics that rely on the NBBO as a benchmark would be affected by the proposed definition of round lot on the NBBO.224 The Commission preliminarily believes that order execution disclosures required under Rule 605 should be based on the NBBO that reflects the new proposed round lot sizes. The NBBO is currently based on round lots, and the proposed definition of round lot would allow additional orders of meaningful size to determine the NBBO. As a result, the execution quality and price improvement statistics required under Rule 605 would be based upon an updated NBBO that the bid and national best offer disseminated for regular trading hours shall be used to calculate a realized spread if it is disseminated less than five minutes after the time of order execution.’’ 17 CFR 242.600(b)(7). 218 Rule 600(b)(6) defines ‘‘average effective spread’’ as ‘‘the share-weighted average of effective spreads for order executions calculated, for buy orders, as double the amount of difference between the execution price and the midpoint of the national best bid and national best offer at the time of order receipt and, for sell orders, as double the amount of difference between the midpoint of the national best bid and national best offer at the time of order receipt and the execution price.’’ 17 CFR 242.600(b)(6). 219 Rule 600(b)(29) defines ‘‘executed with price improvement’’ as ‘‘for buy orders, execution at a price lower than the national best offer at the time of order receipt and, for sell orders, execution at a price higher than the national best bid at the time of order receipt.’’ 17 CFR 242.600(b)(29). 220 Rule 600(b)(28) defines ‘‘executed outside the quote’’ as ‘‘for buy orders, execution at a price higher than the national best offer at the time of order receipt and, for sell orders, execution at a price lower than the national best bid at the time of order receipt.’’ 17 CFR 242.600(b)(28). 221 Rule 600(b)(27) defines ‘‘executed at the quote’’ as ‘‘for buy orders, execution at a price equal to the national best offer at the time of order receipt and, for sell orders, execution at a price equal to the national best bid at the time of order receipt.’’ 17 CFR 242.600(b)(27). 222 Supra note 219. 223 Supra note 220. 224 See supra Section III.C.1(d)(i) (discussing the impact of the proposed definition of round lot on other Regulation NMS defined terms, such as the NBBO). As discussed above, the Commission preliminarily believes that actual execution quality for retail investors will be improved as a result of the inclusion of odd-lot quotes in core data as a result of the better pricing that is often reflected in odd-lots. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 Commission preliminarily believes is a more meaningful benchmark for these statistics. Therefore, the Commission preliminarily believes that the NBBO, as modified by the proposed definition of round lot, should continue to be used as a basis for the statistics required under Rule 605.225 Rule 606, which requires brokerdealers to provide disclosure of information regarding the handling of the broker-dealers’ customers’ orders,226 would also be affected by the proposed definition of round lot because of the effect on the definition of actionable indication of interest.227 Specifically, Rule 606(b)(3) requires every brokerdealer, upon a request of a customer who places a not held order, to provide the customer with a standardized set of individualized disclosures concerning the broker-dealer’s handling of the orders. The disclosures include, among other things, not held orders exposed by the broker-dealer through actionable indications of interest, and the venue(s) to which the actionable indications of interest were exposed, provided that the identity of such venue(s) may be anonymized if the venue is a customer of the broker-dealer. Rule 600(b)(1) defines an actionable indication of interest as any indication of interest that explicitly or implicitly conveys all of the following information with respect to any order available at the venue sending the indication of interest: (i) Symbol; (ii) side (buy or sell); (iii) a price that is equal to or better than the national best bid for buy orders and the national best offer for sell orders; and (iv) a size that is at least equal to one round lot.228 As a result of the proposed definition of round lot, there could be more actionable indications of interest in higher priced securities. The Commission preliminarily believes that 225 The NBBO used for purposes of Rule 605 would be calculated by competing consolidators and self-aggregators using the proposed round lot sizes. See supra Section III.C.1(d)(i). Under the proposal, each competing consolidator and selfaggregator would be required to calculate an NBBO consistent with the requirements set forth in the NBBO definition found in Rule 600(b)(50). See proposed Rule 614(d)(2). Accordingly, even though each competing consolidator and self-aggregator would be calculating its own NBBO, the calculation methodology for the NBBO would be consistent. Because the NBBO would be calculated in a consistent manner, Rule 605 reports should still provide uniform comparisons of execution quality. 226 Broker-dealers who engage in outsourced routing activity are exempt from the requirement to comply with Rule 606(b)(3) until April 1, 2020. See Securities Exchange Act Release No. 86874 (Sept. 4, 2019), 84 FR 47625 (Sept. 10, 2019). 227 See 17 CFR 242.600(b)(1). See also Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (‘‘Rule 606 Adopting Release’’). 228 See id. PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 16745 applying the proposed round lot definition to actionable indications of interest would further the objectives of Rule 606 regarding the disclosure of order handling information—to make it easier for investors to evaluate how their brokers handle orders and make more informed decisions about brokers, and help investors to better understand how broker-dealers route and handle orders and assess the impact of broker-dealer routing decisions on order execution quality. In addition, Rule 610, which governs access to quotations, would be affected by the proposed definition of round lot. Specifically, Rule 610(c) prohibits trading centers from imposing fees for the execution of an order against a protected quotation or any other quotation that is the best bid or offer of an SRO if the fees exceed certain limits ($0.003 per share for quotes of $1.00 or more and 0.3% of the quotation price per share for quotes less than $1.00). As the Commission explained in adopting Regulation NMS, ‘‘the purpose of the fee limitation is to ensure the fairness and accuracy of displayed quotations by establishing an outer limit on the cost of accessing such quotations,’’ and Rule 610 ‘‘thereby assures order routers that displayed prices are, within a limited range, true prices.’’ 229 As a result of the proposed definition of round lot, these fee limitations would apply to quotes in the smaller round lot sizes because they would apply to quotations that are the ‘‘best bid or offer’’ of an SRO. Rule 610(c) currently applies to quotations in round lots and the Commission preliminarily believes that Rule 610(c) should apply to quotations in the new proposed round lot sizes. The Commission preliminarily believes that applying the fee limitations of Rule 610(c) to orders of meaningful size, as reflected in the proposed definition of round lot, would further that rule’s objectives of ensuring the accuracy of displayed quotations by establishing an outer limit on the cost of accessing them. Finally, Rule 201 of Regulation SHO requires, among other things, that trading centers have written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid if the price of that covered security decreases by 10% or more from the covered security’s closing price as determined by the listing market for the covered security as of the end of regular trading hours on 229 See Regulation NMS Adopting Release, supra note 10, at 37502. E:\FR\FM\24MRP2.SGM 24MRP2 16746 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules the prior day.230 As a result of the proposed definition of round lot, the national best bid would include orders in the proposed round lot sizes. The Commission preliminarily believes that the objectives of Rule 201 of restricting destabilizing short sale orders in rapidly declining markets would be furthered by applying the proposed definition of round lot such that bids of meaningful size would be included within this restriction.231 The Commission requests comment on the proposed definition of round lot in proposed Rule 600(b)(81) and the inclusion of additional quotation information for higher priced shares in proposed core data that would result from this proposed definition. In particular, the Commission solicits comment on the following: 8. Should odd-lot quotation data that is not currently reflected in SIP data be incorporated into core data, as proposed, and, if so, what is the best way to do so? 9. Should core data, as proposed, include quotation information for smaller sized orders in higher priced stocks? Why or why not? Does adding this quotation information enhance the usefulness of core data, as proposed? Please explain. What kinds of market participants would use this information? For what purposes? Would the inclusion of this information have any negative or unintended consequences, such as ‘‘information overload’’ effects? Please explain. 10. Do commenters believe the Commission’s proposed definition of round lot is an effective way to incorporate this additional quotation information into core data, as proposed? Why or why not? What effect would the proposed definition have on systems capacity? Please explain and provide data. Would the proposed definition affect market complexity? Please explain. Do commenters believe that the proposed definition of round lot appropriately balances the benefits of providing additional quotation data to investors and other market participants against potential costs such as additional system burdens or increased data complexity? If not, please explain how this balance could be more 230 17 CFR 242.201(b)(1)(i). Exchange Act Release No. 61595, supra note 75. The Commission also preliminarily believes that instituting a different round lot size for purposes of Rule 201 would introduce unnecessary complexity into the markets. In particular, excessive order routing complexity may be introduced if order routers are allowed to execute a short sale order against certain bids (i.e., smaller round lots that are priced better than the 100-share national best bid) but not allowed to execute a short sale order against other bids (i.e., a 100-share bid). lotter on DSKBCFDHB2PROD with PROPOSALS2 231 Securities VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 appropriately achieved. Specifically, please provide details on the quantity of additional data or the increase in message traffic that would be represented by the Commission’s proposal and any alternative proposals. 11. Are there alternative approaches, such as requiring all or a subset of oddlot quotations to be included in the proposed definition of core data, or directly requiring all quotes over a certain notional value to be included in the proposed definition of core data (rather than indirectly as in the proposed definition of ‘‘round lot’’)? Please describe any alternative approaches. What would be the advantages and disadvantages of any alternative approaches? 12. Would the Commission’s proposed definition of round lot capture a significant portion of the odd-lot quotation activity that is currently not included in SIP data? Is the definition appropriately tailored to capture the odd-lot quotation information that would be useful to market participants? If not, please identify and discuss alternative approaches that might be more appropriate. For example, do commenters believe round lot sizes and price intervals different from those in the proposed definition would capture more useful odd-lot quotation data? Please include data to support any suggested alternative sizes or price intervals. Please also discuss any issues related to increased order routing complexity or compliance with Commission rules that might result from the proposed definition of ‘‘round lot.’’ 13. Do commenters believe that oddlot quotes should be aggregated into the new round lot sizes at multiple price levels for the purposes of calculating and disseminating the NBBO in the proposed definition of core data? Why or why not? What are commenters’ views on the specific odd-lot aggregation methodology set forth in the proposed definition of core data? 14. Do commenters agree with the Commission’s proposal to require oddlot aggregation for purposes of protected quotations only at a single price level? Please explain. Should odd-lots be aggregated only at a single price level for purposes of determining the protected bid and offer for stocks valued at $50.00 or less based on the prior calendar month’s average closing price on the primary listing exchange even though the round lot for this price tier remains 100 shares (i.e., both the best bid and offer and protected bid and offer must be 100-shares in this price tier)? Should a multiple price level aggregation methodology for determining protected quotations apply PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 to stocks valued at $50.00 or less? Would there be any costs or negative effects of having different odd-lot aggregation methodologies for stocks at different price levels? 15. Is a price-based metric for determining round lot size an appropriate metric for determining the proposed round lot tiers? Are the proposed tiered round lot sizes appropriate? Why or why not? Should the tiers be set at different intervals? Should there be more or fewer tiers? For example, should the round lot size be one share for any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange was $500.01 or greater? Why or why not? Are the round lot sizes appropriate for the share prices? If not, what is the appropriate round lot size? Please provide empirical support for any suggested alternatives. 16. Do commenters believe that a significant number of broker-dealers do not currently subscribe to proprietary market data products, including proprietary market data products that include odd-lot quotations? If so, how many and what type of broker-dealers (e.g., executing broker-dealers, introducing broker-dealers, small broker-dealers, large broker-dealers)? Are there specific types of proprietary market data products to which any such broker-dealers do not subscribe? If so, which types of proprietary market data products? Do any such broker-dealers subscribe to proprietary data products from some exchanges but not others? 17. Do commenters have views on the odd-lot proposal released by the operating committees of the Equity Data Plans? 232 What are the advantages and disadvantages of the proposal by the Equity Data Plans as compared to the Commission’s proposed definition of round lot? 18. Each of the proposed tiers represent a notional value of over $1,000. Is this an appropriate threshold? Should it be higher or lower? Please explain and submit data to support your analysis. 19. Do commenters believe that the prior calendar month’s average closing price on the primary listing exchange (or IPO price if the prior calendar month’s average closing price is not available) is an effective way to assess the price of a stock for purposes of determining its round lot size? Why or why not? Do commenters believe it would be costly, difficult, or problematic for market participants to adjust procedures and systems to take into account new round lot sizes based 232 See E:\FR\FM\24MRP2.SGM supra notes 181–185. 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules on the prior calendar monthly average closing price on the primary listing exchange, or to account for a particular stock’s potentially different round lot size every month? Are there alternative time periods over which a stock’s price for purposes of assigning a round lot size should be measured or alternative methods for measuring a stock’s price that the Commission should consider? When should a stock whose price changes from one tier to another be assigned to a new round lot size and for how long should it remain in that round lot size? Would stocks priced near the thresholds that differentiate the round lot tiers be affected by frequent shifts between round lot sizes? Please explain. 20. During the month following the IPO of a newly listed stock, should a minimum number of trading days be required to elapse before the stock’s round lot size is determined? If so, should the average daily closing price on the primary listing exchange (or some other metric) over the course of that number of trading days be used to calculate the stock’s price for purposes of determining its round lot size? If so, how would the stock’s round lot size be determined in the interim? 21. Do commenters have views on how monthly average closing price should be determined for stocks that are not traded every day? Should the closing price of the most recent trading day on which there was a trade be used each intervening day until the stock is traded again? 22. Do commenters believe that the impacts of the proposed definition of round lot on the Commission rules described above are appropriate? Why or why not? Will any SRO rules be affected? Please explain. Specifically, please describe any effect of the proposed definition of round lot on market maker quoting obligations under SRO rules. 23. Should the proposed definition of round lot apply to Rules 602 and 604? Do commenters believe the applicability of the proposed smaller round lot sizes to these rules will help foster more displayed quotations of small orders? Do commenters believe this will result in a significant tightening of quoted spreads? 24. Should the Commission amend Rule 605 in light of the proposed round lot definition? Specifically, since the disclosures required by Rule 605 must be ‘‘categorized by order size,’’ 233 which currently begins at 100 shares, should the definition of ‘‘categorized by order size’’ be amended to require the relevant execution information to be 233 See supra note 216. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 provided for sub-100 share orders, such as orders in the proposed round lot sizes? Do commenters believe this would negatively or positively affect the execution quality statistics provided pursuant to Rule 605? More broadly, do commenters believe the proposed definition of round lot would improve the actual prices provided to retail investors (as distinct from the Rule 605 execution quality statistics)? 25. Should the proposed definition of round lot apply to Rule 610(c)? Specifically, should the fee limits under Rule 610(c) apply to quotations in the proposed new round lot sizes? Would exchanges or other trading centers increase access fees for the smaller round lots if Rule 610(c) were limited to 100-share protected quotations? Why or why not? Do commenters believe that market forces would provide sufficient control over access fees for quotations in the smaller round lots? Why or why not? Should Rule 610(c) be limited to the Commission’s definition of protected bid or protected offer, as amended? What would be the benefits and costs of each approach? 26. Should the proposed definition of round lot apply to Rule 201 of Regulation SHO? Would the scope of Rule 201 be expanded as a result of the proposed definition of round lot in a way that would unnecessarily restrict the ability of market participants to sell short? Will additional or excessive order routing complexity result from the application of Rule 201 to quotations in the proposed smaller round lot sizes? Should ‘‘protected bid,’’ as proposed to be amended, rather than the national best bid be used as the reference price for determining which short sales are required to be prevented under Rule 201? What would be the benefits and costs of each approach? 27. Do commenters believe that the proposed definition of round lot would have any effect on an exchange’s official closing prices? Would the proposed definition of round lot have any effect on the pricing practices of mutual funds and other investment companies, including the calculation of net asset value or trading in portfolio securities? Please explain the potential costs and benefits of any such effects. 28. Do commenters believe that the proposed definition of round lot would affect the proportion of on-exchange or off-exchange liquidity? Please explain. (ii) Proposed Amendments to the Definition of Protected Bid or Protected Offer Rule 611 requires trading centers to have policies and procedures that are reasonably designed to prevent tradethroughs on that trading center of PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 16747 protected bids or protected offers in NMS stocks, subject to specified exceptions.234 Rule 611 currently applies only to round lots.235 If the definition of protected bid or protected offer were left unmodified, the Commission’s proposed definition of round lot would result in an expansion of Rule 611 by requiring the protection of quotations in the new smaller round lot sizes. Whether Rule 611 should be modified or repealed has been the subject of much debate in recent years.236 Rule 234 Rule 611(a)(1). See also supra notes 115, 182. Rule 600(b)(81) defines ‘‘trade-through’’ as ‘‘the purchase or sale of an NMS stock during regular trading hours, either as principal or agent, at a price that is lower than a protected bid or higher than a protected offer.’’ 17 CFR 242.600(b)(81). 235 Specifically, Rule 611 applies to ‘‘protected quotations’’ which means ‘‘protected bid[s] or []protected offer[s].’’ 17 CFR 242.600(b)(62). ‘‘Protected bid or protected offer,’’ as defined in Rule 600(b)(61), refers to ‘‘a quotation,’’ defined in Rule 600(b)(66), which in turn refers to ‘‘a bid or an offer,’’ defined in Rule 600(b)(9), which, as noted above, applies to round lots. 236 For example, in its April 2017 memorandum discussing Rules 610 and 611 under the Exchange Act, the Equity Market Structure Advisory Committee (‘‘EMSAC’’) Regulation NMS Subcommittee (‘‘Subcommittee’’) stated that the industry largely remained divided in its view on both the success and the continued need for the trade-through and the locked and crossed markets provisions of Regulation NMS. See Memorandum to EMSAC from the Subcommittee (Apr. 3, 2017), available at https://www.sec.gov/spotlight/emsac/ emaac-regulation-nms-subcommittee-discussionframework-040317.pdf. In the memorandum, the Subcommittee recommended, among other things, that the Commission consider repealing Rule 611 on a pilot basis, with the goals of reducing excess complexity in the marketplace (as demonstrated by venue fragmentation, order types, and routing complexity); testing the hypothesis that Rule 611 has not created an incentive for posting visible liquidity; and opening the markets to competition and innovation over a longer time horizon, which the Subcommittee believed is currently constrained due to the proscriptive nature of Regulation NMS. The Subcommittee noted several arguments supporting the removal of Rule 611, including the apparent failure of Regulation NMS to increase the display of limit orders in the marketplace and the increase in dark liquidity, smaller trade sizes, and ‘‘small’’ venues; the de minimis benefit from decreased trade-through rates, coupled with a relatively high cost of trade-through compliance and the creation of new venues, complex order types, and a need to focus on speed and other market complexities as a requirement to manage queue priority; the fact that competition among market centers is largely based on price and speed; and the difficulty of setting the NBBO in active stocks without the use of sophisticated price-sliding order types and intermarket sweep orders. The Subcommittee also identified several arguments in support of retaining Rule 611, including concerns, especially among individual investors, of losing the best execution backstop of the trade-through rule; the concern that individual investors’ nonmarketable orders would lose trade-through protection; and a concern regarding the amount of effort that could be required to further monitor order routing behavior by agents in the absence of a trade-through rule. The Subcommittee also expressed the view that Rule 611 is too prescriptive as a best execution rule and that concerns about E:\FR\FM\24MRP2.SGM Continued 24MRP2 16748 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 611 was controversial when adopted,237 with many commenters either opposing the rule entirely or advocating for exceptions, such as for block trades or for those wishing to opt out of the Rule’s protections.238 In the years since, Rule 611 has continued to be the subject of much debate, with some arguing that the rule has negatively impacted equity market structure, others taking the position that any benefits were achieved early on when the Rule induced widespread automated quotations and connectivity, and yet others expressing the view that the Rule continues to play an important role in supporting best execution and retail investor confidence.239 Recently, a Subcommittee of the Commission’s Equity Market Structure Advisory Committee advocated that the EMSAC recommend that the Commission consider repealing Rule 611 on a pilot basis to test its impact.240 In light of the concerns about the existing scope of Rule 611, the Commission preliminarily believes that Rule 611 should not be extended to smaller-sized quotations reflected in the proposed definition of round lot. Moreover, the Commission preliminarily believes that extending Rule 611 to the proposed new round lots is not necessary in light of market developments since the adoption of Regulation NMS in 2005. While a substantial amount of trading in 2005 was conducted on relatively slow manual markets,241 and was best execution could be addressed more effectively through enhanced guidance and procedures. 237 See Regulation NMS Adopting Release, supra note 10, dissenting opinion. 238 See Regulation NMS Adopting Release, supra note 10, at 37505–37506, 37516, 37524–37526. 239 See Memorandum to EMSAC from the Subcommittee, supra note 236; Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA to Brent J. Fields, Secretary, SEC, 5–7 (Mar. 29, 2017), available at https://www.sec.gov/comments/s7-21-16/s721161674693-149275.pdf (recommending that the SEC consider (1) eliminating Rule 611 and relying on the duty of best execution to maintain intermarket price protection, or (2) modifications to Rule 611 to add volume thresholds for protected quote status and a block exception); Letter from William R. Harts, CEO, Modern Markets Initiative, to Brent J. Fields, Secretary, SEC (Dec. 9, 2016), available at https:// www.sec.gov/comments/s7-21-16/s72116-9.pdf (recommending that the SEC review Rule 611 to assess whether it should be modified in light of the costs of compliance). 240 See Memorandum to EMSAC from the Subcommittee, supra note 236. 241 See Equity Market Structure Concept Release, supra note 11, 75 FR at 3594 (‘‘NYSE-listed stocks were traded primarily on the floor of the NYSE in a manual fashion until October 2006. At that time, NYSE began to offer fully automated access to its displayed quotations.’’). In contrast to NYSE, stocks listed on Nasdaq traded in a highly automated fashion at many different trading centers following the introduction of SuperMontage in 2002. See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 concentrated for any given stock on its listing exchanges,242 nearly all trading now occurs on fast, electronic markets (where even small degrees of latency affect trading strategies) and is dispersed among a wide range of competing market centers.243 In a market environment characterized by fast, electronic trading across multiple venues, order routing and execution strategies have become highly automated and increasingly sophisticated at obtaining the best prices throughout the national market system.244 In addition, best execution obligations apply to odd-lot orders 245 and would apply to bids and offers in the proposed round lot sizes. The Commission preliminarily believes that these market developments and improvements in trading and order routing technology, in combination with their pursuit of best execution, would Securities Exchange Act Release No. 46429, supra note 15; Steven Quirk, Senior Vice President, Trader Group, TD Ameritrade, Testimony before the U.S. Senate Committee on Homeland Security and Governmental Affairs, Permanent Subcommittee on Investigations, Hearing on ‘‘Conflicts of Interest, Investor Loss of Confidence, and High Speed Trading in U.S. Stock Markets’’ (June 17, 2014), available at https://www.hsgac.senate.gov/imo/ media/doc/STMT%20-%20Quirk%20%20TD%20Ameritrade%20(June%2017%202014) .pdf%20 (citing statistics that average execution speed has improved by 90% since 2004—from 7 seconds to 0.7 seconds in 2014). Today, trading speed is measured in microseconds and is moving towards nanoseconds. See, e.g., Vera Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall Street Journal (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-techaccelerates-toward-speed-of-light-1470559173; Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech Upgrade, Wall Street Journal (Aug. 5, 2019), available at https:// www.wsj.com/articles/nyse-aims-to-speed-uptrading-with-core-tech-upgrade-11565002800. 242 See Securities Exchange Act Release No. 59039 (Dec. 2, 2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File No. SR–NYSEArca–2006–21) (NYSE’s reported market share of trading in NYSE-listed stocks declined from 79.1% in January 2005 to 30.6% in June 2008.); Equity Market Structure Concept Release, supra note 11. 243 See Equity Market Structure Concept Release, supra note 11, 75 FR at 3598 (‘‘The registered exchanges all have adopted highly automated trading systems that can offer extremely high-speed, or ‘low-latency,’ order responses and executions.’’). 244 See Equity Market Structure Concept Release, supra note 11, at 3594, 3598; Paul G. Mahoney and Gabriel Rauterberg, The Regulation of Trading Markets: A Survey and Evaluation, University of Virginia School of Law, Law and Economics Research Paper Series 2017–07, at 6 (Apr. 2017) (‘‘Brokers overwhelmingly place orders and trade through [NYSE’s] electronic trading system . . . all markets have come to rely more and more on using software to match buy and sell orders automatically.’’). 245 See Securities Exchange Act Release No. 37619A (Sept. 6, 1996) 61 FR 48290, 48305 and 48323 (Sept. 12, 1996) (‘‘Order Execution Obligations Release’’) (‘‘The market maker still will have best execution obligations with respect to the remaining odd-lot portion of the customer limit order.’’). PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 provide sufficient incentives for market participants to engage with meaningfully sized orders 246 even in the absence of an expanded order protection mandate under Rule 611.247 Further, the additional pre-trade transparency that would be provided to these orders by their inclusion in proposed core data should encourage market participants to access this liquidity, as many market participants that access similar data through proprietary feeds are already doing today.248 Moreover, as discussed above, the execution quality and price improvement statistics required under Rule 605 would be based upon an NBBO that reflects the new proposed round lot sizes, and would provide investors, including retail investors, with higher-quality information about their order executions. Thus, the Commission is proposing to amend the definition of ‘‘protected bid or protected offer’’ in Rule 600(b)(61) by requiring automated quotations that are the best bid or offer of a national securities exchange or national securities association to be ‘‘of at least 100 shares’’ in order to qualify as a protected bid or protected offer. The proposed addition of this language will preserve the existing scope of Rule 611 for the vast majority of NMS stocks.249 246 See supra notes 196–198 and accompanying text (explaining that the proposed definition of round lot is intended to reflect orders of meaningful size for today’s market participants). 247 Moreover, the Commission is aware that many market participants today already utilize proprietary data feeds that include odd-lots and, therefore, already have visibility into odd-lot quotations priced better than the NBBO. Accordingly, since these market participants already see and trade with quotations that are priced better than protected quotations and have best execution obligations, the greater transparency into smaller-sized orders that the Commission is proposing is not dissimilar from the trading environment that exists today for many market participants. See also supra note 90. 248 See supra Section III.C.1(b) (stating that, during the month of September 2019, approximately 51% of all trades executed on exchange and approximately 14% of all volume executed on exchange in corporate stocks occurred in odd-lot sizes and 43% of those odd-lot transactions (representing approximately 39% of all odd-lot volume) occurred at a price better than the NBBO); supra Tables 2 and 3 (showing the portion of all trades and volume less than 100 shares, at a price better than the prevailing NBBO, occurring in a quantity that would be defined as a round lot under the proposal). 249 But see infra notes 250–252 and accompanying text (discussing stocks that currently have non-100 share round lot sizes). In addition, the proposed amendments to the definition of protected bid or protected offer would also provide clarity to market participants as to whether quotations in the new round lot sizes are protected quotations for purposes of Rule 611, which is responsive to comments made by some Roundtable panelists regarding uncertainty as to whether additional oddlot quotation information would be protected under E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 As noted above, exchange rules generally permit the exchange to assign a round lot size other than 100 shares.250 As of market close on August 8, 2019, 12 stocks had a round lot size other than 100 shares,251 and because they are round lots, they are protected quotations to the extent that they satisfy the other requirements in the definition.252 Therefore, Rule 611 currently applies to orders of those stocks in their non-100 share round lot sizes. The proposed amendment to the definition of protected bid and protected offer would mean that the smaller round lot orders in these 12 stocks would no longer be protected quotations, and therefore they would no longer be subject to Rule 611. The Commission preliminarily believes that the rule should be consistently applied to protected quotations of 100 shares or more (or quotations of fewer than 100 shares that can be aggregated at a single price into 100 shares or more). The Commission preliminarily believes that a single test for the applicability of the protected quotation definition, without special exceptions for certain stocks, would be simpler, would facilitate compliance with Rule 611, and would set consistent expectations among market participants. Further, the Commission preliminarily believes that competition among broker-dealers, improvements in trading and order Rule 611. See supra note 179 and accompanying text. 250 See supra note 141. 251 Of the 12 stocks that had non-100 share round lot sizes, ten had a round lot of ten, and two had a round lot of one. Seven are common stocks, and five are preferred stocks. Prices of these stocks ranged from about $27 to over $300,000. See supra note 141 and accompanying text. Currently, each of these stocks is thinly-traded. For example, during the third quarter of 2019, each of these stocks had: An average daily share volume below 40,000, with most trading only hundreds of shares a day; an average trade count of less than 3,200, with some trading only dozens of times per day; and an average daily dollar volume of less than $130 million, with most trading on average less than $1 million per day. 252 A ‘‘protected bid or protected offer’’ is defined as a ‘‘quotation in an NMS stock that (i) is displayed by an automated trading center; (ii) is disseminated pursuant to an effective NMS plan; and (iii) is an automated quotation that is the best bid or best offer of a national securities exchange . . . or national securities association.’’ Rule 600(b)(61), 17 CFR 242.600(b)(61). ‘‘Protected quotation means a protected bid or protected offer.’’ Rule 600(b)(62), 17 CFR 242.600(b)(62). As explained above, ‘‘protected quotations’’ must be round lots, and exchange rules permit round lot sizes other than 100, so quotes in these stocks in their non-100 round lot sizes are ‘‘protected quotes.’’ See supra notes 141, 235. Similarly, other rules in Regulation NMS that apply to round lots as a result of references to ‘‘bid or offer’’ or other defined terms that directly or indirectly reference ‘‘round lot,’’ such as Rules 602, 603, 604, and 605, also apply to 1 or 10 share round lot quotes of these stocks. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 routing technology,253 and the continued applicability of best execution requirements to sub-100 share orders of these stocks would provide sufficient incentives for the attainment of high-quality executions of such orders even in the absence of tradethrough protection pursuant to Rule 611.254 The Commission is also proposing to delete the references to ‘‘The Nasdaq Stock Market, Inc.’’ in the definition of protected bid or protected offer. Since the Nasdaq Stock Market is now a national securities exchange, that language is redundant. Finally, the locked and crossed markets restrictions of Rule 610 are based on the term ‘‘protected quotation.’’ Specifically, Rule 610(d) requires each national securities exchange and national securities association to establish, maintain, and enforce rules that, among other things, require its members to reasonably avoid displaying quotations that lock or cross any protected quotation in an NMS stock and that prohibit its members from engaging in a pattern or practice of displaying quotations that lock or cross any protected quotation in an NMS stock, absent an applicable exception. Under the proposed amendments to the definition of protected bid or protected offer, ‘‘protected quotation’’ will refer to displayed, automated quotations that are the best bids or offers of at least 100 shares of a national securities exchange or association. As a result, quotations in the new, smaller proposed round lot sizes would not be subject to Rule 610(d) and could be locked or crossed.255 As with Rule 611, the locked and crossed markets provisions of Rule 610 continue to be the subject of much debate, with some arguing that they create additional market complexity without a clear benefit.256 Recently, a 253 See supra notes 241–244 and accompanying text. 254 See supra note 245. example, pursuant to the proposed definitions of round lot and protected bid or offer, a 20 share buy order for a stock that had an average monthly closing price of between $50.01 and $100.00 could be locked or crossed. 256 See Memorandum to EMSAC from the Subcommittee, supra note 236; Letter from Joanna Mallers, Secretary, FIA Principal Trading Group, to Brent J. Fields, Secretary, SEC, 2–3 (Mar. 13, 2017), available at https://www.sec.gov/comments/s7-2116/s72116-1686170-149597.pdf (recommending the Commission review Rule 610(d) in light of increased complexity associated with restrictions on locking and crossing quotations); Letter from William R. Harts, CEO, Modern Markets Initiative, to Brent J. Fields, Secretary, SEC (Dec. 9, 2016), available at https://www.sec.gov/comments/s7-2116/s72116-9.pdf (recommending the Commission review the prohibition on locking or crossing 255 For PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 16749 Subcommittee of the Commission’s EMSAC advocated that the EMSAC recommend that the Commission consider repealing the locked and crossed markets provisions of Rule 610 on a pilot basis to test its impact, in conjunction with an access fee pilot.257 In light of the concerns about the existing scope of the locked and crossed markets provisions of Rule 610, the Commission preliminarily believes that such provisions should not be extended to smaller sized quotations reflected in the proposed definition of round lot. In addition, the Commission preliminarily believes that market forces, such as the economic incentives of market participants to obtain the best price and resolve locked or crossed markets, as well as improvements in trading and order routing technology,258 are sufficient to mitigate excessive locking or crossing of quotations in the new round lot sizes and to resolve such locked or crossed markets efficiently. The Commission requests comment on the proposed amendments to the definition of protected bid or protected offer in proposed Rule 600(b)(69). In particular, the Commission solicits comment on the following: 29. Do commenters believe that the Commission’s proposed amendments to the definition of protected bid or protected offer are an effective way to continue to require order protection for 100 share orders but not for smaller orders, or would an alternative be better? Please explain. 30. Do commenters believe that the definition of NBBO should reflect the proposed round lot sizes or should it remain consistent with the 100-share protected quotation? Why or why not? 31. Do commenters believe that Rule 611 should be extended to orders in the smaller round lot sizes set forth in the proposed definition of round lot? Why or why not? If Rule 611 were to be extended to the proposed smaller round lot sizes, would there be any negative or unintended consequences? Please explain in detail. 32. Do commenters believe it would be costly for market participants to adjust procedures and systems to comply with Rule 611 and prevent trade-throughs at the smaller round lot sizes? Please describe the necessary changes and any consequent costs in detail. 33. Do commenters believe it would be costly for market participants to quotations in light of the unnecessary complexity and investor confusion). 257 See Memorandum to EMSAC from the Subcommittee, supra note 236. 258 See supra notes 241–244 and accompanying text. E:\FR\FM\24MRP2.SGM 24MRP2 16750 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules adjust procedures and systems to comply with Rule 611 and prevent trade-throughs at 100 share order sizes when the new round lot size may be smaller? Please describe the necessary changes and any consequent costs in detail. Please also discuss how this differs meaningfully from today, if at all, for market participants that are currently using proprietary data feeds that include odd-lot information. 34. Do commenters believe that the best execution obligation, combined with the greater transparency that the Commission is proposing for smallersized orders in higher-priced stocks, is sufficient, in the absence of the order protection rule, for market participants to engage with the liquidity represented by orders in the proposed round lot sizes to obtain the best execution for smaller-sized customer orders? 35. Should the Commission maintain the applicability of Rule 611 to the small number of stocks 259 that currently have a round lot other than 100? Why or why not? 36. Do commenters agree with the proposal not to extend Rule 610’s locking and crossing requirements to orders with the proposed smaller-round lot sizes? If not, why not? Do commenters have views or data on the frequency with which smaller-sized orders would be locked or crossed? Please explain. Would it be costly to apply locking and crossing prevention mechanisms to the new round lot sizes? Please explain. (iii) Proposed Amendments to the Definition of National Best Bid and National Best Offer Today, the NBBO is calculated by the exclusive SIPs and disseminated over the consolidated tapes.260 The NBBO is defined in Rule 600(b)(43) as the best bid and best offer 261 for an NMS security 262 that is calculated and disseminated on a current and continuous basis by the exclusive SIPs. The definition further provides that if two or more market centers transmit 259 See supra note 141. addition, market participants that purchase exchange proprietary feeds may calculate their own NBBOs for their internal purposes. 261 As discussed above, the best bid or best offer for an NMS stock of an exchange may contain multiple prices that are better than the best bid or best offer to the extent that an exchange aggregates better priced odd-lots and provides them to the exclusive SIPs at the least aggressive price that forms a round lot. 262 The definition of NMS security is broader than NMS stock and includes ‘‘any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options.’’ 17 CFR 242.600(47). lotter on DSKBCFDHB2PROD with PROPOSALS2 260 In VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 identical bids or offers for an NMS security, the best bid or best offer shall be determined by ranking all identical bids or offers first by size (giving the highest ranking to the bid or offer associated with the largest size) and then by time (giving the highest ranking to the bid or offer received first in time). Accordingly, the NBBO reflects one market center that is the best bid and one market center that is the best offer across all market centers. As noted above, the proposed round lot definition would affect the calculation of the NBBO by requiring that the best bids and offers transmitted by the SROs to be in the new round lot sizes.263 Accordingly, the proposed definition of round lot, if adopted, would result in an NBBO that reflects the smaller round lot sizes. The proposed definition of round lot does not necessitate changes to the definition of NBBO. However, as discussed further below, the Commission is proposing a decentralized consolidation model where competing consolidators and selfaggregators would replace the exclusive SIPs. Therefore, the Commission is proposing amendments to the definition of NBBO to reflect that competing consolidators and self-aggregators, rather than the exclusive SIPs, would be calculating the NBBO in the proposed decentralized consolidation model. In addition, to accommodate this proposed decentralized consolidation model, the Commission is proposing to bifurcate the NBBO definition between NMS stocks and other NMS securities (i.e., listed options) to reflect that the proposed decentralized consolidation would apply only with regard to NMS stocks, and therefore the exclusive SIP for options would continue to be responsible for calculating and disseminating the NBBO in listed options.264 The proposed changes to the definition of NBBO would not impact the manner in which the NBBO is calculated for NMS stocks or listed options. Specifically, the NBBO for an NMS stock would be the best bid and best offer for such stock that is calculated and disseminated on a current and continuing basis by a competing consolidator or calculated by a selfaggregator.265 The Commission is proposing to remove references to a plan processor for NMS stocks because under 263 See supra Section III.C.1(d)(i). competing consolidator model described herein addresses the current market data infrastructure for NMS stocks and not the exclusive SIP for options. See infra note 417. 265 See infra notes 499–502 and accompanying text. 264 The PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 the proposed decentralized consolidation model, there would not be plan processors. Further, competing consolidators and self-aggregators would have to calculate the NBBO in the same manner as it is calculated by the exclusive SIPs today, including the method currently set forth in the definition of NBBO for determining the best bid or offer in the event that two or more market centers transmit identical bid or offer prices. The Commission requests comment on the proposed amendments to the definition of national best bid and national best offer in proposed Rule 600(b)(50). In particular, the Commission solicits comment on the following: 37. What are commenters’ views on the proposed amendments to the definition of national best bid and national best offer? Do the proposed amendments make appropriate adjustments to the definition to accommodate the proposed introduction of a consolidated market data distribution model with competing consolidators and self-aggregators? Are any additional amendments needed, whether to the definition of NBBO or to other provisions? Please be specific. 2. Depth of Book Data Core data currently lacks quotation information in NMS stocks beyond the best round lot quotes of each SRO, commonly referred to as the ‘‘top of book.’’ However, as regulatory changes and market developments, such as decimalization, have increased the significance of information on quotes away from the best prices,266 some have suggested that core data be expanded to include certain depth of book data (i.e., quotations and aggregate size at prices outside the BBO).267 The Commission is proposing to define core data to include certain 266 See infra notes 276–277 and accompanying text. 267 See, e.g., Roundtable Day One Transcript at 120 (Jeff Brown, Charles Schwab) (‘‘So our recommendation for this panel and for this day is that the SEC move to impose . . . depth of book on the SIP.’’). Suggestions for enhancing core data, however, have failed to garner the support by participants to the Equity Data Plans necessary for action. See infra Section III.C.2(c); supra note 164 and accompanying text; supra Section II.A (discussing the distinction between the exclusive SIPs and proprietary DOB data feeds and market participants’ views regarding their ability to use core data to be competitive in today’s markets and provide best execution to their customers). See also, e.g., NYSE Sharing Data-Driven Insights—Stock Quotes and Trade Data: One Size Doesn’t Fit All (Aug. 22, 2019), available at https://www.nyse.com/ equities-insights#20190822 (proposing to replace the exclusive SIP feeds with three tiered levels of service, including certain DOB data, based on the needs of specific types of investors). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules ‘‘depth of book data.’’ Specifically, depth of book data would be defined to include aggregated quotes at each price between the best bid (and best offer) and the protected bid (and protected offer) (if different), as well as the five price levels above the protected offer and below the protected bid.268 The Commission preliminarily believes this approach would approximate the level of liquidity information available to market participants at the best bid or offer prior to decimalization and enable market participants to use proposed core data to trade in a more informed and effective manner.269 (a) Regulatory Background Regulation NMS and the Equity Data Plans neither require nor prohibit the collection, consolidation, or dissemination of depth of book data. Rule 602 requires that national securities exchanges and associations make available their best bids and best offers, which are defined in Rule 600(b)(8) as the highest priced bid and lowest priced offer. Similarly, Rule 603(b) requires the dissemination of an NBBO, and the definition of NBBO in Rule 600(b)(43) refers to best bids and best offers. Market participants that want depth of book data for trading must rely upon the proprietary feeds offered by the exchanges, which include varying degrees of depth of book data.270 In adopting Regulation NMS, the Commission considered the scope of quotations to which trade-through protection should apply under Rule 611. The Commission decided to apply Rule 611 to protected quotations 271 but not to depth of book quotations.272 268 See supra Section III.C.1(d). See also infra notes 310–313 and accompanying text (describing how depth of book data can be used to optimize order placement and to provide directional signals regarding near-term market movements.). 270 For example, CBOE One Premium offers five levels of aggregated depth while NYSE XDP Integrated, Nasdaq Total View, and CBOE Depth offer complete depth of book. 271 See supra note 115. 272 Specifically, the Commission considered a ‘‘Voluntary Depth Alternative’’ under which, in addition to protecting the best bids and offers of each SRO (the Market BBO Alternative), depth of book quotations that markets voluntarily disseminate in the consolidated quotations stream would be protected as well. See Regulation NMS Adopting Release, supra note 10, at 37529. The Commission decided to adopt the Market BBO Alternative, explaining that it would represent a major step toward achieving the objectives of intermarket price protection but with fewer of the costs and drawbacks associated with the Voluntary Depth Alternative. The Commission noted that the Market BBO Alternative will promote best execution for retail investors on an order-by-order basis, given that most retail investors justifiably expect that their orders will be executed at the lotter on DSKBCFDHB2PROD with PROPOSALS2 269 Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 16751 Similarly, the Commission determined not to require that depth of book quotations be included in core data, reasoning that investors who needed depth of book data would be able to obtain that data from markets or thirdparty vendors.273 However, the Commission acknowledged that depth of book data is important to investors and updated former Exchange Act Rule 11Ac1–2 (redesignated as Rule 603) to address the independent dissemination of depth of book and other market data by the exchanges.274 After the adoption of Regulation NMS in 2005, exchanges began to sell their proprietary data products separately from the core data required by Rule 603(b) of Regulation NMS.275 increasingly important as decimal trading has spread displayed depth across a greater number of price points.’’ 277 Since the implementation of decimalization, market participants have raised concerns about reduced price transparency and difficulty executing large transactions at the best prices due to lower concentrations of trading interest at the top of book.278 In the Report to Congress on Decimalization, required under Section 106 of the Jumpstart Our Business Startups Act, Commission staff noted academic literature that found that quoted depth, on average, declined after decimalization.279 (b) Market Evolution The decimalization of securities pricing in 2001, and the resulting shift away from the larger fractional quoting and trading increments,276 had significant implications for the amount of liquidity available at the top of book, the transparency of order book liquidity, and the need for market participants to obtain depth of book information. With the larger quoting and trading increments associated with fractional quoting, such as one-sixteenth of a dollar, trading interest was distributed across fewer price points and more liquidity (i.e., aggregate order interest) was concentrated at the top of book. For example, as the Commission noted in adopting Regulation NMS, ‘‘depth-ofbook quotations have become (c) Comments and Roundtable Discussion NBBO and that the Market BBO Alternative would not require an expansion of the data disseminated through the exclusive SIP Plans. Id. at 37530. 273 See Regulation NMS Adopting Release, supra note 10, at 37567. In making that determination, the Commission stated that this would be ‘‘a competition-driven outcome [that] would benefit investors and the markets in general.’’ See id. at 37530. 274 See Regulation NMS Adopting Release, supra note 10, at 37565; 17 CFR 242.603(a)(2) (an exchange ‘‘that distributes information with respect to quotations for or transactions in an NMS stock to a securities information processor, broker, dealer, or other persons shall do so on terms that are not unreasonably discriminatory’’). While the preRegulation NMS rules did not prohibit the independent distribution of quotes by individual SROs, Rule 603(a) was intended to impose ‘‘uniform standards’’ to such distribution (i.e., the ‘‘fair and reasonable’’ and ‘‘not unreasonably discriminatory’’ standards). See Regulation NMS Adopting Release, supra note 10, at 37569. Prior to Regulation NMS, however, SROs and their members were prohibited from disseminating their trade reports independently. Id. at 37589. 275 See supra note 19 and accompanying text. 276 See Securities Exchange Act Release No. 42914 (June 8, 2000), 65 FR 38010 (June 19, 2000) (directing the National Association of Securities Dealers and the national securities exchanges to act jointly in developing a plan to convert their quotations in equity securities and options from fractions to decimals). PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 These developments have led market participants to call for depth of book data to be distributed through the Equity Data Plans. In connection with the Roundtable, several panelists and commenters recommended adding depth of book data to SIP data or otherwise emphasized their views about 277 Regulation NMS Adopting Release, supra note 10, at 37592; see also Securities Exchange Act Release No. 50870 (Dec. 16, 2004), 69 FR 77424 (Dec. 27, 2004) (‘‘the initiation of trading in penny increments in 2001 transformed the equity markets. The number of quotation updates increased, and the quoted size at any particular price level dropped’’). 278 See, e.g., Regulation NMS Adopting Release, supra note 10, at 37529 (noting a comment from the Consumer Federation of America concerning ‘‘complaints that decimal pricing has reduced price transparency because of the relatively thin volume of trading interest displayed in the best bid and offer’’); Letter from Craig S. Tyle, General Counsel, Investment Company Institute, to Jonathan G. Katz, Secretary, Commission (Nov. 20, 2001), available at https://www.sec.gov/rules/concept/s71401/ tyle1.htm#P41_3920 (‘‘As we have previously noted, the reduction in quoted market depth as the minimum quoting increment has narrowed to a penny has adversely affected institutional investors’ ability to execute large orders . . . Preliminary data has shown that, post-decimalization, it has become more difficult for large institutional orders to be filled entirely at the inside.’’). 279 Report to Congress on Decimalization, 10–11 (July 2012), available at https://www.sec.gov/news/ studies/2012/decimalization-072012.pdf. Cumulative depth at competitive prices did not change, however. Id. See also Phil MacKintosh, What is Liquidity? (Dec. 12, 2019), available at https://www.nasdaq.com/articles/what-is-liquidity2019-12-12 (stating that while smaller quantity of the NBBO and smaller average trade sizes may suggest falling liquidity, depth of book liquidity suggests that overall liquidity is stronger than ever before); Citadel Securities Market Lens—Has Market Structure Evolution Made Equities Less Liquid (Sep. 2019), available at https:// s3.amazonaws.com/citadel-wordpress-prd102/wpcontent/uploads/sites/2/2019/09/27211934/MarketLens-Has-Market-Structure-Evolution-MadeEquities-Less-Liquid.pdf (analyzing full depth of displayed liquidity from the exchanges’ proprietary data feeds and finding that liquidity remained stable over the past eight years). E:\FR\FM\24MRP2.SGM 24MRP2 16752 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 the importance of depth of book data.280 One panelist stated that the exclusive SIPs could be upgraded and made ‘‘relevant again’’ by adding depth of book data, which would benefit retail investors by giving them information on which direction a stock may be moving and what type of order they may need to use.281 Another panelist stated that both his firm and the brokers it employs cannot rely solely on SIP data, as they believe they need depth of book data to have a full view of the market and to trade competitively, particularly with respect to large orders.282 One commenter stated that the Commission should require depth of book data to be included in SIP data and recommended adding at least five levels of depth.283 Some panelists and commenters went further, suggesting that depth of book data (or data provided on the exchange proprietary feeds more generally) is needed to fulfill best execution obligations.284 One panelist stated that paying for full depth of book data from each exchange is essential to effective order routing and to fulfilling best 280 See Roundtable Day Two Transcript at 245 (Tyler Gellasch, Healthy Markets) (stating that the exclusive SIPs should include depth of book data (as well as auction imbalance data and odd-lot quote data)); Roundtable Day One Transcript at 228–29 (Joseph Wald, Clearpool Group) (explaining that the lack of depth of book and auction data on the exclusive SIP feeds needs to be addressed); Letter to Brent J. Fields, Secretary, Commission, from Joe Wald, Chief Executive Officer, The Clearpool Group (Oct. 23, 2018) (‘‘Clearpool Group Letter’’) (‘‘We believe that certain information currently provided through proprietary data feeds, for example, imbalance data and order depth-ofbook information, should be considered core data and provided to all market participants through the SIP.’’); MFA and AIMA Letter at 6 (stating that its members ‘‘purchase proprietary market data (e.g., depth-of-book and imbalance data) from exchanges for a variety of reasons, including strategy implementation, risk-analysis, best-execution, less latency than other sources and to fulfill fiduciary obligations.’’). 281 See Roundtable Day One Transcript at 119– 120 (Jeff Brown, Charles Schwab). 282 See Roundtable Day One Transcript at 136, 165–66 (Simon Emrich, Norges Bank Investment Management). 283 See SIFMA Letter II at 2 (stating that retail firms generally use one level of depth for order routing and institutional firms generally use up to five levels of depth (sometimes as much as ten) and that the Commission should balance the need for more comprehensive information with the additional cost and potential increase in latency from including additional quotes, as well as adjust the exclusive SIP subscriber fee model to account for firms that do not need depth of book data). 284 See Roundtable Day One Transcript at 192– 193 (Jamil Nazarali, Citadel Securities) (stating that proprietary feeds are required for best execution); Roundtable Day One Transcript at 48 (Prof. Hal Scott, Committee on Capital Markets Regulation) (making a similar statement); Roundtable Day Two Transcript at 58–59 (Prof. Robert Bartlett, UC Berkeley) (making a similar statement); MFA and AIMA Letter at 3–4 (stating that broker-dealers that do not have depth of book information will be challenged to provide best execution). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 execution obligations, noting that if his firm did not get depth of book—top of book and many levels away—it could not provide best execution to its clients.285 Another commenter noted that broker-dealers do not have the option to forgo buying proprietary data because SIP data has less content and is slower, and that, even if the Commission provided a safe harbor that best execution requirements may be satisfied by relying on SIP data, buying proprietary data would still be necessary from a business perspective.286 However, some panelists were reluctant to embrace the idea of adding depth of book data to SIP data and pointed out possible negative impacts from doing so. One panelist representing a retail brokerage firm stated that depth may be important for active traders and that his firm has platforms that incorporate it but added that depth is less important for retail investors who trade infrequently and that some of his firm’s platforms do not incorporate it.287 This panelist also stated that there could be technological challenges and latency implications (i.e., added latency associated with the need to process additional message traffic) to adding depth of book data to SIP data.288 Furthermore, several panelists noted that adding depth of book data to the SIP data, particularly on an order-by-order basis, could be confusing, but some suggested that the data could be aggregated at certain price levels or otherwise simplified.289 285 See Roundtable Day One Transcript at 27, 57– 58, 73 (Doug Cifu, Virtu Financial); Letter to Brent J. Fields, Secretary, Commission, from Douglas A. Cifu, Chief Executive Officer, Virtu Financial Inc., 4 (Oct. 23, 2018) (‘‘Virtu Letter I’’) (‘‘Simply put, Virtu could not fulfill its obligations to its myriad of retail customers and institutional clients without full depth of book market data feeds and robust exchange connectivity features that the SIP feeds alone do not offer.’’). 286 See Letter to Brent J. Fields, Secretary, Commission, from Mehmet Kinak, Global Head of Systematic Trading and Market Structure, and Jonathan D. Siegel, Vice President—Senior Legal Counsel, T. Rowe Price, 2 (Jan. 10, 2019) (‘‘T. Rowe Price Letter’’). 287 See Roundtable Day One Transcript at 162– 163 (Matt Billings, TD Ameritrade). 288 Id.; see also Roundtable Day Two Transcript at 74 (Michael Blaugrund, NYSE). 289 See Roundtable Day One Transcript at 227 (Chris Isaacson, Cboe) (stating that he would not go as far as to add depth of book data to the consolidated market data, stating that doing so could potentially cause confusion, and emphasizing the difference between the plan processors and nonSIPs); Roundtable Day One Transcript at 230 (Ronan Ryan, IEX) (stating that adding depth data could be confusing, but suggesting that perhaps there could be simpler alternatives, such as an aggregated size at each price level rather than orderby-order); Roundtable Day One Transcript at 232 (Michael Friedman, Trillium Management) (suggesting that perhaps some abbreviated version PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 In addition, some commenters stated that depth of book data is unnecessary for best execution and not useful for retail investors and other market participants.290 In an article submitted to the comment file for the Roundtable, one commenter expressed the view that depth of book data is not helpful for many types of market participants, citing a 2014 statistic that only 3.3% of all trades take place outside the NBBO, where depth of book information would be particularly useful. The commenter also noted that the Commission has stated that depth of book data is not necessary for a broker to comply with its best execution obligations.291 (d) Commission Discussion and Proposal Decimalization led to a dispersion of quoted volume away from the top of book.292 Consequently, the top of book (or NBBO) currently shown in SIP data has become less informative, and some market participants have come to view depth of book data as essential both to their efforts to trade competitively and to provide best execution to customer orders.293 The Commission preliminarily believes that: (1) The lack of depth of book information in SIP data creates a significant information asymmetry between SIP data and proprietary data; and (2) the availability of the additional information could help enhance the best execution analyses of market participants who currently rely solely on SIP data. Accordingly, the Commission preliminarily believes that core data, as proposed, should include certain depth of book data, including aggregated orders at each price between the best of depth rather than full depth of book could be added to the consolidated market data); Roundtable Day Two Transcript at 70 (Adam Nunes, Hudson River Trading) (cautioning against trying to force every market’s depth of book into a single feed). 290 See Letter to Brent J. Fields, Secretary, Commission, from Thomas Wittman, Executive Vice President, Head of Global Trading and Market Services and CEO, Nasdaq Stock Exchange, 11 (Oct. 25, 2018) (‘‘Wittman Letter’’) (‘‘Main Street investors do not need the exchanges’ proprietary depth-of-book data offerings, and the fact that some firms choose to purchase them has no adverse consequence to the Main Street investor. Nearly 97% of trades occur at or within the NBBO, reflecting that most customers do not require any sort of depth-of-book data.’’); NYSE Group Letter at 13 (‘‘NYSE Group believes that the Commission’s prior conclusion that retail investors do not need depth-of-book data has not changed.’’). 291 See Letter to Brent J. Fields, Secretary, Commission, from Charles M. Jones, Robert W. Lear Professor of Finance and Economics, Columbia Business School, 15–16 (Oct. 21, 2018) (‘‘Jones Letter’’) (citing Securities Exchange Act Release No. 59039, supra note 242). 292 See supra Section III.C.2(b). 293 See supra notes 278, 280–286 and accompanying text. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 bid and best offer and the protected bid and protected offer (if different), as well as several price levels above and below the protected bid and protected offer. The Commission believes that the number of additional price levels should strike an appropriate balance by significantly enhancing the utility of proposed core data for a wide range of market participants, without risking the excessive message traffic 294 or complexity that might result from the inclusion of full depth of book information in proposed core data. The Commission preliminarily believes that this balance is appropriately struck at five price levels (below and above the protected bid and protected offer) as this would approximate the level of liquidity available to market participants at the best bid or offer prior to decimalization.295 The Commission is seeking comment on whether and to what extent depth of book data should be included in the proposed definition of core data. Specifically, under proposed Rule 600(b)(25), ‘‘depth of book data’’ would be defined as all quotation sizes at each national securities exchange, aggregated at each price at which there is a bid or offer 296 that is lower than the best bid down to the protected bid and higher than the best offer up to the protected offer; and all quotation sizes at each national securities exchange, aggregated at each of the next five prices at which there is a bid that is lower than the protected bid and offer that is higher than the protected offer. Although the Commission determined not to add depth of book data to core 294 As discussed below, aggregated quotation sizes at the price levels between the best quotes and protected quotes and the five levels above and below the protected quotes, particularly for the most liquid stocks, represent only a subset of all depth of book price levels at which there are quotations and could hence be represented in fewer messages. 295 Prior to decimalization, when stocks were quoted in sixteenths of a dollar ($0.0625), there were five one cent increments between each permissible quoting increment. For example, market participants could bid $20.0625 or bid $20.125 but not $20.07, $20.08, $20.09, $20.10, $20.11. Decimalization permitted quoting at these intermediate, one-cent price levels, spreading quotation volume to these price levels. As a result of the Commission’s proposal to define depth of book data to include aggregated quotation sizes at the five levels above and below the protected quotations, the proposed core data would provide transparency into the quotation interest that is comparable to the information that was available at the top of the book prior to decimalization. 296 See supra Section III.C.1(d)(i) for a discussion of the proposed definition of round lot and its effect on the terms bid and offer. As discussed above, bids and offers would reflect the proposed round lot sizes. See also Section III.C; supra note 128 and accompanying text for a discussion of proposed odd-lot aggregation. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 data in adopting Regulation NMS,297 the Commission recognizes that the market data needs of market participants continuously evolve. Demand for more content-rich exchange proprietary feeds has increased substantially in the years since the adoption of Regulation NMS, indicating a growing need by market participants for additional data, including depth of book data,298 in the increasingly fast, electronic, and dispersed markets that have developed since 2005.299 The Commission preliminarily believes that enriching the content of the data that is made available to investors and market participants by including depth of book data, as defined, in the proposed core data would promote fairer markets by reducing the information asymmetry between market participants who subscribe to the exchanges’ proprietary depth products and those who rely on SIP data. In addition, the Commission preliminarily believes that many market participants would find depth of book data useful for trading in a more informed and effective manner in today’s markets. As proposed, core data would include the best bids and offers and the protected quotes of each exchange, which market participants need to comply with legal and regulatory requirements, such as the duty of best execution and Rule 611. The Commission preliminarily believes that information on any trading interest between the best bids or offers and the protected quotes, if they are different, would be of keen interest to market participants. Therefore, the Commission is proposing to include aggregated quotation sizes at each price where there is a bid or offer in that range in the definition of depth of book data. However, the Commission preliminarily believes that not all individual quotations away from the best prices should be added to proposed core data. While there may be some market participants that need total visibility into exchange order books, the Commission does not believe, at this time, that complete depth of book data should be required to be made available as proposed core data. The addition of complete, order-by-order depth of book data to proposed core data would represent an enormous volume of information, which could increase latencies in the provision of proposed 297 See supra note 48. supra note 275, 277–278 and accompanying text. 299 See supra notes 241–244 and accompanying text; infra notes 310–313 and accompanying text (discussing how depth of book data is used in order placement and other trading decisions). 298 See PO 00000 Frm 00029 Fmt 4701 Sfmt 4702 16753 core data and introduce complexity that might impair the usability of such data for many subscribers. The Commission’s proposed definition of depth of book data is intended to incorporate into core data additional quotation information that would be useful to a broad array of market participants for trading 300 and to thereby further the goals of the national market system.301 The Commission is not supplanting the proprietary depth offerings of the exchanges that contain additional content and that may be more appropriate for certain market participants or more specialized use cases. The Commission recognizes that market participants have diverse market data needs. The discussions at the Roundtable and the comments received, however, suggest that many market participants need more than the best bids, best offers, and the NBBO disseminated by the exclusive SIPs in order to trade competitively and to optimize the placement of customer orders.302 As noted above, the Commission’s proposed definition of depth of book data seeks to approximate the quotes that market participants were able to access on the exclusive SIPs prior to decimalization, which the Commission preliminarily believes would significantly enhance the usefulness of proposed core data. The Commission preliminarily believes that its proposed definition of depth of book data strikes a balance between enhancing the usefulness of core data for the many market participants that cannot rely entirely on SIP data, and limiting the amount of data disseminated to limit complexity and the processing demand on systems for market participants that do not need full depth of book visibility.303 The 300 Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k–1(c)(1)(B) (stating that the Commission shall prescribe rules to ‘‘assure . . . the fairness and usefulness of the form and content of’’ information with respect to quotations for or transactions in securities). 301 See, e.g., 15 U.S.C. 78k–1(a)(1)(C) (‘‘The Congress finds that . . . [i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure—(i) economically efficient execution of securities transactions; (ii) fair competition among brokers and dealers, among exchange markets, and between exchange markets and markets other than exchange markets; (iii) the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities; (iv) the practicability of brokers executing investors’ orders in the best market; and (v) an opportunity . . . for investors’ orders to be executed without the participation of a dealer.’’). 302 See supra text accompanying notes 280–286. 303 As discussed above, the inclusion of a limited number of price levels in the proposed definition of depth of book data means that fewer data E:\FR\FM\24MRP2.SGM Continued 24MRP2 16754 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 proposed definition of depth of book seeks to balance the needs of different market participants, while reducing the information asymmetries that exist today in the provision of SIP data and proprietary data. Staff believes that there is a substantial amount of quotation volume several levels below the best bid and above the best offer. For example, staff reviewed depth of book quotations for corporate stocks using data from July 19, 2019. This analysis revealed that for this day, indeed, there was substantial quotation volume several levels below the best bid (the ask side was not examined). During active parts of the trading day, there is quotation interest at every $0.01 increment at least ten levels out for the most liquid stocks; for the least liquid stocks, there is a large gap between the best bid and the next highest bid, and large gaps are generally also present between the next several bid levels. This is consistent with the Commission’s proposal to define the depth of book price levels as the first five levels ‘‘at which there is a bid or offer,’’ rather than alternatives such as a fixed $0.05 band around the best quotes, since the former would capture much of the depth of book quotation information for less liquid stocks.304 In addition, the staff review found a significant percentage of the total notional value of all depth of book quotations for both liquid and illiquid stocks falls within the first five price levels. The Commission preliminarily believes that messages would be required than would be the case if full depth of book was proposed. See supra note 294. Accordingly, the proposal would place lower processing demands on systems than if full depth of book data were included in the definition of depth of book data. Similarly, commenters have recommended the addition of five levels of depth to core data, emphasizing the importance of ‘‘balanc[ing] the need for more comprehensive information with the additional cost and potential increase in latency from including additional quotes.’’ See supra note 283; SIFMA Letter II at 2. The Commission is soliciting comment on the extent of depth of book data that best strikes this balance, specifically by seeking quantitative data from market participants regarding any complexity or processing implications associated with the proposed definition of depth of book data. 304 Moreover, because a ‘‘bid or offer’’ is defined in terms of ‘‘round lot,’’ the proposed definition of round lot in effect would establish a minimum size requirement for depth price levels so that, for example, a small number of one share orders at an away price for a stock whose prior calendar month’s average closing price on the primary listing exchange was under $50 would not count as one of the price levels. The Commission acknowledges that the inclusion of price levels ‘‘at which there is a bid or offer’’ in the proposed definition of depth of book data could include quotations beyond what would have been available at the top of the book prior to decimalization for less liquid stocks, but believes that this approach would approximate the level of liquidity available at the top of the book prior to decimalization for more liquid stocks. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 requiring aggregated quotation information at the first five price levels above and below the protected quote range is a reasonable way to delineate the trading interest that would be useful to a variety of market participants to support more effective quoting and trading. On the other hand, while quotations at price levels further away from the best bid and offer may be relevant for market participants handling very large orders or orders in highly illiquid securities for which liquidity at the top of the book and the next five price levels is not sufficient to fully execute the order, the Commission preliminarily believes that liquidity at price levels further away is less likely to provide relevant or immediately actionable information to many market participants.305 While some market participants have stated that depth of book data is necessary to fulfill their best execution obligations, other commenters disagreed and pointed out that the Commission previously stated that depth of book data is not necessary for best execution.306 Several factors are considered in determining whether a broker-dealer has ‘‘use[d] reasonable diligence to ascertain the best market’’ 307 for a customer order and fulfilled its best execution obligations.308 The Commission is not stating that a broker-dealer must always use all proposed depth of book data, under all circumstances, to provide best execution to its customers. However, the Commission preliminarily believes that the expanded set of proposed core data, including the proposed depth of book data, provides additional information that in many circumstances would be useful to a broker-dealer’s best execution analysis.309 Where liquidity is distributed over multiple price points and less liquidity is available at the top of book,310 depth 305 See SIFMA Letter II at 2 (stating that SIFMA members that are retail firms generally use one level of depth for order routing, while SIFMA members that are institutional firms generally use up to five levels of depth, and sometimes as much as ten.). 306 See supra notes 284–291 and accompanying text. 307 FINRA Rule 5310. 308 See Kurz v. Fidelity Management & Research Co., 556 F.3d 639, 640 (7th Cir. 2009) (describing the ‘‘duty of best execution’’ as ‘‘getting the optimal combination of price, speed, and liquidity for a securities trade’’); Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (noting that ‘‘the duty of best execution requires that a broker-dealer seek to obtain for its customer orders the most favorable terms reasonably available under the circumstances’’ (quoting Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 F.3d 266, 270 (3d Cir. 1998))). 309 See Order Execution Obligations Release, supra note 245. 310 See supra notes 276–277. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 of book data is of increased importance to market participants for a number of reasons. Depth of book data can assist SORs and electronic trading systems with the optimal placement of orders across markets. For example, the Commission preliminarily believes that the proposed depth of book data would better inform traders on how to optimally place liquidity taking orders (i.e., marketable orders that execute against the liquidity of resting limit orders) that are larger than the displayed best bid or best offer.311 In addition, the Commission preliminarily believes that proposed depth of book data would assist market participants in determining how best to use liquidity providing orders (i.e., non-marketable orders that will be posted on an exchange’s order book without immediately executing) at prices away from the best bid or offer by providing insight into the length of order book queues.312 Finally, the Commission preliminarily believes that the proposed depth of book data would provide market participants with directional signals to help inform them about nearterm market movements based upon aggregate market imbalance information.313 311 For example, if a liquidity taking order is larger than the displayed liquidity at the top of book and seeks to access liquidity at additional price level(s), then information about liquidity at other price levels is valuable in determining where to send an oversized order when trading in a market ecosystem with multiple exchanges. See, e.g., Shmuel Baruch, Who Benefits from an Open LimitOrder Book?, Journal of Business, Vol. 78, No. 4, 1267–1306 (July 2005), available at https:// www.jstor.org/stable/10.1086/430860 (presenting some theoretical results showing that liquidity takers benefit more from an open limit order book). 312 For example, if a market participant using a particular trading strategy wishes to post orders passively at multiple price levels, depth of book information is valuable in determining the order book queue length (and therefore the ability to achieve beneficial queue priority) at different market centers. Further, depth of book data can assist market participants’ trading strategies achieve better queue placement across market centers. See Roundtable Day One Transcript at 169 (Adam Inzirillo, BAML) (‘‘So depth of book is important to understand where you are potentially in the queue when you aggregate yourself across the overall market center.’’); Exegy, Checklist for Ensuring Best Execution with Historical Trade Performance Analysis (Dec. 6, 2018), available at https:// www.exegy.com/2018/12/checklist-best-executiontrade-performance-analysis/ (‘‘Liquidity can be valuable for executing large volume orders because the orders can be executed with minimal impact to market price. However, very high liquidity can also cause price volatility at a given exchange or time interval that produces slippage. Queue position and message volume are two valuable indicators of this liquidity. A long depth of book or high message volume may signal to traders to re-route an order to a different exchange. However, without a planned strategy for routing an order, slipping may arise.’’). ´ lvaro Cartea, et al., Enhancing 313 See, e.g., A Trading Strategies with Order Book Signals (Oct. 1, E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 Several Roundtable panelists and commenters raised potential concerns regarding the addition of depth of book data.314 The Commission preliminarily believes its proposed definition of depth of book data, and its proposal to introduce a definition of core data and a decentralized consolidation model for the dissemination of proposed consolidated market data more broadly, are responsive to these concerns. With respect to the view that depth of book data could be confusing or not of interest to all investors, the Commission is not mandating the consumption of five levels of depth data by all market data subscribers. While, as discussed below, competing consolidators must calculate and generate consolidated market data, as proposed, including depth of book data, and offer it to subscribers, competing consolidators would not be prohibited from developing and providing top of book only or customized depth of book products to customers who desire such products.315 The effective national market system plan(s) could offer a variety of proposed consolidated market data products geared toward particular categories of end-users, and certain exchanges, recently, have suggested possible approaches for doing so.316 2015), available at https://www.smallake.kr/wpcontent/uploads/2015/11/SSRN-id2668277.pdf (‘‘[O]ur measure of [volume] imbalance [in the limit order book] acts as a strong predictor of the rate of incoming [market orders] as well as the direction and magnitude of price movements following a [market order].’’); Charles Cao, et al., The Information Content of an Open Limit-Order Book, Journal of Futures Markets Vol. 29, No. 1, 16–41 (2009), available at https:// www.pbcsf.tsinghua.edu.cn/research/caoquanwei/ paper/10.The%20Information%20Content%20of %20an%20Open%20Limit%20Order%20Book.pdf (‘‘[T]he authors find that the order book beyond the first step is modestly informative and that price discovery measures suggest that the contribution of the order book beyond the best bid and offer is approximately 22%’’); Ke Xu, Martin D. Gould, and Sam D. Howison, Multi-Level Order-Flow Imbalance in a Limit Order Book, Mathematical Institute, University of Oxford (Oct. 29, 2019) (‘‘[W]e find that including net order flow deeper into the limit order book improves the goodness-offit of the multi-level order-flow imbalance regressions for all of the stocks in our sample, with an improvement of about 65–75% for large-tick stocks and about 15–30% for small-tick stocks. We argue that in many practical applications, improvements of this magnitude are economically meaningful.’’). 314 See supra notes 287–289 and accompanying text. 315 See supra Section III.A (explaining that different market participants and different trading applications have different needs for NMS information, that the proposal to expand and modernize the content of NMS information is intended to address the needs of a broad crosssection of market participants, and that the Commission is not specifying minimum data elements needed to achieve best execution). 316 See, e.g., NYSE Equities Insights, Stock Quotes and Trade Data: One Size Doesn’t Fit All (Aug. 22, VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 With respect to the view that including depth of book data could present technical challenges and have latency ramifications, the Commission preliminarily believes the proposal to add five levels of aggregated depth from each exchange, rather than all order-byorder depth, is responsive to these concerns.317 Restricting depth of book data to the aggregate depth at each price level would limit the number of messages included within proposed core data, making the technological changes required more manageable and mitigating latency concerns. Indeed, the Commission’s proposed approach aligns with some of these commenters’ suggestions that simpler and more abbreviated versions of depth of book data might be more workable.318 In addition, some commenters cited statistics on the high proportion (97%) of trades that execute at or within the NBBO in support of their views that depth of book data is not necessary for retail investors or other market participants.319 The Commission preliminarily believes that, even if these figures are accurate for the current market, they do not, on their own, persuade the Commission that it should not propose to add depth of book data to core data. The commenters, for example, do not specify whether or not the broker-dealers handling the orders at issue had access to proprietary DOB products for their automated trading systems; if they did, depth of book data may have been contributing to the observed high at-or-within-the-NBBO execution rates. For example, as discussed above, depth of book data can indicate the direction a stock price may be moving, which some market participants factor into the prices at which they place limit orders.320 2019), available at https://www.nyse.com/equitiesinsights (proposing enhancing the exclusive SIPs by offering depth of book, odd-lot quotes, and primary auction imbalance information in three new tiers of service, each of which would have different levels of data content); infra Section IV.B.4. 317 Today, there are a number of private data vendors that have developed software and infrastructure solutions for consolidating several of the most voluminous depth of book data feeds across equity markets and are providing consolidated depth of book products, which suggest that technical challenges and latency concerns can be addressed. 318 See supra note 289 and accompanying text. 319 See supra notes 290–291 and accompanying text. 320 Similarly, depth of book data can provide insight into the length of order book queues on different exchanges and therefore the prices at which limit orders can attain queue priority, helping market participants pursue trading strategies involving the placement of liquidityproviding orders that will not execute until the NBBO changes. See supra note 312 and accompanying text. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 16755 Furthermore, in response to the comments that retail investors do not need depth of book data, the Commission preliminarily believes that there are different types of retail investors that have different market data needs and preferences. Some retail investors may not need depth of book information but other, more sophisticated retail investors may find depth of book data useful, as one Roundtable panelist from a retail firm stated.321 Further, while competing consolidators would have to offer proposed consolidated market data to end-users, they also would be permitted to develop products for their customers that could be customized to their customers’ needs.322 Therefore, a competing consolidator could develop a consolidated market data product that does not contain proposed depth of book data if there is demand.323 The Commission’s proposal aims to provide broker-dealers and other market participants with improved access to meaningful depth of book information, so it can be used to improve order placement or other trading decisions and thereby potentially improve execution quality for investors. Finally, the proposed definition of core data specifies that odd-lot quotations at the relevant price levels between the national best bid or offer and the protected quotation, and at the five price levels above and below the protected quotation that can be aggregated into at least a round lot, would be included in depth of book data. As discussed above, the Commission preliminarily believes that its proposed definition of round lot reflects trading interest of meaningful size to market participants. The Commission further preliminarily believes that trading interest that is of less than meaningful size (i.e., an oddlot size), that together with other odd321 See supra note 281 and accompanying text. In addition, another Roundtable panelist whose firm handles the orders of retail customers indicated that his firm needs depth of book data to fulfill its obligations to its retail customers. See supra note 285. 322 See infra Section IV.B.1. 323 Competing consolidators would be required to calculate and generate consolidated market data, including depth of book data as set forth in the Commission’s proposed definition, and to offer such data to subscribers. See proposed Rule 614(d)(1)–(3). As explained above, the Commission believes that the proposed depth of book data would support the needs of some market participants. See supra notes 301–305. However, some market participants may not need the depth of book data specified in the proposed definition. As proposed, market participants would be able to choose the components of consolidated market data that meet their needs, consistent with regulatory requirements, and purchase such data from competing consolidators. E:\FR\FM\24MRP2.SGM 24MRP2 16756 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 lots aggregates into a round lot, similarly represents trading interest of meaningful size and should be displayed at the most conservative price at which such trading interest could be accessed.324 The Commission requests comment on the proposed inclusion of depth of book data in the proposed definition of core data and the definition of depth of book data in proposed Rule 600(b)(25). In particular the Commission solicits comment on the following: 38. Should depth of book data be included in the proposed definition of core data? Why or why not? Do commenters believe the proposed definition of depth of book data would have any negative or unintended consequences? Why or why not? 39. Do commenters believe that the Commission’s proposed definition of depth of book data captures the appropriate level of depth data that should be included in the proposed definition of core data? Why or why not? Should the Commission include more or fewer levels of depth or otherwise revise the definition to capture the key depth information that would be useful to market participants? For example, should the Commission require depth only within a $0.05 band of the protected bid and offer rather than the first five price levels at which there is interest? 40. Does the proposed definition of depth of book data adequately balance the need for more information against potential increases in complexity and processing demand that might result from the addition of such depth of book data? If not, where is this balance most appropriately struck in terms of the extent of depth of book data that should be included in the proposed definition of core data? Particularly, what processing demands would be associated with including varying levels of depth of book data? Please consider the proposed five levels of depth of book as well as any other possible depth of book alternatives. Please provide quantitative data and analyses to support your comments. 41. Do commenters believe that the ‘‘at which there is a bid or offer’’ language in the Commission’s proposed definition of depth of book data establishes an appropriate minimum 324 See supra notes 129–130, 157 and accompanying text. To the extent that an SRO provides proprietary data products for the purposes of making consolidated market data available to competing consolidators and self-aggregators, any odd-lot quotations that are aggregated in an SRO’s existing proprietary data products would be required to be aggregated in a manner consistent with the method set forth in the proposed definition of core data. See proposed Rule 600(b)(20). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 size threshold (i.e., the existence of at least a round lot of aggregated interest) for inclusion as one of the five price levels? Why or why not? Are there alternative ways to set such a threshold, such as price levels where the volume of interest equals a certain percentage of the volume at the best price? 42. Do commenters believe that oddlot quotes at the depth price levels that aggregate into at least a round lot should be included in the proposed definition of core data? Why or why not? 43. The proposed definition of depth of book data refers to depth of book quotations on each national securities exchange, as FINRA’s Alternative Display Facility (‘‘ADF’’) currently does not have quotations submitted to it. Should the proposed definition be formulated to include the depth of book quotations of national securities associations as well to account for the possibility of OTC quotes being reported to the ADF in the future? Why or why not? 3. Auction Information Even as the proportion of trades executing in auctions has risen, little auction information is currently included in today’s SIP data.325 The Commission is proposing to include auction information, including auction order imbalance and other auction data generated by the exchanges during an auction, in the proposed definition of core data.326 The Commission preliminarily believes that including auction information, as described below, in the proposed definition of core data would promote the goals of the national market system 327 by conveying important information about orders participating in auctions and helping market participants to 325 See infra notes 333–334 and accompanying text. 326 See proposed Rule 600(b)(5). The definition of auction information in proposed Rule 600(b)(5) is ‘‘all information specified by national securities exchange rules or effective national market system plans that is generated by a national securities exchange leading up to and during an auction, including opening, reopening, and closing auctions, and disseminated during the time periods and at the time intervals provided in such rules and plans.’’ Accordingly, the proposed definition would include auction information that may be developed in the future and added to an SRO’s rules that are approved by the Commission pursuant to Rule 19b– 4, 17 CFR 240–19b–4. 327 See, e.g., 15 U.S.C. 78k–1(a)(1)(C) (‘‘The Congress finds that . . . [i]t is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure . . . the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities . . . [and] the practicability of brokers executing investors’ orders in the best market.’’). PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 participate in auctions in a more informed and effective manner. (a) Background Auctions are held pursuant to exchange rules at specified periods during the trading day (i.e., at the open, at the close, or during the day to reopen a stock that has been halted) when continuous trading is not occurring. During an auction, buy and sell orders generally interact at the single price, within limits, that maximizes the trading volume that can be executed. For example, a closing auction generally is held at the end of regular trading hours on the primary listing exchange pursuant to a process set forth in the primary listing exchange’s rules to determine a security’s official closing price. Typically, market-on-close orders, limit-on-close orders, and orders resting on the primary listing exchange’s order book at the time a closing auction begins may participate in a closing auction. However, the rules of a primary listing exchange may also allow other specified order types, such as closing offset orders and D-orders on NYSE or imbalanceonly close orders on Nasdaq, to participate in a closing auction.328 The opening auctions, which generally are held at the start of regular trading hours, also use specialized order types as specified in the rules of the primary listing market.329 Auctions conducted by the exchanges, especially opening and closing auctions, have become increasingly important liquidity events in recent years and represent a significant proportion of overall trading volume.330 One factor 328 See, e.g., NYSE Rule 7.31(d)(4) (A Discretionary Order, or ‘‘D Order,’’ is a ‘‘Limit Order that may trade at an undisplayed discretionary price’’); NYSE Rule 13(c)(1) (A Closing Offset, or ‘‘CO,’’ Order is ‘‘[a] day Limit Order to buy or sell as part of the closing transaction where the eligibility to participate in the closing transaction is contingent upon: (i) An imbalance in the security on the opposite side of the market from the CO Order; (ii) after taking into account all other types of interest eligible for executing at the closing price, there is still an imbalance in the security on the opposite side of the market from the CO Order; and (iii) the limit price of the CO Order being at or within the price of the closing transaction.’’); NYSE Rule 123C; Nasdaq Rule 4702(b)(13)(A) (‘‘An ‘Imbalance Only Order’ or ‘IO Order’ is an Order entered with a price that may be executed only in the Nasdaq Closing Cross and only against [market-on-close] Orders or [limit-on-close] Orders.’’). 329 See, e.g., NYSE Open and Closing Auctions, available at https://www.nyse.com/publicdocs/ nyse/markets/nyse/NYSE_Opening_and_Closing_ Auctions_Fact_Sheet.pdf (last accessed Nov. 25, 2019); Nasdaq Opening and Closing Crosses, available at https://www.nasdaqtrader.com/ Trader.aspx?id=OpenClose (last accessed Nov. 25, 2019). 330 See, e.g., Rosenblatt Securities, Closing Time: How End-of-Day Auctions are Taking Over U.S. Equity Trading (Jan. 17, 2019) (stating that the E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 that may be driving the higher concentration of trading in closing auctions is the growth of passive, indextracking investment strategies through mutual funds, ETFs, and similar products.331 Since passive strategies and ETFs often track the performance of a benchmark index, and the closing price used in the benchmark index calculation is often set during the closing auction, participation in closing auctions has become increasingly important.332 To participate efficiently in auctions conducted by the exchanges, market participants seek information about orders that are participating in the auctions. This includes information about auction order imbalances, which reflect the extent to which auction buy percentage of consolidated volume in the executed at the close increased from 4.6% in 2013 to 8.4% in 2018); Financial Times, The 30 Minutes that Have an Outsized Role in US Stock Trading (Apr. 24, 2018), available at https://www.ft.com/content/ 9e1f05b4-43e7-11e8-803a-295c97e6fd0b (‘‘The first and last half-hour of the U.S. trading day now accounts for 39.6 per cent of all volumes, up from 31.5 per cent a decade ago, according to Credit Suisse data. A decade ago about 16 per cent of all trading happened in the final 30 minutes, but that rose to more than 20 per cent in 2012, and almost 25 per cent this year. The closing auction alone— when most ETFs do their rebalancing—now accounts for 8.2 per cent of volumes in 2018, up from 3 per cent in 2007’’); Greenwich Associates, Stock Trading Volumes Gravitate to Open and Closing Auctions (Feb. 2, 2017), https:// www.greenwich.com/press-release/stock-tradingvolumes-gravitate-open-and-closing-auctions (stating that ‘‘[o]n average across both NYSE and Nasdaq listed securities, closing auctions now represent 5.5% of average daily volume, up from just 3.6% in 2011. Over the same period, average open auction volume increased from 1.1% to 1.25%’’). 331 See, e.g., Securities Exchange Act Release No. 75165 (June 12, 2015); 80 FR 34729, 34729–30 (June 17, 2015) (‘‘[F]rom 2006 to 2013, the total number of ETPs [exchange-traded products] listed and traded as of year-end rose by an average of 160 per year, with a net increase of more than 200 in both 2007 and 2011. . . The total market capitalization of ETPs has also grown substantially, nearly doubling since the end of 2009. Much of this growth has been in index-based ETPs. As of December 31, 2014, there were 1,664 U.S.-listed ETPs, and they had an aggregate market capitalization of just over $2 trillion. Trading in these ETPs makes up a significant portion of secondary-market equities trading. For example, during 2014, trading in U.S.-listed ETPs made up about 16.7% of U.S. equity trading by share volume and 25.7% of U.S. equity trading by dollar volume.’’). 332 See Greenwich Associates, Webinar: Trading the Auctions (Apr. 5, 2017), available at https:// business.nasdaq.com/media/Trading-the-AuctionsWebinar-April-2017-17_tcm5044-46070.pdf (‘‘As passive strategies and ETFs aim to track the performance of a benchmark index, they rely heavily on the closing auction, as it determines the closing price used in the benchmark index price calculation. Growth in passive investing and ETFs will thereby make the auction process ever more important.’’); see also, e.g., Nasdaq Rule 4754 (‘‘The Nasdaq Closing Cross price will be the Nasdaq Official Closing Price for stocks that participate in the Nasdaq Closing Cross.’’). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 orders exceed auction sell orders (or vice-versa) and are generally provided at periodic intervals leading up to the auction. In addition, primary listing exchanges provide information about the indicative price for the auction based on auction orders received at that time. Today, only limited auction-related information is included in SIP data.333 Some NYSE auction data is disseminated through the CTA/CQ SIP,334 but this reflects only a small subset of the auction-related information that the primary listing exchanges generate. No auction information generated by the other primary listing exchanges, including Nasdaq, NYSE Arca, and Cboe BZX, is distributed through the exclusive SIPs. By contrast, the primary listing exchanges provide a wide range of auction-related information through their proprietary data products.335 For 333 The LULD Plan requires the primary listing exchanges to provide the exclusive SIPs with certain auction information for dissemination related to reopening auctions after LULD trading pauses: Auction reference price, auction collars, and number of extensions to the reopening auction. See LULD Plan, supra note 38, at VII.B.1. The reopening auction data in proprietary products contains this data plus additional data. For example, NYSE’s Integrated feed includes, among other data elements, a paired quantity (number of shares paired at the reference price), total imbalance quantity (number of shares not matched at the reference price), and the side of any imbalance (buy or sell). See NYSE XDP Integrated Feed Client Specification (Jan. 29, 2018). Nasdaq’s Total View feed includes similar information for auctions that occur after halts or pauses. See Nasdaq TotalViewITCH 5.0 Specifications. 334 For example, in 1998, the Commission approved a NYSE proposal to allow the exchange to disseminate via the CTA/CQ SIP market-on-close (‘‘MOC’’) and limit-on-close (‘‘LOC’’) imbalance information in the final minutes of each trading day. See Securities Exchange Act Release No. 40094 (June 15, 1998), 63 FR 33975 (June 22, 1998). The proposal provided for mandatory dissemination of all MOC and LOC imbalances of 50,000 shares or more at 3:40 p.m. Dissemination of imbalances of less than 50,000 shares could be made at the discretion of a floor official. The Commission stated its belief that the dissemination of such additional information through the plan processor would ‘‘increase the amount of accurate market information available to the public’’ and may ‘‘increase public awareness of MOC/LOC order imbalances,’’ potentially resulting in less market volatility. See id. at 33977–78; NYSE Rule 123C (providing that information regarding any disparity between MOC and marketable LOC interest to buy and MOC and marketable LOC interest to sell, measured at 3:50 p.m., of 50,000 shares or more shall be published on the consolidated tape; publication of imbalances in amounts less than 50,000 shares may also be published with the prior approval of a Floor Official or other qualified ICE employee). In addition, pre-opening indications, including the security and the price range within which the opening price is anticipated to occur, are published via the plan processors under certain conditions. See NYSE Rule 15. 335 The auction-related information disseminated through exchange proprietary feeds includes: The ‘‘reference’’ or ‘‘indicative match’’ prices at which PO 00000 Frm 00033 Fmt 4701 Sfmt 4702 16757 example, NYSE provides opening auction information, such as opening order imbalance information and indicative pricing information, only through its proprietary market data products.336 In addition, with respect to closing auctions, NYSE disseminates order imbalance information approximately every five seconds between 3:50 p.m. and 4:00 p.m., which consists of real-time imbalances between marketable closing orders to buy and marketable closing orders to sell, along with the indicative price at which the auction would occur at that time. This information is available only through NYSE’s proprietary market data products.337 Similarly, Nasdaq,338 the largest potential auction would occur, imbalance side (buy or sell), number of shares of buy and sell orders at the indicative match price and reference price, paired quantity (number of shares matched at the indicative match price and reference price), execution quantity (number of shares executed at the indicative match price and reference price), imbalance quantity (number of shares not matched at the indicative match price and reference price), market order imbalance quantity (number of shares of market orders not matched at the indicative match price and reference price), far price (hypothetical auction-clearing price for cross orders only), near price (hypothetical auction-clearing price for cross orders and continuous orders), price variation indicator (absolute value of the percent of deviation of the near price to the nearest current reference price), continuous book clearing price, closing only clearing price, upper collar, lower collar, freeze status, and number of times halt period extended. See, e.g., Nasdaq Rule 4754; Nasdaq TotalViewITCH 5.0 Specifications; NYSE Rule 15; NYSE XDP Integrated Feed Client Specification. 336 See NYSE Rule 15. 337 See NYSE Rule 123C (describing the dissemination of information regarding imbalances that accumulate prior to the closing transaction, including information on disparities between MOC and marketable LOC interest to buy and MOC and marketable LOC interest to sell, a data field indicating the price at which closing-only interest (e.g., MOC, LOC, and other auction-only orders) may be executed in full, and, beginning at 3:55 p.m., certain floor-broker quotes containing pegging instructions eligible to participate in the closing transaction). 338 During the five minutes prior to the Nasdaq closing auction (also referred to as the closing cross) at 4:00 p.m., Nasdaq disseminates an ‘‘Order Imbalance Indicator’’ every second. The Nasdaq closing cross is an auction process in which Nasdaq’s closing book and continuous book are brought together to create a single closing price. See Nasdaq Opening and Closing Crosses FAQs, available at https://www.nasdaqtrader.com/ content/ProductsServices/Trading/Crosses/ openclose_faqs.pdf (last accessed Jan. 7, 2020).) The Order Imbalance Indicator includes a reference price at which the maximum number of shares can be matched, the number of shares that can be matched at the reference price, the number of shares that cannot be matched at the reference price (i.e., the imbalance), the buy/sell direction of any imbalance, and a variety of indicative prices such as the ‘‘far price,’’ a hypothetical auction-clearing price for cross orders, and ‘‘near price,’’ a hypothetical auction-clearing price for cross orders as well as continuous orders. See Nasdaq Rule 4754; Nasdaq TotalView-ITCH 5.0 Specifications. E:\FR\FM\24MRP2.SGM 24MRP2 16758 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules NYSE Arca,339 and Cboe BZX 340 provide auction information that is available only through each exchange’s proprietary market data products. As noted above, proprietary feeds also include additional information in connection with reopening auctions after trading halts that goes beyond the LULD information that primary listing exchanges are required to report to the exclusive SIP.341 lotter on DSKBCFDHB2PROD with PROPOSALS2 (b) Comments and Roundtable Discussion In connection with the Roundtable, several panelists and commenters supported the addition of auction information to SIP data.342 For example, one commenter stated that the Commission should require the inclusion of auction order imbalance information in SIP data and expressed the view that doing so should not materially increase the operating costs of the exclusive SIP.343 Similarly, other panelists and commenters emphasized the importance of auction information, including for achieving best execution.344 One 339 NYSE Arca disseminates ‘‘Auction Imbalance Information’’ via proprietary data feeds, specifically the NYSE Arca Order Imbalance feed and NYSE Arca Integrated feed. See NYSE Arca Rule 7.35– E(a)(4)(C); NYSE Arca Trading Information: Auctions Overview, available at https:// www.nyse.com/markets/nyse-arca/trading-info (last accessed Jan. 7, 2020). Auction Imbalance Information includes ‘‘if applicable, the Total Imbalance, Market Imbalance, Indicative Match Price, Matched Volume, Auction Reference Price, Auction Collar, Book Clearing Price, Far Clearing Price, Imbalance Freeze Indicator, and Auction Indicator.’’ NYSE Arca Rule 7.35–E(a)(4). 340 Cboe BZX disseminates, via the Bats Auction Feed, Closing Match Process Information (the total size of all buy and sell orders matched at the close) for Non-BZX-Listed Securities and ‘‘information regarding the current status of price and size information related to auctions conducted by the Exchange.’’ See Cboe BZX Rules 11.22(i), 11.28(c). 341 See supra note 333. 342 See Roundtable Day One Transcript at 98 (Stacey Cunningham, NYSE); Roundtable Day One Transcript at 98 (Chris Concannon, CBOE); Roundtable Day One Transcript at 116 (Michael Blaugrund, NYSE); Roundtable Day Two Transcript at 124 (John Ramsay, IEX); Roundtable Day Two Transcript at 245–46 (Tyler Gellasch, Healthy Markets); NYSE Group Letter at 6, 13 (stating ‘‘information about auction imbalances is now automated and yet is available only via proprietary data feeds’’ and ‘‘NYSE Group believes that Main Street could also benefit if auction imbalance information were included in the core data disseminated by the SIPs’’ and recommending the expansion of the definition of core data to include auction imbalance information). 343 See SIFMA Letter II at 2 (‘‘At minimum, auction imbalance information shall include matched quantity, imbalance size, near price, far price, paired shares and imbalance shares.’’). 344 See Roundtable Day One Transcript at 228–29 (Joseph Wald, Clearpool Group) (stating that the lack of auction information (and depth of book data) on the exclusive SIPs needs to be addressed); Clearpool Letter (‘‘We believe that certain information currently provided through proprietary VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 panelist indicated that auctions are becoming more important and that institutional investors use auction imbalance data to trade.345 Another panelist stated that auction imbalance information is important for retail investors, particularly high-net worth individuals, because the amount of the imbalance may be significant to a trading decision.346 However, one panelist (Nasdaq) opposed adding auction information to the exclusive SIP. The panelist indicated that Nasdaq views its crossing process as its intellectual property, retail investors do not use the imbalance information, and auction data is already widely available to retail investors and retail online brokers.347 (c) Commission Discussion and Proposal Auctions have become an increasingly significant part of the trading day, accounting for approximately 7% of daily equity trading volume.348 Auctions, especially the opening and the closing auctions, are important for the implementation of passive investment strategies, as detailed above, and generate prices that are used for a variety of market purposes, including setting benchmark prices for index rebalances and for mutual fund pricing. Reopening auctions also play a crucial role in connection with security-specific or market-wide events, helping to assure the resumption of orderly trading following a limit up-limit down or other regulatory halt.349 Auction information, data feeds, for example, imbalance data and order depth of book information, should be considered core data and provided to all market participants through the SIP.’’); MFA and AIMA Letter at 6 (stating that that its members purchase proprietary market data (e.g., depth of book and imbalance data) from exchanges for a variety of reasons, including strategy implementation, risk-analysis, best execution, less latency than other sources, and to fulfill fiduciary obligations). 345 See Roundtable Day Two Transcript at 68 (Paul O’Donnell, Morgan Stanley). 346 See Roundtable Day One Transcript at 159–60 (Adam Inzirillo, BAML). 347 See Roundtable Day One Transcript at 157–59 (Oliver Albers, Nasdaq). 348 This figure is based on data available on Cboe’s website from November of 2019. See Cboe: U.S. Equities Market Volume Summary, available at https://markets.cboe.com/us/equities/market_ share/ (last accessed Nov. 26, 2019); Rosenblatt Securities, supra note 330 (stating that closing auction volume amounted to 8.4% of consolidated volume); Greenwich Associates, Stock Trading Volumes Gravitate to Open and Closing Auctions (Feb. 2, 2017), available at https:// www.greenwich.com/press-release/stock-tradingvolumes-gravitate-open-and-closing-auctions (stating that average opening auction volume in 2017 was 1.25% of average daily volume). 349 For example, on Aug. 24, 2015, LULD halts were triggered in 471 securities. More than half (55%) of the impacted securities triggered more than one halt, and over one quarter (26%) of the PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 including auction order imbalance and other auction data, is important for effective participation in these significant market events. However, the content of SIP data has not been updated to reflect the growing importance of auctions, and today most auction-related information is available only through exchange proprietary data products.350 This exacerbates the information asymmetries between SIP data and proprietary data 351 and has raised concerns among market participants as to whether SIP data is sufficient to provide best execution to customer orders during auctions.352 Moreover, lack of full reopening auction information in SIP data may inhibit widespread participation in reopening auctions following limit-up-limit-down halts or other volatility events and may impede efficient price discovery during these critical periods.353 As discussed above, market participants rely upon auction information for effective participation in opening, closing, and reopening auctions.354 Accordingly, the Commission preliminarily believes that full auction-related information should be included in the proposed definition of core data. Specifically, under proposed Rule 600(b)(5) of Regulation NMS, ‘‘auction information’’ would be defined as all information specified by national securities exchange rules or impacted securities were halted 4 or more times. See Staff of the Office of Analytics and Research, Division of Trading and Markets, Equity Market Volatility on Aug. 24, 2015, at 68 (Dec. 2015). 350 See supra notes 333–341. 351 See infra note 358 and accompanying text (explaining that auction data that would support more informed participation in auctions is not available publicly or to retail investors). 352 See supra note 344. 353 See supra note 333 (comparing the LULD information available through the exclusive SIP feeds with the more extensive reopening auction information available through proprietary market data products). 354 Market participants use auction information in making a variety of trading decisions. See Markets Media, Auction Imbalance Data Affects Traders (Feb. 7, 2017), available at https:// www.marketsmedia.com/auction-imbalance-dataaffects-traders (stating that ‘‘70% of traders said real-time imbalance data can influence how their firm trades in the auction or continuous market’’ and explaining that large orders can be executed in auctions with less price impact). For example, market participants use auction imbalance information to predict closing volume, which is ‘‘an important factor in the optimal scheduling of algorithmic trading.’’ See Global Trading, Closing Volume Discovery (Sept. 23, 2019), available at https://www.fixglobal.com/home/closing-volumediscovery/. Since actual daily closing volume can vary widely, it is difficult for market participants to manage order placement logic for orders that are being submitted to auctions. Id. Auction imbalance messages published by the primary listing exchanges through proprietary market data products help market participants more accurately predict closing volume. Id. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules effective national market system plans that is generated by a national securities exchange leading up to and during an auction, including opening, reopening, and closing auctions, and disseminated during the time periods and at the time intervals provided in such rules and plans. The elements of proposed auction information would be established by individual exchange rules or effective national market system plans (e.g., the LULD Plan). The individual exchanges have established their own auction information elements that are relevant to their individual auction processes, and effective national market system plans have also established information requirements related to certain auctions (e.g., reopenings after LULD trading pauses).355 The Commission preliminarily believes that each individual exchange and relevant plan should be able to design and develop its individual auctions and the data elements that would be useful to market participants that participate in such auctions. Further, by tying the proposed definition to the rules of the exchanges and effective national market system plans, the proposed definition could evolve over time as such exchanges or plans develop new data elements in the future. Any additional data element set forth in an exchange’s rules or plan(s) would be subject to Commission consideration pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 or Rule 608, respectively. The Commission preliminarily believes that the proposed definition of auction information would promote more informed and effective trading in auctions. For example, information regarding the size and side of order imbalances can indicate the direction a stock’s price might move and inform decisions on where to price an auction order and what order type to use. Including auction information in core data, as proposed, would facilitate a broader distribution of this information to a greater number and variety of market participants. The Commission preliminarily believes that this would help to promote more informed trading for a greater number of market participants, which could also facilitate price formation, and improve execution quality for more traders and investors. While some market participants may not need the proposed auction information, based on the growth of auctions and the importance a variety of market participants have ascribed to information about orders participating 355 See, e.g., LULD Plan, supra note 38, Section VII(B)(1). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 in auctions, the Commission preliminarily believes that many market participants, including some retail investors, would use this information to participate in auctions in a more informed and effective manner.356 Some Roundtable panelists objected to the inclusion of auction information in core data. For example, as previously noted, Nasdaq asserted that its crossing process is its intellectual property and that auction data is already widely available to retail investors on Nasdaq’s website and through other data vendors.357 Although some auctionrelated information may be available on Nasdaq’s website, the Commission preliminarily believes that meaningful auction information, such as the realtime imbalance data that would support decisions regarding order type selection and order pricing during auctions, is available only through Nasdaq’s proprietary market data products.358 In addition, the Commission’s proposal would not require the disclosure of any specific details about the operation of Nasdaq’s crossing process that would appropriate or compromise Nasdaq’s intellectual property. The proposed definition of auction information would require the dissemination of information about orders participating in auctions; 359 the proposed definition would not require the dissemination of information about the technology or processes used to hold an auction. Further, the proposed definition of auction information is based on information currently disseminated by Nasdaq. The Commission requests comment on the inclusion of auction information 356 See supra notes 342–346 and accompanying text. Moreover, as noted above, see supra note 323, competing consolidators will be required to calculate and generate consolidated market data, including the auction information set forth in the Commission’s proposed definition, and to offer this information to subscribers. See proposed Rule 614(d)(1)–(3). However, market participants may require more or less auction information than specified in the proposed definition, and can choose auction information products offered by competing consolidators that are more tailored to their specific needs. 357 See supra note 347 and accompanying text. 358 See Nasdaq Opening and Closing Crosses, https://www.nasdaqtrader.com/ Trader.aspx?id=OpenClose (last accessed Jan. 7, 2020) (providing share volume in the Nasdaq crossing network but noting that imbalance data is available by subscription only); supra note 338. 359 See Section 11A(c)(1)(C) of the Exchange Act, stating that the Commission shall assure the usefulness of the form and content of information with respect to quotations for and transactions in securities. 15 U.S.C. 78k–1(c)(1)(C). The Senate Report stated that the Commission would have the authority under Section 11A to promulgate rules as to what information and how such information is displayed on any tape or within any quotation system. See Senate Report, supra note 5, at 10. PO 00000 Frm 00035 Fmt 4701 Sfmt 4702 16759 in the proposed definition of core data as well as the proposed definition of auction information in proposed Rule 600(b)(5). In particular, the Commission solicits comment on the following: 44. Do commenters believe that auction information should be included in the proposed definition of core data? Why or why not? What kinds of market participants will use this information? For what purposes? What are the advantages or disadvantages of including auction information in proposed core data as opposed to proprietary data? 45. Do commenters believe that the lack of auction information in current SIP data creates significant information asymmetries between users of current SIP data and users of proprietary data products? Do commenters believe that current SIP data is sufficient to meet the needs of some market participants even though it does not include auction information? Please explain. 46. Does the lack of auction information in current SIP data create impediments to achieving best execution when participating in auctions? Do market participants believe that it is possible to participate in auctions without the auction information? Please explain. 47. What are commenters’ views on the Commission’s proposed definition of auction information? Does it capture the full range of auction-related information that market participants need for informed trading in auctions? Does it include any information that is not necessary or useful for informed trading in auctions? Should the Commission delineate specific data elements in the definition of auction information as opposed to defining auction information in terms of the auction information that is currently generated pursuant to exchange rules or effective national market system plans? 48. Should the proposed definition of auction information include information on orders participating in non-auction matching processes, such as Cboe’s market close order, that are related to auctions occurring on other exchanges? Why or why not? D. Proposed Definition of ‘‘Regulatory Data’’ As discussed above,360 the existing Equity Data Plans disseminate data elements related to a number of regulatory requirements, such as Regulation SHO, LULD, and MWCB requirements, and other information provided by the primary listing exchanges, such as official opening and 360 See E:\FR\FM\24MRP2.SGM supra Section II.C. 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16760 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules closing prices. To ensure that this information is included in the proposed definition of consolidated market data, the Commission is proposing to amend Rule 600 to add a definition of ‘‘regulatory data.’’ Specifically, under proposed Rule 600(b)(77) of Regulation NMS, regulatory data would be defined as: (1) Information required to be collected or calculated by the primary listing exchange for an NMS stock and provided to competing consolidators and self-aggregators pursuant to the effective national market system plan or plans required under Rule 603(b), including, at a minimum: (A) Information regarding Short Sale Circuit Breakers pursuant to Rule 201 of Regulation SHO; (B) information regarding Price Bands required pursuant to the LULD Plan; (C) information relating to regulatory halts or trading pauses (news dissemination/pending, LULD, and MWCBs) and reopenings or resumptions; (D) the official opening and closing prices of the primary listing exchange; and (E) an indicator of the applicable round lot size; and (2) information required to be collected or calculated by the national securities exchange or national securities association on which an NMS stock is traded and provided to competing consolidators and self-aggregators pursuant to the effective national market system plan(s) required under Rule 603(b), including, at a minimum: (A) Whenever such national securities exchange or national securities association receives a bid (offer) below (above) an NMS stock’s lower (upper) LULD price band, an appropriate regulatory data flag identifying the bid (offer) as non-executable; and (B) other regulatory messages including subpenny execution and trade-though exempt indicators. For purposes of paragraph (1)(C), the primary listing exchange that has the largest proportion of companies included in the S&P 500 Index shall monitor the S&P 500 Index throughout the trading day, determine whether a Level 1, Level 2, or Level 3 decline, as defined in self-regulatory organization rules related to MarketWide Circuit Breakers, has occurred, and immediately inform the other primary listing exchanges of all such declines (so that the primary listing exchange can initiate trading halts, if necessary).361 361 Because, under the proposed decentralized consolidation model, primary listing exchanges would perform some of the functions that the exclusive SIPs perform today (such as monitoring the S&P 500 Index), each SRO would have to collect all elements of consolidated market data. SROs would not be required to obtain regulatory data or other consolidated market data from competing VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 The primary listing exchange is an SCI entity under Regulation Systems Compliance and Integrity (‘‘Regulation SCI’’).362 An SCI entity includes any national securities exchange other than an exchange that is notice registered with the Commission pursuant to 15 U.S.C. 78f(g) or a limited purpose national securities association registered with the Commission pursuant to 15 U.S.C. 78o–3(k).363 Under Regulation SCI, any SCI system of, or operated by or on behalf of, the primary listing exchange that directly supports functionality relating to trading halts, would be a ‘‘critical SCI system.’’ An ‘‘SCI system’’ means all computer, network, electronic, technical, automated, or similar systems of, or operated by or on behalf of, an SCI entity that, with respect to securities, directly support trading, clearance and settlement, order routing, market data, market regulation, or market surveillance.364 A ‘‘critical SCI system’’ means any SCI systems of, or operated by or on behalf of, an SCI entity that: (1) Directly support the functionality relating to (i) Clearance and settlement systems of clearing agencies; (ii) Openings, reopenings, and closings on the primary listing market; (iii) Trading Halts; (iv) Initial public offerings; (v) The provision of consolidated market data; or (vi) Exclusively-listed securities; or (2) Provides functionality to the securities markets for which the availability of alternatives is significantly limited or nonexistent and without which there would be a material impact on fair and orderly markets.365 Accordingly, with respect to any SCI systems used to determine whether LULD or MWCB trading halts have been triggered, and to notify other SROs of such halts, Regulation SCI requires the primary listing exchange to have reasonably designed business continuity and disaster recovery plans that include maintaining backup and recovery capabilities sufficiently resilient and geographically diverse and that are reasonably designed to achieve two-hour resumption of such systems following a wide-scale disruption.366 consolidators; SROs could choose to obtain such data directly from other SROs. 362 17 CFR 242.1000 et seq. 363 See Rule 1000 of Regulation SCI, 17 CFR 242.1000. 364 See Rule 1000 of Regulation SCI, 17 CFR 242.1000. 365 Id. 366 See Rule 1001(a)(2)(v), 17 CFR 242.1001(a)(2)(v). As the Commission stated when it adopted Regulation SCI, ‘‘[i]n the event a trading halt is necessary, it is essential that the systems responsible for communicating the trading halt— typically maintained by the primary listing market—are robust and reliable so that the trading PO 00000 Frm 00036 Fmt 4701 Sfmt 4702 Market participants use this regulatory data to meet their regulatory obligations and to be informed of trading halts, price bands, or other market conditions that may affect their trading activity. Accordingly, the Commission preliminarily believes that this information should be included in the proposed definition of consolidated market data. 1. Regulation SHO In pertinent part, Rule 201(b) requires a trading center, including a listing market, to establish, maintain, and enforce certain written policies and procedures that are reasonably designed to prevent the execution or display of a short sale order of a covered security if the Short Sale Circuit Breaker has been triggered and further requires that such trading center, including a listing market, regularly surveil to ascertain the effectiveness of those policies and procedures and take prompt action to remedy any deficiencies. Under the proposed definition of regulatory data, the primary listing exchange for an NMS stock (i.e., a covered security under Rule 201 of Regulation SHO) 367 would make the determination 368 regarding whether a Short Sale Circuit Breaker has been triggered.369 The Commission proposes to amend the process required under Rule 201 in two ways. First, if the Short Sale Circuit Breaker has been triggered, the listing market would be required to immediately notify competing consolidators and self-aggregators (rather than a single plan processor as is currently the case). Competing consolidators would then be required to consolidate and disseminate this information to their subscribers. Second, under the proposed decentralized consolidation model with competing consolidators and selfaggregators, the listing market would have the option of obtaining proposed consolidated market data from one or halt is effective across the U.S. securities markets. Thus, systems which communicate information regarding trading halts provide an essential service in the U.S. markets and, should a systems issue occur affecting the ability of an SCI entity to provide such notifications, the fair and orderly functioning of the securities markets may be significantly impacted.’’ See Regulation SCI Adopting Release, supra note 28, at 72278. 367 A ‘‘covered security’’ is defined in Rule 201(a)(1) of Regulation SHO as any NMS stock as defined in Rule 600(b)(48). 17 CFR 242.201(a)(1). 368 17 CFR 242.201(b)(3). 369 Id. This is consistent with the current requirements under Rule 201(b)(3). Rule 201(b)(3) refers to the ‘‘listing market’’ as defined in Rule 201(a)(3). As discussed below, the Commission proposes to amend the definition of ‘‘listing market’’ to refer to the proposed definition of ‘‘primary listing exchange’’ in proposed Rule 600(b)(67). E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules more competing consolidators (rather than from a single plan processor as is currently the case) or, if aggregating consolidated market data itself, to make determinations as to whether a Short Sale Circuit Breaker has been triggered. Due to the changes proposed herein (i.e., a listing market would now have the ability to choose from one or more competing consolidators for proposed consolidated market data, or to aggregate proposed consolidated market data on its own), the Commission preliminarily believes that a trading center, including a listing market, should consider updating its written policies and procedures required under Rule 201(b) to address the source of core data that it uses in making its determination regarding whether the Short Sale Circuit Breaker has been triggered and any changes to that source of core data, including the underlying reason for such change. The Commission preliminarily believes that these types of updates to such written policies and procedures would assist a listing market in ensuring consistency in making its determination regarding whether the Short Sale Circuit Breaker has been triggered and avoiding any appearance of ‘‘gaming’’ or ‘‘cherrypicking’’ of core data in making that determination. Moreover, the Commission is proposing certain conforming amendments in Rule 201 to harmonize that rule with the Commission’s proposal. Currently, Rule 201(a) defines ‘‘listing market’’ by reference to the listing market as defined in the effective transaction reporting plan for the covered security.370 Since primary listing exchanges will be required to collect and calculate regulatory data, the Commission is proposing to introduce a definition of ‘‘primary listing exchange’’ in Rule 600(b)(67) to provide greater clarity with respect to the responsibilities regarding regulatory data. Specifically, under proposed Rule 600(b)(67), primary listing exchange would be defined as, for each NMS stock, the national securities exchange identified as the primary listing exchange in the effective national market system plan or plans required under Rule 603(b). The Commission preliminarily believes that it is appropriate for the effective national market system plan(s) to determine which exchange is the primary listing exchange for each NMS stock and that the proposed definition would ensure that primary listing exchanges are clearly identified. The Commission also preliminarily believes that the definition of listing market in Rule 201(a)(3) should be amended so that it cross-references this proposed definition of primary listing exchange, so as to facilitate the consistent identification of primary listing exchanges across Regulation SHO and Regulation NMS and to avoid potentially duplicative or confusing definitions in the Commission’s rules. Similarly, Rule 201(b)(1)(ii) requires Short Sale Circuit Breakers to be applied ‘‘the remainder of the day and the following day when a national best bid for the covered security is calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan.’’ 371 The Commission is proposing to update this provision by removing the reference to the plan processor to reflect the proposed decentralized consolidation model. In addition, Rule 201(b)(3) requires listing markets to immediately notify ‘‘the single plan processor responsible for consolidation of information for the covered security pursuant to Rule 603(b)’’ 372 when a Short Sale Circuit Breaker has been triggered. Again, as a result of the proposed decentralized consolidation model, this reference to a single plan processor is proposed to be removed and replaced by a requirement for the listing market to immediately make such information available as provided in Rule 603(b) (i.e., to competing consolidators and selfaggregators). 2. Limit Up-Limit Down Plan Currently, the exclusive SIPs calculate and disseminate certain LULD data pursuant to the terms of the LULD Plan.373 Specifically, the exclusive SIPs calculate the price bands and reference prices and disseminate limit state flags identifying quotes that are nonexecutable, trading pause messages, and reopening information. To ensure that this important LULD information continues to be calculated and disseminated as part of proposed consolidated market data, the Commission is proposing several new provisions. First, the Commission is proposing that the primary listing exchanges be required to calculate and disseminate the price bands and reference prices for the LULD Plan as part of proposed regulatory data. As discussed below, the existing exclusive SIPs would be replaced by the proposed decentralized consolidation model with competing consolidators and self371 17 CFR 242.201(b)(1)(ii). CFR 242.201(b)(3). 373 See supra Section II.C.2. aggregators, and, therefore, the obligation to calculate and disseminate LULD data would need to be shifted to another entity. Primary listing exchanges have a direct relationship with their listed companies and are responsible for imposing market-wide ‘‘news pending’’ and other regulatory halts. Further, under the LULD Plan, the primary listing exchanges currently have substantial obligations with regard to imposing and communicating LULD trading pauses, as well as with respect to the reopening of trading.374 The Commission therefore believes that the primary listing exchanges would be well-situated to perform these calculations as part of proposed regulatory data. The LULD Plan is an important mechanism in the national market system. The Commission preliminarily believes that having multiple entities (e.g., competing consolidators and selfaggregators) calculating reference prices and price bands could complicate and potentially undermine the purposes of the LULD Plan and create confusion during periods of market volatility. Accordingly, the Commission believes that the LULD reference prices and price bands should continue to be calculated and disseminated by a single entity—the primary listing exchange. The Commission’s proposal to continue to have a single entity calculate and disseminate LULD information as part of proposed consolidated market data and, as discussed below, to monitor the S&P 500 Index throughout the trading day and send notification messages to the primary listing exchanges regarding MWCBs, is not inconsistent with the proposed decentralized consolidation model under which multiple competing consolidators would calculate and disseminate consolidated market data, including the NBBO. With brokerdealers aggregating various proprietary market data products today, the potential for ‘‘multiple NBBOs’’ already exists, whereas LULD information is currently calculated and disseminated by a single entity (i.e., the exclusive SIPs) and notifications to primary listing exchanges regarding MWCBs triggered by S&P 500 Index declines are also sent by a single entity (i.e., SIAC). In addition, under the proposed definition of regulatory data, all national securities exchanges or national securities associations that receive a quote for an NMS stock that is outside of the price bands under the LULD Plan would be required to attach the appropriate regulatory flag signifying that the quote is non-executable and to 372 17 370 17 CFR 242.201(a)(3). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 16761 374 See E:\FR\FM\24MRP2.SGM supra Section II.C.2. 24MRP2 16762 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules provide the quote and appropriate flag as part of its regulatory data to competing consolidators and selfaggregators. The Commission preliminarily believes that each national securities exchange or national securities association is in the best position to perform the function of attaching a flag to its own quote. The Commission preliminarily believes that assigning the responsibility to identify quotes as non-executable to parties other than the SRO disseminating the quote could add latency and complexity to the process and increase the risk of error. lotter on DSKBCFDHB2PROD with PROPOSALS2 3. Market-Wide Circuit Breakers Today, SIAC (the CTA/CQ SIP) monitors the S&P 500 Index to determine whether a Level 1, Level 2, or Level 3 decline has occurred and is responsible for sending messages to the primary listing exchanges informing them of such declines.375 Under the proposed decentralized consolidation model, there would no longer be an exclusive SIP to perform this function. Accordingly, the proposed definition of regulatory data identifies a specific primary listing exchange to monitor the S&P 500 Index throughout the trading day, determine whether a Level 1, Level 2, or Level 3 decline, as defined in SRO rules related to MWCB, has occurred, and immediately inform the other primary listing exchanges of all such declines. Specifically, the primary listing exchange that has the largest proportion of companies included in the S&P 500 Index would be required to conduct this monitoring and notification function.376 As discussed above, the Commission preliminarily believes that these responsibilities should continue to be carried out by a single entity so that messages regarding the occurrence of Level 1, Level 2, or Level 3 declines are distributed to primary listing exchanges simultaneously from the same source, to avoid the complexity and confusion that might result if such messages were distributed from multiple parties during periods of market volatility. The Commission preliminarily believes that it is appropriate to allocate these 375 By contrast, rather than the exclusive SIP notifying the primary listing exchange, under LULD, if trading for an NMS stock does not exit a limit state within 15 seconds of entry during regular trading hours, then the primary listing exchange is required to declare a trading pause in that NMS stock and notify the exclusive SIP. 376 NYSE currently lists the largest proportion of companies in the S&P 500 Index. If this changes, NYSE and the other primary listing exchange would need to coordinate to ensure that these monitoring and notification responsibilities are transitioned effectively. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 functions to the primary listing exchange that has the largest proportion of companies included in the S&P 500 Index because a significant proportion of the monitoring would be related to its own listings. In addition, under the proposed definition of regulatory data, each primary listing exchange would be responsible for providing certain information required under the MWCB rules to competing consolidators and self-aggregators. Specifically, each primary listing exchange would be required to provide MWCB trading halt and resumption messages to competing consolidators and self-aggregators, just as they do with the exclusive SIPs today. 4. Other Regulatory Data Official opening and closing prices are closely tracked data elements used by market participants for a variety of purposes. The primary listing exchanges currently determine the official opening and closing prices for their listed stocks 377 and provide these data elements to the exclusive SIPs. In addition to Regulation SHO, LULD, and MWCB information, the proposed definition of regulatory data will also require primary listing exchanges to provide the official opening and closing prices for the NMS stocks they list to competing consolidators and selfaggregators. The Commission preliminarily believes that the primary listing exchanges, because they determine the official opening and closing prices for their listed stocks and have direct and immediate access to this information, are best situated to provide official opening and closing prices in their listed securities to competing consolidators and self-aggregators under the decentralized consolidation model so that this important information is included in the proposed consolidated market data made available to market participants. In addition, the proposed definition of regulatory data would require the primary listing exchange for each NMS stock to calculate and make available to competing consolidators and selfaggregators an indicator of the applicable round lot size. As discussed above, the proposed definition of round lot would allocate stocks into five round lot categories based on each stock’s average closing price on the primary listing exchange over the prior calendar month. The Commission preliminarily 377 See, e.g., NYSE Rule 123C(1)(e)(i) (Closing Procedures); NYSE Rule 123D(a) (Openings); Nasdaq Rule 4754(b)(4) (Nasdaq Closing Cross); Nasdaq Rule 4752(d) (Opening Process). PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 believes that such an indicator would help market participants ascertain the applicable round lot size for each NMS stock on an ongoing basis.378 Due to the primary listing exchanges’ direct and immediate access to the official opening and closing prices of their listed stocks, the primary listing exchanges would be well-situated to calculate the monthly average closing price, the metric that will be used to allocate NMS stocks into round lot sizes under the proposed definition of round lot; assign a round lot size of 100, 20, 10, 2, or 1, as applicable; and include an indicator of the applicable round lot size in the data they make available to competing consolidators and self-aggregators. The proposed definition of regulatory data would also require an exchange or association on which an NMS stock is traded to provide other data pertaining to regulatory requirements, including sub-penny execution indicators and trade-though exempt indicators. Additional regulatory messages such as these are included in the technical specifications of the Equity Data Plans. The Commission preliminarily believes that all of these regulatory messages provide important information to the market and facilitate compliance with regulatory requirements. Therefore, the Commission preliminarily believes that such regulatory messages should be included in the proposed definition of consolidated market data. Finally, as discussed above,379 as the markets continue to evolve, there may be a need to reflect new regulatory data elements in proposed consolidated market data. Accordingly, the Commission is proposing that the definition of regulatory data include a provision (as set forth in proposed consolidated market data) that would allow the definition of regulatory data to be amended to include additional regulatory data elements pursuant to amendments to effective national market system plan(s). As discussed above, amendments to effective national market system plans must be filed with, and approved by, the Commission pursuant to Rule 608(b). The Commission requests comment on the proposed definition of regulatory data in proposed Rule 600(b)(77). In particular, the Commission solicits comment on the following: 378 Among other reasons, market participants would need to be aware of the applicable round lot size under the proposed amendments because several Commission rules would apply to round lot orders. See supra Section III.C.1(d)(i) (discussing the impact of the proposed definition of round lot on Rules 602, 603, 604, and 605 of Regulation NMS). 379 See supra Section III.B. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 49. Do commenters believe that the elements of proposed regulatory data enumerated in proposed Rule 600(b)(77) reflect the elements that are necessary for trading in compliance with Commission rules, Equity Data Plans, or SRO rules? Why or why not? Should any additional data elements be included? Is there any significant regulatory information that is currently included in SIP data, including pursuant to the technical specifications to the Equity Data Plans, which is not captured by the proposed definition of regulatory data? If so, should such elements be included in the proposed definition of regulatory data? Please describe. 50. Should any of the proposed elements of regulatory data be excluded? Please explain. 51. Do commenters believe that the primary listing exchange should be responsible for calculating regulatory data, as defined? Why or why not? Would any of those responsibilities be more effectively allocated to competing consolidators? Do commenters believe another party should perform these calculations? Would the proposed definition of regulatory data impose any additional costs on primary listing exchanges? 52. In the context of the Short Sale Circuit Breaker, what benefits and/or challenges do commenters believe will result from the proposed change to a competing consolidator/self-aggregator model? Do primary listing exchanges anticipate utilizing a consistent source of core data in making their determination regarding whether a Short Sale Circuit Breaker has been triggered? Or multiple sources? Please describe. 53. Will updating the primary listing exchange’s existing Rule 201 written policies and procedures, as discussed above, present any operational (or other) challenges? If yes, please describe. 54. Would a round lot size indicator be useful to market participants and investors? Why or why not? 55. Do commenters believe that the primary listing exchange that has the largest proportion of companies included in the S&P 500 Index should be required to perform the MWCBrelated functions described in the proposed definition of regulatory data? Why or why not? Should the primary listing market be determined by weighting the companies included in the S&P 500 Index? Why or why not? Do commenters believe that at least one other market should calculate this information as a backup contingency? Are there alternative approaches to the assignment of the S&P 500 Index VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 monitoring and notification function? Would it be more appropriate to assign this function to another party? If so, please explain how any such other party could appropriately perform this function. 56. Do commenters believe that each national securities exchange and national securities association receiving a quote outside the price bands under the LULD Plan should be required to flag each quote as non-executable? Why or why not? Are there alternative approaches to the assignment of the non-executable quote flagging function? Would it be more appropriate to assign this function to another party? If so, please explain how any such other party could appropriately perform this function. E. Proposed Definition of ‘‘Administrative Data’’ In addition to current core data and current regulatory data, SIP data today includes additional technical information. Much of this information is enumerated in the technical specifications of the Equity Data Plans and described as ‘‘administrative’’ or ‘‘control’’ messages. Examples of administrative messages include market center and issue symbol identifiers.380 Examples of control messages include messages regarding the beginning and end of trading sessions.381 The Commission preliminarily believes that administrative messages can facilitate the efficient and accurate use of consolidated market data by market participants and should be included in the proposed definition of consolidated market data. Further, the Commission preliminarily believes that this information is useful to market participants and should continue to be widely available. The proposed definition is intended to capture administrative information that is currently provided in SIP data.382 In order to capture this type of information, under proposed Rule 600(b)(2), ‘‘administrative data’’ would be defined as administrative, control, and other technical messages made available by national securities exchanges and national securities associations pursuant to the effective national market system plan or plans required under Section 242.603(b) or the technical specifications thereto as of 380 See, e.g., UTP Data Feed Services Specification, supra note 142, at 20. 381 Id. at 33. 382 As discussed above, administrative data elements could be added to consolidated market data pursuant to amendments to the effective national market system plan or plans required under Section 242.603(b). See supra Section III.B. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 16763 [date of Commission approval of this proposal]. The Commission preliminarily believes that administrative data, as proposed to be defined and as currently exists, provides additional context for market participants to understand, and efficiently and accurately use, the proposed core and regulatory data to support their trading activities. For example, issue symbol and market center identifiers provide basic information necessary to understand to which stock the price and size information represented in core data relates and the specific exchange on which this interest is available, which informs decisions about where orders in such stocks should be directed. As such, this information should continue to be included in the proposed definition of consolidated market data. Moreover, the Commission preliminarily believes that SROs would be well-situated to provide administrative data messages, which relate to SRO-specific details such as the market-center identifiers or the beginning and ending of trading sessions, because SROs have direct and immediate access to this information and could efficiently integrate it into the data feeds that they will utilize to make available the data necessary for competing consolidators and selfaggregators to generate core and regulatory data. The Commission requests comment on the proposed amendment to Rule 600(b)(2) to introduce a definition of administrative data. In particular, the Commission solicits comment on the following: 57. Do commenters believe that the Commission should propose a definition of administrative data? Why or why not? Should the Commission take an alternative approach? Why or why not? 58. Do commenters believe that the proposed definition of administrative data captures the market data that would be necessary or useful to market participants? Please explain. Does the proposed definition of administrative data include any market data that should not be included? Please explain. 59. Do commenters believe that each national securities exchange and national securities association should make available administrative data? Should any of the elements be provided by the primary listing exchange? Are there specific administrative data elements that should be consistent across all SROs? Are there any administrative data elements that competing consolidators or some other party, as opposed to national securities exchanges and national securities E:\FR\FM\24MRP2.SGM 24MRP2 16764 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules associations, should be required to generate or provide for inclusion in proposed consolidated market data? Please explain. 60. Do commenters believe that there are administrative data elements that should not require an NMS Plan amendment for inclusion in consolidated market data? For example, are there administrative data elements that are provided solely in the course of providing or utilizing other consolidated market data elements, such as core or regulatory data? Please explain. What procedural mechanism would be appropriate for including any such data elements in consolidated market data? How could any such data elements be distinguished from those which would require an NMS Plan amendment to be added to consolidated market data? F. Proposed Definition of ‘‘ExchangeSpecific Program Data’’ lotter on DSKBCFDHB2PROD with PROPOSALS2 In addition to current core data, regulatory data, and administrative data, current SIP data includes information related to individual exchange retail liquidity programs, which offer opportunities for retail orders to receive price improvement.383 The Commission preliminarily believes that existing retail liquidity programs and, in certain cases, other exchange-specific program information should continue to be 383 See, e.g., CQS Binary Input Specifications (July 17, 2019), at 37 (describing a ‘‘retail interest indicator’’ as follows: ‘‘[w]hen Retail Price Improvement (RPI) interest is priced better than the Protected Best Bid or Offer (PBBO) by a minimum of $0.001, an indication of interest on the Bid, Offer, or both the Bid and Offer will identify that interest will be eligible to interact with incoming Retail Order interest.’’); supra note 47; NYSE Rule 107C; Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR 40673 (July 10, 2012) (NYSE Retail Liquidity Program Approval Order); CBOE BYX Rule 11.24; Securities Exchange Act Release No. 68303 (Nov. 27, 2012), 77 FR 71652 (Dec. 3, 2012) (CBOE BYX Retail Pilot Program Approval Order); Nasdaq BX Rule 4780; Securities Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4, 2014) (NASDAQ BX Retail Pilot Program Approval Order). For example, NYSE’s retail liquidity program defines a class of market participants known as Retail Liquidity Providers who may provide potential price improvement, in the form of a non-displayed order that is priced better than NYSE’s best protected bid or offer called a Retail Price Improvement Order. See NYSE Rule 107C; NYSE Retail Liquidity Program Approval Order. Other NYSE members are allowed, but not required, to submit Retail Price Improvement Orders. Id. When there is a Retail Price Improvement Order in a particular security, NYSE disseminates an indicator, which is included in the SIP data, known as the Retail Liquidity Identifier, indicating that such interest exists. In response, a class of market participants known as Retail Member Organizations can submit a special type of order, called a Retail Order, to the exchange. A Retail Order would interact, to the extent possible, with available contra-side Retail Price Improvement Orders. Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 included in proposed consolidated market data and is therefore proposing to define ‘‘exchange-specific program data’’ to include this information. Under proposed Rule 600(b)(32), exchangespecific program data, which would be included in the proposed definition of consolidated market data, would be defined as (i) information related to retail liquidity programs specified by the rules of national securities exchanges and disseminated pursuant to the effective national market system plan or plans required under Section 242.603(b) as of [date of Commission approval of this proposal] and (ii) other exchange-specific information with respect to quotations for or transactions in NMS stocks as specified by the effective national market system plan or plans required under Section 242.603(b). Proposed Rule 600(b)(32)(i) pertains to information related to existing exchange retail liquidity programs that is currently disseminated pursuant to the Equity Data Plans. The dissemination of retail liquidity identifiers in the current SIP data encourages market participants to submit orders to, or otherwise participate in, such programs that the Commission has approved as consistent with the Exchange Act, including the dissemination of the related retail liquidity program information as SIP data.384 The proposed definition of exchange-specific program information would help ensure that the retail liquidity program information that is currently included in SIP data would be included in consolidated market data. In addition, to the extent that an exchange, at its own discretion, determines to develop a new exchangespecific program in the future, proposed Rule 600(b)(32)(ii) would permit data elements related to any such program to be included in consolidated market data pursuant to the national market system plan or plans required under Section 242.603(b) or amendments thereto that are approved by the Commission. The Commission preliminarily believes that, to the extent that (i) exchanges develop new programs in the future,385 and (ii) the broad dissemination of information 384 See NYSE Retail Liquidity Program Approval Order, supra note 383 (stating that ‘‘the Retail Liquidity Identifier will be disseminated through the consolidated public market data stream, and thus be widely viewable by market participants, and that members of the Exchanges that would not otherwise participate as Retail Liquidity Providers would be able to participate in the Program by submitting Retail Price Improvement Orders’’). 385 See supra note 92 and accompanying text. Currently, the only exchange-specific program data disseminated pursuant to the Equity Data Plans relates to retail liquidity programs. PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 about such programs as part of consolidated market data would facilitate participation in such programs, an amendment to the effective national market system plan(s) could be filed with the Commission under Rule 608 of Regulation NMS to include such information in consolidated market data. Accordingly, the Commission preliminarily believes that this information is useful and should be included in the definition of consolidated market data as proposed. The Commission requests comment on the proposed amendment to Rule 600(b)(32) to introduce a definition of exchange-specific program data. In particular, the Commission solicits comment on the following: 61. Do commenters believe that the proposed exchange-specific program data should be included in proposed consolidated market data? Why or why not? 62. Do commenters believe that information related to retail liquidity programs currently established pursuant to exchange rules should be included in the proposed definition of exchangespecific program data? Why or why not? Do commenters believe that the inclusion of data elements related to these programs in current SIP data is useful for trading or investment decisions? Please explain. 63. Do commenters believe that the proposed definition of exchangespecific program data should permit data elements related to new exchangespecific programs that may be established to be included in consolidated market data pursuant to amendments to the effective national market system plan or plans required under Section 242.603(b)? Why or why not? IV. Need for and Proposed Enhancements to Provision of Consolidated Market Data The Commission is proposing to replace the existing centralized, exclusive consolidation model for SIP data 386 with a decentralized, competitive consolidation model. The Commission preliminarily believes this model would foster competition in the consolidation and dissemination of proposed consolidated market data, better serve the needs of market participants and investors, and help mitigate the influence of certain conflicts of interest inherent in the existing exclusive SIP model.387 The Commission also preliminarily believes 386 See supra Sections I and II.A. conflicts of interest are discussed in Section VI.A.2 infra. 387 These E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules that the proposed approach would modernize the infrastructure of the national market system by eliminating the existing, outdated centralized architecture for data consolidation and fostering the use of more competitive technologies for the collection, consolidation, and dissemination of proposed consolidated market data. Together, these would reduce latency differentials that currently exist between SIP data and proprietary data. Furthermore, the Commission preliminarily believes that this model will address concerns about the significant costs that accompany the exclusive 388 structure that currently exists for the aggregation and dissemination of SIP data. lotter on DSKBCFDHB2PROD with PROPOSALS2 A. Existing Centralized Consolidation Model Today, SIP data is collected, consolidated, and disseminated to investors and market participants through a centralized consolidation model with an exclusive SIP for each NMS stock centrally collecting market data transmitted from the dispersed SRO data centers and then redistributing consolidated SIP data to end-users. Each exchange and FINRA is required to transmit its own data for each NMS stock to the appropriate exclusive SIP.389 As provided under Rule 603(b), the exclusive SIPs do not compete with each other in the collection, consolidation, or dissemination of SIP data.390 For many years, this centralized consolidation model served investors well by providing an accurate, reliable, and fair stream of SIP data that was considered prompt relative to the prevailing technological standards of the time. Technological advances as well as the order routing and trading strategies that developed in response to the adoption of Regulation NMS have greatly increased the speed and automation of both markets and common trading strategies. These changes, along with the provisions adopted in Regulation NMS that allow for the sale of proprietary data products,391 have created incentives for exchanges to develop enhanced proprietary data products that they sell 388 See Bloomberg Decision, supra note 37, at 3, 4. See also infra note 439. 389 See supra note 42 and accompanying text. 390 See supra note 21. The Senate Report stated that an exclusive processor of market information is, ‘‘in effect, a public utility, and thus it must function in a manner which is absolutely neutral with respect to all market centers, all market makers, and all private firms.’’ See Senate Report, supra note 5, at 7. 391 See Regulation NMS Adopting Release, supra note 10, at 37567. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 to the same market participants that are subscribers to the SIP data, and to offer connectivity products and services (e.g., co-location, fiber connectivity, and wireless connectivity) that provide lowlatency access to the proprietary data products. Further, as the markets evolved and depth of book data became more important for some market participants, the exchanges continued to improve their proprietary data feeds without similarly improving the exclusive SIPs to reflect this market evolution. The content and latency differentials between SIP data and the proprietary market data products disseminated directly by the exchanges have become increasingly material.392 There are widespread and significant concerns about the current method of disseminating SIP data and its associated latencies.393 The centralized consolidation model of the Equity Data Plans and the exclusive SIPs suffers from three specific sources of latency disadvantage: (a) Geographic latency, (b) aggregation or consolidation latency, and (c) transmission or communication latency. Geographic latency, as used herein, refers to the time it takes for data to travel from one physical location to another, which must also take into account that data does not always travel between two locations in a straight line. Greater distances usually equate to greater geographic latency, though geographic latency is also affected by the mode of data transmission, as discussed below. The Commission understands that geographic latency is typically the most significant component of the additional latency that SIP data feeds experience compared to proprietary data feeds.394 Because each exclusive SIP must collect data from geographically-dispersed SRO data centers, consolidate the data, and then disseminate it from its location to endusers, which are often in other locations, this hub-and-spoke form of centralized consolidation creates 392 See infra Section VI.B.2(b). e.g., Letter to Brent J. Fields, Secretary, Commission, from Tyler Gellasch, Executive Director, Healthy Markets Association, 6 (Oct. 23, 2018) (‘‘Healthy Markets Association Letter I’’) (‘‘SIP data feeds are still persistently slower and offer less information than is available through the private data feeds and connectivity offerings sold by the exchanges.’’). 394 See, e.g., Letter to Brent J. Fields, Secretary, Commission, from Michael Blaugrund, Head of Transactions, New York Stock Exchange, 1 (Oct. 24, 2018) (‘‘Blaugrund Letter’’) (stating that, as ‘‘processing time approaches zero, it is clear that the time required for trade and quote data to travel from Participant datacenter -> SIP datacenter -> Recipient datacenter, or ‘geographic latency,’ is a larger portion of the total latency.’’). 393 See, PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 16765 additional latency.395 For example, information about quotes and trades on Nasdaq for NYSE-listed securities incurs latency as it travels from Nasdaq’s data center in Carteret approximately 34.5 miles to the CTA/CQ SIP in Mahwah, and then back to Carteret.396 Aggregation or consolidation latency, as used herein, refers to the amount of time an exclusive SIP takes to aggregate the multiple sources of SRO market data into SIP data and includes calculation of the NBBO. This latency reflects the time interval between when an exclusive SIP receives data from an SRO and when it disseminates SIP data to the end-user. For years, market participants have claimed that the exclusive SIP aggregation speeds have remained measurably slower and uncompetitive with private market offerings.397 For 395 One commenter has stated ‘‘[w]hile it is true that the latencies of the SIPs are slightly greater than those of direct exchange feeds, it is important to remember that the SIPs are a consolidation of all market data feeds, not a single feed. Therefore, the SIPs must first aggregate data from multiple exchanges located in geographically disparate data centers before processing and transmitting it to the market, which means their feeds will always be, by definition, slightly slower than the data a user can receive directly from an exchange.’’ See Statement from the SIP Operating Committees Adding to SEC Commissioner Jackson’s Recent Comments (Sept. 24, 2018), available at https://www.nyse.com/ publicdocs/ctaplan/notifications/trader-update/ Media_Statement_from_SIP_Operating_ Committees_Chair_Emily_Kasparov.pdf; Nasdaq, Total Markets Report, supra note 127, at 20. 396 See Roundtable Day One Transcript at 127 (Mark Skalabrin, Redline Trading Solutions) (stating that customers cannot be competitive using SIP data due to geographic latency, explaining ‘‘[i]f you’re sitting at Secaucus and you get a direct feed tick from BATS, it shows up in a few microseconds from when they publish it. That same tick for the SIP for Nasdaq-listed symbols goes to Carteret, for NYSE-listed symbols they go to Mahwah and they come back again. The real numbers are, for one, about 350 microseconds and the other about close to a millisecond in latency for those to show up for someone using the SIP to get the BATS tick. So this is just an architectural—an obsolete architecture, really, for an automated trading system in today’s world . . . you can’t be competitive with those kind of latencies compared to just getting it directly from the exchange.’’). 397 See Joel Hasbrouck, Price Discovery in High Resolution, New York University (Aug. 9, 2019 draft) (‘‘The first analysis examines the extent to which the conventional source of market data (the consolidated tape) accurately reflects the prices observed by agents who subscribe (at additional cost) to direct exchange feeds. At a one-second resolution, the information share of the direct feeds is indistinguishable from that of the consolidated tape. At resolutions of 100 and 10 microseconds, however, the direct feeds are totally dominant, and the consolidated share approaches zero.’’); Elaine Wah and Michael P. Wellman, Latency Arbitrage, Market Fragmentation, and Efficiency: A TwoMarket Model, University of Michigan (2013) (‘‘Given order information from exchanges, the SIP takes some finite time, say [X] milliseconds, to compute and disseminate the NBBO. A computationally advantaged trader who can process the order stream in less than [X] milliseconds can simply out-compute the SIP to derive NBBO*, a E:\FR\FM\24MRP2.SGM Continued 24MRP2 16766 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules example, in the second quarter of 2010, the average aggregation latency 398 for the Tapes A and B quotes and trades feeds exceeded 6,000 microseconds, and the Tape C feeds exceeded 5,500 microseconds.399 In recent years, the Equity Data Plans operating committees have made some improvements to aspects of the exclusive SIPs and related infrastructure, including to address aggregation latency.400 For example, as lotter on DSKBCFDHB2PROD with PROPOSALS2 projection of the future NBBO that will be seen by the public. By anticipating future NBBO, an HFT algorithm can capitalize on cross-market disparities before they are reflected in the public price quote, in effect jumping ahead of incoming orders to pocket a small but sure profit.’’); Herbert Lash, Potential Profit from U.S. ‘‘Latency Arbitrage’’ Trading May Be $3 Billion—Study, Reuters (Feb. 25, 2016). 398 Average latency is only one latency metric. Another metric for the use of evaluating the performance of the exclusive SIP is latency at the 99th percentile, which means that 99% of exclusive SIP latency observations for a given period were below that value. The 99th percentile is often reflective of periods of peak message traffic. These outlier periods tend to be among the more important trading periods during the day, and exclusive SIP latencies have tended to lag in performance during these periods. For example, in the second quarter of 2019, the latency measurement at the 99th percentile for Tapes A and B trades was 648 milliseconds, which is over 4 times slower than the average latency. See CTA, Key Operating Metrics of Tape A&B U.S. Equities Securities Information Processor (CTA SIP), available at https://www.ctaplan.com/publicdocs/ CTAPLAN_Processor_Metrics_2Q2019.pdf (last accessed Jan. 22, 2020). 399 Id.; see also UTP Q4 2016—Dec. Tape C Quote and Trade Metrics, available at https:// www.utpplan.com/DOC/UTP_website_Statistics_-_ Q4_2016_-_December.pdf (last accessed Jan. 22, 2020). 400 One commenter stated, ‘‘In the last three years, the SIP Operating Committees have invested in the technology that powers them, increasing resiliency and redundancy while reducing latency . . .’’ See Statement from the SIP Operating Committees Adding to SEC Commissioner Jackson’s Recent Comments, supra note 395. Following the Nasdaq UTP SIP Outage—and a meeting between the equities and options exchanges, FINRA, DTCC, the Options Clearing Corporation, and the then-Chair of the Commission—the Equity Data Plans’ operating committees discussed with Commission staff the operating committees’ plans for the exclusive SIPs ‘‘designed to improve operational resiliency, strengthen interoperability standards and disaster recovery capabilities, enhance governance, accountability, and establish a clear testing framework for the industry.’’ See Self-Regulatory Organizations Response to SEC for Strengthening Critical Market Infrastructure (Nov. 12, 2013), available at https://ir.theice.com/press/pressreleases/all-categories/2013/11-12-2013; NYSE Group Letter, at 3 (‘‘[E]xchanges have invested significantly in the operation of the [SIPs], resulting VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 of the second quarter of 2019, Tapes A and B reduced average quote feed aggregation latency to 69 microseconds and trade feed aggregation latency to 139 microseconds.401 As another example, Tape C reduced its average quote feed aggregation latency to an average of 16.9 microseconds for quotes and 17.5 microseconds for trades in the second quarter of 2019.402 As shown by these latency statistics, however, aggregation latency for the CTA/CQ SIP data continues to be meaningfully greater than that of Nasdaq UTP SIP data, despite these improvements.403 Transmission latency, as used herein, refers to the time interval between when data is sent (e.g., from an exchange) and when it is received (e.g., at an exclusive SIP and/or at the data center of the subscriber), and the transmission latency between two fixed points is determined by the transmission communications technology through which the data is conveyed. Transmission latency will also vary in improved resilience and reduced latency, all while managing increased volumes.’’); infra Section VI.B. 401 See CTA, Key Operating Metrics of Tape A&B U.S. Equities Securities Information Processor (CTA SIP), available at https://www.ctaplan.com/ publicdocs/CTAPLAN_Processor_Metrics_ 2Q2019.pdf (last accessed Jan. 22, 2020). 402 See UTP Q3 2019—July Tape C Quote and Trade Metrics, available at https:// www.utpplan.com/DOC/UTP_website_Statistics_ Q3-2019-July.pdf (last accessed Jan. 22, 2020). Nasdaq has stated that the Nasdaq UTP SIP is ‘‘faster at processing quote and trade messages than any Nasdaq-owned exchange trading system’’ with an average SIP processing time of 16 microseconds, compared to 25 microseconds ‘‘from entry of an order on the Nasdaq stock market until the associated quotation or execution or execution message is transmitted on the exchange’s proprietary TotalView data feed.’’ See Wittman Letter at 9. These latencies are perceived to be at or near competitive market standards. See also Roundtable Day One Transcript at 106 (statement of Oliver Albers, Nasdaq) (‘‘There have been vast improvements in SIP data in recent years, even as SIP revenue to exchanges has fallen. The Nasdaq UTP SIP has an average latency of just 16 millionths of a second . . . The Nasdaq UTP SIP can also handle 10 billion messages per day, 20 times more than a decade ago, and significant cybersecurity and fraud prevention investments by Nasdaq and other operators have increased the overall market efficiency and resiliency.’’). 403 See Nasdaq Total Markets Report, supra note 127, at 19, n.19 (stating that the CTA/CQ SIP ‘‘currently operates with over 100 microseconds of latency, which is not up to the standard that investors have come to expect in the modern markets.’’). PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 depending on the geographic distance between where the data is sent and where it is received. There are several options currently used for transmitting market data, such as fiber optics, which typically are used by the exclusive SIPs for receipt and dissemination of SIP data, and wireless microwave connections, which the exchanges offer as an alternative for their proprietary data feeds but not for SIP data. Fiber optics use light to transmit data through glass fiber cables. Wireless microwave connections (including extremely high frequency millimeter waves) transmit data through the air via towers in line of sight of one another and are commonly used to transmit market data today. Fiber optics are generally more reliable than wireless networks since the data signal is less affected by weather; 404 however, fiber tends to suffer greater latency because of its dependence on geography: The cables often cannot be laid in the most direct manner, adding distance for the signal to travel. Light also travels slower through fiber than microwaves travel through the air. Laser transmission, a more recent addition to high speed market data transmission, is another wireless mode of transmission that is known to be faster than microwaves but less susceptible to weather conditions.405 404 See Andriy Shkilko and Konstantin Sokolov, Every Cloud Has a Silver Lining: Fast Trading, Microwave Connectivity and Trading Costs (Apr. 2019), available at https://ssrn.com/ abstract=2848562. 405 See Reuters, Lasers, Microwave Deployed in High-Speed Trading Arms Race (May 1, 2013), available at https://www.reuters.com/article/ushighfrequency-microwave/lasersmicrowavedeployed-in-high-speed-trading-armsrace-idUSBRE9400L920130501; ExtremeTech, New Laser Network between NYSE and Nasdaq Will Allow High-Frequency Traders to Make Even More Money (Feb. 14, 2014), available at https:// www.extremetech.com/extreme/176551-new-lasernetwork-between-nyse-andnasdaq-will-allow-highfrequency-traders-to-make-even-more-money; ‘‘The World’s First Laser Network for Transporting Equities Market Data between Nasdaq and BATS/ DirectEdge is Now Live and Operational’’ (July 22, 2015), available at https://anovanetworks.com/theworlds-first-laser-network-for-transporting-equitiesmarket-data-between-nasdaq-batsdirectedge-isnow-live-operational/; ICE Global Network: New Jersey Metro, available at https://www.theice.com/ market-data/connectivity-and-feeds/wireless/newjersey-metro (last accessed Jan. 22, 2020). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 The modes of transmission for SIP data are typically slower than the modes of transmission used for proprietary data. For example, proprietary data products offered by the exchanges often rely on low-latency wireless connections,406 whereas the Equity Data Plans rely on fiber optics for connectivity.407 Additionally, the NYSE, as the operator of the CTA/CQ SIP, has required that access to the CTA/CQ SIP be through the use of the NYSE’s IP local area network. Recently, the NYSE submitted a proposed rule change to amend its prices related to colocation services to provide access to NMS feeds. The NYSE stated in that proposed rule change that the operating committee of the CTA and CQ Plans instituted this access requirement because of the IP network’s security, resiliency, and redundancy.408 The NYSE stated that the IP network is not a low-latency network, so ‘‘the requirement to use the IP network to access the NMS feeds introduces a layer of latency.’’ 409 The NYSE stated that it is in the process of building a lowlatency network alternative to connect to the CTA/CQ SIP that would result in 406 Some of these services are solely offered by exchanges within the facility of an exchange (e.g., co-location connectivity at NYSE’s data center in Mahwah and Nasdaq’s co-location at its data center in Carteret) and some are offered by both exchanges and other third party providers (e.g., fiber and wireless connectivity between data centers). See, e.g., Nasdaq Trade Management Services—Wireless Connectivity Suite, available at https:// n.nasdaq.com/WirelessConnectivitySuite (last accessed on Jan. 22, 2020) (describing low-latency wireless network technology to deliver market data); ICE Global Network—Wireless, available at https://www.theice.com/market-data/connectivityand-feeds/wireless (last accessed on Jan. 22, 2020) (describing low-latency wireless connectivity options between trading hubs). 407 See Roundtable Day One Transcript at 99 (Stacey Cunningham, NYSE) (‘‘[i]n the short term, we could use wireless technology to deliver SIP and overcome some of the geographic latencies.’’); at 156–157 (Oliver Albers, Nasdaq) (stating that Nasdaq could consider permitting microwave transmission from the exchanges to the Nasdaq UTP SIP); ICE Global Network & Colocation: Technical Specifications (Oct. 2019), available at https:// www.nyse.com/publicdocs/data/IGN_Colo_US_ Technical_Specifications.pdf. 408 See NYSE Low-Latency SIP Filing, supra note 47. NYSE currently assesses the following colocation fees for access to the IP network: (1) For a 1 gb circuit, $2,500 per connection initial charge plus $2,500 monthly per connection; (2) for 10 gb circuit, $10,000 per connection initial charge plus $11,000 monthly per connection; and (3) for a 40 gb circuit, $10,000 per connection initial charge plus $18,000 monthly per connection. See NYSE Price List 2020, available at https://www.nyse.com/ publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf (last accessed Jan. 22, 2020). 409 See NYSE Low-Latency SIP Filing, supra note 47, at 47594. The filing defines ‘‘NMS feeds’’ to include the data streams of the Consolidated Tape System, the Consolidated Quote System, and the Options Price Reporting Authority (‘‘OPRA’’). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 a one-way latency reduction of over 140 microseconds.410 Over the past several years, market participants have increasingly raised concerns about these various forms of latency and how they affect their ability to participate competitively in today’s markets and provide best execution to their customers. Market participants have argued that as significant investments have been made in the proprietary data environment, the Equity Data Plans, which are operated by the SROs, have not made—or have 410 Id. The Commission understands this to mean that, currently, each of the CTA/CQ Plan participants must transmit its data through connectivity options that have a round-trip latency of at least 280 microseconds [140 microsecond oneway latency) * 2 = 280 microsecond round-trip latency]. The Commission believes that this is in addition to the transmission latency that is in the published CTA average aggregation latency metrics of between 69 microseconds for the quote feed and 139 microseconds for the trade feed. See CTA, Key Operating Metrics of Tape A&B U.S. Equities Securities Information Processor (CTA SIP), supra note 398 (regarding the second quarter of 2019). The round-trip latency of 280 microseconds would increase the 2Q19 realized CTA aggregation latency to 349 microseconds (from 69 microseconds) for the quotes feed and 419 microseconds (from 139 microseconds) for the trade feed. At the same time, the Commission understands that NYSE, which owns the CTA/CQ SIP, offers non-SIP proprietary data transmission to end-users via faster microwave networks. See, e.g., ICE Global Network: Chicago— New Jersey, available at https://www.theice.com/ market-data/connectivity-and-feeds/wireless/ chicago-to-new-jersey (last accessed Jan. 22, 2020) (describing ICE’s microwave route between the Chicago metro trading hub to Nasdaq’s data center in Carteret, NJ); ICE Global Network: New Jersey Metro, available at https://www.theice.com/marketdata/connectivity-and-feeds/wireless/new-jerseymetro (last accessed Jan. 22, 2020) (describing ICE’s laser and millimeter wave route between ICE’s Mahwah data center and the Carteret and Secaucus data centers. The Commission has instituted proceedings to allow for additional analysis and input concerning proposed fees in connection with the NYSE Low-Latency SIP Filing. See Securities Exchange Act Release No. 87699 (Dec. 9, 2019), 84 FR 68239 (Dec. 13, 2019). In addition, the CTA and OPRA recently made changes that permit access to the NMS feeds with an expected reduction in latency. ‘‘The NMS Network uses low-latency network switches and optimized topology to minimize latency, which [CTA and OPRA] expects will result in one-way latency, across all network hops, of approximately 5us, including fiber latency. This is a substantial improvement over the current inbound one-way latency of approximately 144us over [Secure Financial Transaction Infrastructure].’’ See NMS Network Customer FAQs, at 3 (2019), available at https://www.ctaplan.com/publicdocs/ ctaplan/notifications/trader-update/NMS_Network_ FAQ.pdf (last accessed Jan. 22, 2020); CTA and UTP Annual Letter, supra note 181, at 1 (‘‘In its continuing effort to reduce latency and improve resiliency, the CTA will be making two improvements to the CTA/CQ feeds this year. First, subscribers will be able to connect to a new, dedicated, low latency NMS network to access CTA/CQ feeds. Subject to SEC approval, this should be available in the first quarter of 2020. Second, the CTA will complete its migration to NYSE’s new Pillar technology, which will provide substantial latency reductions for the CTA/CQ feeds. CTA anticipates that it will launch the new technology in the summer of 2020.’’). PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 16767 been slow to make—the investments necessary to address most of these concerns.411 As a result, the latency differentials, in their various forms, between SIP data and proprietary data are significant enough that market participants believe they affect their ability to trade competitively and to provide best execution to customer orders.412 Proprietary data products often rely on low latency wireless connections, and the data is transmitted directly from each exchange to the data center of the subscriber without first having to travel to a centralized consolidation location as is the case with the exclusive SIPs. In addition, new entities have entered the market data space by providing specialized market data products for subscribers using proprietary data feeds. In essence, the provision of proprietary data to market participants via a decentralized consolidation model has developed in a competitive environment that has enhanced content and reduced latency for market participants; however, improvements to latency occurred more slowly and to a lesser extent with the exclusive SIPs.413 The concurrent existence of both the exclusive, centralized consolidation model for SIP data and the decentralized consolidation model for enhanced proprietary data has resulted in a two-tiered market data environment, where those participants that can reasonably afford and choose to 411 See Letter from Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, to Mary Jo White, Chair, Commission, 8–9 (Oct. 24, 2014), available at https://www.sec.gov/comments/ s7-02-10/s70210-422.pdf; Letter from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC, to Vanessa Countryman, Secretary, Commission (Sept. 24, 2019) (‘‘Ramsay Letter II’’) (attachment to letter), available at https:// www.sec.gov/comments/4-729/4729-6190352192448.pdf; Proposed Governance Order, supra note 8. 412 See, e.g., Roundtable Day One Transcript at 64 (Brad Katsuyama, IEX) (‘‘[a]nyone who cares or is, you know, making machine-level decisions cannot use the SIP just from a speed standpoint . . . [b]ut if full information and speed become important, which it is for the majority of large players maintaining their own electronic trading platform, then I would not say the SIP serves much of a purpose to them.’’); at 66 (Mehmet Kinak, T. Rowe Price (‘‘[t]his is a best execution obligation. We are obligated to try and produce best execution on every single order that we have. If our brokers are not aligned in that manner to use the most direct, the fastest, the most robust feeds they can get their hands on, then we will trade with someone else.’’); T. Rowe Price Letter at 2 (explaining that brokerdealers must purchase proprietary data because SIP data is slow and not as expansive as proprietary data and that even if the Commission provided a safe harbor permitting broker-dealers to fulfill their best execution requirements by relying on SIP data, broker-dealers believe that they have an obligation to obtain the ‘‘more robust, faster’’ proprietary data feeds). 413 See supra note 411 and accompanying text. E:\FR\FM\24MRP2.SGM 24MRP2 16768 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules pay for the proprietary feeds receive other content rich data faster than those who do not, such as smaller market participants that face higher barriers to entry from data and other exchange fees.414 The Commission is concerned about this disparity and its effect on investors. Accordingly, the Commission is proposing to address the latency differentials and reduce the asymmetries that exist within this twotiered environment. B. Proposed Decentralized Consolidation Model To enhance the speed and quality of the collection, consolidation, and dissemination of the proposed consolidated market data, the Commission is proposing a decentralized consolidation model with competing consolidators 415 and selfaggregators 416 to replace the existing centralized consolidation model which relies on the exclusive SIPs.417 The Commission preliminarily believes that a decentralized consolidation model with competing consolidators and self-aggregators would benefit market participants because it would significantly reduce the geographic, aggregation, and transmission latency differentials that exist between SIP data and proprietary data that have increasingly reduced the utility of SIP data and disadvantaged, in particular, smaller market participants.418 Specifically, as 414 See infra note 418. infra Section IV.B.2. 416 See infra Section IV.B.3. 417 The Commission is taking an incremental approach to addressing market data infrastructure issues and is at this time addressing only the market data infrastructure issues of NMS stocks. The market data needs of options market participants and equities market participants are different, as are the market structures for options and equities more broadly. The Commission’s proposal to expand the content of consolidated market data and introduce a decentralized consolidation model for its distribution to market participants has been designed for NMS stocks. The Commission may in the future consider the market data infrastructure of listed options. See also Proposed Governance Order, supra note 8. 418 See infra Section VI.C.2(c). Roundtable panelists stated that broker-dealers do not have the option to forgo buying the proprietary data in meeting their clients’ needs because the SIPs are slower and not as expansive. See Roundtable Day One Transcript at 65–66 (Mehmet Kinak, T. Rowe Price); T. Rowe Price Letter at 2; Roundtable Day Two Transcript at 245 (Tyler Gellasch, Healthy Markets) (asking how a small firm can be competitive when it has to spend $50,000 per month to connect to one exchange group’s proprietary data feeds), at 280–281 (describing market data as a mandatory ‘‘tax’’ on doing business that imposes a disproportionately large burden on small brokers). But see Robert P. Bartlett, III and Justin McCrary, How Rigged Are Stock Markets? Evidence from Microsecond Timestamps (2017) (‘‘Bartlett and McCrary’’), available at https:// lotter on DSKBCFDHB2PROD with PROPOSALS2 415 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 discussed above, the Commission preliminarily believes that the decentralized consolidation model would reduce geographic latency by facilitating the ability of proposed consolidated market data to be delivered to subscribers more directly, without going to a separate location to be consolidated by the exclusive SIPs.419 In addition, the proposed decentralized consolidation model likely would reduce geographic latency by allowing consolidation to occur at the data center where a data end-user is located instead of occurring only at the CTA/CQ SIP and the Nasdaq UTP SIP data centers. This arrangement would permit competing consolidators to receive data from each exchange directly at the point of consolidation and latency-sensitive data end-users to receive proposed consolidated market data at the same location if they so desired.420 This would eliminate the geographic latency necessarily encountered when a latencysensitive data end-user receives consolidated data from an exclusive SIP that is in a separate data center and that exclusive SIP is consolidating data from exchanges that are located in other data centers. In addition, the Commission preliminarily believes that the introduction of competitive forces will lead to improvements in the use of more competitive, low latency aggregation and transmission technologies for consolidated market data. Specifically, competition should incentivize competing consolidators to minimize the amount of time it takes to aggregate www.law.berkeley.edu/wp-content/uploads/2019/ 10/bartlett_mccrary_latency2017.pdf (‘‘[O]ur analysis suggests SIP reporting latencies generate remarkably little scope for exploiting the informational asymmetries available to subscribers to exchanges’ direct data fees.’’). Bartlett and McCrary, however, cautioned that their ‘‘results should not be over-interpreted’’ and noted that their results ‘‘do not rule out other types of latency arbitrage that might be prevalent in the current environment.’’ Roundtable respondents supported the view that a competing consolidator model would reduce the speed differential between current SIP data and proprietary data. See, e.g., Roundtable Day One Transcript at 49–50 (Prof. Hal Scott, Harvard University); SIFMA Letter II. 419 As noted above, the current Equity Data Plan architecture requires SRO data to be sent from an SRO’s data center to the exclusive SIP (typically in a separate data center in a different geographic location) for consolidation, prior to then being transmitted from the plan processor’s data center to market data users (again, typically in a separate data center in a different geographic location) once the data is consolidated. See supra notes 395–396 and accompanying text. 420 If a competing consolidator chooses not to consolidate data at the data center of its users, the Commission believes the users would still benefit from reduced aggregation and transmission latencies resulting from the proposed decentralized consolidation model. See infra notes 421–422 and accompanying text. PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 SRO data into proposed consolidated market data.421 In addition, competition could incentivize competing consolidators to reduce transmission latency by offering superior connectivity options that are faster than fiber optics, such as microwave, laser, or other wireless means of connectivity.422 Competing consolidators and selfaggregators would not be restricted to the transmission methods mandated by the Equity Data Plans 423 and would compete based on the efficiency of their aggregation of raw SRO data to generate proposed consolidated market data. By introducing competitive forces into the collection, consolidation, and dissemination of proposed consolidated market data, the Commission preliminarily believes such data could be delivered to market participants with improved efficiencies and latencies comparable to proprietary market data products. To implement this model, the Commission proposes to: (1) Amend Rule 600 to introduce definitions of competing consolidator and selfaggregator; (2) amend Rule 603(b) to require the SROs to provide their NMS information to competing consolidators and self-aggregators in the same manner the SROs make available this information to any person and to remove the requirement that there be only one plan processor for each NMS stock; and (3) adopt new Rule 614 to require the registration of competing consolidators and establish the obligations with which they must comply and a new Form CC for competing consolidator registration. In addition, the Commission is proposing to amend Regulation SCI to expand the definition of ‘‘SCI entities’’ to include competing consolidators because they would be sources of proposed consolidated market data, and therefore would ‘‘play a significant role in the U.S. securities markets and/or have the potential to impact investors, the overall market, or the trading of individual securities.’’ 424 As discussed below, the Commission preliminarily believes that if a competing consolidator’s consolidated market data feed became unavailable or otherwise unreliable, it could have a significant impact on the trading of securities, and could interfere 421 The Commission is proposing to require each competing consolidator to publish on its website its latency statistics on a monthly basis. See infra Section IV.B.2(e)(ii). 422 See infra Section VI.C.2(c). 423 As noted above, the NYSE and Nasdaq offer faster wireless connectivity to their data centers and other data centers. See supra Section IV.A. 424 See Regulation SCI Adopting Release, supra note 28, at 72258. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules with the maintenance of fair and orderly markets.425 Accordingly, this change would subject competing consolidators to the requirements of Regulation SCI. Under this new proposed decentralized consolidation model, the SROs would be required to provide their NMS information to competing consolidators and self-aggregators and the existing exclusive SIP model would cease. The Commission preliminarily believes that the implementation of a decentralized consolidation model with competing consolidators and selfaggregators will fundamentally improve the way consolidated market data, as proposed, is provided in the U.S. Among other things, this model should materially reduce information asymmetries for those market participants who rely exclusively on the exclusive SIP feed and facilitate the ability to achieve best execution for those broker-dealers who rely exclusively on the SIP feed. Finally, the Commission believes that the introduction of competition into the collection, consolidation, and dissemination of the proposed consolidated market data should help ensure that such data continues to be provided in an accurate, reliable, prompt, and fair manner 426 as the market evolves in the future. 1. Access to Data The Commission is proposing to amend Rule 603(b) of Regulation NMS to reflect the decentralized consolidation model by requiring each SRO to provide its NMS information, including all data necessary to generate proposed consolidated market data, to all competing consolidators and selfaggregators 427 in the same manner and using the same methods, including all methods of access 428 and data formats, 425 See infra Section IV.B.2(f). 15 U.S.C. 78k–1(c)(1)(B). 427 The proposal does not include a requirement that the SROs provide a standardized format for the data because the Commission preliminarily believes that imposing a standardized format would increase costs and burdens on the SROs and that competing consolidators and self-aggregators would be able to handle data received in multiple formats, as determined by each SRO, as is the case today for proprietary data. The Commission is proposing to require each SRO to offer the same access or transmission options and the same formats offered for proprietary data to proposed consolidated market data. See proposed amendment to Rule 603(b). 428 For example, the same access options available to proprietary feeds, including, but not limited to transmission medium (i.e., fiber optics or wireless), multicast communication, colocation options, physical port, logical port, bandwidth, and FPGA, would be required to be made available for proposed consolidated market data feeds. Further, any enhancements to proprietary feed methods of access should similarly be made to consolidated market feeds. lotter on DSKBCFDHB2PROD with PROPOSALS2 426 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 as such SRO makes available any information to any other person.429 Under the Commission’s proposed approach, competing consolidators and self-aggregators would have to collect, and the SROs would provide, all of each SRO’s market data that is necessary to generate consolidated market data as proposed,430 and the competing consolidators and self-aggregators would aggregate the SROs’ market data to generate the proposed consolidated market data. For exchange data, an exchange could leverage its existing offerings and infrastructure and make available to competing consolidators and self-aggregators its current 429 Four commenters supported this approach. One commenter stated that for a new consolidator model to be competitive, the consolidators would have to have the right to buy data from exchanges on non-discriminatory terms. See Ramsay Letter II (attachment to letter). Another commenter stated that the economic terms of co-located competing consolidators at an exchange data center should be equivalent to those offered to the exchange’s trading members. This commenter also suggested that any exchange that operates a competing consolidator in its data center should have policies and procedures to ensure that competing consolidators in the same data center have equal access to the exchange’s feeds at equal latencies. This commenter also supported the provision of direct market data feeds by exchanges to competing consolidators. See Letter to Brent J. Fields, Secretary, Commission, from Melissa MacGregor, Managing Director and Associate General Counsel, and Theodore R. Lazo, Managing Director and Associate General Counsel, SIFMA, dated Oct. 24, 2018 (‘‘SIFMA Letter’’) (attachment to letter). The third commenter stated that all market data distributors should receive the same market data at the same time and at the same cost, which may require exchange proprietary data feeds to be delayed to match the data receipt time of affiliated or third-party SIPs. The commenter said that exchanges, affiliates, and third parties then would be able to compete to provide market data to recipients. See Letter to Jay Clayton, Chairman, Commission, from Tyler Gellasch, Executive Director, Healthy Markets Association, 3 (Jan. 3, 2020) (‘‘Healthy Markets Association Letter III’’). The fourth commenter suggested that the Commission update its interpretations for Rule 603(a) to emphasize ‘‘the synchronized availability of data between SIP and exchanges’ proprietary products to satisfy the fair and reasonable, as well as non-discriminatory principles.’’ See Letter to Vanessa Countryman, Secretary, Commission, from Kelvin To, Founder and President, Data Boiler Technologies, LLC, 8 (Dec. 6, 2019) (‘‘Data Boiler Letter’’). The Commission believes that its proposed amendment to Rule 603(b), as discussed below, would achieve this result by requiring the same manner and methods, including all methods of access and the same format for competing consolidators, self-aggregators and subscribers of proprietary data. 430 One commenter advocated that each exchange provide a single data feed to market participants. The commenter said that a single data feed ‘‘would better serve market participants from the standpoint of equality and fairness.’’ See T. Rowe Price Letter at 3. The proposed rule does not require the SROs to provide a single feed. The Commission preliminarily believes that the SROs should be able to utilize their current data feeds to make available the data necessary to generate proposed consolidated market data. This would reduce the costs and burdens of implementing the proposed amendments to Rule 603(b). PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 16769 proprietary data products that contain data elements that are specified in the proposed definition of consolidated market data,431 or an exchange could develop a new market data product that contains only the data elements that are specified in the proposed definition of consolidated market data. Competing consolidators and self-aggregators could choose to purchase products that include only the proposed consolidated market data elements or products that contain elements of both proposed consolidated market data and other proprietary data. However, all SROs must offer market data, and access to such data, to those competing consolidators or self-aggregators that elect to purchase only data that would be necessary to create consolidated market data, as required under the proposed rule amendments. The proposed decentralized consolidation model and the proposed consolidated market data definition do not preclude the exchanges from continuing to sell proprietary data. If an exchange provided its proprietary data products to a competing consolidator or self-aggregator and a competing consolidator or self-aggregator developed a product, or otherwise used data, that exceeded the scope of proposed consolidated market data (e.g., full depth of book data), the competing consolidator or self-aggregator would be charged separately for the proprietary data use pursuant to the individual exchange fee schedules.432 Selfaggregators and competing consolidators that limit their use of exchange data to proposed consolidated market data elements would be charged only for proposed consolidated market data pursuant to the effective national market system plan(s) fee schedules.433 As noted above, under the proposed decentralized consolidation model, SROs must make available market data to competing consolidators or selfaggregators that elect only to purchase 431 For example, an exchange could make available a current proprietary DOB product that contains elements of proposed core data to competing consolidators and self-aggregators for purposes of Rule 603(b). 432 Fees for market data that is outside of the proposed definition of consolidated market data (i.e., proprietary data products, and access to such proprietary data products) would be subject to the rule filing process pursuant to Section 19(b) and Rule 19b–4. As discussed above, competing consolidators would be able to develop products for their subscribers based on subscriber demand. See supra notes 322–323 and accompanying text. 433 Fees for proposed consolidated market data would be subject to the NMS plan process pursuant to Rule 608 of Regulation NMS. See infra Section IV.B.4 for a discussion of the effective national market system plan(s). E:\FR\FM\24MRP2.SGM 24MRP2 16770 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 data necessary for the proposed consolidated market data.434 Currently, the exclusive SIPs are subject to Exchange Act Section 11A(c)(1)(C) (as implemented by Rule 603(a)(1)), which requires that exclusive processors (which include the exclusive SIPs and SROs when they distribute their own data) must assure that all securities information processors may obtain on fair and reasonable terms information with respect to quotations for and transactions in securities, which includes consolidated market data.435 Section 11A(c)(1)(D), in turn (as implemented by Rule 603(a)(2)), requires that the SROs provide such data to broker-dealers and others on terms that are not unreasonably discriminatory. As we have noted, competing consolidators will be securities information processors and thus Exchange Act Section 11(A)(c)(1)(C) will continue to apply. Similarly, self-aggregators are brokerdealers and thus Exchange Act Section 11A(c)(1)(D) will continue to apply. The Commission seeks to ensure that consolidated market data is widely available for reasonable fees.436 In discharging its statutorily mandated review function, the Commission must assess the proposed fees and determine whether they are fair and reasonable, and not unreasonably discriminatory.437 The Commission must have ‘‘sufficient information before it to satisfy its statutorily mandated review function’’— that the fees meet the statutory 434 Vendors would still be able to operate in the decentralized consolidation model. Vendors would be able to receive proprietary market data directly from the SROs as they do today or they would be able to receive consolidated market data from a competing consolidator in a manner that is similar to how they receive SIP data today without being required to register as a competing consolidator. However, if a vendor wished to receive directly from the SROs information with respect to quotations for and transactions in NMS stocks at the prices established by the effective national market system plan(s) and generate consolidated market data for dissemination, such vendor would be required to register as a competing consolidator. Thus, only competing consolidators and selfaggregators would be able to directly receive the NMS information that is necessary to generate consolidated market data from the SROs at the prices established by the effective national market system plan(s). Id. 435 15 U.S.C. 78k–1(c). See also Rule 603(a)(1)–(2) of Regulation NMS, 17 CFR 242.603(a)(1)–(2). 436 Bloomberg Decision, supra note 37, at 4, n.12 (citing Regulation NMS Adopting Release, supra note 10, at 37560) (‘‘In the Proposing Release, the Commission emphasized that one of its primary goals with respect to market data is to assure reasonable fees that promote the wide public availability of consolidated market data.’’). 437 See 15 U.S.C. 78k–1(c); see also Rules 603(a)(1)–(2), 608 of Regulation NMS, 17 CFR 242.603(a)(1)–(2), 608; Bloomberg Decision, supra note 37, at 11–12. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 standard.438 The Commission has previously stated that fees for consolidated SIP data can be shown to be fair and reasonable if they are reasonably related to costs.439 The exchanges would be able to offer different access options (e.g., with different latencies, throughput capacities, and data-feed protocols) to market data customers, but any access options available to proprietary data customers must also be available to competing consolidators and selfaggregators for the purpose of collecting and consolidating proposed consolidated market data.440 Proposed Rule 603(b) would require exchanges to provide all forms of access used for proprietary data to all competing consolidators and self-aggregators for the collection of the data necessary to generate proposed consolidated market data. The Commission is proposing to require that an exchange offer the same form of access, such as fiber optics, wireless, or other forms, in the same 438 Bloomberg Decision, supra note 37 at 15; cf. Rule of Practice 700, 17 CFR 201.700 (providing that the burden of demonstrating that a proposed rule change satisfies statutory standards is on the self-regulatory organization that proposed the rule change). 439 In the Market Information Concept Release, the Commission stated ‘‘the fees charged by a monopolistic provider (such as the exclusive processors of market information) need to be tied to some type of cost-based standard in order to preclude excessive profits if fees are too high or underfunding or subsidization if fees are too low. The Commission therefore believes that the total amount of market information revenues should remain reasonably related to the cost of market information.’’ See Market Information Concept Release, supra note 11, at 70627. The Commission later explained that because core data must be purchased, their fees are less sensitive to competitive forces. See Securities Exchange Act Release No. 59039 (Dec. 2, 2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File No. SR–NYSEArca–2006– 21). A reasonable relation to costs has since been the principal method discussed by the Commission for assessing the fairness and reasonableness of such fees for core data, with the recognition that ‘‘[t]his does not preclude the Commission from considering in the future the appropriateness of another guideline to assess the fairness and reasonableness of core data fees in a manner consistent with the Exchange Act.’’ See Bloomberg Decision supra note 37, at 15 & nn.63. Although this proposal introduces competition into the dissemination of consolidated market data, the mandatory nature of the provision of consolidated market data by the SROs has not changed. The ‘‘principal method we have discussed for assessing the fairness and reasonableness of core data fees has stated that core data fees should bear at least some relationship to costs; past Commission statements have contemplated various approaches for how that relationship might be assessed. This is because distributors of core data have an effective monopoly over such data, and accordingly competitive market forces are not operating to impose sufficient constraints to promote core data fees’ fairness and reasonableness.’’ See Bloomberg Decision, supra note 37, at 15 (footnotes and citations omitted). 440 See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a). Access fees would be set forth in each individual SRO’s fee schedules. PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 manner and using the same methods, including all methods of access and the same format, as the exchange offers for its proprietary data. For instance, if an exchange has more than one form of transmission for its proprietary data, then the exchange must offer the competing consolidators and selfaggregators those types of transmission for proposed consolidated market data. The proposed rule would not require an exchange to offer new forms of access, but if an exchange did offer any new forms of access for proprietary data, it would have to offer them for proposed consolidated market data as well. Different forms of access affect the delivery of data. For example, as discussed above, fiber connections have latencies that wireless connections do not. If an exchange provided its proprietary market data via wireless connections and proposed consolidated market data only via fiber connections, the latencies that exist today would continue. Accordingly, the Commission preliminarily believes that the SROs should be required to provide proposed consolidated market data in the same manner and using the same methods, including all methods of access and the same format as they provide for proprietary data. The Commission understands that different market participants have different access needs. The Commission is not mandating a specific connectivity option or limiting options for market participants but believes that all connectivity options, including colocation, must be available to all market participants whether they are purchasing proposed consolidated market data or proprietary data. In addition, the access requirement under Rule 603(b) would require that the exchanges provide their NMS information, including all data necessary to generate consolidated market data, at one data dissemination location co-located near each exchange’s matching engine. This requirement would allow competing consolidators and self-aggregators to receive data at that location at the same speeds, and with the same access options, as the exchange offers its market data. Different colocation options within a data center could raise concerns about whether that exchange is providing the same manner of access to its data as proposed to be required under Rule 603(b). Further, the exchanges would not be permitted to provide their NMS information necessary to generate consolidated market data in a faster manner to any affiliate exchange, a subsidiary or other affiliate that operates E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 as a competing consolidator or a subsidiary or affiliate that competes in the provision of proprietary data. Furthermore, proposed Rule 603(b) would require that all access options be provided in a latency-neutralized manner such that all participants within the exchange’s data center—such as proprietary data subscribers, competing consolidators, and self-aggregators— would receive the data at the same time, regardless of their location or status within the data center.441 For example, exchanges could adopt equal cable length protocols (i.e., where cable lengths from network equipment to customer cabinets are harmonized for equal access) to ensure that all of the exchange’s data center connections provide market data simultaneously. The proposed decentralized consolidation approach would require the SROs to use the same latencyneutralization processes for competing consolidators and self-aggregators as they offer to subscribers of proprietary data. The Commission is also proposing to remove the requirement in Rule 603(b) that ‘‘all consolidated information for an individual NMS stock [be disseminated] through a single plan processor.’’ 442 While this requirement is necessary for the centralized consolidation model, it would be inconsistent with the proposed decentralized consolidation model, which would allow multiple competing consolidators to disseminate proposed consolidated market data in individual NMS stocks and would permit self-aggregators to collect and generate proposed consolidated market data for individual NMS stocks for their own internal uses. The Commission preliminarily believes that the proposed amendments to Rule 603(b) would be consistent with the goals of Section 11A of the Exchange Act by helping to ensure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of NMS information, as well as the fairness and usefulness of such data.443 The Commission requests comment on the proposed amendments to Rule 441 See also Rule 603(a) of Regulation NMS, 17 CFR 242.603(a); supra note 440 and accompanying text. 442 17 CFR 242.603(b). 443 See Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k–1(c)(1)(B). Section 11A(c)(1)(B) of the Exchange Act authorizes the Commission to prescribe rules, as necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Exchange Act, that assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication of quotation and transaction information, as well as the fairness and usefulness of the form and content of such data. Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 603(b) of Regulation NMS. In particular the Commission solicits comment on the following: 64. Should the SROs be required to provide all of their market data with respect to NMS stocks to competing consolidators and self-aggregators? Should the SROs charge fees based on the use of the data, e.g., fees for proposed consolidated market data set by the effective national market system plan(s) and fees for proprietary data set by individual SROs? Should the SROs only be required to provide the market data that is necessary to generate and calculate proposed consolidated market data? Or, should the determination as to how best to provide the market data that is necessary to generate and calculate proposed consolidated market data be left to the discretion of SROs? What are the benefits and costs of each of these potential approaches? 65. Should the SROs be required to offer both proposed consolidated market data and proprietary data to competing consolidators from the same platform and using the same technology infrastructure at an exchange data center for both products? 66. Should the SROs be required to offer both proposed consolidated market data and proprietary data to competing consolidators from the same platform and using the same SRO infrastructure where the pricing model for the different products is based on data use as opposed to being based upon distinct data feeds? 67. Should the SROs be permitted to process their market data before providing it to competing consolidators and self-aggregators? For example, should the SROs be permitted to aggregate odd-lots before providing data to competing consolidators and selfaggregators? If so, why and to what extent? Should such processing only be allowed to the extent that it does not result in any latency differential between processed and unprocessed data? Alternatively, should such processing be required to facilitate ease of use for certain customers? 68. Should exchanges be required to permit co-location of competing consolidators and self-aggregators within their data centers? If so, should the fees charged for such colocation be subject to the effective national market system plan(s) for NMS stocks? 69. Should all data disseminated by the SROs to competing consolidators and self-aggregators be in the same format (e.g., aggregated vs. message-bymessage depth of book)? Please explain the expected benefits and costs of allowing for multiple formats for data dissemination. PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 16771 70. Should the SROs make historical data freely available to market participants at a specified location and in a specified format? Why or why not? 71. Is there anything different about having competing consolidators or changing the content of consolidated market data that should affect the analysis of the fairness and reasonableness of fees for data distributed pursuant to an NMS plan, or how the NMS plan participants demonstrate the fairness and reasonableness of those fees? If so, please explain why. 72. Do commenters believe that the Commission should also require the SROs to provide a connectivity option solely for access to the NMS information necessary to generate proposed consolidated market data? 2. Competing Consolidators As noted above, currently Rule 603(b) requires all consolidated information for an individual NMS stock to be disseminated through a single plan processor.444 While the Commission has issued a proposed order that would direct the SROs to develop a single ‘‘New Consolidated Data Plan’’ with a new governance structure,445 the Commission now proposes to update and modernize the manner in which NMS information is collected, consolidated, and disseminated. The Commission is proposing to amend Regulation NMS to introduce competitive forces as one of several means to update and modernize the provision of proposed consolidated market data. Competing consolidators would replace the existing exclusive SIPs and would collect NMS information from each of the SROs.446 Thereafter, competing consolidators would calculate, consolidate, and disseminate the data as consolidated market data, as proposed to be defined.447 The Commission 444 Rule 603(b) of Regulation NMS, 17 CFR 242.603(b). See also supra Section II.B. 445 See Proposed Governance Order, supra note 8. 446 The existing exclusive SIPs would be required to continue their operations until such time as the Commission considers and approves an NMS plan amendment that would effectuate a cessation of their operations. See infra Section IV.B.6. Should the existing exclusive SIPs choose to become competing consolidators, proposed Rule 614(a) mandates a registration process for securities information processors that wish to become competing consolidators. See infra Section IV.B.2(e). If the existing exclusive SIPs choose to cease operations, the SROs would be required to amend the effective national market system plan(s) for NMS stocks to reflect this change. 447 As discussed in Section IV.B.2(f), infra, because competing consolidators would be the sources of proposed consolidated market data, the Commission is proposing to define them as ‘‘SCI E:\FR\FM\24MRP2.SGM Continued 24MRP2 16772 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules preliminarily believes that the proposed amendments to Regulation NMS to introduce competing consolidators should help to ensure the ‘‘prompt, accurate, reliable, and fair collection, processing, distribution, and publication of information with respect to quotations for and transactions in such securities and the fairness and usefulness of the form and content of such information.’’ 448 Further, the Commission preliminarily believes that these new market data providers could help to effectively address the latency concerns related to the exclusive SIPs, as well as the cost concerns that have been raised regarding the need to buy both SIP data from the Equity Data Plans as well as proprietary data from the exchanges, and add resilience to the collection, consolidation and distribution of consolidated market data by having redundant systems perform these functions rather than an exclusive SIP. lotter on DSKBCFDHB2PROD with PROPOSALS2 (a) Previous Consideration of Competing Consolidators Under Regulation NMS The Commission previously considered introducing competitive forces to the dissemination of SIP data when it proposed and adopted Regulation NMS. Specifically, the Commission discussed a competing consolidator model 449 that, as described, would have retained the consolidated display requirement of the predecessor to Rule 603(c) of Regulation NMS but would have eliminated the Equity Data Plans and the two exclusive SIPs.450 Under the competing consolidator model that was being considered, each SRO would be allowed to establish its own fees, enter into and administer its own market data contracts, and provide its own data distribution facility.451 Competing consolidators would purchase data from the individual SROs, consolidate it, and entities,’’ and thus subject to the requirements of Regulation SCI. The Commission proposes to amend Rule 1000 of Regulation SCI to effect this change. See proposed amendment to Rule 1000 of Regulation SCI. See also 17 CFR 242.1000. 448 15 U.S.C 78k–1(c)(1)(B). 449 The competing consolidator model was recommended by the Advisory Committee on Market Information (‘‘Advisory Committee on Market Information’’), which had been formed to consider market data issues. See Report of the Advisory Committee on Market Information: A Blueprint for Responsible Change (Sept. 14, 2001), available at https://www.sec.gov/divisions/ marketreg/marketinfo/finalreport.htm. 450 See Securities Exchange Act Release No. 49325 (Feb. 26, 2004), 69 FR 11126 (Mar. 9, 2004) (‘‘Regulation NMS Proposing Release’’), at 11177– 11178; Regulation NMS Adopting Release, supra note 10, at 37558–37559. 451 See Regulation NMS Proposing Release, supra note 450, at 11177; Regulation NMS Adopting Release, supra note 10, at 37559. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 distribute it to investors and other data users.452 At that time, however, the Commission noted several drawbacks to that competing consolidator model,453 including: (1) A lack of uniform data distribution to the public, (2) the potential for an increase in processing costs due to multiple consolidators performing tasks previously performed by a single processor, and (3) the risk that the fees for core data, as then contemplated, could increase because payment of every SRO’s fees would be mandatory, thereby affording little room for competitive forces to influence the level of fees.454 When addressing its concerns about a potential loss of data uniformity, the Commission explained that a report issued by the Advisory Committee on Market Information, which prompted consideration of a competing consolidator model in the Regulation NMS Proposing and Adopting Releases,455 noted four types of quality problems that could arise from the competing consolidator model relating to: (1) Sequencing of information, (2) validation tolerances, (3) capacity, and (4) data protocols and formats.456 With respect to information sequencing, the report stated that the competing consolidator model would impose a risk that market data messages would be processed in different sequences by different consolidators due to the use of differing hardware, software, or communications platforms to process market data. On validation tolerances, the report stated that standards would need to be established for competing consolidators to verify the consistency of information (such as the NBBO), since the plan processors currently check all market center messages to verify that they utilize correct message structures. The report stated that competing consolidators must have sufficient capacity (for example, specifying network capacity, input, output line, system, internal system threading, storage and memory capacity, and database size) to process the 452 Id. 453 See Regulation NMS Proposing Release, supra note 450, at 11178. 454 Id. The Commission stated that it would have to review every SRO’s market data fees and get involved in multiple market data fee disputes. 455 See supra notes 449–450. 456 See supra note 449. See infra text accompanying notes 503–509, 513–515 for a discussion of the risks. The Advisory Committee on Market Information report stated that these risks would be manageable and recommended allowing the private sector to establish technical standards for competing consolidators rather than the Commission. See supra note 449, at Section VII.C.2.b(iv). PO 00000 Frm 00048 Fmt 4701 Sfmt 4702 information from all reporting market centers, explaining that if capacity is lacking, messages will be delayed to data recipients. Finally, with respect to data protocols and formats, the report said that the use of different protocols, message formats, and technologies by different consolidators could make the market data system more cumbersome and prone to error. The report noted that exclusive SIPs currently receive market center information using standard input formats and disseminate consolidated data using standard output formats.457 Ultimately, the Commission concluded that investors and other data users would bear the most risk in switching to a competing consolidator model, while the SROs would benefit by being able to charge higher fees for lower quality information; 458 therefore, the Commission decided not to propose the competing consolidator model for adoption.459 In the Regulation NMS Adopting Release, the Commission focused its discussion on the extent to which the competing consolidator model would subject the level of market data fees to competitive forces.460 The Commission stated that market participants would need to purchase data from the SROs and expressed concern that ‘‘the overall level of fees would not be reduced unless one or more of the SROs or Nasdaq was willing to accept a significantly lower amount of revenue than they are currently allocated by the Plans.’’ 461 The Commission believed that it was ‘‘unlikely that any SRO or Nasdaq would voluntarily propose to lower just its own fees.’’ Rather, the Commission stated that some SROs, ‘‘particularly those with dominant market shares whose information is most vital to investors,’’ might propose higher fees to increase their revenues.462 457 See supra note 449, at Section VII.C.2.b. Commission stated that the four types of data quality problems identified by the Advisory Committee could be limited in severity, but remained concerned that the introduction of competing consolidators would compromise data quality. See Regulation NMS Proposing Release, supra note 450, at 11178. 459 See Regulation NMS Proposing Release, supra note 450, at 11178. In the Regulation NMS Adopting Release, the Commission questioned the extent to which market data fees, which would be charged per SRO, would be subject to competition. See Regulation NMS Adopting Release, supra note 10, at 37559. 460 Id. While the Commission did not propose a competing consolidator model, it received comments on the model described in the Regulation NMS Proposing Release. 461 Id. 462 Id. 458 The E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 (b) Comments and Roundtable Discussion The current market data infrastructure, with the Equity Data Plans providing SIP data and the exchanges providing proprietary data products, has led some market participants to suggest that a competing consolidator model be considered again as a means to address the latency and cost differentials that exist between the two data categories.463 Several panelists and commenters at the Roundtable discussed a competing consolidator model. One panelist presented a competing consolidator model and noted that it would introduce competition in the provision of market data by allowing competing consolidators to compete against each other for subscribers.464 This panelist also stated that market forces would drive consolidators’ ‘‘micro-decisions’’ regarding the technology that they would use to provide data.465 The panelist also suggested that competing consolidators should be ‘‘authorized’’ and be Regulation SCI-compliant.466 The panelist expressed confidence that a competitive market would produce a more reliable solution than the current centralized consolidation model.467 One panelist explained that the exclusive SIPs represent a single point of failure for the equity markets and that competing consolidators could improve the speed and quality of SIP data while also reducing their costs.468 Another panelist said that his clients have expressed interest in competitive SIPs.469 One panelist suggested a competing consolidator model wherein entities would consolidate messages 463 The Treasury Capital Markets Report (‘‘Treasury Report’’), which was published one year prior to the Roundtable and referenced by Roundtable respondents, recommended that the Commission amend Regulation NMS to permit competing consolidators as alternatives to the exclusive SIPs as a means to provide faster consolidation and distribution of a wider breadth of market data, at a lower cost than provided by the exclusive SIPs. The Treasury Report suggested that competing consolidators be allowed to purchase proprietary data feeds from exchanges on a nondiscriminatory basis. See U.S. Department of the Treasury, A Financial System that Creates Economic Opportunities—Capital Markets, 64 (Oct. 2, 2017). Other alternatives to the current centralized consolidation model are discussed below. See infra Section IV.C. 464 See Roundtable Day Two Transcript at 25 (Paul O’Donnell, Morgan Stanley). 465 Id. at 26. 466 Id. at 25. 467 Id. 468 See Roundtable Day One Transcript at 49–50 (Prof. Hal Scott, Harvard University). This panelist also suggested that the SIPs should include proprietary data and also permit competing consolidators to do the same. 469 See Roundtable Day Two Transcript at 43 (Jarred Yuster, PICO). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 from individual exchange members. The panelist acknowledged that this approach would likely result in latency issues, but suggested that such a consolidated feed could possibly be leveraged from work being done on reporting to the consolidated audit trail.470 Several comment letters submitted in connection with the Roundtable expressed support for a competing consolidator model.471 One commenter stressed the importance to investors of competition by stating that competition would result in the reduction of the latency differential between the exclusive SIPs and proprietary data feeds, resilience through the use of multiple consolidators, and lower market data costs.472 Another commenter stated that competing consolidators would compete on ‘‘speed, reliability, and price to the benefit of traders and investors alike’’ 473 and that competing consolidators would provide ‘‘the benefit of expanded access to highquality, low-cost market data.’’ 474 Another commenter noted the Treasury Report, which was published in 2017,475 recommended that the Commission recognize that markets for SIP data and proprietary data feeds are not fully competitive and consider amending Regulation NMS to enable competing consolidators as an alternative to the exclusive SIPs.476 This commenter recommended that if competing consolidators are permitted, regulators should examine why a broker-dealer chooses a particular consolidator over others and should monitor how much exchanges decide to charge consolidators for market data.477 Several commenters suggested details on the types of entities that could be 470 See Roundtable Day One Transcript at 182– 184 (Michael Friedman, Trillium Trading). 471 See T. Rowe Price Letter, Letter to Brent J. Fields, Secretary, Commission, from Marcy Pike, SVP, Enterprise Infrastructure, and Krista Ryan, VP, Associate General Counsel, Fidelity Investments (Oct. 26, 2018) (‘‘Fidelity Letter’’); SIFMA Letter; SIFMA Letter II; Ramsay Letter II. 472 See SIFMA Letter II at 3. In addition to the use of competing consolidators, this commenter suggested that the Commission require the exclusive SIPs to compete with each other. See also T. Rowe Price Letter at 3. This commenter believed that competition among organizations eligible to serve as exclusive SIPs, either through a periodic bidding process or the ability of multiple firms to simultaneously serve as exclusive SIPs and compete to provide the best overall combination of fees, services, and reliability would be beneficial. 473 See Ramsay Letter II; Fidelity Letter at 10 (noting that competition may reduce the cost of consolidated market data). 474 See Ramsay Letter II. 475 See supra note 463. 476 See Fidelity Letter at 10. 477 Id. PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 16773 competing consolidators and the functions they could perform.478 For example, one commenter suggested that a competing consolidator could be any commercial entity meeting minimum standards, which may include exchanges or other financial technology vendors,479 and another suggested that they could be private companies that, unlike the existing exclusive SIPs, could operate in any location and would obtain and sell data comparable to proprietary data feeds.480 One commenter suggested a list of functionality that competing consolidators could provide, such as direct exchange feed data from all tapes, quote and trade feeds, regulatory messages, and the market status of all contributing markets.481 Several panelists, in particular representatives of exchanges operating the current exclusive SIPs, expressed concern with a competing consolidator model. One panelist suggested that the interest in competing consolidators arises from a perception that competing consolidators will make market data less costly.482 The panelist said that the cost to produce market data is not a competing consolidator’s cost and that this realization may make such a model less attractive to potential users of competing consolidators.483 Another panelist said that a competing consolidator model could result in multiple NBBOs prevailing at the same nanosecond, which would provide a broker with a choice regarding the price at which it filled a customer’s order.484 The panelist believed that this discretion in choosing an NBBO could result in uncertainty regarding whether the broker had executed a customer’s order at a price that was in the customer’s interest or the broker’s own interest.485 One panelist stated that there is value in understanding what the NBBO is when there are competing SIPs and asked whether this model would introduce benchmark reference price arbitrage.486 The panelist suggested that 478 See SIFMA Letter; Ramsay Letter II. SIFMA Letter. 480 See Ramsay Letter II. 481 See SIFMA Letter (attachment to the letter). This commenter also stated that depth of book should be considered but stated that it should possibly be sold separately. 482 See Roundtable Day Two Transcript at 46–47 (Michael Blaugrund, NYSE). 483 Id. 484 See Roundtable Day Two Transcript at 61 (Prof. Robert Bartlett, U.C. Berkeley). 485 Id. 486 See Roundtable Day One Transcript at 151– 152 (Oliver Albers, Nasdaq); Bartlett and McCrary, supra note 418 (examining the incidence of exclusive SIP latency arbitrage strategies using 479 See E:\FR\FM\24MRP2.SGM Continued 24MRP2 16774 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 a conflict could arise if a broker-dealer executes customer orders and also manages the price against which such trades are benchmarked, i.e., by calculating the NBBO.487 Several comment letters expressed skepticism about the benefits of a competing consolidator model. One commenter said that making radical market structure changes could undermine the NBBO and that adding multiple competing SIPs would create operational, legal, and regulatory complexities as well as unintended consequences, and may not solve concerns about geographic latency.488 Further, this commenter advocated that having a single source of best quote and trade data creates confidence in the U.S. markets because investors can be assured that orders will automatically route to the venue with the best quoted price on the exclusive SIP feed.489 One commenter said that competition would result in multiple NBBOs that would confuse the market. Further, the commenter stated that competition would not ‘‘curb rent-seeking behaviors, nor promote fairness.’’ 490 This commenter suggested that the Commission mandate a type of encryption instead of introducing competition, explaining that encrypting market data would allow proprietary and exclusive SIP feeds to be made available ‘‘securely in synchronized time.’’ 491 Another commenter urged the Commission to do a cost benefit analysis of efforts to decentralize the exclusive SIP architecture and recommended introducing additional instances of existing technology (i.e., a distributed SIP model) as the best approach to reducing geographic latency.492 This commenter added that a competing consolidator approach would create complexity that would undermine the timestamp data from the two SIPs and concluding that trading surrounding exclusive SIP priced trades showed little evidence that fast traders initiate liquidity taking orders to pick off stale quotes). 487 See Roundtable Day One Transcript at 151– 152 (Oliver Albers, Nasdaq). 488 See Wittman Letter at 14; Letter to Brent J. Fields, Secretary, Commission, from Oliver Albers, SVP, Head of Global Partnerships, Nasdaq, 3 (Oct. 24, 2018) (‘‘Albers Letter’’); Blaugrund Letter at 2. The Wittman and Albers Letters were submitted on behalf of Nasdaq. The Blaugrund Letter was submitted on behalf of NYSE. 489 See Albers Letter at 3. 490 See Data Boiler Letter at 4. This commenter also suggested that the Commission amend interpretations of Rule 603(a) of Regulation NMS to emphasize ‘‘synchronized availability of data between SIP and exchanges’ proprietary products.’’ Id. at 8. 491 Id. at 2, 8. 492 See NYSE Group Letter at 6; Blaugrund Letter at 4. The Blaugrund Letter was submitted on behalf of NYSE. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 purposes of Regulation NMS to keep costs low for investors.493 Finally, one commenter opined that competing SIPs would not solve the problem of the exchanges’ control over market data access.494 This commenter asked why a technology firm would become a competing SIP when it cannot control the cost of the market data it must purchase.495 (c) Commission Discussion The Commission is proposing a decentralized consolidation model with competing consolidators and selfaggregators who would collect data from the SROs, and calculate, consolidate, and disseminate proposed consolidated market data to investors and market participants.496 As discussed below, the Commission preliminarily believes that competing consolidators should be required to disclose publicly certain information about their organization, operations, and products, as well as regularly publish certain performance statistics on, for example, capacity, system availability, and latency to demonstrate their operational capability and to provide transparency into the performance of their systems.497 In addition, the Commission preliminarily believes that competing consolidators should have written policies and procedures to assure the prompt, accurate, and reliable delivery of consolidated market data. The Commission preliminarily believes that the competing consolidator proposal would reduce latency, bolster the resilience of the market data infrastructure, and permit the market data infrastructure to more readily adapt to changes in technology to better fit the needs of market participants. The Commission also preliminarily believes that market forces could help to ensure that the proposed consolidated market data is reliable, accurate, and prompt. To attract and maintain its subscriber base, a competing consolidator would have to ensure that it provides consolidated market data, as proposed, with minimal latency, but also reliably and accurately, and in a cost-effective manner. A competing consolidator that does not adequately perform would risk losing customers to another competing 493 See 494 See Blaugrund Letter at 2. Healthy Markets Association Letter I at 38. 495 Id. 496 See infra Section IV.B.2(e)(ii) for a discussion of proposed Rule 614, which would require competing consolidators that are SIPs to register with the Commission and comply with specified responsibilities. 497 One Roundtable respondent supported publication of operational capabilities and performance metrics by competing consolidators. See SIFMA Letter (attachment to letter). PO 00000 Frm 00050 Fmt 4701 Sfmt 4702 consolidator. Competition should also incentivize competing consolidators to evolve and adapt to the needs of the marketplace. If a new technology would result in better provision of data, a competing consolidator likely would adopt that technology to expand its client base. Finally, the introduction of multiple competing consolidators may bring additional resilience to the collection, consolidation, and distribution of consolidated market data, as there would be redundant systems performing these functions rather than one exclusive SIP creating a single point of failure.498 In proposing this competing consolidator model, the Commission considered the concerns it described when it previously evaluated a different competing consolidator model in connection with the adoption of Regulation NMS.499 The Commission preliminarily believes that the proposed competing consolidator model should not raise the same concerns due to the differences between the two models and the manner in which market participants handle market data today. First, to address the Commission’s prior concern about a lack of data uniformity resulting from the use of multiple competing consolidators,500 the Commission is proposing requirements governing how consolidated market data is collected, calculated, generated, and made available.501 The Commission acknowledges that the introduction of multiple entities generating consolidated market data would result in multiple versions of consolidated market data. However, market participants currently consolidate proprietary data feeds, generate their own consolidated data, and calculate their own NBBO.502 The proposal 498 The single point of failure problem was most recently evidenced on August 12, 2019, when the CTA/CQ SIP experienced multiple system issues and was unable to effectively fail over to its backup system. Among other impacts, final closing prices for many symbols were not able to be published by the CTA until after 8:00 p.m. See CTA, CTA Processing Issue on August 12, 2019: CTA Participant Trade Files—Revised Notice, Alert (Aug. 28, 2019), available at https:// www.ctaplan.com/alerts#110000144324. Several Roundtable respondents noted the additional reliability through the redundancy that multiple consolidators would provide. See Roundtable Day One Transcript at 49–50 (Prof. Hal Scott, Harvard University); Roundtable Day Two Transcript at 77 (Paul O’Donnell, Morgan Stanley); Ramsay Letter II. 499 See supra notes 453–454. 500 See supra note 453. 501 See proposed Rules 614(d)(1)–(3). 502 See Roundtable Day One Transcript at 128 (Mark Skalabrin, Redline Trading Solutions) (explaining that his firm builds an NBBO for its customers that use proprietary data feeds), at 141 (‘‘[E]ffectively today, people have to form the NBBO E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 would require competing consolidators and self-aggregators to calculate consolidated market data, including the NBBO, in a consistent manner as set forth in the proposed definitions in Rule 600 of Regulation NMS, which the Commission preliminarily believes would help ensure continuity and consistency in how proposed consolidated market data, including the NBBO, is calculated. Further, on the Advisory Committee on Market Information’s validation tolerance concerns from 2001,503 the report had stated that standards should be created to ensure the consistency of information, such as the NBBO and market center message formatting.504 The report also stated that differences in the protocols and formats used by competing consolidators could make the market data system cumbersome or prone to error.505 As noted above, the proposal would require competing consolidators and self-aggregators to calculate consolidated market data, including the NBBO, in a consistent manner in accordance with the proposed definitions in Rule 600 of Regulation NMS. Further, the Commission preliminarily believes that competing consolidators would likely establish their own standards for verifying information for consistency because they would be the entities responsible, pursuant to proposed Rule 614(d)(2), for calculating and generating consolidated market data based on this information.506 In addition, as the entities responsible for generating consolidated market data, competing consolidators would likely be incentivized by competition to disseminate data using a protocol or format that results in data that is readily usable by their subscribers. As market participants are currently able to ingest market data from different sources, such as the exclusive SIPs and proprietary at their own location. Even a dark pool does that that’s just trying to match at the best bid and offer. If they use the SIP NBBO, their customers would be subject to latency harm, because it’s too old to use at their location after it’s merged to really get effective performance.’’). Although the Commission does not know the exact number of market participants that currently consolidate proprietary data feeds, generate their own consolidated data, and calculate their own NBBO, Nasdaq has stated that approximately 100 firms purchase all depth of book data from every exchange. See In the Matter of the Application of SIFMA, supra note 37, at 29 (citing an assertion from Nasdaq that 100 firms purchase all depth of book data from every exchange). The Commission acknowledges that not all of these market participants consolidate the proprietary data feeds and solicits comment on the number of market participants that do. 503 See supra text accompanying notes 455–457. 504 Id. 505 Id. 506 See proposed Rule 614(d)(2). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 data feeds, the Commission preliminarily believes that differences in the protocols or formats used by competing consolidators would not likely introduce a new challenge to the market. Rather than impose technical standards, the Commission preliminarily believes that competing consolidators would be in the best position to develop standards with respect to data consistency and generation, as appropriate, because they would be directly responsible for the quality of their product that is in compliance with Rule 614(d)(2), and would be incentivized through competition to create standards to ensure the integrity of their consolidated market data. With respect to the Advisory Committee on Market Information’s previous concerns about capacity,507 the Commission is proposing to require each competing consolidator to publish on its website its capacity statistics on a monthly basis so that market participants can evaluate whether a competing consolidator has sufficient capacity to process information.508 The Commission is also proposing to require each competing consolidator to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that its systems have levels of capacity to maintain operational capability and assure the prompt, accurate, and reliable delivery of consolidated market data.509 The Commission was previously concerned about an increase in processing costs due to multiple consolidators 510 performing the tasks performed by an exclusive SIP. As noted above, the Commission preliminarily believes that the introduction of competition should help to ensure that proposed consolidated market data is disseminated in a cost-effective manner.511 Finally, the Commission was previously concerned about the risk that fees for core data would increase because payment to each SRO would be mandatory. The previous competing 507 See 508 See supra text accompanying notes 455–457. infra Section IV.B.2(e)(ii). 509 Id. 510 The Commission preliminarily estimates that there could be up to twelve competing consolidators. This estimate includes the CTA/CQ SIP and the Nasdaq UTP SIP. See infra Section V.C. 511 See also, e.g., Roundtable Day One Transcript at 49–50 (Prof. Hal Scott, Harvard University) (‘‘[C]ompetition among consolidators of SIP data . . . could improve the speed and quality of consolidated sources of market data while also reducing their costs.’’); Treasury Report, supra note 463, at 64 (‘‘The competing consolidators would aim to provide faster consolidation and distribution, improved breadth of data, and lower cost than the SIPs.’’). PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 16775 consolidator model would have eliminated the Equity Data Plans and contemplated that each individual exchange would have developed its own pricing scheme for its individual data. As discussed below, in contrast, under the proposed decentralized consolidation model, the SROs would continue to develop jointly the fees associated with the provision of the proposed consolidated market data through an effective national market system plan(s) for NMS stocks.512 These fees would be subject to Commission oversight under Rule 608. The use of competing consolidators may introduce sequencing risk, a concern raised by the Advisory Committee on Market Information 513 as well as the Commission when it dismissed a competing consolidator model in proposing Regulation NMS.514 Having multiple competing consolidators using different technology could result in messages being processed in different sequences. The outcome would be the loss of a single reference for consolidated market data, which could negatively impact the reconstruction of the markets at a given point in time. However, the Commission believes that the proposal would mitigate the effects of sequencing risk by mandating that the effective national market system plan(s) require the application of timestamps to all consolidated market data by the SROs when they send market data to competing consolidators as well as requiring competing consolidators to apply timestamps to consolidated market data. Accordingly, no matter the differences in message processing across the competing consolidators, the sequencing of market data based on SRO timestamps should be able to be reconstructed.515 The Commission believes that there are a number of existing firms that 512 See infra Section IV.B.4; Proposed Governance Order, supra note 8; Effective on Filing Proposal, supra note 37 (a proposal to amend Regulation NMS to rescind a provision that allows a proposed amendment to an effective national market system plan(s) to become effective upon filing if the proposed amendment establishes or changes a fee or other charge). 513 See supra text accompanying notes 455–457. 514 See Regulation NMS Proposing Release, supra note 450, at 11178. 515 The Commission further notes that the NBBOs currently calculated by the exclusive SIPs at different data centers may vary due to geographic and other forms of latency, and therefore, the proposed competing consolidator model does not introduce a new issue in this regard. However, under the proposed competing consolidator model, NBBOs created at other data centers where the exclusive SIPs currently do not have a point of presence (e.g., NY4 in Secaucus) could be more accurate for those market participants that are located in such data center. E:\FR\FM\24MRP2.SGM 24MRP2 16776 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 would be well-positioned to become competing consolidators. First, trading technology firms that today provide proprietary data aggregation services for their subscribers may decide to register as competing consolidators in order to potentially expand their subscriber base and to be eligible for the pricing for data content used to create proposed consolidated market data.516 In addition, the existing exclusive SIPs, CTA/CQ and Nasdaq UTP, could consider becoming competing consolidators, as they have extensive experience in this area and may choose to remain in the market data consolidation business. Similarly, SROs have experience collecting and processing market data and may wish to act as competing consolidators. The Commission preliminarily believes that the creation of a competing consolidator market would open up the potential for other entrants, as well. For example, various market participants that are currently self-aggregating and have the technology to consolidate core data may decide to enter the competing consolidator business given the potential market opportunity. Finally, other entities have been interested in performing as plan processors. For example, there were competing bids to be the Nasdaq UTP SIP in 2014,517 and in 2013 and 2019 for OPRA. The bidding firms (or similar types of firms) may decide to enter the market as competing consolidators. The Commission preliminarily believes that sufficient incentives exist to attract a number of entities to register as competing consolidators and for a competitive market to develop. For one thing, the proposed definition of core data will incorporate additional elements such as quotation data in smaller size increments, depth of book data, and auction information, all of which market participants have recommended as necessary or useful. Therefore, there seems to be demand for the key product—i.e., consolidated market data as proposed—that competing consolidators will be producing and selling. Moreover, the 516 The Commission does not know the number of aggregators in operation today, but assumes that certain market data vendors in the following list currently perform that function. See Nasdaq: Market Data Vendors, available at https:// www.nasdaqtrader.com/Trader.aspx?id=Market DataVendorsList&StartAlphabet=A&EndAlphabet= ZZZ (last accessed Dec. 17, 2019). 517 Bidders included Nasdaq, Thesys Technologies LLC, CenturyLink, and a unit of exchange operator Miami International Holdings Inc. See Herbert Lash, Nasdaq Wins Bid to Manage Key Data Processor for Stock Trading, Reuters (Nov. 5, 2014), available at https://www.reuters.com/ article/us-exchanges-stocktrading-nasdaq-omx-id USKBN0IQ00220141106. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 proposed competing consolidator registration regime and responsibilities outlined below—while designed to collect relevant information about competing consolidators and to require competing consolidator performance data, data quality issues, and system issues to be made publicly available— are intended to be a relatively streamlined process that would impose appropriate burdens on entities likely to register as competing consolidators. Several Roundtable panelists and commenters raised potential issues about a competing consolidator model, in particular, about uncertainties regarding control over market data access, the costs of obtaining market data from the various SROs, and operational complexities associated with the model, such as the introduction of multiple NBBOs.518 However, the Commission preliminarily believes that some of these issues would be addressed by the proposal and the others would not be novel or insurmountable. On control over market data access, Rule 603 and the proposed amendments to Rule 603(b) would require that the SROs directly make available to competing consolidators and self-aggregators NMS information, including all data necessary to generate consolidated market data, on terms that are fair and reasonable and not unreasonably discriminatory. With respect to the costs of market data, the SRO fees associated with consolidated market data would be subject to Equity Data Plan requirements and the fees must be fair and reasonable.519 Finally, with respect to the concerns regarding the complexities associated with a competing consolidator model, many of the functions of competing consolidators are performed today by market participants, such as the consolidation of proprietary data feeds and calculation of NBBOs.520 Finally, a Roundtable panelist suggested that multiple NBBOs could raise concerns about broker-dealers executing customer orders at prices that are in the broker’s own interest, rather than the customers’ interest, and questioned whether a competing consolidator model would introduce 518 See Roundtable Day One Transcript at 151– 152 (Oliver Albers, Nasdaq); Roundtable Day Two Transcript at 46–47 (Michael Blaugrund, NYSE), at 61 (Prof. Robert Bartlett, U.C. Berkeley); Wittman Letter at 14; Albers Letter at 3; Blaugrund Letter, at 2; Healthy Markets Association Letter I, at 38; Data Boiler Letter at 4, 8. 519 See supra note 439. 520 For example, multiple NBBOs exist today because many broker-dealers independently calculate it for themselves. PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 benchmark reference price arbitrage.521 A broker-dealer must provide best execution to its customers’ orders.522 However, the existence of multiple NBBOs, which occurs today, does not impact a broker’s best execution obligations. Further, the panelist questioned whether there would be conflicts for broker-dealers that execute customer trades as well as manage the price against which the trades are benchmarked (i.e., by calculating the NBBO). Broker-dealers today purchase market data from the SIP as well as proprietary data feeds and calculate NBBOs. Accordingly, the Commission is not persuaded by concerns about the introduction of multiple NBBOs because multiple NBBOs already exist. (d) Proposed Definition of Competing Consolidator in Rule 600(b) The Commission is proposing to introduce a definition of competing consolidator in Rule 600(b). Specifically, under proposed Rule 600(b)(16) of Regulation NMS, a competing consolidator would be defined as a securities information processor required to be registered pursuant to Rule 614 or a national securities exchange or national securities association that receives information with respect to quotations for and transactions in NMS stocks and generates consolidated market data for dissemination to any person. The Commission requests comment on the proposed amendment to Rule 600(b) to introduce a definition of ‘‘competing consolidator.’’ In particular, the Commission solicits comment on the following: 73. Is a decentralized consolidation model with competing consolidators and self-aggregators a viable and/or appropriate model for the collection, consolidation, and dissemination of consolidated market data? Are there any other viable and/or appropriate alternatives? 74. Do commenters believe that the definition of competing consolidator accurately captures the requisite functions necessary for collecting, consolidating, and disseminating consolidated market data? Do commenters believe that there would be sufficient interest in entities that would become competing consolidators? 75. Do commenters believe that competing consolidators would provide the necessary competition to lower the processing time and distribution speeds 521 See Roundtable Day One Transcript at 151– 152 (Oliver Albers, Nasdaq); Roundtable Day Two Transcript at 61 (Prof. Robert Bartlett, U.C. Berkeley); Data Boiler Letter at 4. 522 See supra note 308. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules for consolidated market data, as proposed to be defined, as well as reduce the overall costs of proposed consolidated market data? 76. Do commenters believe that concerns identified by the Commission regarding the competing consolidator model considered in the Regulation NMS Proposing and Adopting Releases would be sufficiently addressed with the proposed decentralized consolidation model with competing consolidators and self-aggregators proposed in this release? If not, how should these concerns be addressed? 77. Will the change to a proposed competing consolidator/self-aggregator model present any specific operational and/or regulatory challenges to market participants? Are the challenges evenly distributed amongst market participants or would one set of market participants bear more of any burden? If so, please describe. 78. The Commission solicits commenters’ views regarding the various concerns raised by Roundtable respondents about the competing consolidator model. In particular, do commenters have any concerns about competing consolidators calculating independent NBBOs? Please explain. Do commenters have concerns about multiple versions of consolidated market data, as proposed? Please explain. If there are such concerns, please also explain how these concerns would vary from the multiple different forms of aggregation that exist today among broker-dealers either selfaggregating proprietary data feeds or utilizing vendors to do so on their behalf. lotter on DSKBCFDHB2PROD with PROPOSALS2 (e) Proposed Rule 614 The Commission preliminarily believes that SIPs that wish to act as competing consolidators should be required to register with the Commission 523 and be required to publicly disclose certain information about their organization, operations, and products. The proposed disclosure framework is similar to the disclosures currently required under Form SIP, with differences tailored to the proposed 523 As explained further below, SROs are excluded from the definition of SIP under Section 3(a)(22)(A) of the Exchange Act. 15 U.S.C. 78c(a)(22)(A). SROs that wish to act as competing consolidators would therefore not be required to register with the Commission on proposed Form CC, which, as explained below, is the form that SIPs would use to register as competing consolidators. See infra Section IV.B.2(e)(iii). However, SROs that wish to act as competing consolidators would be subject to the other requirements of proposed Rule 614, including the responsibilities of competing consolidators enumerated in proposed Rule 614(d), such as the monthly publication of performance metrics. See infra Section IV.B.2(e)(ii). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 regulatory structure that would apply to competing consolidators. As described more fully below, a competing consolidator would be required to register with the Commission on proposed Form CC and to amend its Form CC (i) prior to the implementation of a material change to the competing consolidator’s pricing, connectivity, or products offered (a ‘‘Material Amendment’’); and (ii) no later than 30 calendar days after the end of each calendar year to correct information that has become inaccurate or incomplete for any reason and to provide an Annual Report as required under Form CC (each a ‘‘Form CC Amendment’’).524 A competing consolidator would be required to publish notice of its cessation of operations on Form CC at least 30 business days prior to the date it ceases to operate as a competing consolidator.525 The Commission would make public on its website each effective initial Form CC, order of ineffective initial Form CC, Form CC Amendment, and notice of cessation.526 The Commission also preliminarily believes that competing consolidators should be subject to certain obligations and should regularly publish certain performance statistics on a monthly basis on their respective websites pursuant to proposed Rules 614(d)(5) and (6).527 These disclosures are similar to disclosures currently made by the exclusive SIPs. These requirements, together with the operational transparency proposed in new Form CC for those SIPs that register as competing consolidators,528 should help to ensure that consolidated market data, as proposed to be defined, is provided in a prompt, accurate, and reliable manner and that all competing consolidators disclose the same information to allow for easier comparison and evaluation. Specifically, these requirements should allow market participants to effectively evaluate competing consolidators and foster competition among competing consolidators, which should result in high levels of performance in the 524 See proposed Rules 614(a)(1)(i) and (a)(2)(i) and (ii). 525 See proposed Rule 614(a)(3). 526 See proposed Rule 614(b)(2). The Commission would publish an effective initial Form CC upon effectiveness and would publish a Form CC Amendment no later than 30 calendar days from the date of filing. See proposed Rule 614(b)(2)(iii). 527 See infra Section IV.B.2(e)(ii) for a discussion of the obligations and performance statistics. The information that the Commission is proposing that competing consolidators publish is based upon information that is currently collected or produced by the CTA/CQ SIP and the Nasdaq UTP SIP, either for public or internal distribution. 528 See infra Section IV.B.2(e)(iii) for a discussion of proposed Form CC. PO 00000 Frm 00053 Fmt 4701 Sfmt 4702 16777 provision of proposed consolidated market data. In addition, these requirements should facilitate Commission oversight of competing consolidators and help to ensure the resiliency of their systems. (i) Section 11A(b) of the Exchange Act Section 11A(b)(1) of the Exchange Act 529 provides that a SIP not acting as the ‘‘exclusive processor’’ 530 of any information with respect to quotations for or transactions in securities is exempt from the requirement to register with the Commission as a SIP unless the Commission, by rule or order, determines that the registration of such SIP ‘‘is necessary or appropriate in the public interest, for the protection of investors, or for the achievement of the purposes of [Section 11A].’’ A SIP that proposes to act as a competing consolidator would not engage on an exclusive basis on behalf of any national securities exchange or registered securities association in collecting, processing, or preparing for distribution or publication any information with respect to quotations for or transactions in securities; therefore, such a proposed competing consolidator would not fall under the statutory definition of ‘‘exclusive processor.’’ However, under the proposed rules, competing consolidators would play a vital role in the national market system by collecting, consolidating, and disseminating proposed consolidated market data. Because the availability of prompt, accurate, and reliable consolidated market data, as proposed, is essential to investors and other market participants, the Commission preliminarily believes that it is necessary and appropriate in the public interest and for the protection of investors to require each SIP that wishes to act as a competing consolidator to register with the Commission as a SIP pursuant to proposed Rule 614. Section 11A(b)(1) provides the Commission with authority to require the registration of a SIP not acting as an exclusive processor by rule or order. The Commission is exercising this authority by proposing Rule 614 to establish the process by which SIPs that wish to act as competing consolidators would be required to register with the Commission. The registration process for exclusive SIPs under Section 11A requires the Commission to publish notice of an exclusive SIP’s application for registration and, within 90 days of publication of notice of the application, 529 15 U.S.C. 78k–1(b)(1). supra note 20. 530 See E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16778 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules by order grant the application or institute proceedings to determine whether the registration should be denied.531 At the conclusion of the proceedings, the Commission must, by order, grant or deny the registration.532 Section 11A(b)(1) of the Exchange Act also authorizes the Commission, by rule or by order, upon its own motion or by application, to conditionally or unconditionally exempt any SIP or class of SIPs from any provision of Section 11A or the rules or regulations thereunder if the Commission finds that such exemption is consistent with the public interest, the protection of investors, and the purposes of Section 11A, including the maintenance of fair and orderly markets in securities and the removal of impediments to and perfection of the mechanisms of a national market system. The Commission preliminarily believes that it is consistent with the public interest, the protection of investors, and the purposes of Section 11A to use its authority under Section 11A(b)(1) to exempt SIPs that wish to act as competing consolidators from the registration process established in Section 11A(b)(3) of the Exchange Act and to allow such competing consolidators to register pursuant to a process that is more streamlined and limited than the process described in Section 11A(b)(3). The process specified in Section 11A(b)(3) of the Exchange Act was developed for exclusive SIPs and reflects the heightened need to review and analyze exclusive processors. In contrast, SIPs that do not act as an exclusive SIP are exempt from registration unless the Commission ‘‘finds that the registration of such securities information processor is necessary or appropriate in the public interest, for the protection of investors, or for the achievement of the purposes of [Section 11A].’’ The Commission preliminarily believes that the proposed registration process would provide the Commission with the information necessary to oversee competing consolidators and help ensure that relevant information regarding such competing consolidators is available to the Commission and to the public, while providing a streamlined registration process designed to encourage entities to register as competing consolidators. The registration process proposed in new Rule 614 requires any person, other than an SRO,533 that chooses to become 531 See Section 11A(b)(3), 15 U.S.C. 78k–1(b)(3). Section 11A(b)(3)(B), 15 U.S.C. 78k– 1(b)(3)(B). 533 See supra note 523. 532 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 a competing consolidator to file with the Commission proposed Form CC.534 The Commission would review the initial Form CC and such filing would become effective, unless declared ineffective by the Commission by order.535 The Commission would make public on its website each effective initial Form CC and any order of ineffective initial Form CC, amendment to Form CC and notice of cessation, if applicable. The registration process proposed in new Rule 614 would not require the publication for notice and comment of an application for registration as a competing consolidator, nor would it require Commission approval of such an application. However, the Commission preliminarily believes that it is consistent with the public interest, the protection of investors, and the purposes of Section 11A to establish a relatively streamlined registration process based on disclosure for those SIPs that wish to act as competing consolidators. The Commission preliminarily believes that a relatively streamlined registration process would impose minimal burdens on entities likely to register as competing consolidators. In addition, the Commission preliminarily believes that it is consistent with the public interest, the protection of investors, and the purposes of Section 11A to use its exemptive authority under Section 11A(b)(1) of the Exchange Act to exempt those SIPs that act as competing consolidators from Section 11A(b)(5) of the Exchange Act,536 which requires a registered SIP to notify the Commission if the SIP prohibits or limits any person with respect to access to its services. Section 11A(b)(5) allows any person aggrieved by a prohibition or limitation of such access to the SIP’s services to petition the Commission to review the prohibition or limitation of access. Exclusive SIPs, by definition, engage on an exclusive basis in collecting, 534 See infra Sections IV.B.2(e)(ii) and IV.B.2(e)(iii) for a discussion of the registration process for competing consolidators under proposed Rule 614. 535 Proposed Rule 614(a)(1)(iii) provides that the Commission may, by order, declare an initial Form CC ineffective no later than 90 calendar days from the date of filing with the Commission. 536 Section 11A(b)(5) of the Exchange Act, 15 U.S.C. 78k–1(b)(5), requires a SIP promptly to notify the Commission if the registered SIP prohibits or limits any person in respect of access to services offered, directly or indirectly, by the registered SIP. The notice must be in the form and contain the information required by the Commission. Any prohibition or limitation on access to services with respect to which a registered SIP is required to file notice is subject to review by the Commission on its own motion, or upon application by any person aggrieved by the prohibition or limitation. PO 00000 Frm 00054 Fmt 4701 Sfmt 4702 processing, or preparing data. In contrast, the proposed competing consolidators would not engage in collecting, processing, or preparing data on an exclusive basis. Therefore, the Commission preliminarily believes that the protections of Section 11A(b)(5) of the Exchange Act, including the ability of an aggrieved person to petition the Commission for review of a SIP’s prohibition or limitation of access to the SIP’s services, are not necessary for the SIPs that register as competing consolidators. The Commission preliminarily believes that competitive forces would reduce the likelihood that a subscriber would not be able to access consolidated market data as proposed because a subscriber should be able to obtain such data from another competing consolidator. Accordingly, the Commission preliminarily believes that it would be consistent with the protection of investors and the public interest to exempt competing consolidators from Section 11A(b)(5) of the Exchange Act. The Commission requests comment on the proposal to establish a registration process for SIPs that wish to act as competing consolidators and to exempt such competing consolidators from Section 11A(b)(5) of the Exchange Act. In particular, the Commission solicits comment on the following: 79. Do commenters agree that the SIPs that wish to act as proposed competing consolidators should be required to register with the Commission? Do commenters agree that such competing consolidators should be subject to the proposed registration requirements in proposed Rule 614, rather than the registration requirements set forth in Section 11A(b) of the Exchange Act? Why or why not? 80. Do commenters believe that the Commission should establish a registration process for competing consolidators different from the registration process in proposed Rule 614? If so, please describe. Should competing consolidator registration be subject to Commission approval and/or additional or different regulation? Why or why not? If so, please describe. 81. Do commenters believe that competition and market forces would be sufficient to support the proposed registration regime for SIPs that wish to act as competing consolidators? Why or why not? 82. Do commenters agree that the Commission should exempt SIPs that register as competing consolidators from Section 11A(b)(5) of the Exchange Act? Why or why not? 83. Do commenters believe that competition and market forces are E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules sufficient to ensure that market participants would have access to consolidated market data as proposed? Why or why not? (ii) Description of Proposed Rule 614 lotter on DSKBCFDHB2PROD with PROPOSALS2 Proposed Rule 614(a)(1)(i) would prohibit any person, other than an SRO,537 from (i) receiving directly from a national securities exchange or national securities association information with respect to quotations for and transactions in NMS stocks; and (ii) generating the proposed consolidated market data for dissemination to any person (i.e., acting as a competing consolidator by disseminating data to external parties) unless that person files with the Commission an initial Form CC and the initial Form CC has become effective pursuant to proposed Rule 614(a)(1)(v).538 The Commission 537 As noted above, SROs are excluded from the definition of SIP in Section 3(a)(22)(A) of the Exchange Act and therefore would not be required to register as a competing consolidator pursuant to proposed Rules 614(a)–(c) and proposed Form CC. However, SROs are regulated entities, and an SRO competing consolidator would be required to provide information equivalent to that required by proposed Form CC. For example, national securities exchanges must file information about their control persons, officers, and directors, and affiliates on Form 1 that is similar to the disclosures required under Exhibits A–D of proposed Form CC. See Form 1 Instructions, at Exhibits C, J, and K, available at https://www.sec.gov/files/form1.pdf (last accessed Jan. 8, 2020). In addition, SRO competing consolidators would be required to file with the Commission all proposed rule changes pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder to begin operations as a competing consolidator, including rule changes related to the SRO competing consolidator’s operations, disclosures regarding consolidated market data products, and all fees related to consolidated market data products. The other requirements of proposed Rule 614—specifically, the responsibilities of competing consolidators enumerated in proposed Rule 614(d), as described below, including the monthly performance metrics and other information required under proposed Rules 614(d)(5) and (d)(6)—would apply to any competing consolidator, including any SRO that acts as a competing consolidator. An SRO, however, would have a choice of the manner in which—and the regulatory regime that would apply to—its competing consolidator business: An SRO could operate a competing consolidator as a facility of the SRO, which would be subject to the rule filing requirements of Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, or the SRO could operate a competing consolidator in a separate affiliated entity, not as a facility, which, like other competing consolidators, would be subject to the proposed registration requirements under proposed Rule 614. 538 In contrast, a self-aggregator would be defined as any broker-dealer that receives information with respect to quotations for and transactions in NMS stocks and generates consolidated market data solely for internal use, and therefore would not be a competing consolidator. See infra Section IV.B.3. If a self-aggregator disseminated consolidated market data to any person, it would be acting as a competing consolidator and would be required to register pursuant to proposed Rule 614 and comply VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 preliminarily believes that a SIP that wishes to act as a competing consolidator should not be permitted to commence operations until the Commission has had the opportunity to review such competing consolidator’s initial Form CC. The Commission’s review of initial Form CC would help to ensure that a SIP that wishes to register as a competing consolidator makes disclosures that comply with the requirements of proposed Rule 614 and that a consistent level of information, and consistent disclosures, are made available to market participants to evaluate such competing consolidators. Proposed Rule 614(a)(1)(ii) would require any reports required under new Rule 614 to be filed electronically on Form CC, include all of the information as prescribed in Form CC and the instructions to Form CC, and contain an electronic signature.539 The electronic signature requirement is consistent with the intention of the Commission to receive documents that can be readily accessed and processed electronically. The proposed rule contemplates the use of an online filing system through which competing consolidators would file a completed Form CC. The system, known as the electronic form filing system (‘‘EFFS’’) is currently used by SROs to submit Form 19b–4 filings and by SCI entities to submit Form SCI filings.540 Other methods of electronic filing of Form CC could include the use of secure file transfer through specialized electronic mailbox or through the Electronic, Data Gathering, Analysis and Retrieval (‘‘EDGAR’’) system, or directly through SEC.GOV via a simple HTML form. Based on the widespread use and availability of the internet, the Commission believes that filing Form CC in an electronic format would be less burdensome and a more efficient filing process for competing consolidators and the Commission because it is likely to be less expensive and cumbersome than mailing and filing paper forms with the Commission. In addition, proposed Rule 614(a)(1)(ii) would establish a uniform manner in which the Commission would receive, and competing consolidators would provide, reports made pursuant to proposed Rule 614. The standardization would make it with the requirements applicable to competing consolidators. 539 This proposed requirement is consistent with electronic reporting standards set forth in other Commission rules under the Exchange Act, such as Rule 17a–25 (Electronic Submission of Securities Transaction Information by Exchange Members, Brokers, and Dealers). See 17 CFR 240.17a–25. 540 See Securities Exchange Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 2004) (adopting the EFFS for use in filing Form 19b–4). PO 00000 Frm 00055 Fmt 4701 Sfmt 4702 16779 easier and more efficient for the Commission to promptly review and analyze the information that competing consolidators provide. Proposed Rule 614(a)(1)(iii) would provide that the Commission may, by order, declare an initial Form CC filed by a competing consolidator ineffective no later than 90 calendar days from filing with the Commission.541 The Commission preliminarily believes that 90 calendar days would provide the Commission with adequate time to carry out its oversight functions with respect to its review of an initial Form CC, including its responsibilities to protect investors and maintain fair, orderly, and efficient markets. Proposed Rule 614(a)(1)(iv) would require a competing consolidator to withdraw an initial Form CC that has not become effective if any information disclosed in the initial Form CC is or becomes inaccurate or incomplete. The competing consolidator would be able to refile an initial Form CC pursuant to proposed Rule 614(a)(1). The Commission preliminarily believes that it would be appropriate to require an initial Form CC to be withdrawn if any information in the form is or becomes inaccurate or incomplete to assure that the Commission’s review is based on accurate and complete information and to assure that the Commission has adequate time to review an accurate and complete initial Form CC. Proposed Rule 614(a)(1)(v)(A) would provide that an initial Form CC would become effective, unless declared ineffective, no later than the expiration of the review period provided in paragraph (a)(1)(iii) and upon publication of the initial Form CC pursuant to proposed Rule 614(b)(2)(i). Proposed Rule 614(a)(1)(v)(B) would provide that the Commission would declare ineffective an initial Form CC if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest and is consistent with the protection of investors. The Commission also preliminarily believes that it would be necessary and appropriate in the public interest, and consistent with the protection of investors, to declare ineffective an initial Form CC if it finds, after notice and opportunity for hearing, that one or more disclosures reveal noncompliance with federal securities laws or the rules or regulations thereunder. The Commission also would make such a declaration if it finds, for example, that one or more disclosures on the initial Form CC were materially deficient with respect to their accuracy, 541 See E:\FR\FM\24MRP2.SGM also proposed Rule 614(a)(1)(iv)(B). 24MRP2 16780 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 currency, or completeness. The Commission preliminarily believes that market participants would use the Form CC disclosure to understand and evaluate the operations of a competing consolidator and to help determine whether to subscribe to a competing consolidator. A disclosure on Form CC that is materially deficient with respect to its completeness or comprehensibility could mislead market participants or impede their ability to evaluate a competing consolidator. In addition, the Commission intends to use the information disclosed on an initial Form CC to exercise oversight over competing consolidators. Given these potential uses, the Commission believes that it is important that an initial Form CC contain disclosures that are accurate, current, and complete. During its review, the Commission and its staff may provide comments to the applicant and may request that the applicant supplement information in its initial Form CC or revise its disclosures on its initial Form CC.542 If the Commission declares an initial Form CC ineffective, the applicant would be prohibited from operating as a competing consolidator. An initial Form CC declared ineffective would not prevent the competing consolidator from subsequently filing a new Form CC that attempted to address any disclosure deficiencies or other issues that caused the initial Form CC to be declared ineffective. The Commission requests comment on proposed Rule 614(a)(1), which establishes filing requirements for an initial Form CC and a Commission review period for determining whether a filed initial Form CC should be declared ineffective. In particular, the Commission solicits comment on the following: 84. Do commenters believe that the proposed electronic filing requirement is appropriate? Are there methods other than EFFS that would be appropriate? If so, please describe. Is EFFS an efficient system for filing proposed Form CC? Would another system be more efficient? If so, please specify and describe the rationale for using a different system. 542 The responsibility for accurate, current, and complete disclosures on proposed Form CC would lie with the competing consolidator. The Commission’s review of an initial Form CC would focus on an evaluation of the completeness and accuracy of the disclosures and compliance with federal securities laws. The Commission’s evaluation regarding compliance with federal securities laws would involve a review of the Form CC disclosures for apparent non-compliance with federal securities laws, or other rules or regulations thereunder, and would focus on the disclosures made on the Form CC. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 85. Should the Commission adopt the proposal that an initial Form CC will become effective by operation of rule without the Commission issuing an order declaring effective the initial Form CC? Do commenters believe that publishing an initial Form CC on the Commission’s website, without a Commission order declaring an initial Form CC effective, would provide sufficient notice that an initial Form CC has become effective? Why or why not? Please support your arguments. 86. Should the Commission require the existing exclusive SIPs to file an initial Form CC before they may become competing consolidators if they decide to act as competing consolidators? Why or why not? Please support your arguments. 87. Do commenters believe that the process to declare a Form CC ineffective is appropriate? Why or why not? 88. Do commenters believe that an SRO seeking to operate a competing consolidator would establish the competing consolidator within the SRO or in a separate affiliated entity? What do commenters believe would be the advantages and disadvantages of each form of operation? Do commenters believe that an SRO competing consolidator would have any advantages over a competing consolidator registered pursuant to proposed Rules 614(a)–(c) and proposed Form CC? 89. If an SRO decides to act as a competing consolidator, should it be required to file a specific notice of its intent to operate as a competing consolidator in addition to, or in lieu of, a Form 19b–4 with the Commission? Would a Form 19b–4 filing by itself provide sufficient notice that an SRO intends to act as a competing consolidator? Please explain. The Commission is proposing Rule 614(a)(2) to provide the requirements for amending an effective Form CC. Under proposed Rule 614(b)(2)(iii), the Commission will make public any Form CC Amendment, as described below, no later than 30 calendar days from the date of its filing with the Commission. Proposed Form CC is similar to Form SIP and the information required to be filed on proposed Form CC is designed to enable market participants to make informed decisions when selecting a competing consolidator and to facilitate Commission oversight of competing consolidators. As described more fully below,543 proposed Form CC would require information concerning, among other things: The legal name and legal status of the competing consolidator; the owners, directors, officers, and 543 See PO 00000 infra Section IV.B.2(e)(iii). Frm 00056 Fmt 4701 Sfmt 4702 governors of the competing consolidator, or persons performing similar functions; whether the competing consolidator is a brokerdealer or an affiliate of a broker-dealer and a description of the organizational structure of the competing consolidator; contact information for an employee of the competing consolidator prepared to respond to questions regarding Form CC; a description of each consolidated market data service or function, including connectivity and delivery options for subscribers, and a description of all procedures utilized for the collection, processing, distribution, publication and retention of information with respect to quotations for, and transactions in, securities; a description of all market data products with respect to consolidated data, or a subset thereof, that the competing consolidator provides to subscribers; a description of fees and charges for use of the competing consolidator with respect to consolidated market data, including the types, range, and structure of the competing consolidator’s fees and differentiation among the types of subscribers; a description of any colocation and related services, the terms and conditions for co-location, connectivity, and related services, including connectivity and throughput options offered, and a description of any other means besides co-location and related services to increase the speed of communication, including a summary of the terms and conditions for its use; and a narrative description, or the functional specifications, of each consolidated market data service or function, including connectivity and delivery options for the subscribers. The Commission is proposing Rule 614(a)(2)(i) to require a competing consolidator to amend an effective Form CC in accordance with the instructions therein: (i) Prior to the date of implementation of a material change to the pricing, connectivity, or products offered; and (ii) no later than 30 calendar days after the end of each calendar year to correct information, whether material or immaterial, that has become inaccurate or incomplete for any reason (‘‘Annual Report’’). The Commission preliminarily believes that a change to a competing consolidator’s pricing, connectivity, or products offered would be material if there is a substantial likelihood that a reasonable market participant would consider the change important when evaluating the competing consolidator as a provider of market data.544 544 See Securities Exchange Act Release No. 833633 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018) E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 The Commission preliminarily believes that the proposal to amend an effective Form CC prior to implementing a Material Amendment would provide market participants with information concerning changes to significant aspects of the competing consolidator’s services, which would assist market participants in evaluating, or reevaluating, the competing consolidator as a provider of market data. The Commission preliminarily believes that requiring a competing consolidator to amend an effective Form CC no later than 30 calendar days after the end of each calendar year to correct any other information that has become inaccurate or incomplete for any reason would help to ensure that market participants have accurate and current information regarding competing consolidators. The Commission preliminarily believes that providing a mechanism for competing consolidators to disclose changes to their operations or to update information that does not constitute a Material Amendment (e.g., a change in the organizational structure of the competing consolidator, its officers or directors, or its affiliated entities) no later than 30 calendar days after the end of each calendar year would tailor the reporting burden on competing consolidators to the degree of significance of the change in a manner that does not compromise the ability of market participants to obtain information about the competing consolidator’s operations. The Commission believes that market participants would use information regarding a competing consolidator’s organization, operational capability, market data products, fees, and colocation and related services to determine whether to subscribe, or continue subscribing, to a competing consolidator. In addition, this information would assist market participants in evaluating which products and services of the competing consolidator would be most useful to them. The information in proposed Form CC is also designed to ensure that the Commission has specified information regarding entities acting as competing consolidators, to facilitate the Commission’s oversight of competing consolidators and help to ensure the resiliency of a competing (Regulation of NMS Stock Alternative Trading Systems) (stating that a change to the operations of an NMS Stock ATS, or the disclosures regarding the activities of the broker-dealer operator of the NMS Stock ATS and its affiliates, would be material if there is a substantial likelihood that a reasonable market participant would consider the change important when evaluating the NMS Stock ATS as a potential trading venue). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidator’s systems. Given these intended uses, the Commission believes that it is important for a competing consolidator to maintain an accurate, current, and complete Form CC. The Commission requests comment on proposed Rule 614(a)(2), which establishes filing requirements for Form CC Amendments. In particular, the Commission solicits comment on the following: 90. In addition to material changes to a competing consolidator’s pricing, connectivity, or products, what should be a Material Amendment? 91. Do commenters believe that a competing consolidator should be required to file a Material Amendment within a specified time prior to implementing the change that constitutes a Material Amendment? Why or why not? Please support your arguments. Is 30 days an appropriate amount of time for a Material Amendment to be filed? 92. Do commenters believe that a competing consolidator should be required to file an Annual Report? Why or why not? Proposed Rule 614(a)(3) would require a competing consolidator to provide notice of its cessation of operations on Form CC at least 30 business days before the date the competing consolidator ceases to operate as a competing consolidator. The notice of cessation would cause the Form CC to become ineffective on the date designated by the competing consolidator. This requirement would provide notice to the public and the Commission that the competing consolidator intends to cease operations. The Commission preliminarily believes that this notice would provide market participants with time to find and select an alternative provider of market data. The Commission requests comment on proposed Rule 614(a)(3), which establishes filing requirements for a Form CC notice of cessation. In particular, the Commission solicits comment on the following: 93. Should the Commission require a competing consolidator to give notice that it intends to cease operations 30 business days or more before ceasing operations as a competing consolidator? If not, why not? Is 30 business days an appropriate time for providing notice of an intention to cease operations? If not, what time period would be appropriate? In proposed Rule 614(b), the Commission is proposing to make public all Form CC reports filed by competing consolidators and other information. Under proposed Rule 614(b)(1), every Form CC filed pursuant to Rule 304 shall constitute a ‘‘report’’ PO 00000 Frm 00057 Fmt 4701 Sfmt 4702 16781 within the meaning of Sections 11A, 17(a), 18(a), and 32(a), and any other applicable provisions of the Exchange Act. Because proposed Form CC is a report that is required to be filed under the Exchange Act, it would be unlawful for any person to willfully or knowingly make, or cause to be made, a false or misleading statement with respect to any material fact in Form CC. Under proposed Rule 614(b)(2), the Commission would make public via posting on the Commission’s website each: (i) Effective initial Form CC; (ii) order of ineffective Form CC; (iii) filed Form CC Amendment; and (iv) notice of cessation. Under the proposed rule, the Commission would publish each Form CC Material Amendment and Annual Report on its website no later than 30 days after the competing consolidator filed the amendment. The Commission preliminarily believes that making each Form CC filing public via public posting on the Commission’s website would provide market participants with important information about the operations of a competing consolidator and facilitate the Commission’s oversight of competing consolidators. The Commission preliminarily believes that this information should be easily accessible to all market participants so that market participants may better evaluate a competing consolidator as a potential provider of market data. Additionally, the Commission preliminarily believes that the publication of Material Amendments and Annual Reports would provide market participants with information necessary to evaluate, or re-evaluate, a competing consolidator as a provider of market data, facilitate the Commission’s oversight of competing consolidators, and help to ensure the continued resiliency of a competing consolidator’s systems. The Commission requests comment on proposed Rule 614(b), which would establish public disclosure requirements for Form CC filings. In particular, the Commission solicits comment on the following: 94. Do commenters believe that the Commission should post on its website each effective initial Form CC, each notice of ineffectiveness of a Form CC, each Form CC Amendment, and each notice of cessation? Why or why not? Please support your arguments. Do commenters believe a competitive marketplace would provide competing consolidators with incentives to disclose sufficient information in the normal course of business? Why or why not? E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16782 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules The Commission preliminarily believes that it would be helpful for a competing consolidator to make market participants aware that the competing consolidator’s filings are publicly posted on the Commission’s website. Therefore, proposed Rule 614(c) would require each competing consolidator to post on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in proposed Rule 614(b)(2), which includes the competing consolidator’s Form CC filings. The Commission preliminarily believes that this requirement would make it easier for market participants to review a competing consolidator’s Form CC filings by providing an additional means for market participants to locate Form CC filings that are posted on the Commission’s website. The Commission requests comment on proposed Rule 614(c), which would require each competing consolidator to provide a direct URL hyperlink to the Commission’s website that contains the documents identified in proposed Rule 614(b)(2). In particular, the Commission solicits comment on the following: 95. Do commenters believe that proposed Rule 614(c) should require each competing consolidator to provide a direct URL hyperlink to the Commission’s website that contains the documents identified in proposed Rule 614(b)(2). Why or why not? Please support your arguments. Under the proposed decentralized consolidation model, competing consolidators would be required to perform many of the obligations currently performed by the existing exclusive SIPs. Proposed Rule 614(d) establishes the responsibilities applicable to competing consolidators, which also includes the disclosure of information that would facilitate the Commission’s oversight of competing consolidators and assist market participants in choosing and evaluating competing consolidators. Proposed Rule 614(d)(1) would require each competing consolidator to collect from each national securities exchange and national securities association, either directly or indirectly, the information with respect to quotations for and transactions in NMS stocks as provided in Rule 603(b), which would include all data necessary to generate the proposed consolidated market data. Proposed Rule 614(d)(2) would require each competing consolidator to calculate and generate consolidated market data, as defined in proposed Rule 600(b)(16), from the information collected in proposed Rule 614(d)(1). Proposed Rule 614(d)(3) would require competing VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidators to make the proposed consolidated market data available to subscribers on a consolidated basis and on terms that are not unreasonably discriminatory, with the timestamps required by proposed Rule 614(d)(4) and Rule 614(e)(1)(ii), as discussed below. As noted above, competing consolidators would be required under proposed Rule 614(d)(2) to calculate and generate proposed consolidated market data and make proposed consolidated market data available to subscribers. Accordingly, all competing consolidators would be required to develop a consolidated market data product that contains all of the data elements provided under the proposed definition of consolidated market data. In addition, competing consolidators could develop other market data products that contain only a subset of consolidated market data elements (e.g., a TOB product) and could develop market data products that contain elements that go beyond the elements required under the proposed definition of consolidated market data (e.g., a full DOB product). The Commission recognizes that market participants have varying needs with respect to market data, and the proposed rules would permit a competing consolidator to offer additional market data products to meet these needs so long as the competing consolidator complies with proposed Rules 614(d)(2) and (d)(3) by providing a consolidated market data product.545 The Commission preliminarily believes that the proposed provisions are both necessary and appropriate because they reflect the main obligations of competing consolidators, which are to collect, calculate, and disseminate consolidated market data, as proposed. In addition, the use of a competing consolidator at a specific data center would likely be more accurate and useful in assessing the trading activity of a trading participant in that same data center. As proposed, competing consolidators would be the only entities providing proposed consolidated market data to market participants. Accordingly, the terms by which they provide proposed consolidated market data to their subscribers must not be unreasonably discriminatory.546 The Commission requests comment on proposed Rules 614(d)(1)–(3). In particular, the Commission solicits comment on the following: 96. Do these provisions reflect the main obligations of competing 545 See 546 See PO 00000 supra Section III.A. 15 U.S.C. 78k–1(c)(1)(D). Frm 00058 Fmt 4701 Sfmt 4702 consolidators? Should there be any other obligations? 97. Competing consolidators would be required to generate proposed consolidated market data, which would include the calculation of an NBBO consistent with the process outlined in the definition of NBBO in Rule 600(b)(42). Do commenters believe that the definition of NBBO would ensure the calculation of consistent NBBOs by competing consolidators? 98. Do commenters believe that competing consolidators should be required to develop a consolidated market data product that contains all of the data elements provided under the proposed definition of consolidated market data? Why or why not? Could there be some competing consolidators that only offer a subset of the proposed consolidated market data? Please explain. Proposed Rule 614(d)(4) would require each competing consolidator to timestamp the information collected in proposed Rule 614(d)(1): (i) Upon receipt from each national securities exchange and national securities association at the exchange’s or association’s data center; (ii) upon receipt of such information at its aggregation mechanism; and (iii) upon dissemination of consolidated market data to customers. The Commission understands that the existing SIPs similarly timestamp information in accordance with proposed Rule 614(d)(4)(i) and (iii). The Commission preliminarily believes that the proposed rule is appropriate because it would allow subscribers to ascertain a competing consolidator’s realized latency (i.e., how quickly the competing consolidator can receive data from the exchanges, transmit that data between the exchange’s data center and its aggregation center, and aggregate and disseminate proposed consolidated market data to subscribers). This information provides transparency that should help subscribers evaluate a potential competing consolidator or determine whether an existing competing consolidator continues to meet their needs.547 The Commission is also proposing several rules, described below, that would require public disclosure of metrics and other information concerning the performance and operations of a competing consolidator. The information that the Commission is 547 If a competing consolidator uses a vendor to transmit data between the SRO data center and the competing consolidator’s data center, the competing consolidator retains responsibility for collecting all of the timestamps described in proposed Rule 614(d)(4). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 proposing that competing consolidators publish is based upon information that is currently produced by the CTA/CQ SIP and the Nasdaq UTP SIP, either for public or internal distribution.548 Because this information is useful to current users of the exclusive SIPs and participants of the Equity Data Plans, the Commission preliminarily believes that it should be made publicly available 549 by competing consolidators. The Commission preliminarily believes that public disclosure and accessibility of this information would help market participants to evaluate the merits of a competing consolidator by providing transparency into the services and performance, and resiliency of each competing consolidator, and could also lower search costs for market participants and enhance competition. In addition, the Commission preliminarily believes that the public disclosure of this information— particularly the system availability and network delay statistics and data quality and system issues—would help to ensure that competing consolidators have a demonstrated ability to provide consolidated market data in a stable and resilient manner. Proposed Rule 614(d)(5) would require each competing consolidator to publish prominently on its website, within 15 calendar days after the end of each month, certain performance metrics. All information posted pursuant to proposed Rule 614(d)(5) must be publicly posted in downloadable files and must remain 548 The exclusive SIPs currently publish to their respective websites monthly processor metrics that provide the following information: System availability, message rate and capacity statistics, and the following latency statistics from the point of receipt by the SIP to dissemination from the SIP: Average latency and 10th, 90th and 99th percentile latency. See CTA Metrics, available at https:// www.ctaplan.com/metrics; UTP Metrics, available at https://www.utpplan.com/metrics. Additionally, the exclusive SIPs post on their websites any system alerts and the Nasdaq UTP Plan posts vendor alerts as well. See CTA Alerts, available at https://www.ctaplan.com/alerts; UTP–SIP System Alerts, available at https://www.utpplan.com/ system_alerts; UTP Vendor Alerts, available at https://www.utpplan.com/vendor_alerts. Further, the exclusive SIPs publish on their websites charts detailing realized latency from the inception of a Participant matching engine event through the point of dissemination from the exclusive SIP. See CTA Latency Charts, available at https:// www.ctaplan.com/latency-charts; UTP Realized Latency Charting, available at https:// www.utpplan.com/latency_charts. 549 Rule 600(b)(37) of Regulation NMS defines ‘‘make publicly available’’ as ‘‘posting on an internet website that is free and readily accessible to the public, furnishing a written copy to customers on request without charge, and notifying customers at least annually in writing that a written copy will be furnished on request.’’ See 17 CFR 242.600(b)(37). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. The Commission preliminarily believes that the availability of this information on a website (without any encumbrances or restrictions) would assist market participants in comparing competing consolidators and evaluating their performance over time.550 In particular, proposed Rule 614(d)(5) would provide that the performance metrics include: (i) Capacity statistics (such as system tested capacity, system output capacity, total transaction capacity, and total transaction peak capacity); (ii) message rate and total statistics (such as peak output rates on the following bases: 1millisecond, 10-millisecond, 100millisecond, 500-millisecond, 1-second, and 5-second); (iii) system availability statistics (for example, whether system up-time has been 100% for the month and cumulative amount of outage time); (iv) network delay statistics (for example, today under a TCP–IP network, network delay statistics would include quote and trade zero window size events, quote and trade TCP retransmit events, and quote and trade message total); and (v) latency statistics (with distribution statistics up to the 99.99th percentile) for (1) when a national securities exchange or national securities association sends an inbound message to a competing consolidator network and when the competing consolidator network receives the inbound message; 551 (2) when the competing consolidator network receives the inbound message and when the competing consolidator network sends the corresponding consolidated message to a subscriber; and (3) when a national securities exchange or national securities association sends an inbound message to a competing consolidator network and when the competing consolidator network sends the corresponding consolidated message to a subscriber. Additionally, proposed Rule 614(d)(6) would require each competing consolidator to publish prominently on its website, within 15 calendar days after the end of each month, information on: (i) Data quality issues (such as delayed message publication, publication of duplicative messages, 550 A competing consolidator that ceases operations would not be required to maintain the information posted pursuant to proposed Rule 614(d)(5) after the competing consolidator files its notice of cessation and its Form CC becomes ineffective, as provided in proposed Rule 614(a)(3). 551 The Commission believes that the SIPs do not currently produce this latency statistic. PO 00000 Frm 00059 Fmt 4701 Sfmt 4702 16783 and message inaccuracies); (ii) system issues (such as processing, connectivity, and hardware problems); (iii) any clock synchronization protocol utilized; (iv) for the clocks used to generate the timestamps described in Rule 614(d)(4), clock drift averages and peaks and number of instances of clock drift greater than 100 microseconds; 552 and (v) vendor alerts (such as holiday reminders and testing dates). All information posted pursuant to proposed Rule 614(d)(6) must be publicly posted and must remain free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. The Commission requests comment on proposed Rules 614(d)(4)–(d)(6). In particular, the Commission solicits comment on the following: 99. Do commenters believe that separate timestamps should be required as described in Rule 614(d)(4)? Are these the relevant instances for timestamps? Should any other timestamps be adopted? Should any of the proposed timestamps not be required? 100. Do commenters believe that the information required to be published pursuant to proposed Rule 614(d)(5) and proposed Rule 614(d)(6) is appropriate for competing consolidators? Should any further information be published? Is any information proposed to be published unnecessary? 101. Do commenters believe that the frequency of publication of the information required to be published pursuant to proposed Rule 614(d)(5) and proposed Rule 614(d)(6) is sufficient? Is it too onerous? 102. Do commenters believe that requiring each competing consolidator to publish the data required by proposed Rule 614(d)(5) and proposed Rule 614(d)(6) on its respective website is appropriate? Would commenters prefer that the competing consolidators instead file the data with the Commission for publication on the Commission’s website? 103. Do commenters believes that any of the information required to be published on the competing consolidator’s website should not be required to be made publicly available? Please explain. If so, should this information be required to be provided to subscribers? Should any information proposed to be made publicly available not be made publicly available due to competitive concerns? If so, please 552 The Commission believes that the SIPs do not currently produce this information. E:\FR\FM\24MRP2.SGM 24MRP2 16784 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 identify the information and provide an explanation. 104. Do commenters believe a requirement for the competing consolidators to publish historical performance data should be included in proposed Rule 614(d)(5) and proposed Rule 614(d)(6)? If yes, for what time periods should historical data be required to be published? The Commission is proposing several rules that would require competing consolidators to provide and maintain information for regulatory purposes. Proposed Rule 614(d)(7) would require each competing consolidator to keep and preserve at least one copy of all documents, including all correspondence, memoranda, papers, books, notices, accounts, and such other records as shall be made or received by it in the course of its business as such and in the conduct of its business.553 The proposed rule would require competing consolidators to keep these documents for a period of no less than five years, the first two years in an easily accessible place. Proposed Rule 614(d)(8) would require each competing consolidator to, upon request of any representative of the Commission, promptly furnish to the possession of such representative copies of any documents required to be kept and preserved by it.554 These requirements would facilitate the Commission’s oversight of competing consolidators and the national market system. The Commission requests comment on proposed Rules 614(d)(7) and (d)(8). In particular, the Commission solicits comment on the following: 105. Do commenters believe that the documents required to be kept and 553 See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 78q(a)(1). 554 In this context, ‘‘promptly’’ or ‘‘prompt’’ means making reasonable efforts to produce records that are requested by the staff during an examination without delay. The Commission believes that in many cases a competing consolidator could, and therefore will be required to, furnish records immediately or within a few hours of a request. The Commission expects that only in unusual circumstances would a competing consolidator be permitted to delay furnishing records for more than 24 hours. Accord Regulation Crowdfunding, Securities Act Release No. 9974, Securities Exchange Act Release No. 76324 (Oct. 30, 2015), 80 FR 71387, 71473 n. 1122 (Nov. 15, 2015) (similarly interpreting the term ‘‘promptly’’ in the context of Regulation Crowdfunding Rule 404(e)); Security Based Swap Data Repository Registration, Duties, and Core Principles, Securities Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR 14438, 14500, n. 846 (March 19, 2015) (similarly interpreting the term ‘‘promptly’’ in the context of Exchange Act Rule 13n–7(b)(3)); Registration of Municipal Advisors, Securities Exchange Act Release No. 70462 (Sept. 20, 2013), 78 FR 67468, 67578–67579 n. 1347 (Nov. 12, 2013) (similarly interpreting the term ‘‘prompt’’ in the context of Exchange Act Rule 15Ba1–8(d)). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 preserved by proposed Rule 614(d)(7) are appropriate for competing consolidators? If not, please explain. Are there any other documents that should be kept and preserved by competing consolidators? 106. Do commenters believe that the recordkeeping time periods required by proposed Rule 614(d)(7) are appropriate for competing consolidators? If not, what would be more appropriate recordkeeping time periods? 107. Do commenters believe that proposed Rule 614(d)(8), which requires competing consolidators to provide copies of any documents required to be kept and preserved to any representative of the Commission upon request, is appropriate for competing consolidators? If not, please explain. The Commission is proposing to define ‘‘business day’’ for purposes of proposed Rule 614 to comport with provisions contained in Rule 19b–4 and to specify the conditions under which filings required pursuant to Rule 614 are deemed to have been made on a particular business day. Specifically, the Commission proposes to define ‘‘business day’’ in the same manner in which it is defined in Rule 19b– 4(b)(2).555 The Commission preliminarily believes that these provisions providing a date-of-filings standard would facilitate the ability of competing consolidators to comply with the requirements of Rule 614 and facilitate the ability of the Commission to effectively receive, review, and make public the filings required under proposed Rule 614. The Commission requests comment on proposed Rules 614(a)(4)(i) and (a)(4)(ii). In particular, the Commission solicits comment on the following: 108. Do commenters believe that the definition of business day in proposed Rule 614(a)(4)(i) is appropriate? Why or why not? Would any alternative definition of business day be preferable? Please explain. 109. Do commenters believe that the standards set forth in proposed Rule 614(a)(4)(ii) regarding when a filing or publication requirement is deemed to have occurred on a particular business day are appropriate? Why or why not? Would any alternative standards be preferable? Please explain. (iii) Proposed New Form CC Proposed new Form CC includes a set of instructions for its completion and submission. These instructions are attached to this release, together with proposed Form CC. Proposed Form CC would require competing 555 See PO 00000 Rule 19b–4(b)(2), 17 CFR 240.19b–4(b)(2). Frm 00060 Fmt 4701 Sfmt 4702 consolidators556 to provide information and/or reports in narrative form by attaching specified exhibits. The proposed form would require a competing consolidator to indicate the purpose for which it is filing the form (i.e., initial report, material amendment, annual amendment, or notice of cessation), and to provide information in four categories: (1) General information, along with contact information; (2) business organization; (3) operational capability; and (4) services and fees. The Commission preliminarily believes that it is necessary to obtain the information requested in proposed Form CC to enable the Commission to determine whether to declare a Form CC ineffective. Specifically, the Commission believes that the requested information would assist the Commission in understanding the competing consolidator’s overall business structure, technological reliability, and services offered. In addition, Form CC would help to provide for consistent disclosures among competing consolidators. General Information: Proposed Form CC would require a competing consolidator to provide its legal name and ‘‘DBA’’ (doing business as), if applicable, its address, website URL, legal status (e.g., corporation, partnership, and sole proprietorship), and, except in the case of a sole proprietorship, the date of formation and state or country in which it was formed. The Commission preliminarily believes that this basic information is necessary for the Commission to evaluate a competing consolidator. Proposed Form CC also would require the competing consolidator to indicate (1) whether it is registered as a brokerdealer or affiliated with a registered broker-dealer and (2) whether it is a successor to a previously registered competing consolidator and, if so, the date of succession and the name and address of the predecessor registrant. The Commission preliminarily believes that this would provide basic identifying information about the competing consolidator and assist the Commission in its review of Form CC. Business Organization: Proposed Form CC would require each competing consolidator to provide information regarding its business organization, including: (1) In Exhibit A, information regarding any person who owns 10 percent or more of the competing 556 As explained above, only non-exclusive SIP competing consolidators, and not SRO competing consolidators, would be required to register on Form CC. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidator’s stock or who, either directly or indirectly, through agreement or otherwise, in any other manner, may control or direct the competing consolidator’s management or policies, including the full name and title of any such person and a copy of the agreement, or if there is no written agreement, a description of the agreement or basis upon which such person may exercise such control or direction; (2) in Exhibit B, a list of the officers, directors, governors, or persons performing similar functions of the competing consolidator; (3) in Exhibit C, a narrative or graphic description of the competing consolidator’s organizational structure; and (4) in Exhibit D, a list of all affiliates of the competing consolidator and the general nature of the affiliations. The Commission preliminarily believes that obtaining this information would assist the Commission in understanding the competing consolidator’s overall business structure, governance arrangements, and operations, all of which would assist the Commission in its review of Form CC. If the competing consolidator is a broker-dealer, or is affiliated with a broker-dealer, proposed Form CC would permit the competing consolidator to attach its, or its affiliate’s, Schedule A of Form BD, relating to direct owners and executive officers, and Schedule B of Form BD, relating to indirect owners. Alternatively, in lieu of filing Exhibits A and B to proposed Form CC, or providing Schedules A and B of Form BD, proposed Form CC would permit a competing consolidator to provide a URL address where the information requested under Exhibits A and B to proposed Form CC are available. The Commission preliminarily believes that this information would help the Commission and market participants understand the persons and entities that directly and indirectly own the brokerdealer, thereby enabling the Commission and market participants to better understand potential conflicts of interest that may arise for a competing consolidator that is a broker-dealer or is affiliated with a broker-dealer. Operational Capability: Proposed Form CC would require each competing consolidator to provide a description of each proposed consolidated market data service or function, including connectivity and delivery options for subscribers, and a description of all procedures utilized for the collection, processing, distribution, publication, and retention of information with respect to quotations for, and transactions in, securities. The VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 Commission further believes, preliminarily, that this information could assist the Commission in overseeing competing consolidators and assist market participants in assessing whether to become a subscriber of a certain competing consolidator. Competing consolidators could serve an important role in the national market system by calculating and generating consolidated market data, as proposed, and, accordingly, it is important for the competing consolidator to provide the requested information relating to its operational capability. Services and Fees: Proposed Form CC would further require a competing consolidator to provide information regarding access to its competing consolidator services, including: (1) A description of all market data products with respect to proposed consolidated market data or any subset of proposed consolidated market data that are provided to subscribers; (2) a description of any fees or charges for use of the competing consolidator with respect to proposed consolidated market data or any subset of proposed consolidated market data, including the types of fees (e.g., subscription and connectivity), the structure of the fee (e.g., fixed and variable), variables that affect the fees (e.g., data center costs, aggregation costs, and transmission costs), pricing differentiation among the types of subscribers, and range of fees (high and low); (3) a description of any co-location, connectivity, and related services, and the terms and conditions for co-location and related services, including connectivity and throughput options offered; and (4) a description of any other means besides co-location and related services to increase the speed of communication, including a summary of the terms and conditions for its use. The Commission preliminarily believes that this information would assist market participants in determining whether to become a subscriber of a competing consolidator by requiring the availability to all market participants of information regarding the services offered by the competing consolidator and the fees it charges for services and proposed consolidated market data. The availability of this information would also help to assure that all subscribers and potential subscribers have the same information about the services that the competing consolidator offers. Contact Information: In addition to the foregoing, proposed Form CC would require a competing consolidator to provide Commission staff with point of contact information for a person(s) prepared to respond to questions regarding Form CC, including the name, PO 00000 Frm 00061 Fmt 4701 Sfmt 4702 16785 title, telephone number, and email address of such person. Proposed Form CC also would require an electronic signature to help ensure the authenticity of the Form CC submission. The Commission preliminarily believes these proposed requirements would expedite communications between Commission staff and a competing consolidator and help to ensure that only personnel authorized by the competing consolidator are submitting required filings and responding to questions from Commission staff regarding Form CC. The Commission requests comment on proposed Form CC. In particular, the Commission solicits comment on the following: 110. Are the instructions in proposed Form CC sufficiently clear? If not, identify any instructions that should be clarified, and, if possible, offer alternatives. 111. Should the Commission implement an electronic filing system for receipt of Form CC, and, if so, what particular features should be incorporated into the system? Are there any burdens associated with the electronic filing of proposed Form CC that the Commission should consider? 112. Is the requested information relating to a competing consolidator’s operational capability appropriate? If not, identify any items that are not appropriate, explain why, and, if possible, offer alternatives. 113. Is the requested information relating to access to a competing consolidator’s services appropriate? If not, identify any items that are not appropriate, explain why, and, if possible, offer alternatives. 114. Do commenters believe that competing consolidators will bundle their products and/or services? If so, should this be disclosed on Form CC? 115. Should the Commission require any additional information on Form CC? If so, what information and why? 116. Are there any items on proposed Form CC that the Commission should not request? If so, which items and why? (f) Amendments to Regulation SCI The Commission adopted Regulation SCI in November 2014 to strengthen the technology infrastructure of the U.S. securities markets.557 Regulation SCI is designed to reduce the occurrence of systems issues in the U.S. securities markets, improve resiliency when systems problems occur, and enhance 557 See Regulation SCI Adopting Release, supra note 28, at 72252–56 for a discussion of the background of Regulation SCI. E:\FR\FM\24MRP2.SGM 24MRP2 16786 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 the Commission’s oversight of securities market technology infrastructure. The key market participants that are currently subject to Regulation SCI are called ‘‘SCI entities’’ and include certain SROs (including stock and options exchanges, registered clearing agencies, FINRA and the Municipal Securities Regulatory Board) (‘‘SCI SROs’’); alternative trading systems that trade NMS and non-NMS stocks exceeding specified volume thresholds (‘‘SCI ATSs’’); the exclusive SIPs (‘‘plan processors’’); and certain exempt clearing agencies.558 Regulation SCI, among other things, requires these SCI entities to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that their key automated systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and that such systems operate in accordance with the Exchange Act and the rules and regulations thereunder and the entities’ rules and governing documents, as applicable.559 Broadly speaking, Regulation SCI also requires SCI entities to take appropriate corrective action when systems issues occur; provide certain notifications and reports to the Commission regarding systems problems and systems changes; inform members and participants about systems issues; conduct business continuity and disaster recovery testing and penetration testing; conduct annual reviews of their automated systems; and make and keep certain books and records.560 Regulation SCI applies primarily to the systems of, or operated on behalf of, SCI entities that directly support any one of six key securities market functions—trading, clearance and settlement, order routing, market data, market regulation, and market surveillance (‘‘SCI systems’’).561 With respect to security, Regulation SCI also applies to systems that, if breached, would be reasonably likely to pose a security threat to SCI systems (‘‘indirect SCI systems’’).562 In addition, certain 558 See Rule 1000 of Regulation SCI, 17 CFR 242.1000. Because self-aggregators would be brokerdealers, see infra Section IV.B.3, they would be subject to existing broker-dealer risk control and supervisory obligations. See, e.g., 17 CFR 240.15c3– 5, FINRA Rule 3110, FINRA Rule 4370, FINRA Rule 4380. 559 See Rule 1001 of Regulation SCI, 17 CFR 242.1001, which is also discussed further below. 560 See Rules 1002–1007 of Regulation SCI, 17 CFR 242.1001–1007, which are also discussed further below. 561 See Rule 1000 of Regulation SCI, 17 CFR 242.1000. 562 Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 systems that raise concerns about single points of failure (defined as ‘‘critical SCI systems’’) are subject to certain heightened requirements.563 When adopting Regulation SCI, the Commission included within the scope of Regulation SCI those entities ‘‘that play a significant role in the U.S. securities markets and/or have the potential to impact investors, the overall market, or the trading of individual securities.’’ 564 The Commission identified by function the key market participants it believed were integral to ensuring the stability, integrity, and resiliency of securities market infrastructure.565 As discussed below, ‘‘plan processors’’ are currently among those entities that are subject to Regulation SCI. Under Regulation SCI, ‘‘plan processors’’ have the meaning set forth in Regulation NMS.566 Thus, currently, the exclusive SIPs, or plan processors of the Equity Data Plans and the OPRA Plan, are subject to Regulation SCI.567 The Commission included plan processors within the scope of Regulation SCI because the Commission believed that such entities, because they are exclusive processors and providers of key market data pursuant to a national market system plan, are central features of the national market system and serve an important role within the national market system in operating and maintaining computer and communications facilities for the receipt, processing, validating, and dissemination of quotation and/or last sale price information.568 The Commission preliminarily believes that competing consolidators, because they would be sources of consolidated market data, even if not exclusive sources of such data, would similarly serve an important role in the national market system, and therefore should be subject to the requirements of 563 Id. Subparagraph (1) of the definition of ‘‘critical SCI systems’’ in Rule 1000 of Regulation SCI specifically enumerates certain systems to be within its scope, including those that ‘‘directly support functionality relating to: (i) Clearance and settlement systems of clearing agencies; (ii) openings, reopenings, and closings on the primary listing market; (iii) trading halts;(iv) initial public offerings; (v) the provision of consolidated market data; or (vi) exclusively-listed securities . . .’’. 564 See Regulation SCI Adopting Release, supra note 28, at 72258. 565 Id. at 72254. 566 See Rule 600(b)(59) of Regulation NMS, 17 CFR 242.600(b)(59). 567 See also Regulation SCI Adopting Release, supra note 28, at 72270–71, n. 196 (discussing how the term ‘‘plan processor’’ applies to the CTA, CQ, Nasdaq UTP, and OPRA plans). 568 See also id. at 72271. The Commission also stated how systems issues affecting SIPs highlighted their importance within the national market system. See id. at n. 199 (discussing the impact of two systems issues involving SIPs). PO 00000 Frm 00062 Fmt 4701 Sfmt 4702 Regulation SCI. When adopting Regulation SCI, the Commission explained that Regulation SCI would apply not only to exclusive providers of consolidated market data, but also to the market data systems of SCI SROs, stating, ‘‘both consolidated and proprietary market data systems are widely used and relied upon by a broad array of market participants, including institutional investors, to make trading decisions, and [] if a consolidated or a proprietary market data feed became unavailable or otherwise unreliable, it could have a significant impact on the trading of the securities to which it pertains, and could interfere with the maintenance of fair and orderly markets.’’ 569 The Commission preliminarily believes that if a consolidated market data feed of a competing consolidator became unavailable or otherwise unreliable, it could have a significant impact on the trading of NMS stocks and/or the market participants subscribing to its data feeds, and could possibly interfere with the maintenance of fair and orderly markets. A systems issue could occur at a competing consolidator (e.g., a systems disruption that prevented the competing consolidator from disseminating consolidated market data to its subscribers, a systems intrusion that impacted the quality of the data being disseminated, or another cybersecurity incident, such that certain market participants or the securities markets broadly could be significantly impacted until such time that the issue was resolved at the competing consolidator, or the end user (or its market data vendor, if applicable) was able to implement any backup arrangements with an alternative competing consolidator. As detailed further below, the Commission is requesting comment on whether all of the obligations set forth in Regulation SCI should apply to competing consolidators, or whether only certain requirements should be imposed, such as those requiring written policies and procedures, notification of systems problems, business continuity and disaster recovery testing (including testing with participants/subscribers of a competing consolidator), and penetration testing. In addition, the Commission is proposing to revise the definition of ‘‘critical SCI system,’’ to take account of competing consolidators, which, as proposed, would not be exclusive providers of consolidated market data. Currently, subparagraph (1)(v) of the 569 See Regulation SCI Adopting Release, supra note 28, at 72275. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules definition of ‘‘critical SCI systems’’ includes those SCI systems of, or operated on behalf of, an SCI entity that directly support functionality relating to ‘‘the provision of consolidated market data.’’ The Commission is proposing to revise this subparagraph to apply to those systems that directly support functionality relating to ‘‘the provision of market data by a plan processor.’’ The proposed revised language in subparagraph (1)(v) is intended to identify as critical SCI systems only those market data systems that perform an exclusive market data dissemination function pursuant to an NMS plan. Accordingly, the scope of ‘‘critical SCI systems’’ would still capture single points of failure within the national market system. Under the current consolidation model, because the exclusive SIPs represent such single points of failure, they are all subject to heightened requirements as ‘‘critical SCI systems.’’ However, because the competing consolidator model is designed to result in multiple viable sources of consolidated market data, and would not be initiated until a transition period was complete,570 the Commission preliminarily believes that including systems of such competing consolidators within the scope of ‘‘critical SCI systems’’ would not be necessary. With multiple competing consolidators operating in the national market system, the systems of competing consolidators would be subject to the standard (i.e., as SCI systems that are not critical SCI systems) requirements of Regulation SCI, whereas the proposed revised definition of ‘‘critical SCI systems’’ would address single point of failure concerns. Because the competing consolidator model would not apply with respect to trading in options, the definition of ‘‘critical SCI systems’’ must still account for the systems of OPRA’s plan processor, whose systems would continue to be ‘‘critical SCI systems.’’ In addition, to avoid confusion with the term ‘‘consolidated market data’’— which is proposed to be defined to include (1) core data, (2) regulatory data, (3) administrative data, (4) exchangespecific program data, and (5) additional regulatory, administrative, or exchangespecific program data elements defined as such pursuant to the effective national market system plan(s) required under Rule 603(b) 571—the Commission is proposing to replace that phrase 570 See infra Section IV.B.6. proposed Rule 600(b)(19) of Regulation NMS. See also supra Section III.B. 571 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 within the definition of ‘‘critical SCI systems’’ with ‘‘market data.’’ 572 Thus, under this proposal, the definition of ‘‘SCI entities’’ would be expanded to include ‘‘competing consolidators,’’ which would be defined to have the same meaning as the definition of ‘‘competing consolidators’’ set forth in proposed Rule 600(b)(16) of Regulation NMS.573 Competing consolidators would be subject to the requirements of Regulation SCI, as described below. Rule 1001(a) of Regulation SCI requires SCI entities to have policies and procedures reasonably designed to ensure that their SCI systems and, for purposes of security standards, indirect SCI systems, have levels of capacity, integrity, resiliency, availability, and security adequate to maintain their operational capability and promote the maintenance of fair and orderly markets, and includes certain minimum requirements for those policies and procedures relating to capacity planning, stress tests, systems development and testing methodology, the identification of vulnerabilities, business continuity and disaster recovery plans (including geographic diversity and resumption goals), and monitoring.574 Of particular note for competing consolidators is Rule 1001(a)(2)(vi), which requires that an SCI entity’s policies and procedures include standards ‘‘that result in such systems being designed, developed, tested, maintained, operated, and surveilled in a manner that facilitates the successful collection, processing, and dissemination of market data.’’ 575 Rule 1001(a)(3) of Regulation SCI requires that SCI entities periodically review the effectiveness of these policies and procedures, and take prompt action to remedy any deficiencies.576 Rule 1001(a)(4) of Regulation SCI provides that, for purposes of the provisions of Rule 572 See proposed amendment to Rule 1000 of Regulation SCI. 573 See proposed amendment to Rule 1000 of Regulation SCI. As discussed above, competing consolidators would not fall within the definition of ‘‘plan processors’’ under Regulation SCI. See supra notes 566–567 and accompanying text. In addition to revising Rule 1000 of Regulation SCI to define ‘‘competing consolidators’’ and include them within the definition of ‘‘SCI entity,’’ corresponding changes would be made to Form SCI and the General Instructions to Form SCI to include references to ‘‘competing consolidators.’’ See infra note 595 and accompanying text (discussing Form SCI and Rule 1006 of Regulation SCI). 574 Rule 1001(a) of Regulation SCI, 17 CFR 242.1001(a). 575 Rule 1001(a)(2)(vi) of Regulation SCI, 17 CFR 242.1001(a)(2)(vi). 576 Rule 1001(a)(3) of Regulation SCI, 17 CFR 242.1001(a)(3). PO 00000 Frm 00063 Fmt 4701 Sfmt 4702 16787 1001(a), an SCI entity’s policies and procedures will be deemed to be reasonably designed if they are consistent with current SCI industry standards, which shall be comprised of information technology practices that are widely available to information technology professionals in the financial sector and issued by an authoritative body that is a U.S. governmental entity or agency, association of U.S. governmental entities or agencies, or widely recognized organization; 577 however, Rule 1001(a)(4) of Regulation SCI also makes clear that compliance with such ‘‘current SCI industry standards’’ are not the exclusive means to comply with these requirements. Rule 1001(b) of Regulation SCI requires that each SCI entity establish, maintain, and enforce written policies and procedures reasonably designed to ensure that its SCI systems operate in a manner that complies with the Act and the rules and regulations thereunder and the entity’s rules and governing documents, as applicable, and specifies certain minimum requirements for such policies and procedures.578 Rule 1001(b)(3) of Regulation SCI requires that SCI entities periodically review the effectiveness of these policies and procedures, and take prompt action to remedy any deficiencies.579 Rule 1001(b)(4) of Regulation SCI provides individuals with a safe harbor from liability under Rule 1001(b) if certain conditions are met.580 Rule 1001(c) of Regulation SCI requires SCI entities to establish, maintain, and enforce reasonably designed written policies and procedures that include the criteria for identifying responsible SCI personnel, the designation and documentation of responsible SCI personnel, and 577 Rule 1001(a)(4) of Regulation SCI, 17 CFR 242.1001(a)(4). We note that concurrent with the Commission’s adoption of Regulation SCI, Commission staff issued staff guidance on current SCI industry standards as referenced in Regulation SCI. The staff guidance listed examples of publications in nine domains describing processes, guidelines, frameworks, or standards an SCI entity could look to in developing reasonable policies and procedures to comply with Rule 1001(a) of Regulation SCI. See ‘‘Staff Guidance on Current SCI Industry Standards,’’ November 19, 2014, available at: https://www.sec.gov/rules/final/2014/staffguidance-current-sci-industry-standards.pdf. The domains included: Application controls; capacity planning; computer operations and production environment controls; contingency planning; information security and networking; audit; outsourcing; physical security; and systems development methodology. 578 Rule 1001(b)(1)–(2) of Regulation SCI, 17 CFR 242.1001(b)(1)–(2). 579 Rule 1001(b)(3) of Regulation SCI, 17 CFR 242.1001(b)(3). 580 Rule 1001(b)(4) of Regulation SCI, 17 CFR 242.1001(b)(4). E:\FR\FM\24MRP2.SGM 24MRP2 16788 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 escalation procedures to quickly inform responsible SCI personnel of potential SCI events.581 Rule 1000 of Regulation SCI defines ‘‘responsible SCI personnel’’ to mean, ‘‘for a particular SCI system or indirect SCI system impacted by an SCI event, such senior manager(s) of the SCI entity having responsibility for such system, and their designee(s).’’ 582 Rule 1000 also defines ‘‘SCI event’’ to mean an event at an SCI entity that constitutes a system disruption, a systems compliance issue, or a systems intrusion.583 Rule 1001(c)(2) of Regulation SCI requires that SCI entities periodically review the effectiveness of these policies and procedures, and take prompt action to remedy any deficiencies.584 Under Rule 1002 of Regulation SCI, SCI entities have certain obligations related to SCI events. Specifically, when any responsible SCI personnel has a reasonable basis to conclude that an SCI event has occurred, an SCI entity must begin to take appropriate corrective action which must include, at a minimum, mitigating potential harm to investors and market integrity resulting from the SCI event and devoting adequate resources to remedy the SCI event as soon as reasonably practicable.585 Rule 1002(b) provides the framework for notifying the Commission of SCI events including, among other things, to: Immediately notify the Commission of the event; provide a written notification within 24 hours that includes a description of the SCI event and the system(s) affected, with other information required to the extent available at the time; provide regular updates regarding the SCI event until the event is resolved; and submit a final detailed written report regarding the SCI event.586 Rule 1002(c) of 581 Rule 1001(c) of Regulation SCI, 17 CFR 242.1001(c). 582 Rule 1000 of Regulation SCI, 17 CFR 242.1000. 583 A ‘‘systems disruption’’ means an event in an SCI entity’s SCI systems that disrupts, or significantly degrades, the normal operation of an SCI system. A ‘‘systems compliance issue’’ means ‘‘an event at an SCI entity that has caused any SCI system of such entity to operate in a manner that does not comply with the Act and the rules and regulations thereunder or the entity’s rules or governing documents, as applicable.’’ A ‘‘systems intrusion’’ means any unauthorized entry into the SCI systems or indirect SCI systems of an SCI entity.’’ See Rule 1000 of Regulation SCI, 17 CFR 242.1000. 584 Rule 1001(c)(2) of Regulation SCI, 17 CFR 242.1001(c)(2). 585 See Rule 1002(a) of Regulation SCI, 17 CFR 242.1002(a). 586 See Rule 1002(b) of Regulation SCI, 17 CFR 242.1002(b). For any SCI event that ‘‘has had, or the SCI entity reasonably estimates would have, no or a de minimis impact on the SCI entity’s operations or on market participants,’’ Rule 1002(b)(5) provides an exception to the general Commission VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 Regulation SCI also requires that SCI entities disseminate information to their members or participants regarding SCI events.587 These information dissemination requirements are scaled based on the nature and severity of an event. Specifically, for ‘‘major SCI events,’’ SCI entities are required to promptly disseminate certain information about the event to all of its members or participants. For SCI events that are not ‘‘major SCI events,’’ SCI entities must, promptly after any responsible SCI personnel has a reasonable basis to conclude that an SCI has occurred, disseminate certain information to those SCI entity members and participants reasonably estimated to have been affected by the event. In addition, dissemination of information to members or participants is permitted to be delayed for systems intrusions if such dissemination would likely compromise the security of the SCI entity’s systems or an investigation of the intrusion.588 Rule 1003(a) of Regulation SCI requires SCI entities to provide reports to the Commission relating to system changes, including a report each quarter describing completed, ongoing, and planned material changes to their SCI systems and the security of indirect SCI systems, during the prior, current, and subsequent calendar quarters, including the dates or expected dates of commencement and completion.589 Rule 1003(b) of Regulation SCI also requires that an SCI entity conduct an ‘‘SCI review’’ not less than once each calendar year.590 ‘‘SCI review’’ is defined in Rule 1000 of Regulation SCI to mean a review, following established procedures and standards, that is performed by objective personnel having appropriate experience to conduct reviews of SCI systems and indirect SCI systems, and which review contains: A risk assessment with respect to such systems of an SCI entity; and an notification requirements under Rule 1002(b). Instead, an SCI entity must make, keep, and preserve records relating to all such SCI events, and submit a quarterly report to the Commission regarding any such events that are systems disruptions or systems intrusions. 587 See Rule 1002(c) of Regulation SCI, 17 CFR 242.1002(c). 588 See Rule 1002(c)(2) of Regulation SCI, 17 CFR 242.1002(c)(2). In addition, the information dissemination requirements of Rule 1002(c) do not apply to SCI events to the extent they relate to market regulation or market surveillance systems, or to any SCI event that has had, or the SCI entity reasonably estimates would have, no or a de minimis impact on the SCI entity’s operations or on market participants. See Rule 1002(c)(4) of Regulation SCI, 17 CFR 242.1002(c)(4). 589 See Rule 1003(a) of Regulation SCI, 17 CFR 242.1003(a). 590 See Rule 1003(b) of Regulation SCI, 17 CFR 242.1003(b). PO 00000 Frm 00064 Fmt 4701 Sfmt 4702 assessment of internal control design and effectiveness of its SCI systems and indirect SCI systems to include logical and physical security controls, development processes, and information technology governance, consistent with industry standards.591 Rule 1003(b)(2)– (3) SCI entities are also required to submit a report of the SCI review to their senior management, and must also submit the report and any response by senior management to the report, to their board of directors as well as the Commission.592 Rule 1004 of Regulation SCI sets forth the requirements for testing an SCI entity’s business continuity and disaster recovery plans with its members or participants. This rule requires that, with respect to an SCI entity’s business continuity and disaster recovery plan, including its backup systems, each SCI entity shall: (a) Establish standards for the designation of those members or participants that the SCI entity reasonably determines are, taken as a whole, the minimum necessary for the maintenance of fair and orderly markets in the event of the activation of such plans; 593 (b) designate members or participants pursuant to the standards established and require participation by such designated members or participants in scheduled functional and performance testing of the operation of such plans, in the manner and frequency specified by the SCI entity, provided that such frequency shall not be less than once every 12 months; and (c) coordinate the testing of such plans on an industry- or sector-wide basis with other SCI entities. Rule 1005(b) of Regulation SCI relates to the recordkeeping requirements of competing consolidators related to compliance with Regulation SCI.594 591 See Rule 1000 of Regulation SCI, 17 CFR 242.1000. In addition, Rule 1003(b)(1) of Regulation SCI states that penetration test reviews of an SCI entity’s network, firewalls, and production systems must be conducted at a frequency of not less than once every three years, and assessments of SCI systems directly supporting market regulation or market surveillance must be conducted at a frequency based upon the risk assessment conducted as part of the SCI review, but in no case less than once every three years. See Rule 1003(b)(1)(i)–(ii) of Regulation SCI, 17 CFR 242.1003(b)(1)(i)–(ii). 592 See Rule 1003(b)(2)–(3) of Regulation SCI, 17 CFR 242.1003(b)(2)–(3). 593 See Rule 1004 of Regulation SCI, 17 CFR 242.1004. For a competing consolidator, its designated members or participants generally would include the national securities exchanges that receive its consolidated market data, as well as its other significant subscribers for such data (including, but not limited, to major market data vendors that widely redistribute such data). 594 See Rule 1005 of Regulation SCI, 17 CFR 242.1005. Rule 1005(a) relates to recordkeeping provisions for SCI SROs, whereas Rule 1005(b) E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Rule 1006 of Regulation SCI provides for certain requirements relating to the electronic filing, on Form SCI, of any notification, review, description, analysis, or report to the Commission required to be submitted under Regulation SCI.595 Finally, Rule 1007 of Regulation SCI contains requirements relating to a written undertaking when records required to be filed or kept by an SCI entity under Regulation SCI are prepared or maintained by a service bureau or other recordkeeping service on behalf of the SCI entity.596 The Commission requests comment on the proposed inclusion of competing consolidators in Regulation SCI and the related revisions to Rule 1000 of Regulation SCI. In particular, the Commission solicits comment on the following: 117. Do commenters believe that Regulation SCI should apply to competing consolidators? If so, do commenters believe that the proposed revisions to Rule 1000 of Regulation SCI are appropriate? Why or why not? Is there a potential for a systems issue at a competing consolidator to have an adverse impact on the maintenance of fair and orderly markets? If so, what do commenters believe would be the most effective way to mitigate that potential? 118. Do commenters believe that competing consolidators could play a significant role in the U.S. securities markets such that they should be defined as SCI entities? Why or why not? What do commenters believe are the risks related to subscribers associated with systems issues at a competing consolidator? What impact would a systems issue have on the trading of securities and the maintenance of fair and orderly markets? Do commenters believe that all requirements set forth in Regulation SCI should apply to competing consolidators? Why or why not? 119. Unlike other types of SCI entities, ATSs are only subject to Regulation SCI if they meet certain volume thresholds set forth in the definition of ‘‘SCI ATS.’’ Do commenters similarly believe there is a threshold size, or a threshold for significant market share, at which Regulation SCI should apply to a competing consolidator? For example, the definition of SCI ATSs contains a two-pronged volume threshold test measured over a ‘‘four out of six-month’’ period to determine whether an relates to the recordkeeping provision for SCI entities other than SCI SROs. 595 See Rule 1006 of Regulation SCI, 17 CFR 242.1006. 596 See Rule 1007 of Regulation SCI, 17 CFR 242.1007. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 alternative trading system is subject to Regulation SCI. Would a similar test be appropriate for competing consolidators? If so, what do commenters believe would be an appropriate measurement that should be used for such a test? For example, in the definition of SCI ATS, the NMS stock volume threshold test for inclusion of an alternative trading system in Regulation SCI is one percent (1%) or more of overall volume in NMS stocks during at least four of the preceding six calendar months. Would it, for example, be appropriate for the Commission to apply Regulation SCI to competing consolidators that had one percent (1%) or more of total subscribers of consolidated market data during at least four of the preceding six calendar months? Or, would a different threshold (such as five, ten, or twenty percent) be more appropriate? Why or why not? Please describe. Do commenters believe that another measurement (other than total subscribers of consolidated market data) be more appropriate? If so, what do commenters believe that measurement should be? Please describe. 120. Do commenters believe that only certain provisions of Regulation SCI should apply to competing consolidators? For example, should competing consolidators only be subject to certain aspects of Regulation SCI, such as the policies and procedures required by Rule 1001 of Regulation SCI; the requirement to provide notification of SCI events and to take corrective action as required by Rule 1002 of Regulation SCI; the requirement to conduct SCI reviews as required by Rule 1003 of Regulation SCI; the requirement to perform disaster recovery testing as required by Rule 1004 of Regulation SCI; the requirements related to recordkeeping, as required by Rule 1005 of Regulation SCI; the requirements relating to electronic filing on Form SCI pursuant to Rule 1006 of Regulation SCI; and the requirements relating to service bureaus, as required by Rule 1007 of Regulation SCI? If so, which provisions should apply? Do commenters believe that different or unique requirements should apply to the systems of competing consolidators? What should they be and why? 121. In what instances, if at all, should the systems of competing consolidators be defined as ‘‘critical SCI systems’’? Please describe. 122. Which subscribers or types of subscribers should competing consolidators consider as ‘‘designated members or participants’’ that should be required to participate in the annual PO 00000 Frm 00065 Fmt 4701 Sfmt 4702 16789 mandatory business continuity and disaster recovery testing? Please describe. 123. Do commenters believe that requiring competing consolidators to be defined as SCI entities would deter parties from registering as competing consolidators? Why or why not? 124. Do commenters believe that competing consolidators should not be defined as SCI entities but should be required to comply with provisions comparable to provisions of Regulation SCI? Why or why not? 125. If commenters believe that competing consolidators should not be defined as SCI entities but should be required to comply with provisions comparable to provisions of Regulation SCI, what provisions should apply? Should competing consolidators be required to have business continuity and disaster plans, to designate subscribers that the competing consolidator determines are necessary for the maintenance of fair and orderly markets in the event of the activation of such plans, to mandate such subscribers’ participation in scheduled functional and performance testing of the operation of such plans not less than once every 12 months, and to coordinate testing of such plans on an industry- or sector-wide basis with SCI entities, or otherwise be required to participate in coordinated testing scheduled by SCI entities? Why or why not? 126. Do commenters believe that existing proprietary market data aggregation firms that wish to register as competing consolidators would establish separate legal entities for that purpose? Why or why not? 3. Self-Aggregators Currently, some broker-dealers effectively act as self-aggregators by purchasing proprietary data products from the exchanges, consolidating that information (either independently or with the use of vendor services and/or hardware), and calculating the NBBO for their own use. Broker-dealers may self-aggregate to eliminate various forms of latency 597 or to access the additional content provided by proprietary data feeds in a consolidated form. This selfaggregated consolidated data may be used for SORs, algorithmic trading systems, alternative trading systems (‘‘ATSs’’), visual display, or other uses. While broker-dealers raised concerns about the costs associated with proprietary data products, some have developed these self-aggregation solutions as a means to address the 597 See supra Section IV.A for a discussion of geographic, aggregation, and transmission latencies. E:\FR\FM\24MRP2.SGM 24MRP2 16790 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 latency and content issues that are present with the exclusive SIPs themselves.598 The Commission preliminarily believes that brokerdealers should be permitted to continue to self-aggregate consolidated market data as proposed to be defined under the proposed decentralized consolidation model. The Commission is concerned that eliminating the ability of broker-dealers to self-aggregate proposed consolidated market data for their own use would be unnecessarily disruptive to the current market data infrastructure landscape. Accordingly, the Commission proposes to amend Rule 600(b) to add a definition of a self-aggregator. The Commission proposes to define a selfaggregator as ‘‘a broker or dealer that receives information with respect to quotations for and transactions in NMS stocks, including all data necessary to generate consolidated market data, and generates consolidated market data solely for internal use. A self-aggregator may not make consolidated market data, or any subset of consolidated market data, available to any other person.’’ In particular, a self-aggregator would collect the NMS information necessary to generate proposed consolidated market data that it needs to trade for its own account or to execute transactions for its customers. A self-aggregator would generate the proposed consolidated market data that it needs for its business, such as calculating current protected bids and offers from each trading center for purposes of Rule 611 and the current best bids and offers from each trading center for achieving and analyzing best execution.599 The proposed definition would prohibit selfaggregators from disseminating proposed consolidated market data to any person, including a customer or any affiliated entity, as such action would not be for the internal use of a selfaggregator and would be akin to the actions of a competing consolidator, and thus would require registration as a competing consolidator. 598 See, e.g., Roundtable Day One Transcript at 198–199 (Joseph Wald, Clearpool) (‘‘Clearpool and other broker-dealers are compelled to purchase exchanges’ proprietary data feeds, both to provide competitive execution services to our clients and to meet our best execution obligations due to the content of the information contained in the proprietary data feeds as well as the latency differences between them, which are major and important considerations for brokers.’’). 599 A self-aggregator also would receive from the primary listing exchanges regulatory data (as defined as proposed consolidated market data), which would be necessary for meeting regulatory obligations, such as monitoring Short Sale Circuit Breakers and LULD price bands. See supra Section III.D. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 Like competing consolidators, a selfaggregator would collect all information with respect to quotations for and transactions in NMS stocks directly from each SRO, but importantly, selfaggregators would not be permitted to re-distribute or re-disseminate proposed consolidated market data to any person, including to any affiliates or subsidiaries. A self-aggregator that redistributed or re-disseminated proposed consolidated market data, or any subset of proposed consolidated market data, would be performing the functions of a competing consolidator and, accordingly, would be required to register as a competing consolidator. Self-aggregators would establish connectivity to the SROs directly or through the use of a service provider and would either use their own proprietary technology or that of a third party vendor to perform aggregation and any other functions necessary for generating proposed consolidated market data. A vendor providing hardware, software, and/or other services for the purposes of selfaggregation would not be a competing consolidator unless it collected and aggregated proposed consolidated market data in a standardized format within its own facility (e.g., not that of a broker-dealer customer) and resold that configuration of proposed consolidated market data to a customer. As discussed above, pursuant to Rule 603(b), self-aggregators would receive access from the SROs, either directly or via the use of a vendor, to the data necessary to generate proposed consolidated market data in the same manner and using same methods as other persons, including competing consolidators.600 A self-aggregator that limits its use of exchange data to the creation of proposed consolidated market data would be charged only for proposed consolidated market data pursuant to the effective national market system plan(s) fee schedules.601 A selfaggregator that uses an exchange’s proprietary data (e.g., full depth of book data) could be charged separately for the proprietary data use pursuant to the individual exchange’s fee schedule.602 600 See supra Section IV.B.1. infra Section IV.B.4 for a discussion of the effective national market system plan(s). This would apply to proposed consolidated market data provided through an exchange’s proprietary data product. 602 SRO fees for market data other than the proposed consolidated market data would be subject to the rule filing process pursuant to Section 19(b) and Rule 19b–4. 601 See PO 00000 Frm 00066 Fmt 4701 Sfmt 4702 (a) Roundtable Discussion and Comments Roundtable participants discussed self-aggregation. One panelist described a variation of the self-aggregation alternative that he referred to as the ‘‘one feed-one speed’’ model.603 The panelist suggested that consolidated market data should be made available in a similar manner and using the same framework as the exchanges use to make available their direct proprietary data feeds.604 The Commission received one comment letter that supported consideration of a self-aggregation model. The commenter believed that this approach would further the principles of transparency and fairness and ‘‘level the playing field for industry participants.’’ 605 In contrast, the Commission received one comment letter that expressed criticism of a self-aggregation model. The commenter urged against government intervention requiring all market participants to use the same connectivity and the same data, explaining that different customers need different products and that the government should not limit choices ‘‘in this radical manner.’’ 606 The commenter also stated that adding multiple consolidators or competing SIPs to the model would magnify risks.607 603 See Roundtable Day Two Transcript at 27–29 (Adam Nunes, Hudson River Trading). 604 Id. This panelist also published a note that described the ability of firms and vendors to receive data directly from the exchanges. See Adam Nunes, MMI Member Guest Editorial: Speed up the SIP, Modern Markets Initiative (Dec. 22, 2015), available at https://www.modernmarketsinitiative.org/ archive/2018/11/14/mmi-member-guest-editorialspeed-up-the-sip. In this note, the panelist described a model in which (1) firms would order the SIP data as they do today, by contacting their vendor or the SIP administrator; (2) the firm/vendor connecting to the SIP would get a connection to each exchange to listen to their data where the data is produced (rather than getting the data from a central location); and (3) the firm would receive and process the data similarly to how it handles direct market data feeds. 605 See Letter to Brent J. Fields, Secretary, Commission, from Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, 5–6 (Oct. 18, 2018) (‘‘Modern Markets Initiative Letter’’). One commenter advocated that each exchange should provide a single data feed to market participants (instead of a SIP data feed and proprietary data feeds). The commenter said that a single data feed ‘‘would better serve market participants from the standpoint of equality and fairness.’’ However, the commenter also noted that investors would benefit from competition among organizations able to operate as SIPs, either through a bidding process for a centralized SIP or the ability of multiple SIPs to operate (i.e., a competing consolidator model). See T. Rowe Price Letter at 3. 606 See Wittman Letter at 15. 607 Id. at 16. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules (b) Commission Discussion The Commission preliminarily believes that the proposed decentralized consolidation model should allow broker-dealers to continue to selfaggregate by collecting and calculating consolidated market data, as proposed, solely for their internal use, in a manner that would allow access to proposed consolidated market data on fair and reasonable terms and without the inefficiencies and added latencies associated with the existing exclusive SIP model. The proposed decentralized consolidation model is designed to increase, rather than limit, market participants’ choices with respect to data products and connectivity. Accordingly, the Commission preliminarily believes that brokerdealers should be able to choose to selfaggregate consolidated market data for their own internal purposes in a similar manner as they may do today with proprietary data. Under the proposed rules, competing consolidators and selfaggregators would be able to select the transmission services that meet the needs of their client or their individual needs, respectively, rather than be restricted to transmission services mandated by the Equity Data Plans. In addition, the proposed rules would allow competing consolidators and selfaggregators to choose to receive exchange data products that include only proposed consolidated market data elements or products that contain both proposed and non-proposed consolidated market data elements (e.g., existing proprietary data products). As discussed more fully above, the proposed rules would permit the exchanges to offer different connectivity options (e.g., with different latencies, throughput capacities, and data-feed protocols) to market data customers but would require that any options provided to proprietary data customers be available to competing consolidators and self-aggregators in the same manner and using the same methods, including all methods of access and the same format, for the purpose of collecting and consolidating proposed consolidated market data. Self-aggregators may have a minor latency advantage over market participants that decide to utilize a competing consolidator for their consolidated market data, due to the fact that self-aggregators will be collecting and consolidating this data for themselves rather than relying on a competing consolidator to do so, and therefore would eliminate a potential latency cost that comes with an extra VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 hop within a given data center. The Commission, however, preliminarily believes that the addition of competitive forces with the introduction of competing consolidators should minimize these inherent latencies.608 The Commission has not proposed a separate registration requirement for self-aggregators, nor has it proposed to impose the obligations of competing consolidators on self-aggregators. Because self-aggregators will be brokerdealers who are subject to broker-dealer registration requirements, the Commission preliminarily believes that imposing an additional registration requirement and the competing consolidator obligations on selfaggregators would be unnecessary and could result in undue costs and burdens. Further, self-aggregators would be required to calculate and generate proposed consolidated market data, or a component of proposed consolidated market data, to the extent that such information is necessary for the selfaggregator to comply with applicable regulatory requirements. For example, to the extent that a self-aggregator’s activities require that self-aggregator to generate the NBBO, the self-aggregator would be required to do so consistent with proposed Rule 600(b)(50). Any self-aggregator that disseminates to any person—including to an affiliate or subsidiary of the self-aggregator—or makes public the proposed consolidated market data, or any subset of the proposed consolidated market data, would be required to register as a competing consolidator.609 608 Some have argued that speed-based competition in modern markets—in particular, the speed advantages of high-frequency traders and practices such as ‘‘latency arbitrage’’— impose costs on investors and other market participants. See, e.g., Matteo Aquilina, et al., Quantifying the HighFrequency Trading ‘‘Arms Race’’: A Simple New Methodology and Estimates, Financial Conduct Authority (Jan. 2020), available at https:// www.fca.org.uk/publication/occasional-papers/ occasional-paper-50.pdf?mod=article_inline. But see Bartlett and McCrary, supra note 418. As discussed above, the Commission preliminarily believes that the proposed decentralized consolidation model would reduce latency in the distribution of proposed consolidated market data and speed-based information asymmetries between market participants. See supra Section IV.B. 609 A self-aggregator that provides a software product to other broker-dealers for purposes of allowing such other broker-dealers to self-aggregate SRO data to generate proposed consolidated market data within such other broker-dealers’ facilities would not be a competing consolidator because the self-aggregator itself would not be generating consolidated market data for dissemination to such broker-dealers. However, if an entity uses its own software product to aggregate SRO data to generate proposed consolidated market data within the selfaggregator’s facilities and thereafter redistributes or disseminates proposed consolidated market data to other broker-dealers or market participants, such entity would be a competing consolidator because PO 00000 Frm 00067 Fmt 4701 Sfmt 4702 16791 The Commission requests comment on the proposed amendment to Rule 600(b)(82) to introduce a definition of ‘‘self-aggregator.’’ In particular, the Commission solicits comment on the following: 127. Is the definition of self-aggregator as ‘‘a broker or dealer that receives information with respect to quotations for and transactions in NMS stocks, including all information necessary to generate consolidated market data, and generates consolidated market data solely for internal use’’ too broad or narrow? Should other entities be included in the definition? Please identify such entities and explain. 128. Are the distinctions between selfaggregators and competing consolidators sufficiently clear? Should any additional clarification be provided to fully distinguish between a vendor that provides self-aggregation services to multiple broker-dealers and competing consolidators that provide aggregated data to multiple broker-dealers? If so, please describe what additional clarification should be provided. 129. Should self-aggregators be subject to a registration requirement? Why or why not? 130. Self-aggregators may have a minor latency advantage over competing consolidators. Please provide comment on this potential latency advantage. Would the latency advantage be material? Are there methods to neutralize any latency advantage between self-aggregators and competing consolidators? If so, should they be instituted? 131. Should self-aggregators be permitted to disseminate proposed consolidated market data to their affiliates and subsidiaries without being required to register as a competing consolidator? Why or why not? Does the restriction on not providing consolidated market data or a subset thereof to customers or affiliates reflect a significant departure from current practices? Please explain. 132. Should any market participants aside from broker-dealers be included in the proposed definition of selfaggregator? Please explain. 4. Amendment to the Effective National Market System Plan(s) for NMS Stocks An integral part of the national market system is the use of NMS plans. Section 11A(a)(3)(B) of the Exchange Act reflects their importance by providing the Commission the authority to require the SROs, by order, ‘‘to act jointly . . . in planning, developing, operating, or it would be generating and disseminating consolidated market data to others. E:\FR\FM\24MRP2.SGM 24MRP2 16792 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules regulating a national market system (or a subsystem thereof).’’ The Equity Data Plans, which are the effective national market system plans for NMS stocks,610 historically have played an important role in developing, operating, and governing the national market system.611 The proposed decentralized consolidation model would fundamentally change the national market system and the role of the Equity Data Plans.612 Under the decentralized consolidation model, the effective national market system plan(s) for NMS stocks, would continue to play an important but modified role in the national market system.613 Therefore, the Commission is proposing in Rule 614(e) that an amendment to the effective national market system plan(s) be filed with the Commission to conform the plan(s) to the decentralized consolidation model, to address the application of timestamps by the SROs, to require annual assessments of competing consolidators’ performance, and to develop a list of the primary listing market for each NMS stock, as discussed below. Proposed Rule 614(e) would require the participants to the effective national market system plan(s) for NMS stocks to submit an amendment pursuant to Rule 608 to conform the plan(s) to the proposed decentralized consolidation model within 60 calendar days from the effective date of Rule 614. As discussed above, today, the Equity Data Plans operate the exclusive SIPs for the collection, consolidation, and dissemination of SIP data.614 In the decentralized consolidation model, the effective national market system plan(s) for NMS stocks would no longer be responsible for collecting, consolidating, and disseminating consolidated market data and would no longer operate an exclusive SIP.615 Instead, the participants of the effective national market system plan(s) for NMS stocks would develop and file with the Commission the fees for SRO data content required to be made available by each SRO to competing consolidators and self-aggregators for the creation of proposed consolidated market data, including fees for SRO market data 610 See 611 See Proposed Governance Order, supra note 8. supra Section II.A. lotter on DSKBCFDHB2PROD with PROPOSALS2 612 Id. 613 Pursuant to the proposed amendments to Rule 603(b), proposed consolidated market data would be collected, consolidated, and disseminated pursuant to an effective national market system plan. 614 See supra Section II.A. 615 The Commission preliminarily believes that the operators of the existing exclusive SIPs may choose to become competing consolidators. See infra Section IV.B.6. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 products that contain all of the components of proposed consolidated market data as well as the fees for market data products that contain only a subset of the components of proposed consolidated market data.616 The effective national market system plan(s) would also collect fees for the SRO data content used to create the proposed consolidated market data; 617 and allocate the revenues among the SRO participants. The effective national market system plan(s) would also oversee plan accounts and plan audits for purposes of billing, among other things.618 Rule 614(e)(1) would direct the participants to file with the Commission an amendment to the effective national market system plan(s) for NMS stocks in order to conform the plan(s) to reflect the proposed consolidated market data and proposed decentralized consolidation model. The Commission preliminarily believes that to conform to the proposed decentralized consolidation model, the effective national market system plan(s) for NMS stocks would need to be amended to reflect the fees for the proposed consolidated market data. The proposed new fees would need to reflect the following: (i) That proposed consolidated market data includes the content described above, including depth of book data, auction information, and additional information on orders of sizes smaller than 100 shares; (ii) that the effective national market system plan(s) for NMS stocks is no longer operating an exclusive SIP and is no longer performing aggregation and other operational functions; and (iii) that the SROs are no longer responsible for the connectivity and transmission services required for providing data to the exclusive SIPs from the SROs’ data centers since the exclusive SIPs will no longer be operated by the effective national market system plan(s) for NMS 616 For example, the operating committee of the effective national market system plan(s) could develop different pricing for a TOB product that includes only certain SRO data content used to create proposed consolidated market data. See supra note 316 and accompanying text. See also NYSE Sharing Data-Driven Insights—Stock Quotes and Trade Data: One Size Doesn’t Fit All (Aug. 22, 2019), available at https://www.nyse.com/equitiesinsights#20190822 (proposing to replace the exclusive SIP feeds with three tiered levels of service, including certain DOB data, based on the needs of specific types of investors). Nothing in this proposal would prevent the operating committee of the effective national market system plan(s) from structuring the sale of data in a similar manner. 617 See supra Section IV.B.1. 618 The effective national market system plan(s) for NMS stocks would review the performance of competing consolidators. See infra discussion on proposed Rule 614(e) (1)(iii). PO 00000 Frm 00068 Fmt 4701 Sfmt 4702 stocks.619 The proposed new fees for consolidated market data must be fair and reasonable and not unfairly discriminatory.620 The proposed fees must be submitted by the participants of the effective national market system plan(s) for NMS stocks pursuant to Rule 608 under the Exchange Act. In addition, to conform the effective national market system plan(s) for NMS stocks to the proposed decentralized consolidation model, the amendment to the plan(s) generally should include a harmonized approach to data billing protocols, including with respect to any unified multiple installations, single users (‘‘MISU’’) policy.621 Proposed Rule 614(e)(1)(ii) would require the participants to file a proposed amendment to the effective national market system plan(s) for NMS stocks to address the application of timestamps by the SRO participants on proposed consolidated market data, including the time the proposed consolidated market data was generated by the SRO participant and the time the SRO participant made the proposed consolidated market data available to competing consolidators and selfaggregators. Timestamping should provide incentives for the SROs to generate and disseminate proposed consolidated market data as quickly as possible. Further, the Commission preliminarily believes that the application of timestamps will be an important part of market participants’ ability to measure latency and to seek to ensure accurate sequencing of data in the new national market system, and therefore the application of timestamps should be consistent and reliable.622 619 As noted above, pursuant to proposed Rule 603(b), each SRO must provide its NMS information, including all data necessary to generate proposed consolidated market data, to all competing consolidators and self-aggregators in the same manner and using the same methods, including all methods of access and the same format, as such SRO makes available any information to any other person. The competing consolidators and self-aggregators will be responsible for establishing the connectivity and transmission services they use to connect to the SROs. 620 See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a). 621 MISU policies seek to ensure that a single device fee is applied to a data user that receives consolidated market data on multiple display devices. See, e.g., CTA, CTA Multiple Installations for Single Users (MISU) Policy (Apr. 2016), available at https://www.ctaplan.com/publicdocs/ ctaplan/notifications/trader-update/Policy%20%20MISU%20with%20FAQ.pdf. MISU policies would need to be conformed in the proposed decentralized consolidation model to reflect that consolidated market data users may seek to receive through more than one competing consolidator and/ or access through multiple devices. 622 SRO timestamps would also assist market participants in their ability to assess latencies in the E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 The Commission understands that the SROs currently submit timestamped data under the SIP plans 623 and the National Market System Plan Governing the Consolidated Audit Trail (‘‘CAT NMS Plan’’).624 Proposed Rule 614(e)(1)(iii) would require the participants to file a proposed amendment to the effective national market system plan(s) for NMS provision of proposed consolidated market data. Under proposed Rule 614(d)(3), competing consolidators would have to make available consolidated market data that includes timestamps assigned by the SROs as well as competing consolidators. See supra Section IV.B.2(e)(ii) and the discussion of proposed Rule 614(d)(4). 623 See, e.g., CTA Plan, supra note 13, at Section VI.(c); Nasdaq UTP Plan, supra note 13, at Section VIII. 624 See CAT NMS Plan at Sections 6.3(d), 6.8. As required by Rule 613, the CAT NMS Plan was filed with the Commission by the national securities exchanges and national securities associations, who include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), BATS–Y Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Exchange LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange, Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago, Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), International Securities Exchange, LLC (n/k/a Nasdaq ISE, LLC), ISE Gemini, LLC (n/k/a Nasdaq GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX BX, Inc. (n/k/a Nasdaq BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a Nasdaq PHLX LLC), The Nasdaq Stock Market LLC, National Stock Exchange, Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE MKT LLC, and NYSE Arca, Inc. See 17 CFR 242.613; Securities Exchange Act Release No. 78318 (Nov. 15, 2016), 81 FR 84696, (Nov. 23, 2016) (‘‘CAT NMS Plan Approval Order’’). The CAT NMS Plan is Exhibit A to the CAT NMS Plan Approval Order. See CAT NMS Plan Approval Order, at 84943–85034. In approving the CAT NMS Plan, the Commission added ISE Mercury, LLC (n/k/a Nasdaq MRX, LLC) and Investors’ Exchange LLC as Participants to the CAT NMS Plan. See id. at 84728. On January 30, 2017 and March 1, 2019, the Commission noticed for immediate effectiveness amendments to the CAT NMS Plan to add MIAX PEARL, LLC and MIAX Emerald, LLC, respectively, as Participants. See Securities Exchange Act Release Nos. 79898 (Jan. 30, 2017), 82 FR 9250 (Feb. 3, 2017), and 85230 (Mar. 1, 2019), 84 FR 8356 (Mar. 7, 2019). On November 27, 2019, the Commission noticed for immediate effectiveness amendments to the CAT NMS Plan to add Long-Term Stock Exchange, Inc. as a Participant. See Securities Exchange Act Release No. 87595 (Nov. 22, 2019), 84 FR 65447 (Nov. 27, 2019). The CAT NMS Plan functions as the limited liability company agreement of the jointly owned limited liability company formed under Delaware state law through which the Participants conduct the activities of the CAT (the ‘‘Company’’). Each Participant is a member of the Company and jointly owns the Company on an equal basis. The Participants submitted to the Commission a proposed amendment to the CAT NMS Plan on August 29, 2019, which they designated as effective on filing. Under the amendment, the limited liability company agreement of a new limited liability company named Consolidated Audit Trail, LLC serves as the CAT NMS Plan, replacing in its entirety the CAT NMS Plan. See Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 52905 (Oct. 3, 2019). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 stocks to reflect that the participants would need to conduct an annual assessment of the overall performance of competing consolidators, including speed, reliability, and cost of data provision and provide the Commission with a report of such assessment on an annual basis. As noted above, the Equity Data Plans play an important role in governing the operation of the national market system. The Commission preliminarily believes that the effective national market system plan(s) for NMS stocks should continue in this important role by monitoring the overall performance of competing consolidators to seek to ensure that the decentralized consolidation model is operating soundly. To aid the Commission’s monitoring, the Commission is requiring the effective national market system plan(s) for NMS stocks to provide assessments in key factors of competing consolidators, including: Speed of the competing consolidators in receiving, calculating, and disseminating proposed consolidated market data; the reliability of the transmission of proposed consolidated market data; and a detailed cost analysis of the provision of proposed consolidated market data. The effective national market system plan(s) would base their assessments on publicly available information about the competing consolidators, including the information that each competing consolidator would be required to make available under proposed Rule 614. Finally, proposed Rule 614(e)(1)(iv) would require the participants to file an amendment to the effective national market system plan(s) for NMS stocks to include a list that identifies the primary listing exchange for each NMS stock. As discussed above, primary listing exchanges will be required to collect, calculate, and provide the data included in the proposed definition of ‘‘regulatory data’’ to competing consolidators and self-aggregators. Moreover, the Commission is proposing to define ‘‘primary listing exchange’’ in proposed Rule 600(b)(67) as ‘‘for each NMS stock, the national securities exchange identified as the primary listing exchange in the effective national market system plan or plans required under § 242.603(b).’’ The effective national market system plan(s) for NMS stocks must accordingly be amended to include this list so that the primary listing exchange for each NMS stock— and the responsibilities regarding the collection, calculation, and provision of regulatory data—are clear. The Commission preliminarily believes that information regarding the primary listing exchange for each NMS stock is PO 00000 Frm 00069 Fmt 4701 Sfmt 4702 16793 readily accessible and that the operating committee of the effective national market system plan(s) for NMS stock, which will have representation from each primary listing exchange, is wellsituated to include such a list in a plan amendment. The Commission requests comment on proposed Rule 614(e). In particular, the Commission solicits comment on the following: 133. Do the proposed amendments to the effective national market system plan(s) for NMS stocks reflect an appropriate role for the NMS plan(s) under the proposed decentralized consolidation model? 134. Should the rule include other provisions that should be included in an amendment to the effective national market system plan(s) for NMS stocks? Please describe. 135. Should the rule require an amendment to the effective national market system plan(s) for NMS stocks to include plan provisions related to the development by competing consolidators of non-core market data products (i.e., a full depth of book product)? Why or why not? 136. Should the rule require an amendment to the effective national market system plan(s) to require the operating committee of such plan(s) to develop latency statistics based on the SRO timestamps and make them publicly available? 137. Do commenters believe that the proposed timestamps are sufficiently comprehensive? Should the Commission require other timestamps to be added by the SROs, or should any of the proposed requirements for the timestamps be pared down or removed? Please explain. 138. Should the rule require an amendment to the effective national market system plan(s) for NMS stocks to specify a method for synchronizing clocks on the various systems and networks utilized in the provision of proposed consolidated market data? If yes, what is the appropriate method or protocol (e.g., Precision Time Protocol vs. Network Time Protocol)? Or should the requirement for clock synchronization be performance based (i.e., accurate to less than one microsecond)? If so, what is the appropriate standard for maximum allowable clock drift? Please explain. Should the SROs be required to publish clock drift statistics? 139. Do commenters believe that there are other measures to assess the performance of competing consolidators that should be included in the annual report? Please explain. E:\FR\FM\24MRP2.SGM 24MRP2 16794 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules The Commission preliminarily believes that this provision of the CAT NMS Plan will be affected by the proposed decentralized consolidation model and the proposed definition of consolidated market data. Rule 603(b), as proposed to be amended, would require the national securities exchanges and associations to distribute consolidated market data ‘‘pursuant to one or more effective national market system plans.’’ Under Section 6.5(a)(ii) of the CAT NMS Plan, the Central Repository must collect and retain ‘‘all data’’ from ‘‘a SIP or pursuant to an NMS Plan,’’ so the Central Repository would be required to collect and retain consolidated market data. Because proposed consolidated market data would include information beyond the data that is currently disseminated by the exclusive SIPs, such as smaller-sized orders in higherpriced stocks pursuant to the proposed definition of round lot, proposed depth of book data, and proposed auction information, the scope of the consolidated data collected and retained by the CAT Central Repository would be expanded. In addition, the Central Repository may have to obtain the data from a different source. The Commission preliminarily believes that having the Central Repository collect an expanded set of data from a different source and retain this data in the Central Repository are appropriate to further the objectives of CAT by enabling regulators to use the expanded set of data ‘‘solely for surveillance and 5. Effects on the National Market System regulatory purposes.’’ 629 Plan Governing the Consolidated Audit The Commission requests comment Trail on the effects of the proposed The CAT NMS Plan requires the decentralized consolidation model and Central Repository 625 to ‘‘collect (from the proposed definition of consolidated a SIP 626 or pursuant to an NMS Plan 627) market data on the CAT. In particular, and retain on a current and continuing the Commission solicits comment on basis . . . all data, including the the following: 628 following (collectively, ‘SIP Data’).’’ 145. Do commenters believe that CAT 625 The CAT NMS Plan defines ‘‘Central should receive consolidated market data Repository’’ as ‘‘the repository responsible for the from one competing consolidator, all receipt, consolidation, and retention of all competing consolidators, or some information reported to the CAT pursuant to SEC specific subset of competing Rule 613 and this Agreement.’’ CAT NMS Plan, consolidators? Please explain. supra note 624, at Section 1.1. 626 The CAT NMS Plan defines ‘‘Securities 146. Do commenters believe the Information Processor’’ or ‘‘SIP’’ as having ‘‘the selection by the CAT of a competing same meaning provided in Section 3(a)(22)(A) of consolidator could have a competitive the Exchange Act.’’ Id. at Section 1.1. 627 The CAT NMS Plan defines ‘‘NMS Plan’’ as impact on other competing having ‘‘the same meaning as ‘National Market consolidators? Please explain. lotter on DSKBCFDHB2PROD with PROPOSALS2 140. Do commenters believe that a portion of the assessment or the full assessment should be made public? Do commenters believe that a portion of the annual report or the full annual report to the Commission should be made public? Why or why not? Please explain. 141. Do commenters believe that the operating committee for the effective national market system plan(s) for NMS stocks should conduct an assessment and provide the Commission with a report more frequently than annually, or at all? Please describe any alternative frequency and the rationale. 142. Do commenters believe that a similar report should be generated for self-aggregators? If so, please explain. Should self-aggregators be required to publish any performance statistics publicly or to the Commission? 143. Do commenters believe that the effective national market system plan(s) for NMS stocks should be amended to include a list that identifies the primary listing exchange for each NMS stock? Please explain. Are there alternative ways to ensure that the primary listing exchange for each NMS stock is clearly identified? Please explain. 144. Do commenters believe that the effective national market system plan(s) for NMS stocks should include fees for different types of proposed consolidated market data products, such as products that contain only a subset of proposed core data elements (e.g., a TOB product)? If so, what products should be included? System Plan’ provided in SEC Rule 613(a)(1) and SEC Rule 600(b)(43).’’ Id. at Section 1.1. 628 Id. at Section 6.5(a)(ii). Section 6.5(a)(ii) specifically enumerates the following ‘‘SIP Data’’ elements: ‘‘(A) Information, including the size and quote condition, on quotes including the National Best Bid and National Best Offer for each NMS Security; (B) Last Sale Reports and transaction reports reported pursuant to an effective transaction reporting plan filed with the SEC pursuant to, and VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 meeting the requirements of, SEC Rules 601 and 608; (C) trading halts, Limit Up/Limit Down price bands, and Limit Up/Limit Down indicators; and (D) summary data or reports described in the specifications for each of the SIPs and disseminated by the respective SIP.’’ Id. 629 See CAT NMS Plan, supra note 624, at Section 6.5(g); infra Section VI.C.4(c). PO 00000 Frm 00070 Fmt 4701 Sfmt 4702 6. Transition Period A transition period would be necessary to implement the decentralized consolidation model. While SROs would be permitted to make the data necessary to generate consolidated market data, as proposed to be defined, available to competing consolidators and self-aggregators using their existing data feeds, SROs may also choose to provide this data through new, separate feeds,630 which would require development time. Furthermore, the proposed requirements related to the provision by SROs of regulatory data to competing consolidators and selfaggregators would require SROs to make adjustments to their data collection and processing systems and procedures to integrate the proposed regulatory data elements into new or existing data feeds.631 In addition, firms intending to act as competing consolidators or selfaggregators will need to register, develop or modify systems, establish pricing, and make other preparations needed to function as competing consolidators or self-aggregators. Finally, market participants would be expected to need some period of time for implementation and testing of any new data feeds. As these changes are being implemented, market participants will continue to need a consistent and reliable source of consolidated market data. Accordingly, the Commission preliminarily believes that the existing exclusive SIPs should continue their operations until such time as the Commission considers and approves an NMS plan amendment that would effectuate a cessation of their operations as exclusive SIPs. In considering and approving such an NMS plan amendment, the Commission preliminarily believes that it would need to consider the operational readiness of competing consolidators and self-aggregators to determine whether market participants are fully able to receive proposed consolidated market data in a manner that is sufficiently prompt, accurate, and reliable.632 The Commission preliminarily believes that sufficient operational readiness would only be achieved once consolidated market data generated under the decentralized consolidation model is demonstrably capable of supporting the various needs of users of consolidated market data, including needs for visual display, trading activities, and compliance with 630 See supra Section IV.B.1. supra Section III.D. 632 Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k–1(c)(1)(B). 631 See E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 regulatory obligations, such as under Rules 603(c) and Rule 611 under Regulation NMS and best execution. In determining whether to approve an NMS plan amendment to effectuate the cessation of the operations of the existing exclusive SIPs and whether it meets the standards set forth in Rule 608(b)(2),633 the Commission would consider the state of the market and the general readiness of the competing consolidator infrastructure. Examples of some of the things that the Commission could consider include, among other things: The status of registration, testing, and operational capabilities of multiple competing consolidators, selfaggregators, and market participants; capabilities of competing consolidators to provide monthly performance metrics and other data required to be published pursuant to proposed Rule 614(d)(5)– (6); 634 and the consolidated market data products offered by competing consolidators. The Commission preliminarily believes that consideration of these and other factors should help to ensure that market participants have effective and continuous access to proposed consolidated market data and other market data products during the transition period and prior to the cessation of operations of the existing exclusive SIPs. The Commission anticipates that the operators of the existing exclusive SIPs may choose to become competing consolidators and that they too may need to make additional investments and operational changes during this transition period to provide a competitive competing consolidator service.635 The Commission preliminarily believes that the existing exclusive SIPs should have the ability to pursue such development while continuing concurrent operations of existing SIPs. Given their experience operating the exclusive SIPs, the exclusive SIP operators would likely be able to enter the competing consolidator business from a competitively strong 633 See 17 CFR 242.608(b)(2) (providing that the Commission shall approve an NMS plan amendment ‘‘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.’’). 634 See supra Section IV.B.2(b). 635 The exclusive SIPs may choose to utilize existing proprietary data feeds for the provision of consolidated market data. They may also choose to develop a business to support self-aggregation by broker-dealers. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 position relative to other potential competing consolidators. The Commission requests comment on the proposed transition period to implement the decentralized consolidation model. In particular, the Commission solicits comment on the following: 147. What period of time should be expected for SROs to make any changes necessary to provide the data necessary to generate proposed consolidated market data to competing consolidators and self-aggregators? 148. What period of time should be expected for broker-dealers to make any changes necessary, including testing, to utilize the new data feeds in a manner that is not disruptive to their trading practices and their ability to meet their regulatory obligations? 149. What other factors should be taken into consideration to allow for a smooth transition from a centralized, exclusive SIP model to a competitive, decentralized consolidation model? 150. What should the Commission take into consideration in determining whether the availability of proposed consolidated market data from competing consolidators, or any other aspect of the development or implementation of the proposed decentralized consolidation model, is sufficient to allow for the cessation of the existing exclusive SIPs? 151. Should the Commission require the operation of a certain number of competing consolidators before allowing the exclusive SIPs to cease operations? Why or why not? If so, how many competing consolidators should be operational before allowing exclusive SIPs to cease operations? Please explain. 152. How long do commenters think such an implementation period should be? Please explain your answer. C. Alternatives to the Centralized Consolidation Model Several alternative approaches to the centralized consolidation model were suggested by Roundtable respondents and separately by several exchanges. These suggestions include the distributed SIP model, a single SIP for all exchange-listed securities, and a lowlatency dedicated connection to existing exclusive SIP feeds. 1. Distributed SIP Alternative A distributed SIP alternative has been suggested as one possible means to reduce geographic latency.636 Specifically, under a distributed SIP 636 See supra notes 492–493 and accompanying text; Cboe Report, supra note 186, at 3–4 (recommending the creation of distributed SIPs in different geographic locations). PO 00000 Frm 00071 Fmt 4701 Sfmt 4702 16795 alternative, each exclusive SIP would place an additional processor in other major data centers, where the additional processor would separately aggregate and disseminate consolidated market data for its respective tape. The SROs would submit their quotations and trade information directly to each instance of the exclusive SIP in each data center, and each exclusive SIP instance would consolidate and disseminate its respective consolidated market data feeds to subscribers at those data centers, thereby eliminating geographic latency. Under the distributed SIP alternative, consolidated market data would not have to travel from an exchange at one location to an exclusive SIP at a second location for consolidation and dissemination prior to traveling yet again to a subscriber that may be at a third location.637 (a) Comments and Roundtable Discussion The distributed SIP model was suggested and discussed at the Roundtable by certain panelists and commenters. One panelist who presented on the distributed SIP model argued that it would be the least burdensome approach for the industry to reduce delays,638 explaining that firms could consume data under the current structure without having to make any changes if they did not have sub-millisecond latency concerns, while those firms for which geographic latency is critical could choose to consume data at the nearest SIP instance.639 Two other panelists expressed interest in considering the distributed SIP model.640 One panelist said that the 637 One commenter noted that the distributed SIP alternative could address the issue of geographic latency. See SIFMA Letter II at 3. 638 See Roundtable Day Two Transcript at 17 (Michael Blaugrund, NYSE). 639 See Roundtable Day Two Transcript at 18 (Michael Blaugrund, NYSE). This panelist also believed that the distributed SIP model would not require changes to Rule 603(b) of Regulation NMS, which requires the dissemination of consolidated information for an individual NMS stock through a single plan processor. The panelist stated that the existing SIPs would remain under the distributed SIP model, only with additional processors. See Roundtable Day Two Transcript at 19–20 (Michael Blaugrund, NYSE). 640 See, e.g., Roundtable Day One Transcript at 227–228 (Chris Issacson, Cboe) (‘‘[W]e’re open to discussion about distributed SIPs.’’); at 98–99 (Stacey Cunningham, NYSE) (‘‘. . . there is debate the NYSE brought to the SIP Committee a long time ago to talk about the nature of a distributed SIP and that is something we should explore.’’); Roundtable Day Two Transcript at 17 (Michael Blaugrund, NYSE) (‘‘. . . we think that a distributed SIP implementation of the existing processors would be the simplest, least costly approach for the industry to minimize delays when consolidated data and E:\FR\FM\24MRP2.SGM Continued 24MRP2 16796 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 distributed SIP model could address the latencies of the current centralized consolidation model.641 Another panelist suggested that a distributed SIP model with enhanced content, such as auction imbalance and depth of book information, would be useful 642 and that even a fiber optics connection could be sufficient for a distributed SIP model since the consolidated market data would no longer have to travel throughout the various data centers for collection and distribution.643 Three panelists were skeptical about the value of the distributed SIP model. One panelist described the distributed SIP model as better than the current SIP system, ‘‘but just less worse than direct feeds,’’ 644 and said what is desired instead is an exclusive SIP that is as fast as the direct feeds.645 Another panelist said that, with the distributed SIP model, determining the appropriate instance of the SIP locations would be complicated.646 One commenter submitted two comment letters that discussed the distributed SIP model. One letter urged the Commission to do a cost benefit analysis of efforts to decentralize the SIP architecture and recommended introducing additional instances of existing technology as the best approach to reducing geographic latency.647 The other letter noted questions about which SIP location would be responsible for regulatory messages, such as for LULD and MWCBs, and whether the costs for the industry to connect to this infrastructure would outweigh the benefits.648 Another commenter stated that the distributed SIP alternative would introduce new and expensive operational complexities, legal and regulatory questions, and possible unintended consequences. This commenter also questioned whether the distributed SIP alternative would resolve concerns regarding geographic latency and noted that the NBBO could differ among the distributed SIPs, single market proprietary data are received in distant data centers.’’). 641 See Roundtable Day One Transcript at 231– 232 (Vlad Khandros, UBS). 642 See Roundtable Day One Transcript at 225 (Ronan Ryan, IEX). 643 See Roundtable Day One Transcript at 229– 230 (Ronan Ryan, IEX). This is a reference to the understanding that a distributed SIP model would solve for geographic latency. 644 See Roundtable Day Two Transcript at 27 (Adam Nunes, Hudson River Trading). 645 Id. 646 See Roundtable Day One Transcript at 151– 152 (Oliver Albers, Nasdaq). 647 See Blaugrund Letter at 4. The Blaugrund Letter was submitted on behalf of NYSE. 648 See NYSE Group Letter at 10. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 leading to operational and compliance questions.649 (b) Commission Discussion The Commission preliminarily believes that a distributed SIP model could address the geographic latencies that exist in the current centralized consolidation model but is concerned that the distributed SIP model has certain fundamental shortcomings that make it a less desirable option compared to the proposed competitive, decentralized consolidation model. In particular, the distributed SIP model does not allow for the introduction of competitive forces and continues to allow for one exclusive SIP to have exclusive rights for the dissemination of market data for the NMS stocks on a given consolidated tape. Because the distributed SIP model does not introduce competitive forces, it is less likely to adequately address the broader array of latencies and competitive product and service offerings. In addition, insofar as the distributed SIP model does not allow for the provision of all three consolidated tapes to be consolidated and disseminated from a single entity, it retains the inefficiencies that would not apply to a competing consolidator model, such as the need for end-users to obtain data from multiple SIPs.650 As a result, the Commission preliminarily believes that, since the distributed SIP model could result in significant additional costs and complexity and would not be likely to competitively address all forms of content and latency differentials, the Commission preliminarily believes that the distributed SIP model is not the optimal solution for the provision of consolidated market data. The Commission requests comment on the distributed SIP alternative. In 649 See Albers Letter at 3; Wittman Letter at 14. The Albers and Wittman Letters were submitted on behalf of Nasdaq. The commenter also believed that significant advances in clock synchronization techniques would be necessary. See Wittman Letter at 14. This commenter later expressed support for the distributed SIP model, stating that the approach could reduce data transmission time for some market participants between 400 and 750 microseconds. See Nasdaq Total Markets Report, supra note 127, at 19–20; Remarks by Tal Cohen, Nasdaq, Meeting of the Securities and Exchange Commission Investor Advisory Committee, at 50 (‘‘[R]ecognizing the industry’s desire for a distributed SIP, we support this in concept to ensure geographic latency concerns are addressed.’’). 650 Since 2017, a distributed SIP subcommittee created by the CTA and Nasdaq UTP Plan operating committees has considered and continues to consider implementation of a distributed SIP model to address geographic latencies. See CTA and UTP Annual Letter, supra note 181, at 1–2. PO 00000 Frm 00072 Fmt 4701 Sfmt 4702 particular, the Commission solicits comment on the following: 153. Is the distributed SIP alternative a viable or superior alternative to the proposed competing consolidator and self-aggregator model? If so, please describe the benefits of the distributed SIP model and why that model is the preferred alternative. 2. Single SIP Alternative Another suggestion to modify the centralized consolidation model to address latency concerns was to combine the exclusive SIPs into a single exclusive SIP for all exchange-listed securities.651 Comments noted that such a change would permit the harmonization of exclusive SIP infrastructure 652 and narrow the latency difference between the exclusive SIPs and proprietary data feeds.653 One commenter thought this alternative would be a low cost alternative.654 In light of the fact that the Nasdaq UTP SIP has less latency that the CTA/ CQ SIP, within the current exclusive and centralized exclusive SIP model, this solution has certain merits. It could allow for an upgrade to existing processor technology for the CTA/CQ SIP, which continues to lag the performance of the Nasdaq UTP SIP. It could also eliminate certain inefficiencies in having two separate exclusive SIPs for SIP data. Potentially having a single administrator and exclusive SIP could ease these burdens and introduce benefits such as a less complex infrastructure and greater standardization. However, this alternative has certain key shortcomings. For one thing, it does not attempt to introduce competitive forces, and, therefore, as with the distributed SIP alternative, would not necessarily be expected to fully address all forms of latency in a competitive data environment. Further, it does not attempt to address geographic latency, which, as noted, is believed to be the most significant source of latency undermining the viability of the current centralized exclusive SIP model. The Commission requests comment on these alternative approaches to the current centralized consolidation 651 See Nasdaq Total Markets Report, supra note 127, at 21; SIFMA Letter II at 3. This suggestion would apply the centralized consolidation structure. 652 See Nasdaq Total Markets Report, supra note 127, at 21. 653 See SIFMA Letter II at 3. The commenter did not elaborate on how this model could address latency issues. This commenter, however, noted that the use of competing consolidators would best resolve the latency issues because competition would provide the incentives for improvements. 654 Id. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules model. In particular, the Commission solicits comment on the following: 154. Is the single exclusive SIP alternative a viable alternative to addressing the concerns with the current centralized consolidation model? If so, please describe the operation of the single exclusive SIP alternative and how it would address the latency and cost concerns arising from the centralized consolidation model. Are there any other viable alternatives? 155. Do commenters believe that the single centralized exclusive SIP model could be a viable solution despite the fact that it would not introduce competitive forces into the provision of consolidated data and would not address geographic latency? If so, please describe any factors that make this solution as good as or better than the proposed decentralized model. V. Paperwork Reduction Act Certain provisions of the proposed rules and proposed rule amendments contain ‘‘collection of information requirements’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).655 The Commission is submitting these collections of information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The title of the new collection of information is ‘‘Market Data Infrastructure and Form CC.’’ Further, the title of the existing collection of information for Regulation SCI is ‘‘Regulation SCI, Form SCI,’’ OMB Control No. 3235–0703.656 An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid control number. A. Summary of Collection of Information The proposed rules and rule amendments would include a collection of information within the meaning of the PRA for competing consolidators who would be required to comply with 655 44 U.S.C. 3501 et seq. discussed below, the proposed modifications to Regulation SCI contain ‘‘collection of information requirements’’ within the meaning of the PRA. See infra Section V.G. Further, as discussed above, the proposed definition of round lot would affect Rule 606(b)(3) by requiring actionable indications of interest to be in the proposed round lot sizes and included in 606(b)(3) reports. The Commission preliminarily believes that the PRA estimates set forth in the Rule 606 Adopting Release would cover the collection of actionable indications of interest in the proposed round lot sizes because there should only be minor systems updates to reflect the new round lot sizes. See Rule 606 Adopting Release, supra note 227. lotter on DSKBCFDHB2PROD with PROPOSALS2 656 As VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 the provisions of Rule 614 and file a Form CC with the Commission. In addition, SROs would be required to collect information that they would then have to provide to competing consolidators and self-aggregators for the purposes to generating proposed consolidated market data. Finally, the SROs would be required to amend the effective national market system plan(s) required under Rule 603(b). 1. Registration Requirements and Form CC Proposed Rule 614(a)(1)(i) would require each competing consolidator to register with the Commission by filing Form CC electronically in accordance with the instructions contained on the form.657 To file a form CC, a competing consolidator would need to access the Commission’s EFFS, a secure website operated by the Commission. Each competing consolidator would have to submit an application and register each individual who would access the EFFS system on behalf of the competing consolidator. Proposed Rule 614(a)(1)(ii) would require any reports required under proposed Rule 614 to be filed electronically on Form CC, include all of the information as prescribed in Form CC and contain an electronic signature. Proposed Rule 614(a)(1)(iv) would require a competing consolidator to withdraw an initial Form CC during its review by the Commission if information on the initial Form CC is or becomes inaccurate or incomplete. Under proposed Rule 614(a)(2)(i), a competing consolidator would be required to amend an effective Form CC in accordance with the instructions therein: (i) Prior to the implementation of a material change to pricing, connectivity or products offered; and (ii) no later than 30 calendar days after the end of each calendar year to correct information that has become inaccurate or incomplete for any reason. Proposed Rule 614(a)(3) would require a competing consolidator to provide notice of its cessation of operations on Form CC at least 30 business days before the date the competing consolidator ceases to operate as a competing consolidator. 2. Competing Consolidator Duties and Data Collection Proposed Rules 614(d)(1)–(4) would require each competing consolidator to: (1) Collect from each national securities exchange and national securities 657 As explained above, SROs that wish to act as competing consolidators would not be required to register with the Commission on Form CC. See supra note 537. PO 00000 Frm 00073 Fmt 4701 Sfmt 4702 16797 association, either directly or indirectly, the information with respect to quotations for and transactions in NMS stocks as provided in Rule 603(b); (2) calculate and generate consolidated market data as defined in proposed Rule 600(b)(19) from the information collected pursuant proposed Rule 614(d)(1); (3) make consolidated market data, as defined in proposed Rule 600(b)(19), and as timestamped as required by proposed Rule 614(d)(4) and including the SRO data generation timestamp required to be provided by the SROs by proposed Rule 614(e)(1)(ii), available to subscribers on a consolidated basis on terms that are not unreasonably discriminatory; and (4) timestamp the information collected pursuant to proposed Rule 614(d)(1): (i) Upon receipt from each national securities exchange and national securities association; (ii) upon receipt of such information at its aggregation mechanism; and (iii) upon dissemination of consolidated market data, as defined in proposed Rule 600(b)(19), to customers. Proposed Rule 614(c) would require each competing consolidator to make public on its website a direct URL hyperlink to the Commission’s website that contains each effective initial Form CC, as amended, order of ineffective initial Form CC, and Form CC amendment to an effective Form CC. 3. Recordkeeping Proposed Rule 614(d)(7) would require each competing consolidator to keep and preserve at least one copy of all documents, including all correspondence, memoranda, papers, books, notices, accounts and such other records as shall be made or received by it in the course of its business as such and in the conduct of its business. The proposed rule would require competing consolidators to keep these documents for a period of no less than five years, the first two years in an easily accessible place. Proposed Rule 614(d)(8) would require each competing consolidator, upon request of any representative of the Commission, to promptly furnish to such representative copies of any documents required to be kept and preserved by it. 4. Reports and Reviews Proposed Rule 614(d)(5) would require each competing consolidator, within 15 calendar days after the end of each month, to publish prominently on its website monthly performance metrics, as defined by the effective national market system plan(s) for NMS stocks, that shall include at least the following: (i) Capacity statistics; (ii) E:\FR\FM\24MRP2.SGM 24MRP2 16798 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 message rate and total statistics; (iii) system availability; (iv) network delay statistics; (v) latency statistics for the following, with distribution statistics up to the 99.99th percentile: (A) When a national securities exchange or national securities association sends an inbound message to a competing consolidator network and when the competing consolidator network receives the inbound message; (B) when the competing consolidator network receives the inbound message and when the competing consolidator network sends the corresponding consolidated message to a subscriber; and (C) when a national securities exchange or national securities association sends an inbound message to a competing consolidator network and when the competing consolidator network sends the corresponding consolidated message to a subscriber. All information posted pursuant to proposed Rule 614(d)(5) must be publicly posted in downloadable files and must remain free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. Proposed Rule 614(d)(6) would require a competing consolidator, within 15 calendar days after the end of each month, to publish prominently on its website the following information: (i) Data quality issues; (ii) system issues; (iii) any clock synchronization protocol utilized; (iv) for the clocks used to generate the timestamps described in proposed Rule 614(d)(4), the clock drift averages and peaks, and the number of instances of clock drift greater than 100 microseconds; and (v) vendor alerts. All information posted pursuant to proposed Rule 614(d)(6) must be publicly posted and must remain free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks As detailed above, proposed Rule 614(e)(1) would direct the participants to the effective national market system plan(s) for NMS stocks to submit an amendment to such plan(s) within 60 days of the effectiveness of the proposed rule that would address several articulated provisions. In particular, proposed Rule 614(e)(1)(i) would require that the amendment conform the plan(s) to reflect the provision of market data that is necessary to generate consolidated market data, as defined in proposed Rule 600(b)(19), by the SRO VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 participants to competing consolidators and self-aggregators, and the role that the plan(s) would have in developing fees for consolidated market data and defining the monthly performance metrics that competing consolidators would be required to publish.658 Proposed Rule 614(e)(1)(ii) would require that the participants to the effective national market system plan(s) for NMS stocks file an amendment that contains provisions regarding the application of timestamps by the SRO participants on all consolidated market data, as defined in proposed Rule 600(b)(19), and that such time stamps be attached at the time the data was generated by the SRO and the time that the SRO made the proposed consolidated market data available to competing consolidators and selfaggregators. The participants to the effective national market system plan(s) for NMS stocks would be required to file an amendment that includes provisions relating to assessments of competing consolidator performance that would include the speed, reliability and cost of data provision and the provision of an annual report of such assessment to the Commission. Finally, participants to the effective national market system plan(s) for NMS stocks would be required to file an amendment to identify the primary listing market for each NMS stock. Proposed Rule 614(e) would impose paperwork burdens on the participants to the effective national market system plan(s) for NMS stocks. First, requiring the submission of an amendment or amendments to the effective national market system plan(s) for NMS stocks would impose a paperwork burden on the participants of such plan(s) associated with preparing and filing the amendment or amendments. Second, defining the monthly performance metrics for competing consolidators would impose a paperwork burden on the participants of the plan(s). Third, developing the requirements for the application of timestamps by the SROs would impose a paperwork burden on the SRO participants of such plans. Fourth, requiring the provision of an annual report to the Commission assessing competing consolidator performance would impose a paperwork burden on the participants of the effective national market system plan(s) for NMS stocks. Finally, developing and maintaining a list of the primary listing market for each NMS stock would impose a paperwork burden on the participants of the effective national market system plan(s) for NMS stocks. 658 See PO 00000 proposed Rule 614(d)(6). Frm 00074 Fmt 4701 Sfmt 4702 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations The proposed amendment to Rule 603(b) would require every national securities exchange on which an NMS stock is traded and national securities association to make available to all competing consolidators and selfaggregators all information with respect to quotations for and transactions in NMS stocks, including all data necessary to generate consolidated market data, in the same manner and using the same methods, including all methods of access and using the same format, as such exchange or association makes available any information with respect to quotations for and transactions in NMS stocks to any person. SROs would be required to collect the information necessary to generate proposed consolidated market data, which would be required to be made available under proposed Rule 603(b). As proposed, the primary listing exchange would have to collect and make available pursuant to Rule 603(b) information required under Rule 201 of Regulation SHO. Moreover, the proposal would require the primary listing exchange with the largest proportion of stocks includes in the S&P 500 Index to monitor the index throughout the trading day. The collection of information may require system changes by the SROs. B. Proposed Use of Information 1. Registration Requirements and Form CC As discussed above, proposed Form CC, Rules 614(a)(1) and 614(a)(2) would generally require competing consolidators to register on Form CC and make amendments to an effective Form CC prior to implementing a material change to the pricing, connectivity or products offered and annually to correct information that has become inaccurate or incomplete for any reason. The information collected in Form CC would be used to help assure that a competing consolidator’s disclosures comply with the requirements of proposed Rule 614 and so that specified information would be made publicly available and could be used to evaluate competing consolidators. The information required under proposed Rule 614(a)(1) also would be used by the Commission to determine whether to declare ineffective an initial Form CC filed by a competing consolidator. Proposed Rule 614(a)(3) would require a competing consolidator to E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules provide notice of its cessation of operations on Form CC at least 30 business days prior to the date the competing consolidator will cease to operate as a competing consolidator. This information would be used by the Commission to monitor and oversee competing consolidators and would provide notice to the public that the competing consolidator intends to cease operations. conduct of its business. These documents must be kept for a period of no less than five years, the first two years in an easily accessible place. Proposed Rule 614(d)(8) would require each competing consolidator to promptly furnish these documents to any representative of the Commission upon request. This information would facilitate the Commission’s oversight of competing consolidators. 2. Competing Consolidator Duties and Data Collection Under the proposed decentralized consolidation model, proposed Rules 614(d)(1)–(d)(3) would require the competing consolidators to collect from the SROs quotation and transaction information for NMS stocks, calculate and generate consolidated market data, as proposed, from this information, and make such consolidated market data available on terms that are not unreasonably discriminatory to subscribers. The information that would be collected under these provisions is a critical element of the U.S. national market system, and the availability of this information would promote fair and efficient markets and facilitate the ability of brokers and dealers to trade more effectively and to provide best execution to their customers. Proposed Rule 614(d)(4) would require competing consolidators to timestamp the information with respect to quotations and transactions in NMS stocks that they collect from the SROs pursuant to proposed Rule 614(d)(1) upon receipt, upon receipt by the aggregation mechanism, and upon dissemination to subscribers. This information would be used by subscribers to determine a competing consolidator’s realized latency and should assist subscribers in choosing a competing consolidator or in deciding whether the chosen competing consolidator continues to meet their latency needs. Proposed Rule 614(c) would require each competing consolidator to make public on its website a direct URL hyperlink to the Commission’s website that contains each effective initial Form CC, order of ineffective initial Form CC, and amendments to effective Form CCs. These proposed requirements will help to assure that information regarding competing consolidators is readily available. 4. Reports and Reviews Proposed Rules 614(d)(5) and (d)(6) would require the monthly publication, on a competing consolidator’s website, of metrics and other information concerning the competing consolidator’s performance and operations. This information would include, among other things, latency statistics, system availability, data quality problems, and clock drift information. The information must be publicly posted and must remain free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. These proposed rules would provide transparency with respect to the services and performance of a competing consolidator, which would allow market participants to evaluate the merits of a competing consolidator. 3. Recordkeeping Proposed Rule 614(d)(7) would require each competing consolidator to keep and preserve at least one copy of all documents made or received by it in the course of its business and in the VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks As discussed above, the effective national market system plan(s) for NMS stocks would need to be updated and would be required to include specified new provisions. Accordingly, the participants would be required to file an amendment or amendments to the plans to reflect the new role and functions of the plan(s). For example, the proposed amendment would need to reflect that the plan(s) is (are) no longer operating the exclusive SIPs. In addition, the amendment would reflect the new fees for consolidated market data as well as the approach to billing protocols, including an MISU policy. In addition, the participants to the plan(s) would need to file an amendment to define the monthly performance metrics of competing consolidators. The information that would be collected pursuant to the proposed plan(s) amendment would inform market participants of the proposed operation of the effective national market system plan(s) for NMS stocks and facilitate the Commission’s ability to oversee the national market system for NMS stocks. The information that would be collected pursuant to the proposed plan(s) amendment would also inform PO 00000 Frm 00075 Fmt 4701 Sfmt 4702 16799 competing consolidators of the monthly performance metrics that they would be required to develop. The amendment or amendments would be published for public comment. (a) Proposed Application of Timestamps (Rule 614(e)(1)(iii)) As noted above, timestamps are used extensively in reporting market data elements. Timestamps are used to properly sequence events and are necessary for the elements of consolidated market data, as proposed. Timestamps also help to measure latencies with the provision of proposed consolidated market data. The lack of timestamps would impair the usefulness of the data and would impair market participants’ ability to measure the latencies involved with the provision of proposed consolidated market data. Accordingly, the Commission preliminarily believes that the timestamp information that would be collected pursuant to the effective national market system plan(s) would be used by competing consolidators and self-aggregators to properly sequence core data elements and measure latencies relating to the collection, calculation and generation of core data.659 (b) Proposed Annual Report (Rule 614(a)(2)(ii)) The proposed assessment of competing consolidators’ performance and the proposed annual report would be used by the Commission to analyze and oversee the operation of the effective national market system plan(s) for the provision of proposed consolidated market data in NMS stocks. The annual report would contain useful information for measuring the promptness, accuracy and reliability of the competing consolidator model. As noted above, the provision of consolidated market data is a necessary part of the national market system and the annual report would be useful in assessing its operation. (c) Proposed List of Primary Listing Markets (Rule 614(e)(1)(iv)) The proposed list of the primary listing market for each NMS stock would be used by the Commission to oversee the development and provision of proposed regulatory data. In addition, the list would be used by primary listing exchanges to identify which primary listing exchange is responsible for making Short Sale Circuit Breaker 659 In addition, the proposed timestamps would be used by competing consolidators to generate the monthly performance metrics pursuant to proposed Rule 614(d)(5). E:\FR\FM\24MRP2.SGM 24MRP2 16800 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules information available pursuant to Rule 201(b)(3) is clearly identified. lotter on DSKBCFDHB2PROD with PROPOSALS2 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations As discussed above, the proposed amendment to Rule 603(b) would require every national securities exchange on which an NMS stock is traded and national securities association to make available to all competing consolidators and selfaggregators all information with respect to quotations for and transactions in NMS stocks, including all data necessary to generate consolidated market data, as proposed, in the same manner and using the same methods, including all methods of access and using the same format, as such exchange or association makes available any information with respect to quotations for and transactions in NMS stocks to any person. In addition, as proposed, the primary listing exchange would have to collect and make available pursuant to Rule 603(b) information required under Rule 201 of Regulation SHO. Moreover, the primary listing exchange with the largest proportion of stocks included in the S&P 500 Index would need to monitor the index throughout the trading day. Therefore, to comply with this provision, the SROs would have to collect all elements of consolidated market data. The competing consolidators would consolidate, process, and sell to their customers these data regarding NMS stock quotations and transactions. The data will also be used by self-aggregators to trade and provide services to their customers. C. Respondents The collection of information in the proposed changes to Rule 603(b) would apply to the sixteen national securities exchanges (that are equity securities exchanges) and the one national securities association (Financial Industry Regulatory Authority, Inc.) that are registered with the Commission. The amendment to the effective national market system plan(s) for NMS stocks would apply to these sixteen national securities exchanges and the one national securities association (Financial Industry Regulatory Authority, Inc.) that are registered with the Commission and that are participants in the effective national market system plan(s) for NMS stocks.660 In addition, the proposed 660 Currently, these national securities exchanges are: Cboe BYX Exchange, Inc., Cboe BZX Exchange, VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 information collections regarding registration requirements and Form CC, competing consolidator duties and data collection, recordkeeping, reports and reviews, and policies and procedures as contemplated in proposed Rule 614 would apply to those entities that register under the process in proposed Rule 614 to become competing consolidators. The Commission preliminarily estimates that there would initially be 12 persons who decide to perform the functions of a competing consolidator that would have to comply with the proposed information collections. D. Total Annual Reporting and Recordkeeping Burden 1. Registration Requirements and Form CC (a) Initial Burden and Costs As discussed above, proposed Rule 614(a)(1) would require competing consolidators to register with the Commission by filing electronically new Form CC in accordance with the instructions to the Form CC. For purposes of the PRA, the Commission preliminarily estimates that it will take 200 hours to complete the initial Form CC with the information required, including all exhibits to Form CC. The Commission based this estimate on the number of hours necessary to complete Form SIP because Form CC was generally based on Form SIP and incorporated many of the provisions of Form SIP.661 In addition, the Commission estimates that each competing consolidator would initially designate two individuals to access EFFS, with each application to access EFFS taking 0.15 hours for a total of 0.3 hours per competing consolidator. Therefore, the Commission estimates that it would take 200.3 hours to complete the Form CC and gain access to EFFS. Inc., Cboe EDGA Exchange, Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., Investors Exchange LLC, Long-Term Stock Exchange, Inc., Nasdaq BX, Inc., Nasdaq ISE, LLC, Nasdaq PHLX LLC, Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE Chicago, Inc., and NYSE National, Inc. The primary listing exchanges responsible for making Short Sale Circuit Breaker information available pursuant to Rule 201(b)(3) would be identified in the effective national market system plan(s). 661 The Commission estimated that completing Form SIP, which includes 20 exhibits, would take 400 hours. See Securities Exchange Act Release No. 63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010) (‘‘The Commission calculated in 2008 that Form SIP takes 400 hours to complete.’’). Proposed Form CC includes 9 exhibits, so the Commission preliminarily estimates that completing proposed Form CC would take 200 hours. PO 00000 Frm 00076 Fmt 4701 Sfmt 4702 As noted above, the Commission preliminarily estimates that 12 respondents would be subject to this burden, however, as noted above, SROs are not required to file Form CC.662 Therefore, there would be 8 respondents (the Commission preliminarily estimates that 4 SROs would also act as competing consolidators). Accordingly, the Commission estimates that the onetime initial registration burden for all competing consolidators is approximately 1,602.4 burden hours.663 The Commission estimates that competing consolidators will, as a general matter, prepare Form CC internally and not use external service providers to complete the form. It is likely that Form CC would be prepared by an attorney, and, with approximately 1,602.4 burden hours for all competing consolidators, the total cost to register all competing consolidators would be $748,320.80.664 In addition, the Commission estimates that each respondent would designate two individuals to sign the Form CC. An individual signing the Form CC must obtain a digital ID, at the cost of approximately $25 each year. Therefore, each respondent would expend approximately $50 annually to obtain digital IDs for the individuals with access to EFFS for the purposes of signing the Form CC 665 or approximately $400 for all respondents.666 As discussed below, the Commission believes that amendments to Form CC represent the ongoing annual burdens of Form CC and proposed Rule 614(a)(2). The Commission preliminarily estimates that competing consolidators may file two amendments—one Material Amendment and one Annual Report— during its first year after the 662 See supra note 537. hour figure is based on 200.3 hours × an estimated 8 competing consolidators. The Commission preliminarily believes that additional competing consolidators may register from time to time and would be subject to a similar one-time initial registration burden. 664 The Commission based this estimate on the $467 hourly rate as of May 2019 for an assistant general counsel × 200.3 hours × 8 respondents. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. Burden estimates may vary to the extent that competing consolidators utilize external service providers or outside counsel. The Commission preliminarily believes that competing consolidators would use in-house counsel and not use external service providers or outside counsel to file the Form CC. 665 $25 per digital ID × 2 individuals = $50 per respondent. 666 $50 per respondent × 8 total respondents = $400. 663 The E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules effectiveness of its Form CC. As discussed below, the ongoing annual burden for complying with these amendment requirements will be approximately 6.0 burden hours for each competing consolidator per amendment 667 (for a total of $2,802), and approximately 48 burden hours for all competing consolidators per amendment (for a total of $22,416).668 Therefore, the Commission preliminarily estimates that each respondent will have an average annual burden of 12.0 hours (for a total of $5,604) for a total estimated average annual burden of 96 hours (for a total of $44,832).669 As with the initial Form CC, the Commission believes the competing consolidators will conduct this work internally. lotter on DSKBCFDHB2PROD with PROPOSALS2 (b) Ongoing Burden and Costs As discussed above, proposed Rule 614(a)(2) would require competing consolidators to amend Form CC prior to the implementation of material changes to pricing, connectivity, or products offered as well as annually to correct information that has become inaccurate or incomplete for any reason. On an ongoing basis, each competing consolidator may add one individual to access the EFFS system for amendments, adding 0.15 hours per competing consolidator.670 The Commission believes that these amendments represent the ongoing annual burdens of Form CC and proposed Rule 614(a)(2). The Commission preliminarily estimates that the ongoing annual burden for complying with these amendment requirements will be approximately 6.15 burden hours for each competing consolidator per amendment 671 (for a 667 When Form SDR was adopted in 2015, the Commission estimated the hour burden for amendments to be roughly 3% of the initial burden. Securities Exchange Act Release No. 74246, supra note 554, at 14522. In that release, the initial burden was calculated to be 400 hours per respondent and 12 hours per respondent for amendments. The Commission believes that a similar ratio will apply to filers of Form CC because filers of Form SDR, like filers of Form CC, are required to file amendments annually as well as when certain information on Form SDR becomes inaccurate. Form SDR: General Instructions for Preparing and Filing Form SDR, available at https://www.sec.gov/about/forms/ formsdr.pdf (last accessed Jan. 8, 2020). Thus, the Commission estimates that the annual burden of filing one amendment on Form CC will be 3% of the 200 hour initial burden, or 6 hours. 668 See supra note 664. 669 See id. 670 For example, a competing consolidator may have to add an individual to access EFFS to account for staffing changes. 671 When Form SDR was adopted in 2015, the Commission estimated the hour burden for amendments to be roughly 3% of the initial burden. Securities Exchange Act Release No. 74246, supra note 554, at 14522. In that release, the initial burden VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 total of $2,872.05), and approximately 49.2 burden hours for all competing consolidators per amendment (for a total of $22,976.40).672 The Commission preliminarily believes that one Material Amendment would be a reasonable estimate for the number of such amendments per year. Thus, the Commission preliminarily estimates that respondents will be required to file on average a total of two amendments per year, one Material Amendment plus one Annual Report. Therefore, the Commission preliminarily estimates that each respondent will have an average annual burden of 12.3 hours (for a total of $5,744.10) for a total estimated average annual burden of 98.4 hours (for a total of $45,952.80).673 As with the initial Form CC, the Commission believes the competing consolidators will conduct this work internally. Further, as noted above, an individual signing the Form CC must obtain a digital ID, at the cost of approximately $25 each year. Therefore, each respondent would expend approximately $25 annually to obtain digital IDs for the individuals with access to EFFS for the purposes of signing the Form CC or approximately $200 for all respondents. Thus, the Commission preliminary estimates that each respondent will have an average annual cost of $5,769.10 ($5,744.10 + $25) and a total estimated annual cost of $46,152.80 ($5,769.10 * 8). As discussed above, proposed Rule 614(a)(3) would permit a competing consolidator to cease acting as a competing consolidator by filing an amendment to Form CC 30 business days before the proposed cessation of acting as a competing consolidator. The Commission preliminarily believes that a competing consolidator’s notice of cessation of acting as a competing consolidator on Form CC will be substantially similar to its most recently filed Form CC. The Form CC being filed in this circumstance will therefore already be substantially complete and as a result, the burden will not be as great as the burden of filing an application for registration on Form CC. Rather, the was calculated to be 400 hours per respondent and 12 hours per respondent for amendments. The Commission believes that a similar ratio will apply to filers of Form CC because filers of Form SDR, like filers of Form CC, are required to file amendments annually as well as when certain information on Form SDR becomes inaccurate. Form SDR: General Instructions for Preparing and Filing Form SDR, available at https://www.sec.gov/about/forms/ formsdr.pdf (last accessed Jan. 8, 2020). Thus, the Commission estimates that the annual burden of filing one amendment on Form CC will be 3% of the 200 hour initial burden, or 6 hours. 672 See supra note 664. 673 See id. PO 00000 Frm 00077 Fmt 4701 Sfmt 4702 16801 Commission preliminarily believes that the burden of filing a notice of cessation of acting as a competing consolidator on Form CC will be akin to filing an amendment on Form CC. Thus, the Commission estimates that the one-time burden of filing Form CC to notice cessation of acting as a competing consolidator will be approximately 2 burden hours (for a total of $934).674 2. Competing Consolidator Duties and Data Collection As discussed above, proposed Rules 614(d)(1)–(d)(3) would require the competing consolidators to collect from the SROs quotation and transaction information for NMS stocks, calculate and generate proposed consolidated market data from this information, and make proposed consolidated market data available to subscribers on a consolidated basis on terms that are not unreasonably discriminatory. Proposed Rule 614(d)(4) would require competing consolidators to timestamp the information with respect to quotations and transactions in NMS stocks that they collect from the SROs pursuant to proposed Rule 614(d)(1) upon receipt, upon receipt by the aggregation mechanism, and upon dissemination to subscribers. The Commission preliminarily believes that five types of entities may register to become competing consolidators and would have to build systems, or modify existing systems, that comply with Rules 614(d)(1)–(d)(4): (1) Market data aggregation firms, (2) broker-dealers that currently aggregate market data for internal uses, (3) the existing exclusive SIPs (CTA/CQ and Nasdaq UTP SIPs), (4) entities that would be entering the market data aggregation business for the first time (‘‘new entrants’’), and (5) SROs. The Commission preliminarily estimates that, apart from the SRO category, two respondents from each category may register to become a competing consolidator; the Commission preliminarily believes that four SROs may register to become competing consolidators.675 (a) Initial Burden Hours and Costs for Market Data Aggregation Firms There are a number of technology firms that provide proprietary market data aggregation services. The Commission preliminarily believes that 674 See id. The Commission preliminarily estimates that no competing consolidators would cease operation in the first three years of the rule’s effectiveness. 675 The Commission preliminarily believes that these SROs may be a national securities association and equities national securities exchanges that do not currently operate an exclusive SIP. E:\FR\FM\24MRP2.SGM 24MRP2 16802 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 some of these firms may choose to become competing consolidators because they currently collect, consolidate and disseminate market data to their customers, much like competing consolidators would. The systems used by these firms already collect, consolidate and disseminate more extensive proprietary market data than the data that is provided by the exclusive SIPs. Therefore, the Commission preliminarily believes that firms providing proprietary market data aggregation services would not have to extensively modify their systems to comply with Rules 614(d)(1)–(d)(4). For example, the Commission preliminarily believes that each market data aggregation firm would incur burden hours to expand their bandwidth to receive information that is not currently disseminated in the exchange proprietary market data feeds, such as the proposed regulatory data and administrative data, and may incur external costs to purchase hardware to receive such added information. The Commission preliminarily believes that each market data aggregation firm that chooses to become a competing consolidator would incur initial burden hours to upgrade its systems to comply with Rules 614(d)(1)–(d)(4) in order to collect, consolidate and disseminate the proposed consolidated market data. The Commission also preliminarily believes that each market data aggregation firm would incur initial external costs associated with such upgrades, including co-location fees at the exchange data centers and the cost of market data. The Commission preliminarily believes that each market data aggregation firm would incur 900 initial burden hours 676 and $206,250 in external costs 677 to modify its systems to comply with Rules 614(d)(1)–(d)(4). Additionally, the Commission estimates that an existing market data aggregator 676 The Commission estimates the monetized initial burden for this requirement to be $293,750. Based on discussions with a market participant, the Commission reached the following estimates: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 burden hours) to upgrade existing systems to comply with Rules 614(d)(1)– (d)(4). The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. 677 This estimate is based on discussions with a market participant and the Commission’s understanding of hardware costs. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 would incur initial external costs of $14,000 to purchase market data from the SROs,678 and an additional initial external cost of $194,000 to co-locate at four exchange data centers,679 for a total initial external cost of $414,250 per existing market data aggregator,680 and an aggregate estimate of 1,800 initial burden hours 681 and $828,500 in initial external costs.682 The Commission solicits comment on the accuracy of this information. (b) Initial Burden Hours and Costs for Broker-Dealers That Aggregate Market Data The Commission preliminarily believes that some broker-dealers that currently aggregate market data for their own internal uses may choose to become competing consolidators. The systems used by such broker-dealers already collect and consolidate the proprietary feeds from the exchanges, which contain more extensive data than the data provided by the exclusive SIPs. Therefore, Commission preliminarily believes that these firms may not have to extensively modify their systems to comply with Rules 614(d)(1)–(d)(4). For example, the Commission preliminarily believes that each broker-dealer would incur burden hours to expand their bandwidth to receive information that is not currently disseminated in the exchange proprietary market data feeds, such as data from the OTC market, the proposed regulatory data and 678 The Commission is using the monthly market data access and redistribution fees currently charged by the CTA/CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 679 This estimate is based on an estimated $48,500 in initial co-location fees as calculated from NYSE Price List 2020, multiplied by four exchange data centers. The Commission preliminarily believes that the market data aggregators would already be co-located at the four exchange data centers, which may lower this estimate. See NYSE Price List 2020, supra note 408. 680 $414,250 = [($206,250 in initial external costs to modify systems to comply with Rules 614(d)(1)– (d)(4)) + ($14,000 for the first month of market data costs) + ($194,000 in initial co-location costs at four exchange data centers)]. 681 The Commission estimates the monetized initial burden for this requirement to be $587,500. Based on discussions with a market participant, the Commission reached the following estimates: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] × [(2 market data aggregation firms)] = 1,800 initial burden hours across the market data aggregation firms. 682 The Commission preliminarily estimates that the market data aggregation firms would incur the following initial external costs: [($206,250 to modify systems to comply with Rules 614(d)(1)– (d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] × [(2 market data aggregation firms)] = $828,500. PO 00000 Frm 00078 Fmt 4701 Sfmt 4702 administrative data and may incur external costs to purchase hardware to receive such added information. In addition, these broker-dealers would incur burden hours to disseminate proposed consolidated market data to subscribers. The Commission estimates that the initial burden hour and external costs estimates for these broker-dealers to modify their systems to comply with Rules 614(d)(1)–(d)(4) would be similar to market data aggregation firms because, for both types of respondents, the scope of the systems changes and costs associated with becoming competing consolidators would be comparable. The Commission preliminarily believes that each broker-dealer that aggregates market data for internal uses that chooses to become a competing consolidator would incur burden hours to upgrade its systems to comply with Rules 614(d)(1)–(d)(4) in order to collect, consolidate, and disseminate the proposed consolidated market data. The Commission also preliminarily believes that each broker-dealer would also incur initial external costs associated with such upgrades, including co-location fees at the exchange data centers and the cost of market data. The Commission preliminarily believes that each broker-dealer would incur 900 initial burden hours 683 and $206,250 in external costs 684 to modify its systems to comply with Rules 614(d)(1)–(d)(4). Additionally, the Commission estimates that a brokerdealer would incur initial external costs of $14,000 to purchase market data from the SROs,685 and an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,686 683 The Commission estimates the monetized initial burden for this requirement to be $293,750. Based on discussions with a market participant, the Commission reached the following estimates: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 burden hours) to upgrade existing systems to comply with Rules 614(d)(1)– (d)(4). The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for a 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. 684 This estimate is based on discussions with a market participant and the Commission’s understanding of hardware costs. 685 The Commission is using the monthly market data access and redistribution fees currently charged by the CTA/CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 686 This estimate is based on an estimated $48,500 in initial co-location fees as calculated from NYSE Price List 2020, multiplied by four exchange data centers. See NYSE Price List 2020, supra note 408. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules for a total initial external cost of $414,250 per broker-dealer,687 and an aggregate estimate of 1,800 initial burden hours 688 and $828,500 in initial external costs.689 The Commission solicits comment on the accuracy of this information. lotter on DSKBCFDHB2PROD with PROPOSALS2 (c) Initial Implementation Burden Hours and Costs for the Exclusive SIPs The Commission preliminarily believes that the CTA/CQ SIP and the Nasdaq UTP SIP could choose to become competing consolidators due to their years of experience in collecting, consolidating and disseminating market data. The systems used by the exclusive SIPs already collect, consolidate and disseminate SIP data. Therefore, the Commission preliminarily believes that the exclusive SIPs would not have to build entirely new systems to comply with Rules 614(d)(1)–(d)(4). For example, each exclusive SIP would incur burden hours and external costs to expand their bandwidth and connections to consume and disseminate proposed consolidated market data as well as to transmit it, and to program feed handlers to receive and normalize the different formats of the data feeds developed by the exchanges.690 Further, each exclusive SIP would expend external costs on purchasing proposed consolidated market data and on colocation fees at the exchange data centers. However, the exclusive SIPs may have to make a greater scope of changes to become competing consolidators than market data aggregation firms. For this reason, the Commission has estimated initial burden hour and external cost estimates that are higher than those estimated for market data aggregation firms. The Commission preliminarily believes that each exclusive SIP would 687 $414,250 = [($206,250 in initial external costs to modify systems to comply with Rules 614(d)(1)– (d)(4)) + ($14,000 for the first month of market data costs) + ($194,000 in initial co-location costs at four exchange data centers)]. 688 The Commission estimates the monetized initial burden for this requirement to be $587,500. Based on discussions with a market participant, the Commission reached the following estimates: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] × [(2 broker-dealers)] = 1,800 initial burden hours across the broker-dealers. 689 The Commission preliminarily estimates that broker-dealers would incur the following initial external costs: [($206,250 to modify systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers) × (2 brokerdealers)] = $828,500. 690 Feed handlers receive market data and make it usable to customers. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 incur burden hours to upgrade their systems to comply with Rules 614(d)(1)–(d)(4) to collect, consolidate and disseminate the proposed consolidated market data. The Commission also preliminarily believes that each exclusive SIP would also incur external costs associated with such upgrades, including co-location fees at the exchange data centers and the cost of market data. The Commission preliminarily believes that each exclusive SIP would incur 1,800 initial burden hours 691 and $412,500 in external costs 692 to modify its systems to comply with Rules 614(d)(1)–(d)(4). Additionally, the Commission estimates that an exclusive SIP would incur initial external costs of $14,000 to purchase market data from the SROs,693 and an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,694 for a total initial external cost of $620,500 per existing SIP,695 and an aggregate estimate of 3,600 initial burden hours 696 and $1,241,000 in initial 691 Based on discussions with a market participant, the Commission reached the following estimates for a market data aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 burden hours) to upgrade existing systems to comply with Rules 614(d)(1)– (d)(4). The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for a 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. As noted above, the Commission has increased this initial burden hour estimate for the exclusive SIPs. Therefore, the Commission preliminarily estimates that each exclusive SIP will incur 1,800 initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1)–(d)(4) (or $587,500, as monetized). 692 As noted above, the Commission estimates the initial external cost estimates to comply with Rules 614(d)(1)–(d)(4) will be higher for exclusive SIPs than for market data aggregation firms. Therefore, the Commission preliminarily estimates that each existing SIP will incur $412,500 in initial external costs to modify its systems to comply with Rules 614(d)(1)–(d)(4). 693 The Commission is using the monthly market data access and redistribution fees currently charged by the CTA/CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 694 This estimate is based on an estimated $48,500 in initial co-location fees as calculated from NYSE Price List 2020, multiplied by four exchange data centers. See NYSE Price List 2020, supra note 408. 695 The Commission preliminarily estimates that each existing SIP would incur the following initial external costs: [($412,500 to modify systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $620,500. 696 Based on discussions with a market participant, the Commission reached the following estimates for a market data aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + PO 00000 Frm 00079 Fmt 4701 Sfmt 4702 16803 external costs.697 The Commission solicits comment on the accuracy of this information. (d) Initial Implementation Burden Hours and Costs for New Entrants The Commission anticipates that firms without prior experience in the business of collecting, consolidating and disseminating market data may choose to become competing consolidators and would have to build systems to comply with Rules 614(d)(1)–(d)(4). Because these systems would be completely new, the Commission preliminarily believes that these new entrants will incur substantially higher initial burden hours and external costs to build a system that complies with Rules 614(d)(1)–(d)(4) than the other entities described above. For this reason, the Commission has estimated initial burden hour and external cost estimates for new entrants that are higher than those estimated for the other potential entities that may choose to become competing consolidators. The Commission preliminarily believes that each new entrant would incur initial burden hours to comply with Rules 614(d)(1)–(d)(4) to build a system that collects, consolidates, and disseminates the proposed consolidated market data. The Commission also preliminarily believes that each new entrant would incur associated external costs, including co-location fees at the exchange data centers and the cost of market data. The Commission preliminarily believes that each new entrant would incur 3,600 initial burden hours 698 and $825,000 in external (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 900 initial burden hours across the market data aggregation firms. As noted above, the Commission has increased this initial burden hour estimate to apply to the exclusive SIPs. Therefore, the Commission preliminarily estimates that each exclusive SIP will incur 1,800 initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1)–(d)(4) (or $587,500, as monetized). The aggregate initial burden hour estimate for two exclusive SIPs would be [(1,800 initial burden hours) × (2 existing SIPs)] = 3,600 initial burden hours. 697 The Commission preliminarily estimates that the exclusive SIPs would incur the following initial external costs: [($412,500 to modify systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] × [(2 exclusive SIPs)] = $1,241,000. 698 Based on discussions with a market participant, the Commission reached the following estimates for a market data aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 burden hours) to upgrade E:\FR\FM\24MRP2.SGM Continued 24MRP2 16804 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 costs 699 to build systems to comply with Rules 614(d)(1)–(d)(4). Additionally, the Commission estimates that a new entrant would incur initial external costs of $14,000 to purchase market data from the SROs,700 and an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,701 for a total initial external cost of $1,033,000 per new entrant,702 and an aggregate estimate of 7,200 initial burden hours 703 and $2,066,000 in initial external costs.704 The Commission solicits comment on the accuracy of this information. existing systems to comply with Rules 614(d)(1)– (d)(4). The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. As noted above, the Commission has increased this initial burden hour estimate to apply to the new entrants. Therefore, the Commission preliminarily estimates that each new entrant will incur 3,600 initial burden hours to build systems to comply with Rules 614(d)(1)–(d)(4) (or $1,175,000, as monetized). 699 As noted above, the Commission has increased its initial external cost estimates for market data aggregation firms to apply to new entrants. Therefore, the Commission preliminarily estimates that each new entrant will incur $825,000 in initial external costs to build systems to comply with Rules 614(d)(1)–(d)(4). 700 The Commission is using the monthly market data access and redistribution fees currently charged by the CTA/CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 701 This estimate is based on an estimated $48,500 in initial co-location fees as calculated from NYSE Price List 2020, multiplied by four exchange data centers. See NYSE Price List 2020, supra note 408. 702 The Commission preliminarily estimates that each new entrant would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $1,033,000. 703 Based on discussions with a market participant, the Commission reached the following estimates for a market data aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 900 initial burden hours. As noted above, the Commission has increased the per market data aggregation firm initial burden hour estimate to apply to the new entrants. Therefore, the Commission preliminarily estimates that each existing SIP will incur 3,600 initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1)–(d)(4) (or $1,175,000, as monetized). [(3,600 burden hours) × (2 new entrants] = 7,200 hours (or $2,350,000 as monetized). 704 The Commission preliminarily estimates that each new entrant would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers) × (2 new entrants)] = $1,033,000. [($1,033,000 in initial external costs) × (2 new entrants)] = $2,066,000. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 (e) Initial Implementation Burden Hours and Costs for SROs The Commission anticipates that SROs may choose to become competing consolidators and would have to build new systems to comply with Rules 614(d)(1)–(d)(4). Although these SROs may be able to leverage existing systems in developing a system compliant with Rules 614(d)(1)–(d)(4), the Commission preliminarily believes that these SROs would likely have to build new systems and thus will incur initial burden hours to comply with Rules 614(d)(1)–(d)(4) that are similar to new entrants. The Commission preliminarily believes that each SRO would incur initial burden hours to comply with Rules 614(d)(1)– (d)(4) to build a system that collects, consolidates, and disseminates the proposed consolidated market data. The Commission also preliminarily believes that each SRO would incur associated external costs, including co-location fees at the exchange data centers and the cost of market data. The Commission preliminarily believes that each SRO would incur 3,600 initial burden hours 705 and $825,000 in external costs 706 to build systems to comply with Rules 614(d)(1)–(d)(4). Additionally, the Commission estimates that an SRO would incur initial external costs of $14,000 to purchase market data from the SROs,707 and an additional initial external cost of $194,000 to colocate itself at four exchange data centers,708 for a total initial external cost 705 Based on discussions with a market participant, the Commission reached the following estimates for a market data aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 burden hours) to upgrade existing systems to comply with Rules 614(d)(1)– (d)(4). The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. As it did for its new entrant estimates, the Commission has increased this initial burden hour estimate to apply to the SROs. Therefore, the Commission preliminarily estimates that each new entrant will incur 3,600 initial burden hours to build systems to comply with Rules 614(d)(1)–(d)(4) (or $1,175,000, as monetized). 706 As it did for its new entrant estimates, the Commission has increased its initial external cost estimates for market data aggregation firms to apply to the SROs. Therefore, the Commission preliminarily estimates that each SRO will incur $825,000 in initial external costs to build systems to comply with Rules 614(d)(1)–(d)(4). 707 The Commission is using the monthly market data access and redistribution fees currently charged by the CTA/CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 708 This estimate is based on an estimated $48,500 in initial co-location fees as calculated from NYSE PO 00000 Frm 00080 Fmt 4701 Sfmt 4702 of $1,033,000 per new entrant,709 and an aggregate estimate of 14,400 initial burden hours 710 and $4,132,000 in initial external costs.711 The Commission solicits comment on the accuracy of this information. (f) Ongoing Burden Hours and Costs for Market Data Aggregation Firms, BrokerDealers That Aggregate Market Data, Exclusive SIPs, New Entrants, and SROs The Commission preliminarily believes that once a competing consolidator’s system has been built, the entities that have become competing consolidators (originally, the existing market data aggregation firms, brokerdealers that aggregate market data, exclusive SIPs, new entrants, and SROs) will incur annual ongoing burden hours and external costs to operate and maintain their systems to comply with Rules 614(d)(1)–(d)(4). The Commission also preliminarily believes that these annual ongoing burdens should be similar across the competing consolidators because such systems would likely be similar in nature. Therefore, the burden hours and costs associated with operating and maintain a competing consolidator system should be comparable across competing consolidators. The Commission is therefore applying the same annual ongoing burden hour and external cost estimates across the five types of entities that the Commission anticipates may choose to become competing consolidators. Price List 2020, multiplied by four exchange data centers. See NYSE Price List 2020, supra note 408. 709 The Commission preliminarily estimates that each SRO would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $1,033,000. 710 Based on discussions with a market participant, the Commission reached the following estimates for a market data aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 hours) + (Director of Compliance at $489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 hours)] = 900 initial burden hours. As it did for its new entrant estimates, the Commission has increased the per market data aggregation firm initial burden hour estimate to apply to the SROs. Therefore, the Commission preliminarily estimates that each SRO will incur 3,600 initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1)–(d)(4) (or $1,175,000, as monetized). [(3,600 burden hours) × (4 new entrants] = 14,400 hours (or $4,700,000 as monetized). 711 The Commission preliminarily estimates that each SRO would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1)–(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $1,033,000. [($1,033,000 in initial external costs) × (4 new entrants)] = $4,132,000. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 The Commission preliminarily believes that entities choosing to become competing consolidators would incur annual ongoing burden hours and external costs to operate and maintain their modified systems to comply with Rules 614(d)(1)–(d)(4). The Commission preliminarily believes that each entity would incur 540 annual ongoing burden hours 712 and $123,725 in annual ongoing external costs 713 to operate and maintain its systems to comply with Rules 614(d)(1)–(d)(4). Additionally, the Commission estimates that each entity would incur annual ongoing external costs of $168,000 to purchase market data from the SROs,714 and an additional annual ongoing external cost of $4,602,720 to co-locate itself at four exchange data centers,715 for a total annual ongoing external cost of $4,894,445 per entity.716 Because the Commission preliminarily believes that there will be two entities per category of potential competing consolidators for existing market data aggregators, broker-dealers that currently aggregate market data, exclusive SIPs and new entrants, for each of these categories, the aggregate 712 The Commission preliminarily believes that once a competing consolidator’s infrastructure is in place, the burden of operating and maintaining the infrastructure will be less than the burdens associated with establishing the infrastructure. The Commission estimates the monetized initial burden for this requirement to be $176,250. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Programmer at $332 for 210 hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance Manager at $310 for 60 hours) + (Director of Compliance at $489 for 30 hours) + (Compliance Attorney at $366 for 60 hours)] = 540 burden hours per entity and $176,250. 713 This estimate is based on the initial external cost estimate for a market data aggregation firm to modify its systems to comply with Rules 614(d)(1)– (d)(4), but reduced because the Commission preliminarily believes that once a competing consolidator’s infrastructure is in place, the burden of operating and maintaining the infrastructure will be less than the burdens associated with establishing the infrastructure. 714 The Commission is using the monthly market data access and redistribution fees currently charged by the CTA/CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000), multiplied by 12 months. 715 This estimate is based on an estimated $95,890 in monthly co-location fees as calculated from NYSE Price List 2020, multiplied by four exchange data centers over 12 months. The Commission preliminarily believes that the market data aggregators would already be co-located at the four exchange data centers, which may lower this estimate for this category of respondent. See NYSE Price List 2020, supra note 408. 716 $4,894,445 = [($123,725 to operate and maintain systems to comply with Rules 614(d)(1)– (d)(4)) + ($168,000 in monthly market data fees over 12 months) + ($4,602,720 to co-locate within four exchange data centers over 12 months)]. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 estimates would amount to estimate of 1,080 annual ongoing burden hours 717 and $9,797,530 in annual ongoing external costs.718 Since the Commission preliminarily believes that there may be four SROs that will choose to become competing consolidators, it is estimating that these SROs will incur an aggregate estimate of 2,160 annual ongoing burden hours 719 and $19,577,780 in annual ongoing external costs.720 The Commission solicits comment on the accuracy of this information. (g) Initial Burden and Costs for Proposed Rule 614(c) As discussed above, proposed Rule 614(c) would require each competing consolidator to make public on its website a direct URL hyperlink to the Commission’s website that contains each effective initial Form CC, order of ineffective initial Form CC, and amendments to effective Form CCs. The Commission preliminarily estimates an 717 The Commission estimates the monetized annual ongoing burden for this requirement to be $352,500. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Programmer at $332 for 210 hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance Manager at $310 for 60 hours) + (Director of Compliance at $489 for 30 hours) + (Compliance Attorney at $366 for 60 hours)] × [(2 market data aggregation firms/broker-dealers that currently aggregate market data/existing SIPs/new entrants)] = 1,080 annual ongoing burden hours and $352,500. 718 The Commission preliminarily estimates that the market data aggregation firms/broker-dealers that currently aggregate market data for their own usage/exclusive SIPs/new entrants would incur the following aggregate annual ongoing external costs: [($123,725 to operate and maintain systems to comply with Rules 614(d)(1)–(d)(4)) + ($168,000 in monthly market data fees over 12 months) + ($4,602,720 to co-locate within four exchange data centers over 12 months)] × [(2 entities)] = $9,788,890. 719 The Commission estimates the monetized initial burden for this requirement to be $353,500. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Programmer at $332 for 210 hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance Manager at $310 for 60 hours) + (Director of Compliance at $489 for 30 hours) + (Compliance Attorney at $366 for 60 hours)] × [(4 SROs)] = 2,160 annual ongoing burden hours across the SROs and $705,000. 720 The Commission preliminarily estimates that the SROs would incur the following initial external costs: [($123,725 to operate and maintain systems to comply with Rules 614(d)(1)–(d)(4)) + ($168,000 in monthly market data fees over 12 months) + ($4,602,720 to co-locate within four exchange data centers over 12 months)] × [(4 SROs)] = $19,577,780 across the SROs. PO 00000 Frm 00081 Fmt 4701 Sfmt 4702 16805 initial burden of 0.5 hours per competing consolidator to publicly post the Commission’s direct URL hyperlink to its website upon filing of the initial Form CC,721 for an aggregate initial burden of approximately six hours for the competing consolidators to publicly post the direct URL hyperlink to the Commission’s website on their own respective websites.722 (h) Ongoing Burden and Costs for Proposed Rule 614(c) The Commission preliminarily believes that each competing consolidator would check the Commission’s website whenever it submits amendments to effective Form CCs to ensure that the Commission’s direct URL hyperlink that the competing consolidator has posted to its own website remains valid. The Commission preliminarily believes that a competing consolidator will file two amendments per year, so the Commission preliminarily estimates that each competing consolidator will incur an ongoing burden of 0.25 hours per amendment, or 0.5 hours per year, to ensure that it has posted the correct direct URL hyperlink to the Commission’s website on its own website,723 for an aggregate annual 721 The Commission bases this estimate on a fulltime Programmer Analyst spending approximately 0.5 hours to publicly post the URL hyperlink per competing consolidator. The Commission estimates the monetized initial burden for this requirement to be $120.50. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: Programmer Analyst at $241 for 0.5 hours = 0.5 initial burden hours per competing consolidator and $120.50. 722 The Commission estimates the monetized initial aggregate burden for this requirement to be $1,446. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Programmer Analyst at $241 for 0.5 hours) × (12 competing consolidators)] = 6 initial burden hours across the competing consolidators and $1,446. 723 The Commission bases this estimate on a fulltime Programmer Analyst spending approximately 0.25 hours to check the Commission’s website when the competing consolidator submits an amendment to effective Form CCs to ensure that the Commission’s direct URL hyperlink that the competing consolidator has posted to its own website remains valid. Since the Commission preliminarily believes that a competing consolidator would file two amendments per year, the Commission preliminarily estimates that each competing consolidator would incur a burden of 0.5 hours per year. [(0.25 hours) × (2 amendments per year)] = 0.5 hours per year to check the URL hyperlink. The Commission estimates the E:\FR\FM\24MRP2.SGM Continued 24MRP2 16806 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules burden of approximately six hours for the competing consolidators to do so.724 3. Recordkeeping (a) Initial Burden and Costs Proposed Rule 614(d)(7) would require each competing consolidator to keep and preserve at least one copy of all documents made or received by it in the course of its business and in the conduct of its business. These documents must be kept for a period of no less than five years, the first two years in an easily accessible place. Proposed Rule 614(d)(8) would require each competing consolidator to promptly furnish these documents to any representative of the Commission upon request. Based on the Commission’s experience with recordkeeping costs and consistent with prior burden estimates for similar provisions,725 the Commission preliminarily estimates that this requirement will create an initial burden of 40 hours (for a total cost of $8,720),726 for a total initial burden of 480 hours for all respondents (for a total cost of $104,640). lotter on DSKBCFDHB2PROD with PROPOSALS2 (b) Ongoing Burden and Costs The Commission preliminarily believes that the ongoing annual burden of recordkeeping in accordance with proposed Rules 614(d)(7) and 614(d)(8) would be 20 hours per respondent (for a total cost of $4,360) and a total ongoing annual burden of 240 hours for all respondents (for a total cost of $52,320). monetized annual burden for this requirement to be $120.50. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: Programmer Analyst at $241 for 0.5 hours = 0.5 annual burden hours per competing consolidator and $120.50. 724 The Commission estimates the monetized aggregate annual burden for this requirement to be $1,446.00. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Programmer Analyst at $241 for 0.5 hours) × (12 competing consolidators)] = 6 annual burden hours across the competing consolidators and $1,446.00. 725 See Securities Exchange Act Release No. 74246, supra note 554, at 14541. 726 The Commission based this estimate on the $218 hourly rate as of May 2019 for a paralegal × 40 hours. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 4. Reports and Reviews (a) Initial Burden and Costs The Commission preliminarily believes that the average one-time, initial burden to program systems to produce the monthly reports required by proposed Rules 614(d)(5) and (d)(6), including keeping the information publicly posted and free and accessible (in downloadable files under Rule 614(d)(5)), would be 246 hours per competing consolidator (for a total cost of $80,507) 727 and $800 in external costs.728 The Commission estimates that the total initial burden would be 2,952 hours (for a total cost of $966,804) 729 and a total initial external cost of $9,600.730 727 This figure is based on the estimated initial paperwork burden for Rule 606(a), which requires each broker or dealer to make publicly available on a website a quarterly report on its routing of nondirected orders in NMS stocks that are submitted on a held basis and of non-directed orders that are customer orders in NMS securities. See Disclosure of Order Handling Information, Securities Exchange Act Release No. 84528, supra note 10. For purposes of this proposal, the Commission is converting the 10 hour estimate for a quarterly report to an estimate for a monthly report. Additionally, the Commission is adding the burden of posting the required information to the website. The Commission estimates the monetized initial burden for this requirement to be $80,507. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Programmer at $332 per hour for 160 hours) + (Sr. Database Administrator at $342 per hour for 20 hours) + (Sr. Business Analyst at $275 per hour for 20 hours) + (Attorney at $417 per hour for 4 hours) + (Sr. Operations Manager at $366 per hour for 20 hours) + (Systems Analyst at $263 per hour for 16 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr. Programmer for 6 hours)] = 246 initial burden hours per competing consolidator and $80,507. 728 The Commission estimates that each competing consolidator would incur an initial external cost of $800 for an external website developer to create the website. 729 The Commission estimates the monetized initial aggregate burden for this requirement to be $966,804. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Programmer at $332 per hour for 160 hours) + (Sr. Database Administrator at $342 per hour for 20 hours) + (Sr. Business Analyst at $275 per hour for 20 hours) + (Attorney at $417 per hour for 4 hours) + (Sr. Operations Manager at $366 per hour for 20 hours) + (Systems Analyst at $263 per hour for 16 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr. Programmer for 6 hours)] × [(12 competing consolidators)] = 2,952 initial aggregate burden hours across the competing consolidators and $966,804. 730 $9,600 = ($800 for an external website developer to create the website) × (12 competing consolidators). PO 00000 Frm 00082 Fmt 4701 Sfmt 4702 (b) Ongoing Burden and Costs The Commission estimates that each competing consolidator would incur an average burden of 11 hours to prepare and make publicly available a monthly report in the format required by proposed Rules 614(d)(5) and (d)(6) (for a total cost of $3,768.50), or a burden of 132 hours per year (for a total cost of $45,222).731 Once a report is posted on an internet website, the Commission does not estimate that there would be an additional burden to allow the report to remain posted for the period of time specified in the rules. The total burden per year for all competing consolidators to comply with the monthly reporting requirement in proposed Rules 614(d)(5) and (d)(6) is estimated to be 1,584 hours (for a total cost of $542,664).732 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks As discussed above, the proposed rule would require an amendment to the effective national market system plan(s) for NMS stocks from the 16 national securities exchanges and one national securities association respondents who are participants in the effective national market system plan(s). The Commission preliminarily estimates that it would take the participants to the effective 731 This figure is based on the estimated ongoing paperwork burden for Rule 606(a), which requires each broker or dealer to make publicly available on a website a report on a quarterly basis. In the Paperwork Reduction Act discussion for Rule 606(a), the Commission established that the average annual burden for a broker-dealer to comply with Rules 606(a)(1)(i)–(iii) would be 10 hours. See supra note 727, at 58388. For purposes of this proposal, the Commission is converting the 10 hour estimate for a quarterly report to an estimate for a monthly report. Additionally, the Commission is adding the burden of updating the website. The Commission estimates the monetized annual burden for this requirement to be $3,768.50. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Business Analyst at $275 per hour for 5 hours) + (Attorney at $417 per hour for 5 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr. Programmer for 1 hour)] × [(12 months)] = 132 initial burden hours per competing consolidator and $45,222. 732 The Commission estimates the monetized annual aggregate burden for this requirement to be $542,664. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Sr. Business Analyst at $275 per hour for 5 hours) + (Attorney at $417 per hour for 5 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr. Programmer for 1 hour)] × [(12 competing consolidators)] × [(12 months)] = 1,584 aggregate burden hours across the competing consolidators and $542,664. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules national market system plan(s) approximately 420 hours to prepare the amendment. This preliminary estimate includes 210 hours for a respondent to comply with the timestamps required by the proposed rule, including a review and any applicable change of the respondent’s technical systems and rules. Each SRO already employs some form of timestamping, and the Commission does not necessarily expect that the burden to comply with the timestamp requirement would be particularly burdensome.733 The preliminary estimate also includes 105 hours for the participants to compose the form of annual report on competing consolidator performance. Finally, the preliminary estimate includes 20 hours the participants to compile and confirm the primary listing exchange for each NMS stock. The initial burden hours for all respondents would be 420 hours × 17 (for a total cost of $2,977,380).734 lotter on DSKBCFDHB2PROD with PROPOSALS2 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations As discussed above, the proposed amendment to Rule 603(b) would require every national securities exchange on which an NMS stock is traded and national securities association to make available to all competing consolidators and selfaggregators all information with respect to quotations for and transactions in NMS stocks, including all data necessary to generate consolidated market data, in the same manner and using the same methods, including all methods of access and using the same formats, as such exchange or association makes available any information with respect to quotations for and transactions in NMS stocks to any person. Accordingly, the SROs would be required to collect the information necessary to generate proposed consolidated market data, which would be required to be made available under proposed Rule 603(b). The respondents to this collection of information are the 16 national securities exchanges and the 733 Currently, under the Equity Data Plans, the SROs attach timestamps to quotation information and transaction information provided to the exclusive SIPs. See, e.g., Nasdaq UTP Plan, supra note 13, at Section VIII; CQ Plan, supra note 13, at Section VI; CTA Plan, supra note 13, at Section VI. 734 The Commission estimates the monetized burden for this requirement to be $130,860. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Attorney at $417 for (420 × 17) hours)]. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 one national securities association who are participants in the effective national market system plan(s). The new data elements of proposed consolidated market data that the national securities exchanges and national securities associations must make available include auction information, depth of book data, round lot data, regulatory data (including LULD price bands), and administrative data. The Commission understands that the national securities exchanges and national securities associations currently collect and/or calculate all data necessary to generate proposed consolidated market data.735 Therefore, the Commission believes that the proposed amendments to 603(b) would impose minimal initial and ongoing burdens on these respondents, including any changes to their systems, because they already collect and provide the data necessary to generate proposed consolidated market data, including regulatory data, to the exclusive SIPs and to subscribers of their proprietary data feeds. (a) Initial Burden and Costs The Commission preliminarily estimates, in order to collect the information necessary to generate consolidated market data as required by proposed Rule 603(b), that a national securities exchange on which an NMS stock is traded or national securities association will require an average of 220 736 initial burden hours of legal, compliance, information technology, and business operations personnel time to prepare and implement such a system (for a total cost per exchange of $70,865).737 735 For example, the primary listing exchanges currently calculate LULD price bands and related information to generate synthetic LULD price bands. See Nasdaq, Equity Trader Alert #2016–79: NASDAQ Announces Improved Protections for Equity Markets Coming Out of Halts (‘‘Leaky Bands’’) (Apr. 12, 2016), available at https:// www.nasdaqtrader.com/ TraderNews.aspx?id=ETA2016-79; NYSE, Trader Update: NYSE and NYSE MKT: Enhanced Limit Up Limit Down Procedures (Aug. 1, 2016), available at https://www.nyse.com/trader-update/ history#110000029205; Securities Exchange Act Release No. 34–78435 (July 28, 2016), 81 FR 51239 (Aug. 3, 2016) (SR–FINRA–2016–028). 736 The Commission based its estimate on the burden hour estimate provided in connection with the adoption of Regulation SHO because the requirements are similar to what a national securities exchange or national securities association would need to do to comply with proposed Rule 603(b). See Commission, Supporting Statement for the Paperwork Reduction Act Information Collection Submission for Rule 201 and Rule 200(g) of Regulation SHO (Sept. 5, 2019). 737 The Commission estimates the monetized initial burden for this requirement to be $70,865. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry PO 00000 Frm 00083 Fmt 4701 Sfmt 4702 16807 (b) Ongoing Burden and Costs The Commission estimates that each national securities exchange on which an NMS stock is traded and national securities association would incur an annual average burden on an ongoing basis of 396 hours to collect the information necessary to generate proposed consolidated market data required by proposed Rule 603(b) (for a total cost per exchange of $128,064).738 E. Collection of Information Is Mandatory The collection of information discussed above would be a mandatory collection of information. F. Confidentiality 1. Registration Requirements and Form CC As discussed above, under proposed Rule 614(b)(2), the Commission would make public via posting on the Commission’s website each: (i) Effective initial Form CC, as amended; (ii) order of ineffectiveness of a Form CC; (iii) filed Form CC Amendment; and (iv) notice of cessation. 2. Competing Consolidator Duties and Data Collection and Maintenance The collection of information regarding competing consolidator duties and data collection and maintenance relates to the proposed consolidated market data that competing consolidators will collect, calculate, and provide to subscribers. 3. Recordkeeping The collection of information relating to recordkeeping would be available to the Commission and its staff, and to other regulators. 4. Reports and Reviews The collection of information regarding reports and reviews relates to information that would be published on competing consolidator websites. 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Compliance Manager at $310 for 105 hours) + (Attorney at $417 for 70 hours) + (Sr. Systems Analyst at $285 for 20 hours) + (Operations Specialist at $137 for 25 hours)] = 220 initial burden hours and $70,865. 738 The Commission estimates the monetized ongoing, annual burden for this requirement to be $128,064. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Compliance Manager at $310 for 192 hours) + (Attorney at $417 for 48 hours) + (Sr. Systems Analyst at $285 for 96 hours)] = 336 initial burden hours and $128,064. E:\FR\FM\24MRP2.SGM 24MRP2 16808 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 5. Amendment to the Effective National Market System Plan(s) for NMS Stocks Amendments to the effective national market system plan(s) for NMS stocks would be required to be filed with the Commission pursuant to Rule 608. Once filed, the Commission would publish the amendments for public comment. Finally, the annual report of competing consolidator performance would be submitted to the Commission. lotter on DSKBCFDHB2PROD with PROPOSALS2 6. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations As discussed above, the proposed amendment to Rule 603(b) would require national securities exchanges and national securities associations to collect and provide information to the competing consolidators and selfaggregators, not to the Commission. Therefore, no assurances of confidentiality are necessary because the information will be made available to the public for a fee from the competing consolidators. G. Revisions to Current Regulation SCI Burden Estimates As described above, the Commission is proposing to expand the definition of ‘‘SCI entities’’ under Regulation SCI to include ‘‘competing consolidators,’’ which would be defined to have the same meaning as set forth in the proposed amendments to Rule 600(b)(16) of Regulation NMS.739 Thus, under the proposal, competing consolidators would be subject to the requirements of Regulation SCI. The rules under Regulation SCI impose ‘‘collection of information’’ requirements within the meaning of the PRA.740 Rule 1001(a) of Regulation SCI requires each SCI entity to establish, maintain, and enforce written policies and procedures for systems capacity, integrity, resiliency, availability, and security. Rule 1001(b) requires each SCI entity to establish, maintain, and enforce written policies and procedures to ensure that its SCI systems operate in a manner that complies with the Exchange Act, the rules and regulations thereunder, and the SCI entity’s rules and governing documents, as applicable. Rule 1001(c) requires each SCI entity to establish, maintain, and enforce written policies and procedures 739 See proposed amendment to Rule 1000 of Regulation SCI. 740 For a complete analysis of Regulation SCI under the PRA, see SCI Adopting Release, supra note 28, at 18141; and Proposed Collection; Comment Request; Extension: Regulation SCI, Form SCI; SEC File No. 270–653, OMB Control No. 3235– 0703, 83 FR 34179 (‘‘2018 PRA Extension’’). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 for the identification, designation, and documentation of responsible SCI personnel and escalation procedures. Rule 1002(a) requires each SCI entity to begin to take appropriate corrective action upon any responsible SCI personnel having a reasonable basis to conclude that an SCI event has occurred. Rule 1002(b) requires each SCI entity to notify the Commission of certain SCI events. Rule 1002(c) requires each SCI entity, with certain exceptions, to disseminate information about SCI events to affected members or participants, and disseminate information about major SCI events to all members or participants. Rule 1003(a) requires each SCI entity to notify the Commission of material systems changes quarterly. Rule 1003(b) requires each SCI entity to conduct annual SCI reviews. Rule 1004 requires each SCI entity to designate certain members or participants for participation in functional and performance testing of the SCI entity’s business continuity and disaster recovery plans, and to coordinate such testing with other SCI entities. Rules 1005 and 1007 set forth recordkeeping requirements for SCI entities. Rule 1006 requires, with certain exceptions, that each SCI entity electronically file required notifications, reviews, descriptions, analysis, or reports to the Commission on Form SCI.741 In 2018, there were an estimated 42 entities that met the definition of SCI entity and were subject to the collection of information requirements of Regulation SCI (‘‘respondents’’).742 At that time, an estimate of approximately 2 entities would become SCI entities each year, one of which would be an SRO. Accordingly, under these estimates, over the following three years, there would be an average of approximately 44 SCI entities each year.743 As discussed above, the Commission preliminarily estimates that, under the current proposal, there could be 12 competing consolidators that would be subject to Regulation SCI as SCI entities.744 As discussed below, some of these entities may already be SCI entities and subject to the requirements of Regulation SCI. While the 741 For further details regarding the requirements of Regulation SCI, see Regulation SCI Adopting Release, supra note 28. See also ‘‘Responses to Frequently Asked Questions Concerning Regulation SCI,’’ September 2, 2015 (updated August 21, 2019), available at: https://www.sec.gov/divisions/ marketreg/regulation-sci-faq.shtml. 742 See 2018 PRA Extension, supra note 740, at 34180. 743 Id. 744 See supra Section V.C. PO 00000 Frm 00084 Fmt 4701 Sfmt 4702 Commission estimates that the number of respondents would increase as a result of this proposal, the Commission preliminarily believes that its prior paperwork burden estimates per entity under Regulation SCI generally would be applicable to these new competing consolidators because they would be subject to the same requirements and burdens as other SCI entities.745 At the same time, the Commission preliminarily believes that burden estimates also should take into account the extent to which the entities that may register to become competing consolidators already comply with the requirements of Regulation SCI. In particular, the Commission preliminarily believes that 2 of the estimated 12 competing consolidators may be the existing exclusive SIPs, which are currently subject to Regulation SCI as plan processors. Because these entities are responsible for collecting, consolidating, and disseminating proposed consolidated market data to market participants and thus would be operating a substantially similar business and performing a similar function in their role as competing consolidators, the Commission preliminarily believes that the current ongoing burden estimates for existing SCI entities would be applicable and there would be no material change in the estimated paperwork burdens for these entities under Regulation SCI.746 As stated above, the Commission also preliminarily believes that 4 of the entities that may register to become competing consolidators may be either: (i) An SRO currently subject to Regulation SCI; or (ii) an entity affiliated with an SCI SRO, formerly subject to Regulation SCI. The burden estimates for SCI entity respondents include both initial burdens for new SCI entities and ongoing burdens for all SCI entities.747 Because these SRO entities that would become competing consolidators are current SCI entities and are already required to implement the requirements of Regulation SCI with regard to SCI systems that they operate in their role as 745 See 2018 PRA Extension, supra note 740. As discussed below, the Commission believes that 6 of the 12 entities estimated to register as competing consolidators are currently SCI entities. Thus, the Commission preliminarily estimates that, if the proposal were adopted, there would be an average of approximately 50 SCI entities each year. 746 Id. The burden estimates for SCI entity respondents included initial burdens for new SCI entities and ongoing burdens for all SCI entities. For the reasons discussed herein, the Commission preliminarily believes that the initial paperwork burdens for new SCI entities would not be applicable to these entities. 747 Id. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 SCI SROs, the Commission preliminarily believes that these entities would not have initial burdens equivalent to those estimated for new SCI entities. At the same time, as discussed above, the Commission preliminarily believes that these SROs may be a national securities association and/or equities national securities exchanges that do not currently operate an exclusive SIP. Because these entities would be entering an entirely new business and performing a new function with new SCI systems, unlike the current exclusive SIPs who may register to become competing consolidators discussed above, the Commission preliminarily believes that these SRO entities would have some initial burden that would be a percentage of that which entirely new SCI entities have. In particular, the Commission preliminarily estimates that the initial burdens for existing SCI SROs who register as competing consolidators would be 50 percent of the estimated initial burdens for entirely new SCI entities. For example, the Commission believes that such SCI SROs would need to develop and draft the policies and procedures required by Rule 1001(a) for new SCI systems utilized in their role as competing consolidators, but unlike completely new SCI entities, SCI SROs would already have existing Rule 1001(a) policies and procedures in place for other types of SCI systems that they could utilize as a model and modify as needed for new SCI systems.748 The Commission also believes that the estimated ongoing paperwork burden estimates for all SCI entities would be applicable to these entities as well.749 The Commission preliminarily believes that the remaining 6 estimated competing consolidators may be entities that are not currently subject to Regulation SCI. As discussed above, the Commission believes that these 6 entities may be market data aggregation firms, broker-dealers that currently aggregate market data for internal uses, and entities that would be entering the market data aggregation business for the first time.750 Accordingly, the Commission preliminarily believes that 748 As an example, the estimate of an initial recordkeeping burden was 694 hours per new respondent to comply with the policies and procedures requirement of Rule 1001(a). Id. at 34180. The Commission preliminarily estimates that, for an SCI SRO who registers as a competing consolidator, the initial burden for Rule 1001(a) would be 50 percent of this estimated amount, or 347 hours. 749 The ongoing paperwork burden estimates in the PRA Extension do not distinguish between different categories of SCI entities, but rather provides an average for all SCI entities. 750 See supra Section V.D.2. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 these entities would have the same estimated initial paperwork burdens as those estimated for new SCI entities and the same ongoing paperwork burdens as all other SCI entities.751 H. Request for Comments Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: 156. Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information shall have practical utility; 157. Evaluate the accuracy of our estimates of the burden of the proposed collection of information; 158. Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; 159. Evaluate whether there are ways to minimize the burden of collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology; and 160. Evaluate whether the proposed amendments would have any effects on any other collection of information not previously identified in this section. Persons submitting comments on the collection of information requirements should direct them to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and should also send a copy of their comments to Vanessa Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090, with reference to File Number S7–03–20. Requests for materials submitted to OMB by the Commission with regard to this collection of information should be in writing, with reference to File Number S7–03–20 and be submitted to the Securities and Exchange Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 20549–2736. As OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. VI. Economic Analysis A. Introduction and Market Failures 1. Introduction Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation.752 In addition, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition.753 Exchange Act Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. Wherever possible, the Commission has quantified the likely economic effects of the proposed amendments. The Commission is providing both a qualitative assessment and quantified estimates of the potential economic effects of the proposed amendments where feasible. The Commission has incorporated data and other information provided by commenters to assist it in the analysis of the economic effects of the proposed amendments. However, as explained in more detail below, because the Commission does not have, and in certain cases does not believe it can reasonably obtain data that may inform the Commission on certain economic effects, the Commission is unable to quantify certain economic effects. Further, even in cases where the Commission has some data, it is not practicable due to the number and type of assumptions necessary to quantify certain economic effects, which render any such quantification unreliable. Our inability to quantify certain costs, benefits, and effects does not imply that such costs, benefits, or effects are less significant. The Commission requests that commenters provide relevant data and information to assist the Commission in analyzing the economic consequences of the proposed amendments. In general, the Commission preliminarily believes that the proposed amendments would result in benefits by enhancing the consolidated market data content, reducing the latency of consolidated market data, and improving the dissemination of 752 15 751 See PO 00000 2018 PRA Extension, supra note 740. Frm 00085 Fmt 4701 Sfmt 4702 16809 753 15 E:\FR\FM\24MRP2.SGM U.S.C. 78c(f). U.S.C. 78w(a)(2). 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16810 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidated market data. This would reduce information asymmetries that exist between market participants who subscribe to proprietary DOB and other proprietary products and market participants who only subscribe to SIP data, and could allow some market participants who subscribe to the more expensive proprietary DOB products to replace them with potentially cheaper consolidated market data feeds. Improvements to the content and latency of consolidated market data from the proposed amendments could also help market participants that currently rely on SIP data to make more informed trading decisions, which would facilitate their ability to trade competitively and improve their execution quality, and would facilitate best execution. The Commission preliminarily believes there are three main benefits from the expanded content of consolidated market data, which as noted above includes proposed ‘‘core data.’’ First, the expanded content of consolidated market data could allow market participants that currently only subscribe to SIP data to get additional content from expanded consolidated market data and to experience increased gains from trade by allowing them to take advantage of trading opportunities they may not have been aware of due to the lack of information in existing SIP data.754 Second, the expanded content of consolidated market data could also allow these market participants to improve their order routing and order execution capabilities, potentially lowering investor transaction costs. Finally, the expanded consolidated market data content and associated changes in how the NBBO and protected quotes are calculated could result in a narrower NBBO and wider protected quote in some stocks. A narrower NBBO and changes in protected quotes could affect price improvement that trading venues, including ATSs, exchanges, and internalizers, could offer. The Commission preliminarily believes that there are costs to expanding the content of consolidated market data, including costs to new competing consolidators related to upgrading existing infrastructure in order to handle the dissemination of the increased message traffic; upgrading software and trading systems that 754 Here and throughout, the phrase ‘‘gains from trade’’ is meant to refer to a situation in which two market participants would each be better off if they exchanged their respective property. It captures the idea of a potential welfare benefit that could be realized if trade was allowed and possible. Generally in this proposal the relevant property will be securities and cash. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consume consolidated market data; costs to market participants receiving consolidated market data from technological investments required to handle increased content and message traffic; as well as other costs. Expanding consolidated market data would also result in transfers among various market participants, including transfers from the current beneficiaries of asymmetric information associated with the uneven distribution of market data to market participants who currently do not have access to the additional information contained in proprietary DOB products and other proprietary products. There could also be costs to SROs associated with the dissemination of consolidated market data. With respect to the introduction of the decentralized consolidation model, the Commission has several reasons to believe that it is likely that a sufficient number of firms would be willing to enter the space of competing consolidators so that the market would be competitive. Under this assumption, the potential economic benefits of the proposed decentralized consolidation model would include a reduction in the latency differential that exists between SIP data and proprietary data feeds (as measured at the location of market participants using the data) and potential improvements in innovation and efficiency in the consolidated market data delivery space. Moreover, the fees for proposed consolidated market data could be lower than fees that market participants pay for similar depth of book data today because today market participants would need to subscribe to both the exclusive SIPs and proprietary data feeds to receive the same content that would be included in proposed consolidated market data. However, the Commission recognizes that there is uncertainty in the fees for proposed consolidated market data because they would depend on the structure of fees ultimately proposed for data content by an effective national market system plan(s) and on the ultimate fee structure of competing consolidators.755 The Commission also recognizes uncertainty in the fees that subscribers choosing to receive a subset of consolidated market data would pay under the proposed rule and that these subscribers could pay higher or lower fees than they do today for equivalent data. At the same time, the introduction of the decentralized consolidation model would impose direct costs on SROs, the existing exclusive SIPs, and potential competing consolidators. It would also 755 See PO 00000 infra Section VI.C.2(b). Frm 00086 Fmt 4701 Sfmt 4702 impose indirect costs on the existing exclusive SIPs and market participants. The direct costs for potential competing consolidators (such as SROs, exclusive SIPs, and current market data aggregators) would include registration and compliance costs and implementation and incremental infrastructure costs. The Commission, however, preliminarily believes that many of the potential competing consolidators have currently already invested in this infrastructure for the existing business services that they provide (e.g., proprietary data aggregation services). The indirect costs to the existing exclusive SIPs would be a potential loss in revenue to competing consolidators from no longer being the exclusive distributors of consolidated market data. The indirect costs for market participants would include implementation costs and potential effects on prices that market participants would pay for the proposed consolidated market data. However, new fees for the data content of consolidated market data would need to be proposed by the effective NMS plan(s) for NMS stocks and filed with the Commission. The Commission preliminarily believes that there are a number of economic effects that are only possible as a result of expanding consolidated market data and the introduction of the decentralized consolidation model. These changes would lead to the benefits of less expensive alternatives to proprietary DOB products for market participants; potential new entrants into the broker-dealer, market making, and other latency sensitive trading businesses; expansion of business opportunities for market data aggregators; improved regulatory oversight from the Consolidated Audit Trail; and enhancements to the quality of service data vendors are able to provide. Further, as noted above, the Commission preliminarily believes that the proposal would facilitate best execution and reduce information asymmetries. These changes could also result in a number of costs including costs to market participants in the form of lower revenues for SROs; higher costs for the implementation of the Consolidated Audit Trail; potentially higher costs for certain market data vendors; as well as other costs. Some of these benefits and costs would result from transfers among various market participants. 2. Market Failures The Commission is proposing to amend Rules 600 and 603 and to adopt new Rule 614 of Regulation NMS under E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules the Exchange Act to increase the availability and improve the dissemination of information regarding quotations for and transactions in NMS stocks to market participants. First, the Commission proposes to define terms ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘regulatory data,’’ and ‘‘administrative data,’’ and to enhance the content of core data to include certain odd-lot quote information, certain depth of book data, and information on orders participating in auctions. Second, the Commission proposes to introduce a decentralized consolidation model whereby competing consolidators and selfaggregators would assume responsibility for the collection, consolidation, and dissemination functions currently performed by the exclusive SIPs.756 As discussed above,757 currently, some market participants have stated their view that they are unable to rely solely on SIP data to trade competitively in today’s markets. One reason is that SIP data does not currently include some important data elements such as odd-lot quotations (except, as explained above,758 to the extent that odd-lots quotations are aggregated into round lots pursuant to exchange rules), depth of book data, and information about orders participating in auctions.759 Exchanges directly sell these additional data elements to market participants and market data aggregation firms as part of proprietary DOB data products at significant premiums to SIP products.760 Another reason some market participants have raised concerns about SIP data is that there is a substantial latency differential between market data provided via the exclusive SIPs and proprietary data products delivered by the exchanges directly to market participants or to market data aggregators as part of proprietary data feeds.761 The latency and content disparity between SIP data feeds and proprietary DOB data products has the effect of increasing the market participants’ demand for proprietary products to the extent market participants view acquiring such products as a competitive necessity. The Commission understands that there is an inherent conflict of interest in that the exchanges, as voting members of the Equity Data Plan operating committees, may not be 756 See supra Sections III, IV. 757 Id. 758 See supra Section III.C.1(a). explained above, only limited auctionrelated information is currently included in SIP data. See supra Section III.C.3(a). 760 See infra Section VI.B.2(a). 761 See infra Section VI.B.2(b). 759 As VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 incentivized to improve the content or latency of SIP data.762 Many of the exchanges have actively pursued commercial interests that do not necessarily further the regulatory objective to ‘‘preserve the integrity and affordability of the consolidated data stream,’’ 763 which is necessary to ensure that there is a ‘‘comprehensive, accurate, and reliable source of information for the prices and volume of any NMS stock at any time during the trading day.’’ 764 One example of this divergence of interest has been the development by certain exchanges of proprietary data products with reduced latency and expanded content (i.e., proprietary DOB products), without the exchanges, in their role as participants to the Equity Data Plans, similarly enhancing the data products offered by the Equity Data Plans.765 These proprietary DOB products have evolved to be considered competitive necessities by many market participants and are offered at significant premiums to exclusive SIP products.766 Another example of the divergence between commercial interests and regulatory goals has been the development by certain exchanges of limited TOB data products, which are offered at a discount compared to the SIP data and marketed to a more price-sensitive segment of the market, without corresponding development by the exclusive SIPs of a less expensive SIP product for the price-sensitive segment of the market.767 The exchanges have continued to develop and enhance their proprietary market data businesses— which generate revenue that, unlike SIP data revenues, do not have to be shared with the other SROs—while remaining fully responsible for the governance and operation of the Equity Data Plans, including content, infrastructure, and pricing, as well as data consolidation and dissemination.768 At the same time, the operation of the Equity Data Plans has not kept pace with the efforts of the exchanges to expand the content of and to employ technology to reduce the latency and increase the throughput of certain proprietary data products. The Commission preliminarily believes that there are two additional 762 See supra Section IV.A; supra note 267 (describing an exchange-led initiative to enhance the SIPs). 763 See Regulation NMS Adopting Release, supra note 10, at 37503. 764 See Equity Market Structure Concept Release, supra note 11, at 3600. 765 See Proposed Governance Order, supra note 8, at Section II.B.1. 766 See id. 767 See id.; supra note 25. 768 See Proposed Governance Order, supra note 8, at Section II.B.1. PO 00000 Frm 00087 Fmt 4701 Sfmt 4702 16811 factors related to the Equity Data Plan processors that may impede improvements to the dissemination of SIP data. First, pursuant to Regulation NMS, each exclusive SIP has exclusive rights to collect trade and quotation data related to NMS stocks from multiple SROs and then aggregate and disseminate market data to market participants.769 This structure may further impede improvements in the dissemination of SIP data 770 because Equity Data Plan participants that govern exclusive SIPs do not have incentives to innovate due to the lack of competition in dissemination of SIP data. Second, the exclusive SIPs are either SROs themselves or affiliates of SROs.771 This gives them a dual role in that they serve as both existing plan processors and as entities selling directly their own proprietary market data products that can reach market participants faster than SIP data, or as affiliates of entities that do so. As discussed above, this may create an additional conflict of interest that could provide incentives making the Equity Data Plan participants that oversee the Equity Data Plans reluctant to improve the content and latency of the SIP data, because a divergence in the usefulness of SIP data provided by the exclusive SIPs as compared to the proprietary data feeds increases the value of the proprietary market data products. B. Baseline The Commission has assessed the likely economic effects of the proposed amendments, including benefits, costs, and effects on efficiency, competition, and capital formation, against a baseline that consists of the existing regulatory process for collecting, consolidating, and disseminating market data, and the structure of the markets for SIP data products and for connectivity and trading services. 1. Current Regulatory Process for Equity Data Plans and SIP Data As discussed above,772 the current regulatory framework for SIP data relies upon a centralized consolidation model, whereby the SROs provide certain quotation and transaction information for each NMS stock to a single exclusive SIP, which then consolidates this data and makes it available to market participants.773 This SIP data includes what historically has commonly been 769 See supra note 21 and accompanying text. infra Section VI.B.2(b). 771 See supra note 42. 772 See supra Section II.A. 773 Id. 770 See E:\FR\FM\24MRP2.SGM 24MRP2 16812 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules referred to as core data, as well as certain regulatory data related to Commission and SRO rules and NMS plan requirements.774 As discussed in more detail below,775 SIP data currently includes transaction information for both round lot and oddlot sized transactions as well as quotation information for round lot top of book quotes for each SRO. Additionally, several exchanges, pursuant to their own rules, aggregate odd-lot orders into round lots and report such aggregated odd-lot orders as quotation information to the exclusive SIPs.776 Thus, SIP data lacks information on odd-lot quotations at prices better than the best bid and offer and on depth of book quotations (i.e., limit orders resting at exchanges at prices outside of the bid and offer). Additionally, only limited auctionrelated information is included in SIP data.777 Currently, the operating committees of the Equity Data Plans, which are governed exclusively by the SROs,778 select the exclusive SIPs to consolidate and disseminate market data to market participants. The selection process for the exclusive SIPs is organized through a bidding process, and once selected, an exclusive SIP has exclusive rights to consolidate and disseminate market data for a given Equity Data Plan.779 Currently, SIAC (a NYSE affiliate) is the exclusive SIP for the CTA and CQ Plans, and Nasdaq is the exclusive SIP for the UTP Plan. As explained above, each exclusive SIP is physically located in a different data center.780 The exchanges’ primary data centers are also located in different locations. Each exchange and FINRA must transmit its quotation and transaction information from its own data center to the appropriate exclusive SIP’s data center for consolidation, at which point SIP data is then further transmitted to market data end-users, which are often located in other data centers. The exclusive SIPs do not compete with each other in the lotter on DSKBCFDHB2PROD with PROPOSALS2 774 Id. 775 See infra Section VI.B.2(a); supra Section III.C.1. 776 See supra Section III.C.1(a). 777 See supra Section III.C.3. 778 Under the Proposed Governance Order, the operating committee of the New Consolidated Data Plan would include non-SRO members. See Proposed Governance Order, supra note 8. 779 The Nasdaq UTP Plan contains the description of its approach to the selection and evaluation of the processor. See Nasdaq UTP Plan, supra note 13, at 10. The CTA/CQ Plan does not contain a similar provision. See CTA Plan, supra note 13; CQ Plan, supra note 13. Historically, exchanges or exchange affiliates had always been selected to be plan processors. 780 See supra Section II.A; supra note 43. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 collection, consolidation, or dissemination of SIP data. As discussed in more detail below,781 the dispersed physical locations of exclusive SIPs and SROs contribute to increased latency in delivering SIP data to market participants. 2. Current Process for Collecting, Consolidating, and Disseminating Market Data As discussed above,782 in addition to the provision of SIP data pursuant to the Equity Data Plans, the national securities exchanges separately sell their individual proprietary market data products directly to market participants via proprietary data feeds. Proprietary data feeds may include SIP data elements and a variety of additional data elements and can vary in content from proprietary top of book products to proprietary depth of book products.783 In addition, in connection with proprietary data feed products, the exchanges offer various connectivity services (e.g., co-location at primary data centers, fiber optic connectivity, wireless connectivity, and point-ofpresence connectivity at third-party data centers), which may result in higher speed transmissions.784 Typically, proprietary data is transmitted directly from each exchange to the data center of the subscriber, where the subscriber’s broker-dealer or vendor (or the subscriber itself) privately consolidates such data with the proprietary data of the other exchanges. This section describes the current content of SIP data and proprietary data feeds, current process of data dissemination, and current process for costs of generating SIP data and proprietary data feeds. (a) Current Content of SIP Data and Proprietary Data Feeds As discussed above,785 today SIP data does not include some of the content that certain market participants rely on when handling customer orders and trading. The Commission preliminarily believes that while a large portion of retail investors rely solely on SIP data for trading decisions,786 a certain 781 See infra Section VI.B.2(a); supra Section IV.A. 782 See supra Section II.A. supra Section III.C.2. 784 See supra note 51 and accompanying text; supra Section IV.A. 785 See supra Section III.C. 786 In response to a question about the need for Nasdaq’s other market data products since the exclusive SIPs consolidate all market data, Nasdaq has stated: ‘‘[t]here are a minority of market participants who want data that go ‘deeper’ than SIP data, such as pending buy and sell interest at different price levels. For these customers of market data, Nasdaq and other firms offer proprietary 783 See PO 00000 Frm 00088 Fmt 4701 Sfmt 4702 portion of market participants do not rely solely on SIP data to trade competitively in today’s markets and instead purchase proprietary data from SROs to supplement or even replace SIP data.787 In particular, the Commission understands that approximately 50 to 100 firms purchase all of the DOB proprietary feeds from the exchanges and do not rely on the SIP data for their trading.788 Conversely, the number of users of the SIP data is much larger (in the millions),789 suggesting that many users rely on the exclusive SIPs alone. This creates significant information asymmetries between market participants who rely solely on SIP data and market participants who also rely on proprietary data feeds. As described in Section II.A above, SIP data consists of certain quotation 790 and transaction data 791 that the SROs are required to provide to the exclusive SIPs for consolidation and dissemination to the public on the consolidated tapes. Specifically, the SIP data includes: (1) An NBBO; 792 (2) the best bids and best offers from each SRO; 793 and (3) information on trades such as prices and sizes. The SIP data also includes certain regulatory data, products that include so-called ‘depth of book’ and related auction data from our exchanges.’’ See Nasdaq, Revenues Trend Down for U.S. Stock Market Data Backbone (Mar. 14, 2018), available at https://www.nasdaq.com/articles/revenues-trenddown-us-stock-market-data-backbone-2018-03-14. 787 The Commission preliminarily believes that when market participants purchase proprietary data feeds to replace SIP data, they also almost always purchase SIP data as a back-up system to proprietary data. See also supra note 101. 788 See supra note 140. 789 As of the fourth quarter of 2018, there were approximately 2–3 million non-professional and approximately 0.3 million professional use cases across the UTP and CTA/CQ SIPs. Additionally, there were approximately 300 non-display vendor use cases at each of the exclusive SIPs. The Commission understands that there is an overlap in subscribers across the exclusive SIPs. See, e.g., CTA Plan, Q3 2019 CTA Tape A & B Quarterly Population Metrics, available at https:// www.ctaplan.com/publicdocs/CTAPLAN_ Population_Metrics_3Q2019.pdf; Nasdaq UTP Plan, Q3 2019 UTP Quarterly Population Metrics, available at https://www.utpplan.com/DOC/UTP_ 2019_Q3_Stats_with_Processor_Stats.pdf. 790 See Rule 602 of Regulation NMS, 17 CFR 242.602. 791 See Rule 601 of Regulation NMS, 17 CFR 242.601. 792 The national best bid and offer are constructed from the best bid and offer prices across all exchanges in which the quoted size is at least one round lot. See supra Section III.C.1. 793 The best bids and offers on an exchange are determined by the best prices in which the quoted size is at least one round lot. Some exchanges aggregate odd-lot orders at better prices into round lots and report such aggregated orders as their best bid or offer at the least aggressive price of the aggregated orders. Typically, the best bids and offers on each exchange are protected quotes under NMS Rule 611 and cannot be traded-through. See supra Section III.C.1(a). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules such as information required by the LULD Plan,794 information relating to regulatory halts and MWCBs,795 information regarding short sale circuit breakers,796 and other data, such as data relating to retail liquidity programs, market and settlement conditions, the financial condition of the issuer, OTCBB data, last sale prices for corporate bonds, and information about indices.797 The exchanges separately sell their individual market data directly to market participants via proprietary data feeds. For example, the exchanges have developed proprietary DOB products that provide greater content (e.g., oddlot quotations, orders at prices above and below the best prices, and information about orders participating in auctions, including auction order imbalances) at lower latencies,798 relative to the exclusive SIPs, for certain segments of the data market, such as automated trading systems. They have also developed proprietary TOB products that provide data that is generally limited to the highest bid and lowest offer and last sale price information at a lower price for another segment of the data market that is less sensitive to latency (e.g., retail or nonprofessional investors and wealth managers that access market data visually).799 Proprietary data feeds are available as part of exchanges’ standard offerings. All exchanges, with the exception of IEX,800 offer for sale as part of their proprietary DOB products the complete set of orders at prices above and below the best prices (e.g., depth of 794 See supra note 38. supra note 39. 796 See supra note 40. 797 See supra note 41. 798 See, e.g., Nasdaq Global Data Products, RealTime—NYSE Proprietary Market Data, and Cboe Equities Exchanges Market Data Product Offerings, supra note 19 (describing low-latency DOB data products). 799 Examples of such proprietary TOB products include NYSE BBO, Nasdaq Basic, and Cboe One Feed. See supra note 19. NYSE BBO provides TOB data. Nasdaq Basic and Cboe One’s Summary Feed provide TOB and last sale information. Nasdaq Basic also provides Nasdaq Opening and Closing Prices and other information, including Emergency Market Condition event messages, System Status, and trading halt information. Cboe One also offers a Premium Feed that includes DOB data. Each of these products is sold separately by the relevant exchange group. See TD Ameritrade Letter, supra note 19, at 5–8 (stating that the lower cost of exchange TOB products, coupled with costs associated with the process to differentiate between retail professionals and non-professionals imposed by the Equity Data Plans, and associated audit risk, favors retail broker-dealer use of exchange TOB products). 800 IEX makes proprietary data available but does not charge for it. See, e.g., IEX, Market Data, available at https://iextrading.com/trading/marketdata/ (last accessed Jan. 8, 2020); Ramsay Letter II. lotter on DSKBCFDHB2PROD with PROPOSALS2 795 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 book data), complete odd-lot quotation information, and information about orders participating in auctions, including auction order imbalances (for listing exchanges).801 One notable gap between SIP data and proprietary DOB data is that SIP data does not include complete odd-lot quotation information even though oddlots represent a large share of all trades in the U.S. stock market and can represent economically significant trading opportunities at prices that are better than the prices of displayed and disseminated round lots.802 While several exchanges aggregate odd-lot orders into round lots and report such aggregated orders as quotation information to exclusive SIPs,803 market participants must purchase proprietary data feeds, available from the exchanges, to see the odd-lot quotations that are priced better than the best bid or offer.804 Odd-lot transactions make up a significant proportion of transaction volume in NMS stocks, including ETPs. As discussed above,805 based on data from the SEC’s MIDAS analytics tool, the daily exchange odd-lot rate (i.e., the number of exchange odd-lot trades as a proportion of the number of all exchange trades) for all corporate stocks ranged from approximately 29% to 42% of trades and the daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of trades in 2018, with the daily exchange odd-lot rate for all corporate stocks exceeding 50% several times in June 2019 (and exceeding 65% several times for the top decile by price) and reaching almost 30% for all ETPs in the same period. Additionally, the staff analysis, referenced above, found that a significant portion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, highpriced tickers, and that as stock prices rise, the difference in spreads calculated using the different feeds also rises, indicating that odd-lots are more likely to set the best quote as stock prices rise.806 In addition, one commenter 801 See supra note 335. Alexander Osipovich, supra note 166. 803 See supra Section III.C.1(a). Exchange rules specify how the aggregation process works in different terms and with different levels of specificity, but many exchanges aggregate odd-lots across multiple prices and provide them to the exclusive SIPs at the least aggressive price if the combined odd-lot interest is equal to or greater than a round lot. See supra notes 157, 158, 789. 804 See supra note 163. 805 See supra Section III.C.1(b). 806 Id. The staff analysis in Section III.C.1(b) found that for the 500 top tickers by dollar volume, odd-lot quotes represented a significant price improvement over the exclusive SIP quotes. This 802 See PO 00000 Frm 00089 Fmt 4701 Sfmt 4702 16813 provided data supporting the findings of the staff analysis and showing that the odd-lot quotes provide superior pricing compared to the SIP data.807 A panelist at the Roundtable stated that odd-lot quotation data is needed to make effective decisions in trading applications and to fill client orders effectively.808 The Commission is unable to differentiate in the data between original round lot quotes and odd-lot quotes that were aggregated by the exchanges to be a round lot quote. The Commission invites comments on this issue. Another gap between SIP data and proprietary DOB data is that SIP data currently lacks quotation information in NMS stocks beyond the top of book 809 even though the decimalization of securities pricing in 2001 led to a dispersion of quoted volume away from the top of book. Consequently, the NBBO currently shown in SIP data became less informative and some market participants have come to view depth of book data as necessary to their efforts to trade competitively and to provide best execution to customer orders.810 Market participants interested in such depth of book data must rely upon the proprietary DOB products offered by the exchanges that include varying degrees of depth data.811 A staff review of depth of book quotations for corporate stocks using data from July 19, 2019, referenced above,812 revealed that there is a substantial amount of quotation volume at several levels below the best bid. During active parts of the trading day, there is quotation interest at every $0.01 increment at least ten levels out for the most liquid stocks; for the least liquid stocks, there is a large gap between the best bid and the next highest bid and large gaps are generally also present between the next several bid levels. The Commission recognizes that market participants have diverse market data needs. Depth of book data can assist SORs and electronic trading systems with the optimal placement of orders across markets. Specifically, depth of book data can help market participants improve trading strategies and lower execution costs by placing liquidity taking orders that are larger than the displayed best bid or best offer analysis further found that as the price of the stock increased, the duration-weighted amount by which the odd-lot quote improved on the SIP quote increased as well. 807 See supra note 177 and accompanying text. 808 See supra note 173 and accompanying text. 809 See supra Section III.C.2. 810 See supra Section III.C.2(d). 811 See supra note 270. 812 See supra Section III.C.2(d). E:\FR\FM\24MRP2.SGM 24MRP2 16814 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules and achieve queue priority for liquidity providing orders that post at prices away from the best bid or offer.813 At the same time, the depth of book data may be less valuable to a certain segment of market participants (e.g., retail or non-professional customers). For example, a relatively small portion of orders execute at prices outside the NBBO indicating that some market participants do not find ‘‘walking the book’’ useful.814 Finally, yet another gap between SIP data and proprietary DOB data is that SIP data includes only limited auctionrelated information even though auctions, especially opening and closing auctions, represent a significant proportion of trading volume on the primary listing exchanges.815 In particular, auctions account for approximately 7% of daily equity trading volume.816 Auctions are important for the implementation of passive investment strategies and generate prices that are used for a variety of market purposes, including setting benchmark prices for index rebalances and for mutual fund pricing. As such, the Commission recognizes that auction information may be valuable to a certain segment of market participants (e.g., those market participants that participate or would participate in auctions). Today, some NYSE auction data, such as pre-opening indicators,817 is disseminated through the CTA/CQ SIP, and no auction information generated by the other primary listing exchanges is distributed through the exclusive SIPs, except very limited LULD information related to auction collar messages.818 Thus while the exchanges’ proprietary data includes detailed information on several aspects of their auctions, only a small subset of the 813 See id.; infra Section VI.C.1(b)(ii). is, an order so large that it executes against all the volume at the top of the book and then executes against orders behind the top of the book. See Craig W. Holden and Stacey Jacobsen, Liquidity Measurement Problems in Fast Competitive Markets, 69 J. FIN. 1760, at Table I (2014) (showing that 3.3% of orders clear outside the NBBO). This does not necessarily mean that limit orders outside the NBBO are irrelevant. There are limitations to using the observation of trades at prices outside the NBBO at the time of trade execution as an indicator for orders that executed at prices outside of the NBBO at the time of trade order (specifically, these events are not necessarily the same thing). 815 See supra note 330. 816 See supra Section III.C.3(c); supra note 348. 817 See NYSE Rule 15. 818 See supra note 333; UTP Plan, UTP Participant Input Specification (Dec. 3, 2019), available at https://www.utpplan.com/DOC/ UtpBinaryInputSpec.pdf. auction-related information is included in SIP data.819 While all listing exchanges make auction information available to market participants through proprietary data feeds, only some exchanges offer this information through specialized feeds for a lower price than full DOB products. For instance, NYSE Order Imbalances is an example of such proprietary auction data product offered by NYSE,820 while Nasdaq does not offer such specialized product.821 Currently, the gap in information between data in the exclusive SIP and proprietary DOB products may limit the current level of price efficiency if market participants with access to proprietary DOB products do not incorporate this information into prices quickly enough through their trading or quoting activity.822 However, the Commission does not know the extent of this possible effect. (b) Current Process for Dissemination of SIP Data and Proprietary Data Feeds As discussed above,823 today SIP data is disseminated to investors and market participants through a centralized consolidation model with an exclusive SIP for each NMS stock, centrally collecting market data transmitted from the dispersed SRO data centers and then redistributing the consolidated market data to market participants who are often in different locations. The SROs typically transmit their market data through fiber optic cables to the SIPs.824 Typically, proprietary data is transmitted directly from each exchange to the data center of the subscriber and does not first travel to a centralized consolidation location. Furthermore, unlike the standardized transmission of SIP data over fiber optic cable, proprietary data is frequently transmitted using low-latency wireless connectivity or other forms of connectivity (often provided by the exchanges) that are faster than fiber.825 lotter on DSKBCFDHB2PROD with PROPOSALS2 814 That VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 819 See, e.g., NYSE, TAQ NYSE Order Imbalance—Quick Reference Card, available at https://www.nyse.com/publicdocs/nyse/data/TAQ_ NYSE_Order_Imbalance_QRC.pdf (last accessed Jan. 8, 2020). 820 See NYSE, Real-Time Data Imbalances, available at https://www.nyse.com/market-data/ real-time/imbalances (last accessed Jan. 8, 2020) (describing the NYSE Order Imbalances product). 821 The Nasdaq Net Order Imbalance Indicator is a feature of Nasdaq’s BookViewer proprietary data feed product rather than a stand-alone product. See Nasdaq, Net Order Imbalance Indicator, available at https://data.nasdaq.com/NOII.aspx (last accessed Jan. 8, 2020). 822 See infra Section VI.D.1. Price efficiency is greater when prices reflect current information faster. 823 See supra Sections I, II.A. 824 See supra Section II.A. 825 Id. PO 00000 Frm 00090 Fmt 4701 Sfmt 4702 There is a significant latency differential between SIP data and the proprietary market data products that are delivered directly to market participants or to market data aggregators who generally have better connectivity, communications, and aggregation technology than the SIPs.826 Specifically, the centralized consolidation model has three sources of latency: (a) Geographic latency; (b) aggregation or consolidation latency; and (c) transmission or communication latency. The latency differentials between SIP data and proprietary data, in their various forms, are meaningful as detailed below, and market participants believe these differentials impact their ability to trade and their order execution quality.827 Geographic latency refers to the time it takes for data to travel from one physical location to another. Greater distances usually equate to greater geographic latency, though geographic latency is also affected by the mode of data transmission. The Commission understands that geographic latency is typically the most significant component of the additional latency that SIP data feeds experience compared to proprietary data feeds.828 Because each exclusive SIP must collect data from geographically-dispersed SRO data centers, consolidate the data, and then 826 See supra note 397; Bartlett and McCrary, supra note 418, at 45. 827 See supra note 412 and accompanying text; Martin Scholtus et al., Speed, algorithmic trading, and market quality around macroeconomic news announcements, 38 J. BANKING & FIN. 89 (2014) (‘‘This paper documents that speed is crucially important for high-frequency trading strategies based on U.S. macroeconomic news releases. Using order-level data on the highly liquid S&P 500 ETF traded on Nasdaq from January 6, 2009 to December 12, 2011, we find that a delay of 300 ms or more significantly reduces returns of news-based trading strategies.’’); Grace Hu et al., Early peek advantage? Efficient price discovery with tiered information disclosure, 126 J. FIN. ECON. 399 (2017) (‘‘Calibrating the speed of price discovery at a finer scale, we find that the first 200;milliseconds at 9:54:58 accounts for 89% of the one-second return at 9:54:58 on negative news days, and 85% of the one-second return at 9:54:58 on positives news days. In other words, most of the price discovery happens during the first 200 milliseconds, faster than the blink of an eye.’’); Tarun Chordia et al., Low Latency Trading on Macroeconomic Announcements (Jan. 2016), available at https:// www.business.unsw.edu.au/About-Site/SchoolsSite/banking-finance-site/Documents/Low-LatencyTrading-on-Macroeconomic-Announcements.pdf (‘‘Trading in the direction of the announcement surprise results in average dollar profits (across market participants) of $19,000 per event for the S&P500 ETF. Profits are larger for index futures, roughly $50,000 per event, yet this dollar amount translates to just two basis points of return relative to the $80 million of notional value traded in the direction of the surprise, and our measured profits do not account for commissions or the expense incurred in subscribing to real-time data services.’’). 828 See supra Section IV.A. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules disseminate it from its location to endusers, which are often in other locations, this hub-and-spoke form of centralized consolidation creates additional latency.829 The Commission understands that the geographic latency of SIP data may be up to a millisecond.830 Aggregation or consolidation latency refers to the amount of time an exclusive SIP takes to aggregate the multiple sources of SRO market data into SIP data and includes the time it takes to calculate the NBBO. This latency reflects the time interval between when an exclusive SIP receives data from an SRO and when it disseminates consolidated data to the end-user. Even though in recent years the exclusive SIPs made improvements to address aggregation latency, the related latency differential remains: as mentioned above, in the second quarter of 2019, for Tapes A and B average quote feed and average trade feed aggregation latencies were 69 and 139 microseconds, respectively.831 In the same time period, the Tape C aggregation latency was an average of 16.9 microseconds for quotes and 17.5 microseconds for trades.832 Notably, these latency differentials remain even though the Equity Data Plans’ operating committees have made some improvements to certain aspects of the exclusive SIPs and related infrastructure, including improvements to address aggregation latency.833 Although exclusive SIPs are tasked with calculating and disseminating the NBBO, at each particular instant the NBBO being used by various market participants could be different due to market participants using proprietary data feeds. In particular, because of geographic and aggregation latencies, market participants that aggregate proprietary data feeds internally or that purchase proprietary data feeds from market data aggregators are likely to have NBBO quotes different from each other and different from the NBBO quote distributed by the exclusive SIPs. Transmission latency refers to the time interval between when data is sent (e.g., from an exchange) and when it is received (e.g., at an exclusive SIP and/ or at the data center of the subscriber), and the transmission latency between two fixed points is determined by the transmission communications technology through which the data is conveyed. Transmission latency also 829 Id. 830 See 831 See supra note 396. supra Section IV.A. 832 Id. 833 Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 varies depending on the geographic distance between where the data is sent and where it is received. There are several options currently used for transmitting market data, such as fiber optics, which typically are used by the exclusive SIPs for receipt and dissemination of SIP data, and wireless microwave connections, which the exchanges offer as an alternative for their proprietary data feeds but not for SIP data.834 Fiber optics are generally more reliable than wireless networks since the data signal is less affected by weather. The modes of transmission for SIP data are typically slower than the modes of transmission used for proprietary data. For instance, the Commission understands that currently each of the CTA/CQ Plan participants must transmit its data through connectivity options that have a roundtrip latency of at least 280 microseconds.835 The Commission preliminarily believes that the benefits of greater speed on the timescales at which the market currently measures latency have mostly to do with being faster than one’s competitors. That is, the Commission understands that a speed increase on the microsecond timescale is less useful unless it makes a market participant faster than its rivals in the market. This means that in some situations small latency differentials that leave enough time for certain market participants to observe and react to information before other, slower market participants can be as costly to slower market participants as larger latency differentials.836 Currently, some market participants obtain proprietary data feeds from many 834 Id. 835 See supra note 410. literature examines the effects of trading speed on revenues, adverse selection, and liquidity. See, e.g., Matthew Baron et al., Risk and Return in High-Frequency Trading, 54 J.Fin. & Quantitative Analysis 993 (2019) (testing the connection between high frequency trading (‘‘HFT’’) latency and trading performance; the authors find that relative latency matters and that ‘‘HFT firms exhibit large, persistent cross-sectional differences in performance, with trading revenues disproportionally accumulating to a few firms.’’ Furthermore, when HFT firms use their relative latency advantages to trade on news to create shortterm arbitrage opportunities, they generate adverse selection on slower traders.); Bruno Biais et al., Equilibrium fast trading, 116 J. Fin. Econ. 292 (2015) (arguing that fast trading technology ‘‘provides advance access to value-relevant information, which creates adverse selection, lowering welfare,’’ and ‘‘generates a negative externality’’); Thierry Foucault et al., Toxic Arbitrage, 30 Rev. Fin. Stud. 1053 (2017) (providing evidence that ‘‘[a]rbitrage opportunities due to asynchronicities in the adjustment of prices to news are toxic because they expose dealers to the risk of trading with arbitrageurs at stale quotes.’’ The authors then claim that these toxic arbitrage opportunities that come with higher trading speed impair market liquidity.). 836 Academic PO 00000 Frm 00091 Fmt 4701 Sfmt 4702 16815 SROs.837 Of these market participants, some prefer to have consolidated proprietary data. There are two ways these market participants can obtain consolidated data. First, market participants may independently create consolidated data by purchasing individual exchange proprietary market data products and consolidating that information for their own use. Second, market participants may obtain consolidated data from market data aggregators, which are mostly firms that purchase direct access to exchange data,838 consolidate the data, and disseminate the data (after various levels of processing) to market participants.839 Additionally, some market data aggregators do not purchase direct access to exchanges. Instead they provide hardware and software for market data aggregation to the parties that have contractual relationships to purchase or license the market data. These market data aggregators offer the opportunity for market participants to outsource the significant hardware, software, and personnel expertise that is required to consolidate the proprietary feeds directly. The products provided by these market data aggregators are used by many of the most sophisticated market participants in the market, and despite the fact that they create an additional chain link between market participants and proprietary feeds, the Commission preliminarily believes that these firms still deliver the data to the market participants faster than the exclusive SIPs.840 (c) Current Costs of Generating SIP Data and Proprietary Data Feeds As mentioned above,841 currently the exclusive SIPs consolidate and disseminate SIP data to market participants. The data fees that exclusive SIPs charge to market participants for obtaining SIP data are set by the operating committees of the Equity Data Plans.842 A portion of the 837 The exchanges, as a subset of SROs, sell proprietary data feeds to market participants. 838 As mentioned below, even when obtaining consolidated market data from market data aggregators, market participants also have to pay data fees directly to the exchanges. See infra Section VI.B.2(c). 839 Market participants who consolidate market data independently may use other market data aggregators’ products and services such as software. 840 See, e.g., Roundtable Day One Transcript at 128–129 (Mark Skalabrin, Redline Trading Solutions). 841 See supra Section VI.B.1. 842 Currently, these fees are immediately effective on filing, although the Commission has the ability to abrogate them. See Rule 608(b)(3)(i) and (iii), 17 CFR 242.608(b)(3)(i) and (iii). The Commission recently proposed to amend Rule 608 to rescind the E:\FR\FM\24MRP2.SGM Continued 24MRP2 16816 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 SIP data revenues is used to pay for the cost of maintaining and administering the exclusive SIP,843 and the remaining funds are distributed to the SRO members proportionately to their trading and quoting activity.844 In the case of the UTP SIP, there is an additional FINRA cost for the oversight of the OTC markets that is also taken out of the exclusive SIP’s revenues before distributing funds to the plan participants. Exclusive SIP revenues from data fees totaled more than $430 million in 2017.845 There are three broad categories of SIP data fees: Access fees, content fees, and distribution/ redistribution fees.846 An access fee is a flat monthly fee for physical connectivity to SIP data and does not depend on the type of market participant (e.g., market data vendor vs. institutional broker). There are three categories of content fees that depend on how market participants access SIP data. First, if SIP data is displayed for market participants on computer screens or other devices, the market participant is charged a display fee (a professional or a nonprofessional subscriber fee depending on the type of market participant). These fees can be per screen displaying the data, per user as part of the multi instance single user (MISU) program, and per application where multiple applications can run on one screen. Second, if SIP data is not displayed on effective-on-filing nature of the fees and make them subject to the procedures in Rule 608(b)(1) and (2) for NMS plan amendments. If adopted as proposed, the Commission would publish a proposed fee and provide an opportunity for public comment on the proposed fee, and the proposed fee would not become effective unless approved by the Commission. See Effective on Filing Proposal, supra note 37. 843 Once an exclusive SIP is selected, upgrades to that processor’s SIP infrastructure are mandated and funded by the operating committee of the relevant Equity Data Plan. This comes out of SIP revenues distributed to the SROs. 844 The market data revenue allocation formula is summarized at, e.g., UTP Plan, Summary of Market Data Revenue Allocation Formula, available at https://www.utpplan.com/DOC/Revenue_ Allocation_Formula.pdf (last accessed Jan. 8, 2020). FINRA rebates a portion of the SIP revenue it receives back to broker-dealer internalizers and ATSs based on the trade volume they report. See FINRA Rule 7610B. One Roundtable commenter estimated that from 2013 to 2017, through the Nasdaq/UTP plan, the FINRA/Nasdaq TRF gave 83 percent of SIP revenue it received to broker-dealers. See Wittman Letter, supra note 290, at 19. 845 See Proposed Governance Order, supra note 8. 846 See, e.g., CTA Plan, Q3 2019 CTA Quarterly Revenue Disclosure, available at https:// www.ctaplan.com/publicdocs/Q3_2019_CTA_ Quarterly_Revenue_Disclosure.pdf; Nasdaq UTP Plan, Q3 2019 UTP Quarterly Revenue Disclosure, available at https://www.utpplan.com/DOC/UTP_ Revenue_Disclosure_Q32019.pdf; Jones Letter, supra note 291. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 computer screens and instead is directly sent to an automated system such as a trading algorithm or a smart order router, then the market participant is charged a non-display fee. Display and non-display fees are monthly fees and entitle the subscriber to an unlimited amount of real-time market information during the month. In 2018, around 65% to 75% of total SIP revenue was accounted for by professional and nonprofessional display fees, and around 8% to 13% of revenue was accounted for by non-display fees.847 A third type of content fee is the query quote fee, which are fees collected from market participants accessing SIP data on a per quote basis. Under the per-query fee structure, subscribers are required to pay an amount for each request for a packet of real-time market information. Around 4% to 10% of total SIP revenue is accounted for by quote query fees in 2018.848 Finally, exclusive SIPs charge distribution/redistribution fees when the market data is delivered to a user other than the initial purchaser. Based on the exclusive SIPs’ public disclosures, as of fourth quarter of 2018 there were approximately 2–3 million non-professional subscription use cases and approximately 0.3 million professional subscription use cases across the UTP and CTA/CQ SIPs. Additionally, there were approximately 300 non-display vendor use cases at each of the exclusive SIPs.849 The Nasdaq UTP SIP operating expenses totaled around $7 million in 2017.850 The CTA/CQ SIP operating expenses totaled around $8.8 million in 2018. The Commission preliminarily believes that there is a substantial difference between the fees market participants pay for SIP data and the fees they pay for proprietary DOB data products. For instance, monthly nondisplay fees charged by the CTA/CQ SIP is $2,000 for Network A and $1,000 for Network B,851 while monthly nondisplay fees charged by NYSE as part of proprietary data feed is $20,000,852 847 Id. 848 Id. 849 See supra note 789. expenses for the Nasdaq UTP Plan represent support costs, paid to the SIP, and are a pre-determined amount agreed upon by the Nasdaq UTP Plan’s SRO participants. The Nasdaq UTP SIP costs do not include the costs of the exchanges generating the data they send to the Nasdaq UTP SIP. The UTP Plan also incurs administrative costs and other miscellaneous expenses, which together totaled around $3.6 million. 851 See CTA Plan, Schedule of Market Data Charges (Jan. 1, 2015), available at https:// www.ctaplan.com/publicdocs/ctaplan/ notifications/trader-update/Schedule %20Of%20Market%20Data%20Charges%20%20January%201,%202015.pdf. 852 See SIFMA Letter. 850 Operating PO 00000 Frm 00092 Fmt 4701 Sfmt 4702 which is an order of magnitude larger than the SIP data fee. Additionally, proprietary data feed fees have increased significantly over the past decade. For instance, SIFMA estimates that between 2010 and 2018 data fees charged by some exchanges went up by three orders of magnitude or more.853 In comparison, SIP data fees went up by 5% during the same time period.854 Based on Commission staff experience, the Commission understands that the number of subscribers to proprietary market data is relatively small.855 The Commission understands that the number of subscribers of proprietary market data and proprietary market data revenues vary across exchanges and that some exchanges obtain a larger percentage than other exchanges of their total market data revenue from proprietary data products (as opposed to revenue from SIP data products). For example, the Commission estimates that in 2018, NYSE collected approximately 5% of its net revenues from selling proprietary market data products. On the other hand, according to the Commission’s estimates, Cboe BYX collected approximately 9% of its revenues from selling proprietary market data products.856 As mentioned above,857 market participants who purchase proprietary data feeds from multiple SROs may 853 See SIFMA Letter. study submitted in connection with the Roundtable contained analysis examining the change in fees that some broker-dealers paid for CTA SIP data between 2010 and 2018. The analysis showed that CTA SIP fees for most categories of data increased by an average of 5% between 2010 and 2018. However, the change in the total amount each broker-dealer spent on CTA SIP data varied based on the type of broker-dealer. The analysis found that the average amount of money spent on CTA SIP data by retail broker-dealers declined by 4% between 2010 and 2017, but the average amount spent by institutional broker-dealers increased by 7%. See id. at 21–28. 855 See supra note 140. 856 See infra Section VI.B.2(d). The Commission estimates are based on NYSE and Cboe BYX’s Form 1 filings and UTP and CTA/CQ revenue metrics. NYSE’s Form 1 filings disclose $968 million as its net revenues in 2018. NYSE’s revenues from the SIP redistribution is approximately $47 million. Note 2 to the exchange’s financial statements states that NYSE collects market data revenues from the exclusive SIPs and ‘‘to a lesser extent for (sic) New York Stock Exchange proprietary data products,’’ indicating that the approximately $47 million in revenues from SIP data could be a benchmark for their proprietary market data revenues. NYSE Form 1, available at https://www.sec.gov/Archives/edgar/ vprr/1900/19003689.pdf (last accessed Jan. 29, 2020). Similarly, Cboe BYX Form 1 filings report $58 million in net revenues. Of this $58 million, $26 million were market data revenue— approximately $21 million from SIP data revenues and $5 million from proprietary market data revenues. Cboe BYX Form 1, available at https:// www.sec.gov/Archives/edgar/vprr/1900/ 19003669.pdf (last accessed Jan. 29, 2020). 857 See supra Section VI.B.2(b). 854 SIFMA’s E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 choose to self-aggregate multiple data feeds, or, alternatively, they can purchase already consolidated data from market data aggregators. The exchanges charge a data fee to any market participant that purchases exchanges’ data from market data aggregators.858 Therefore, these fees are effectively a part of the total price that a market participant must pay when purchasing data from a market data aggregator. In some cases, these fees may be so high that only a subset of market participants can afford to self-aggregate proprietary feeds from all exchanges or purchase market data aggregator products.859 The Commission preliminarily believes that more active market makers and some sophisticated broker-dealers including a number of HFT firms and some of the larger banks with proprietary data feed trading desks either self-aggregate or purchase aggregation services or products from third-party vendors. Based on Commission staff expertise, the Commission understands that the data fees the exchanges charge to market participants that purchase the exchanges’ data from market data aggregators may account for a significant portion of the total price market participants pay for the market data aggregators’ data products. However, the Commission does not have information on the pricing of market data aggregators’ data and cannot break down market data product prices between the direct data fees charged by the exchanges and the fees charged by market data aggregators for their services; the Commission invites comments on the issue. Among other fees, the exchanges charge fees for various connectivity services they offer (e.g., co-location, fiber connectivity, and wireless connectivity). Connectivity services permit a customer to access an exchange’s proprietary market data and/ or its trading and execution systems as well as SIP data. The purchase and use of certain connectivity services is necessary to directly access an exchange’s market data and to directly participate in that market, at least for those market participants that represent the vast majority of trading activity on exchanges. Additionally, these 858 Some exchanges charge redistribution fees or their equivalents to market data aggregators and separately, one or more data fees (based on different use cases such as professional or non-professional, display or non-display) to market participants who purchase the exchanges’ data from market data aggregators. See Virtu Letter I, at 16–79 (Exhibit ‘‘A,’’ lists of data and connectivity fees by several exchanges). 859 See, e.g., Roundtable Day One Transcript at 128–129 (Mark Skalabrin, Redline Trading Solutions). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 connectivity services may be needed in order to take advantage of the reduced latencies offered by the proprietary data feeds, including when market participants prefer the contents of SIP data consolidated from the proprietary data feeds—rather than delivered by an exclusive SIP—to avoid additional latencies. Connectivity fees can be substantial. For instance, the annual fiber connectivity fees per port at the exchanges’ primary data centers are $90,000 at Cboe, $120,000 at Nasdaq, and $168,000 at NYSE.860 Co-location services may have two components: An initial fee and an ongoing monthly fee based on the kilowatt (kW) usage. For example, at NYSE an initial fee for a dedicated high-density cabinet that consumes 9kW per month is $5,000, and an ongoing monthly fee per kW is $1,050.861 At Nasdaq, an initial fee is $3,500, and an ongoing monthly fee is $4,500.862 Thus, for a year of co-location in a dedicated cabinet with 9kW power, these fees add up to over $118,000 for NYSE and over $57,000 for Nasdaq. (d) Current Aggregate Exchange Revenues From Selling Market Data and Connectivity The Commission estimates that in 2018 the exchanges earned a total revenue of approximately $941 million from selling both proprietary and SIP market data products and connectivity services in the equities market. In addition, the Commission estimates that the exchanges earned approximately $596 million of this $941 million revenue from selling market data products and approximately $345 million of this revenue from selling connectivity services. With respect to the revenue from market data products, the Commission estimates that in 2018 the exchanges earned approximately $327 million of the $596 million revenue from equity SIP data and approximately $269 million from selling proprietary data products. Further, approximately $63 million of the $327 million equity SIP revenue in 2018 was distributed to FINRA.863 860 See Letter to Brent J. Fields, Secretary, Commission, from Brad Katsuyama, CEO, Investors Exchange LLC, at Table 7 (Jan. 29, 2019) (‘‘Katsuyama Letter II’’) (10Gb fiber connectivity). 861 See NYSE price list 2020, supra note 408. 862 See Nasdaq, Price List—Trading Connectivity, available at https://www.nasdaqtrader.com/ Trader.aspx?id=PriceListTrading2 (last accessed Dec. 19, 2019). 863 When taking this $63 million into account, total SIP revenues shared by SROs were approximately $390 million in 2018, which is consistent with the $430 million estimate for 2017 noted in the Proposed Governance Order (which also included the amount paid to the plan PO 00000 Frm 00093 Fmt 4701 Sfmt 4702 16817 The Commission’s estimates above are mainly based on revenue information that the exchanges submitted as part of their Form 1 filings.864 In addition, the Commission used SIP revenue information disclosed by the CTA/CQ Plans and the Nasdaq UTP Plan in their quarterly revenue disclosures.865 Furthermore, because revenue information provided by some exchanges in their Form 1 filings is not sufficiently detailed for this calculation, the Commission had to make certain assumptions in order to derive these estimates. First, the Form 1 filings for NYSE and NYSE MKT combine revenue from connectivity fees with revenue from market data fees. For these exchanges, the Commission derived the revenue earned from connectivity fees by assuming that the revenue that these exchanges earn from proprietary data is slightly smaller than the revenue that they earn from SIP data (based on notes in their Form 1 filings which indicate that SIP revenue exceeds proprietary data revenue). Second, the Form 1 filing for Nasdaq combines revenue from connectivity fees with revenue from transaction fees. The Commission derived the revenue that Nasdaq earned from connectivity fees by assuming that Nasdaq’s revenues from connectivity fees and transaction fees were in the same proportion to one another as NYSE’s revenues from these two business lines. Third, Form 1 filings for exchanges that offer trading in both equities and options provide revenue information for these two asset classes combined. For these exchanges, the Commission assumed that their combined revenues from market data fees and connectivity fees in the equities market and in the options market were in the same proportion to one another as the market data and connectivity revenues that these exchanges would have earned in each of these markets based on their dollar volume market share (as compared to the dollar volume market share of the exchanges that trade only equities or only options). 3. Competition Baseline This section discusses, as it relates to this rulemaking, the current state of the market for core and SIP data products, the market for proprietary data processor). See supra note 845 and accompanying text. This estimate is also consistent with the $387 million estimate for 2017. See Jones Letter, supra note 291, at 25. 864 See Commission, National Securities Exchange Periodic Amendments to Form 1 (Modified June 20, 2019), available at https:// www.sec.gov/rules/national-securities-exchangesamendments.htm (providing links to exchanges’ Form 1 filings). 865 See supra note 846. E:\FR\FM\24MRP2.SGM 24MRP2 16818 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 products, the market for connectivity services, and the market for trading services as well as broker-dealers’ competitive strategies for trading services. (a) Current Structure of Market for Core and SIP Data Products As discussed above,866 under the NMS plans, SIP data is collected, consolidated, processed, and disseminated by the exclusive SIPs.867 Equity Data Plan operating committees, which are composed of the SROs, set the fees the exclusive SIPs charge for SIP data.868 Any revenue earned by the exclusive SIPs, after deducting their operating costs and FINRA’s OTC oversight costs, is split among the SROs. FINRA rebates a portion of the exclusive SIP revenue it receives back to brokerdealer internalizers and ATSs based on the trade volume they report.869 The fact that Equity Data Plan operating committees approve all NMS plan proposed fee changes can create conflicts of interest for the SROs because their duties administering NMS plans that either charge or could charge fees could potentially come into conflict with other products the SROs sell or costs they incur as part of their businesses. For example, some of the SROs sell proprietary data products that are considered by some to be substitutes for SIP data. This can create a conflict of interest regarding the three NMS plans that set fees for SIP data because the SROs vote to set SIP fees, own and control the dissemination of data, and set the prices of some of the proprietary data products the exclusive SIPs may compete against. As discussed in detail above, each Equity Data Plan selects a single exclusive SIP through a bidding process to be the exclusive distributor of the NMS plan’s data.870 This grants the SIP a monopoly franchise in the distribution of the NMS plan’s data, which means that the SIPs may not be subject to competitive forces. The Commission acknowledges that there is uncertainty about this conclusion. In particular, the economic literature provides theory and evidence that could predict either more efficient or less efficient outcomes under a monopoly structure. A paper by Demsetz would predict that the current monopolistic structure is most efficient.871 In industries where there are economies of scale, a monopoly 866 See 872 See supra Section II.A. 868 See supra note 842 and accompanying text. supra note 844. 870 See supra Section IV.A. 871 See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & Econ. 55 (1968) (‘‘Demsetz (1968)’’). 869 See 19:07 Mar 23, 2020 infra note 882 and accompanying text. e.g., Oliver E. Williamson, Franchise Bidding for Natural Monopolies—in General and with Respect to CATV, 7 The Bell J. Econ. 73 (1976) (discussing why bidding for monopolies may not work well); Robin A. Prager, Firm behavior in franchise monopoly markets, 21 Rand J. Econ. 211 (1990). 873 See, 867 Id. VerDate Sep<11>2014 structure may lead to the most efficient means of production. This profile applies to the distribution of core data because of the high fixed costs.872 Demsetz (1968) argues that just because an industry has a monopolistic provider of a service does not mean that it is not subject to competitive forces. In particular, Demsetz (1968) argues that if the monopolistic provider of a service is subject to competition in the bidding process it could provide sufficient competitive incentives to achieve a competitive outcome. However, many theories provide examples of situations in which the monopolistic structure is less efficient than other structures.873 The Commission does not believe that the exclusive SIP bidding process provides sufficient competitive incentives for three reasons. First, the bidding process could be subject to conflicts of interest since some of the SROs voting to select the exclusive SIP are also bidding to be the SIP. Second, the contracts are not bid out regularly, so there may not be a significant chance that the current exclusive SIP will be replaced. Third, historically in some cases the bidding process may not be competitive due to the number of bidders. Therefore, the Commission does not believe that the bidding process for exclusive SIPs is likely to produce the most efficient outcome and subject the exclusive SIPs to competitive forces. The exclusive SIPs have significant market power in the market for core and aggregated market data products and are monopolistic providers of certain information, which means that for all such products they would have the market power to charge supracompetitive prices. Fees for core data are paid by a wide range of market participants, including investors, broker-dealers, data vendors, and others. One reason the exclusive SIPs have significant market power is that, although some market data products are comparable to SIP data and could be used by some core data subscribers as substitutes for SIP data in certain situations, these products are not perfect substitutes and are not viable substitutes across all use cases. For example, as mentioned above, some market data aggregators buy direct depth of book feeds from the exchanges and aggregate them to produce products similar to SIP Jkt 250001 PO 00000 Frm 00094 Fmt 4701 Sfmt 4702 data.874 However, these products do not provide market information that is critical to some subscribers and only available through the exclusive SIPs, such as LULD plan price bands and administrative messages.875 Additionally, some SROs offer top of book data feeds, which may be considered by some to be viable substitutes for SIP data for certain applications.876 However, brokerdealers typically rely on the SIP data to fulfill their obligations under Rule 603 of Regulation NMS, i.e., the ‘‘Vendor Display Rule,’’ which requires a brokerdealer to show a consolidated display of market data in a context in which a trading or order routing decision can be implemented.877 The purchase of SIP data or proprietary market data from all exchanges, either directly or indirectly, is necessary for all market participants executing orders in NMS securities.878 SROs have significant influence over the prices of most market data products. For example, the exchanges individually set the pricing of the top of book data feeds that they sell to market data aggregators and broker-dealers that self-aggregate who in turn generate consolidated data. At the same time, SROs collectively, as participants in the national market system plans, decide what fees to set for SIP data.879 Although market data aggregators might compete with the exclusive SIPs by offering products that provide consolidated data, they ultimately derive their data from the exchanges’ direct proprietary data feeds, whose prices are set by the exchanges, a subset of SROs.880 874 The feeds produced by market data aggregators offer additional features, such as lower latency, but usually cost more than SIP data. See Roundtable Day One Transcript at 126–129 (Mark Skalabrin, Redline Trading Solutions). 875 See supra Section III.D, III.E. 876 In the equity markets, the top of book feeds offered by the SROs are usually cheaper than SIP data. However, they may only contain information from one exchange, or one exchange family. See, e.g., Nasdaq Basic, supra note 19; CBOE One, supra note 19; NYSE BQT, supra note 19; TD Ameritrade Letter, supra note 19 (stating that the lower cost of exchange TOB products, coupled with costs associated with the process to differentiate between retail professionals and non-professionals imposed by the SIP Plans, and associated audit risk, favors retail broker-dealer use of exchange TOB products). 877 See Vendor Display Rule, Rule 603 of Regulation NMS; supra Section IV.B.2(a). 878 For example, Rule 611(a) of Regulation NMS requires trading centers to establish policies and procedures to prevent trade-throughs. In order to prevent trade-throughs, executing broker-dealers need to be able to view the protected quotes on all exchanges. They can fulfill this requirement by using SIP data, proprietary data feeds offered by the SROs, or a combination of both. 879 See supra note 842. 880 Pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, SROs must file with the E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Regarding the level of competition among non-SRO market data aggregators that sell consolidated data to market participants, the Commission currently does not have a precise estimate of the number of players in this market and does not know how specialized these players are.881 The Commission invites comments on this issue. Additionally, the production of both core data and proprietary data feeds involves relatively high fixed costs and low variable costs.882 Fixed costs are composed of, among others, costs to set up infrastructure, regulatory approval costs, software development costs, administrative costs and overhead costs, while variable costs include costs to contract with and establish connectivity to each customer. Importantly, fixed costs of the production of both core data and proprietary data feeds are not specific to the production of data but also support the exchanges’ other services such as intermediating trade. In such markets, the firms have additional incentives to increase the number of their customers in order to spread the fixed cost across a larger base of consumers. (b) Current Structure of Market for Proprietary Market Data Products lotter on DSKBCFDHB2PROD with PROPOSALS2 In addition to SIP data, the exchanges voluntarily disseminate proprietary data and charge fees for this data. As noted above,883 the proprietary DOB products are generally characterized as fast, low latency products designed for automated trading systems that include additional content, such as depth of book data, while proprietary TOB products are limited in content, such as the exchange’s top of book quotation information and transaction information and are designed largely for the nonautomated segment of the market (e.g., non-professional investors and wealth managers that access market data visually). Proprietary DOB products typically include odd-lot quotations, orders at prices above and below the best prices (i.e., depth of book data), and information about orders participating Commission proposed rules, in which they set prices for their direct feed data. Those prices can vary depending on the type of end user. 881 The Commission assumes that certain entities from the list of market data vendors published on Nasdaq’s website currently perform the market data aggregator function. See supra note 516. 882 See, e.g., Paul M. Romer, Endogenous Technological Change, 98 J. Pol. Econ. S71–102 (1990) (pointing out that information is fundamentally distinct from other goods because it has a fixed cost of discovery and a near zero cost of replication). 883 See supra Section II.A. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 in auctions, including auction order imbalances. Proprietary data fees have increased significantly over the past decade, as suggested by SIFMA estimates that show that, for some broker-dealers, data fees charged by some exchanges went up by three orders of magnitude or more between 2010 and 2018.884 Correspondingly, exchanges’ revenues from selling proprietary data and connectivity services also went up over the last several years. For example, Budish, et al. (2019) observe that exchanges earn significant revenues from selling proprietary data (as well as connectivity services).885 According to NYSE’s Form 1 filings, its revenues from data services (including connectivity revenues but excluding SIP data revenues) increased approximately 93% from 2014 to 2018. Similarly, Nasdaq’s Form 1 filings show an approximately 21% increase in their revenues from data services (excluding revenues from connectivity services and SIP data revenues). On the other hand, during the same period, revenues distributed back to NYSE by the exclusive SIPs increased approximately 18% and the revenues distributed back to Nasdaq increased approximately 12%. The exchanges’ differences in their reporting of these numbers make it difficult to compare revenue numbers across exchanges. However, for both of these exchanges, their revenues from the proprietary data and connectivity business have been growing faster than the revenues they collect from SIP data.886 Indicia that exchanges may not be subject to robust competition include 884 See SIFMA Letter; Virtu Letter I, at 4 (discussing double ‘‘dipping’’ on fees by the exchanges). 885 See Eric Budish et al., supra note 15. 886 According to its 2014 Form 1 filing, NYSE collected approximately $138 million as market data revenues, covered under the ‘‘data services fees’’ income statement line item. According to the notes to NYSE’s financial statements, these market data revenues include proprietary data revenues, SIP data revenues, and revenues from connectivity services. NYSE’s same revenue line item increased to approximately $236 million by the end of 2018. Whereas during this same time period, the revenues NYSE collected from the exclusive SIPs went from approximately $40 million to approximately $47 million. Nasdaq’s 2014 Form 1 filing discloses approximately $206 million in ‘‘information services’’ line item in its income statement. According to the footnotes to its financial statements, this line item includes Nasdaq’s market data revenues and redistributed SIP revenues but does not include connectivity service revenues. In its 2018 Form 1 filing, Nasdaq disclosed $242 million in revenues under the same information services line item. During the same time period, Nasdaq’s SIP data revenues went up from approximately $76 million to $85 million, a smaller revenue increase relative to its market data revenues. PO 00000 Frm 00095 Fmt 4701 Sfmt 4702 16819 that many broker-dealers state that even in the face of increasing proprietary data fees they feel compelled to buy proprietary data to be able to provide competitive trading strategies for their clients.887 Additionally, some academic research suggests that each particular exchange’s proprietary data has no substitutes for some uses of the data and no perfect substitutes for any uses. For example, Budish et al. (2019) conclude that each exchange has market power with respect to the data products (and the speed technology) specific to that particular exchange because of a lack of substitutes for many applications of their data.888 (c) Current Structure of Market for Connectivity Services Exchanges are exclusive providers of their own connectivity services, and for many market participants, effective trading strategies require connecting to many if not all of the exchanges, making their demand for these connectivity services less elastic (i.e., less sensitive to price changes). The Commission examined data on exchange orders that shows that large broker-dealers (as measured, for example, by the number of messages sent to exchanges) connect to all or almost all exchanges.889 This is consistent with commenters’ and Roundtable participants’ stated view that in order to avoid a competitive disadvantage, market participants have little choice but to purchase direct connectivity services from multiple SROs.890 As mentioned above, the exchanges offer different connectivity options to transmit market data to market participants. These options may include fiber optics connections, wireless microwave connections, and laser transmission, all of which vary in speeds and reliability.891 The fastest and more reliable connections (e.g., laser transmission) offer market participants an advantage over other market participants with slower or less reliable connections. Therefore, the Commission preliminarily believes that the 887 See supra note 598. Eric Budish et al., supra note 15. 889 Based on the sample of audit trail data made available to the Commission by FINRA, firms that are connected to all exchanges account for 76.6% of the message volume (there are 37 such firms out of a total of 327 firms in the sample). Firms that are connected to at least all but one of the exchanges account for 91.6% of the message volume (there are 50 such firms). The FINRA data sample covers the week of December 5, 2016, and includes messages sent to 11 exchanges (NYSE National and Chicago Stock Exchange are not part of this sample). 890 See supra Section III.C.2(c); supra Section II.A. 891 See supra Section II.A. 888 See E:\FR\FM\24MRP2.SGM 24MRP2 16820 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules exchanges have incentives to offer multiple levels of connectivity so that the fastest connections have the least elastic demand and the exchanges could charger higher prices for these connections. lotter on DSKBCFDHB2PROD with PROPOSALS2 (d) Current Structure of the Market for Trading Services in NMS Stocks The market for trading services is served by exchanges, ATSs, and liquidity providers. The market relies on competition to supply investors with execution services at efficient prices. These trading venues, which compete to match traders with counterparties, provide a framework for price negotiation and disseminate trading information. The market for trading services in NMS stocks currently consists of 16 national securities exchanges, as well as off-exchange trading venues including wholesalers 892 and 33 NMS stock alternative trading systems.893 Since the adoption of Regulation NMS in 2005, the market for trading services has become more fragmented. The number of exchanges increased from eight in 2005 to 16 exchanges operating today.894 Additionally, the market shares of individual exchanges became less concentrated, with a shift in market shares from some of the bigger and older exchanges to the newer ones.895 For instance, from 2005 to 2013, there was a decline in the market share of trading volume for exchange-listed stocks on NYSE.896 At the same time, there was an increase in the market share of newer national securities exchanges such as NYSE Arca, Cboe BYX, and Cboe BZX.897 During the same time period, the proportion of NMS stocks trading offexchange (which includes both internalization and ATS trading) increased; for example, as of August 2018, NMS stock ATSs alone comprised approximately 14 percent of 892 Wholesalers are broker-dealers that pay retail brokers for sending their clients’ orders to the wholesaler to be filled internally (as opposed to sending the trade orders to an exchange). Typically a wholesaler promises to provide price improvement relative to the NBBO for filled orders. 893 As of February 7, 2020, 33 NMS stock ATSs are operating pursuant to an initial Form ATS–N. A list of NMS stock ATSs, including access to initial Form ATS–N filings that are effective, can be found at https://www.sec.gov/divisions/marketreg/ form-ats-n-filings.htm. 894 See supra note 660. 895 See Letter to Brent J. Fields, Secretary, Commission, from Edward T. Tilly, Chairman and Chief Executive Officer, Cboe (May 25, 2018), at note 9. 896 See Securities Exchange Act Release No. 76474 (Nov. 18, 2015), 80 FR 80998, 81112 (Dec. 28, 2015) (Regulation of NMS Stock Alternative Trading Systems Proposing Release). 897 Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidated volume, and other offexchange volume totaled approximately 21 percent of consolidated volume.898 Aside from trading venues, exchange market makers provide trading services in the securities market. These firms stand ready to buy and sell a security ‘‘on a regular and continuous basis at a publicly quoted price.’’ 899 Exchange market makers quote both buy and sell prices in a security held in inventory, for their own account, for the business purpose of generating a profit from trading with a spread between the sell and buy prices. Off-exchange market makers also stand ready to buy and sell out of their own inventory, but they do not quote buy and sell prices.900 All of these developments increased the competitiveness of the market for trading services in NMS stocks. However, the Commission recognizes that while the market is more competitive, the actual level of competition that any given trading venue faces may depend on multiple factors including the liquidity of a stock as well as the type of trading venue and market participant engaging in the trade. (e) Broker-Dealers’ Competitive Strategies for Trading Services While many market participants use market data to make investment decisions, not all market participants are equally competitive in their use of real-time data. The Commission understands that while some investors (including retail investors) may use a broker-dealer to execute a trade on their behalf, others, such as the brokerdealers themselves and other latency sensitive traders, utilize sophisticated routing tools to strategically decide how to fill an order on an exchange, including when and where to submit the order, how to split a larger order (i.e., into how many pieces, or ‘‘child orders’’ 901), how large the child order sizes should be, and what order type(s) should be used, e.g., whether to use a market order, limit order, or some other order type. The strategies employed by broker-dealers and other latency sensitive traders in this regard are designed to secure the best possible execution price(s) for an order. For 898 See Securities Exchange Act Release No. 84875 (Dec. 19, 2018), 84 FR 5202, 5255 (Feb. 20, 2019) (Transaction Fee Pilot for NMS Stocks). 899 See Commission, Fast Answers: Market Maker (modified Mar. 17, 2000), available at https:// www.sec.gov/answers/mktmaker.html. 900 See Laura Tuttle, OTC Trading: Description of Non-ATS OTC Trading in National Market System Stocks, Commission (Mar. 2014), available at https:// www.sec.gov/dera/staff-papers/white-papers/otctrading-white-paper-03-2014.pdf. 901 Child order refers to a smaller order that was a piece of a larger ‘‘parent’’ order. PO 00000 Frm 00096 Fmt 4701 Sfmt 4702 example, the Commission understands that methodologies utilized in trading orders can impact the price of the stock being purchased or sold in a manner that can increase or decrease its execution cost. The Commission understands that broker-dealers in particular compete with each other to provide the lowest possible execution costs for their clients (i.e., high execution quality) as quickly as possible. An example of routing tools as noted above is smart order routing (‘‘SOR’’). SORs employ the use of algorithms (e.g., by broker-dealers on behalf of a client) designed to optimally send parts of an order (child orders) to various market centers (e.g., exchange and ATSs) so as to optimally access market liquidity while minimizing execution costs. SORs help to determine how to quickly access (‘‘take’’) available market liquidity before other market participants, and help to determine how to strategically place limit orders to optimize queue priority across various limit order books among exchanges. The ability to optimize queue priority facilitates the ability for a broker to ‘‘capture the quoted’’ spread, i.e., buy on the bid or sell on the offer, while also potentially benefitting from exchange rebates paid to liquidity providers. The Commission understands that data beyond the NBBO with minimal latency are important inputs to strategies designed to optimize the ability to access market liquidity and minimize execution costs. Further, the Commission understands that competing with the most effective SORs is more difficult without possessing real-time market data while minimizing data latency.902 The Commission understands that those traders who do not access trading tools that utilize comprehensive market data with low latency experience higher execution costs on average. 4. Request for Comments on Baseline The Commission requests comments on its baseline analysis. In particular, the Commission solicits comment on the following: 161. Do you agree with the Commission’s assessment of the market failures and the need for regulation to solve market data problems? Why or why not? Do additional market failures exist that are not described in this release? If so, what are they? Please explain in detail. 902 The Commission preliminarily believes that there is also a significant personnel and technological cost to producing a sophisticated, competitive smart order router. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 162. Do you agree that some market participants are unable to rely solely on SIP data to trade competitively in today’s markets? Why or why not? Please explain in detail. If so, what businesses rely on the purchase of proprietary market data? The Commission is also seeking information on the number, type and sizes of market participants that purchase proprietary market data products either directly from exchanges for self-aggregation or through market data aggregators. The Commission requests that commenters provide such information where available. 163. Do you agree that exchanges are disincentivized from making improvements to the content or latency of SIP data? Why or why not? Please explain in detail. 164. Does the Economic Analysis contain all relevant baseline information? If not, what else should the baseline contain? Please explain in detail. 165. How competitive is the selection process for the exclusive SIPs? How does the selection process affect the performance of the SIP? How does past performance factor into the selection process? Please explain in detail. 166. The Commission is seeking information on the number of market participants that rely solely on SIP data for their trading needs, and, separately, on the number of market participants that do not rely solely on SIP data for their trading needs. The Commission requests that commenters provide such information where available. 167. The Commission is seeking information on the consequences (both positive and negative) of the limited amount of odd-lot quotation information currently included in SIP data. Please be specific about exact odd-lot quotation information that results in these consequences and provide data analysis where possible. Do the consequences vary across stocks and/or exchanges? Please explain and provide data analysis where possible. 168. The Commission is seeking information on the consequences (both positive and negative) of the lack of depth of book information currently included in SIP data. Please be specific about exact depth of book information that results in these consequences and provide data analysis where possible. Do the consequences vary across stocks and/or exchanges? Please explain and provide data analysis where possible. 169. The Commission is seeking information on the consequences (both positive and negative) of the lack of auction-related information currently included in SIP data. Please be specific VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 about exact auction-related information that results in these consequences and provide data analysis where possible. Do the consequences vary across stocks and/or exchanges? Please explain and provide data analysis where possible. 170. The Commission requests comment on the scope and content of exchange proprietary data feeds. Are the proprietary data offerings similar across exchanges? Please explain in detail. 171. What are the consequences of the differences in latency between the SIP and proprietary feeds? Please explain in detail. 172. The Commission requests comment on the comparison of SIP versus proprietary data access experiences and costs. How do the types of fees and discount programs compare? Do the exclusive SIPs offer services that target the same clients as the exchanges do? Please explain in detail. Do exclusive SIPs offer services that target the same clients as third-party aggregators? Please explain in detail. 173. The Commission is seeking information on specific revenues and expenses associated with processing and disseminating market data by market data aggregators. The Commission requests that commenters provide such information where available. 174. The Commission is seeking information on pricing of market data aggregators’ data and the breakdown of such product prices between the direct data fee charged by the exchanges and the fees charged by market data aggregators for their services. The Commission requests that commenters provide such information where available. 175. Do you agree with the Commission’s competition baseline? Why or why not? Please explain in detail. 176. Do you agree that the exclusive SIPs have market power? Why or why not? Please explain in detail. 177. Do you agree with the Commission’s assessment of the state of competition in the market for core and aggregated market data products in the equities market? Why or why not? Please explain in detail. What is the magnitude of this market? What are the total expenses incurred by brokerdealers on market data products? What are the total revenues earned by exchanges on market data products? Who else incurs costs or earns revenues on market data products? 178. The Commission requests that commenters provide information on the number of players in the market data aggregator space, and provide PO 00000 Frm 00097 Fmt 4701 Sfmt 4702 16821 information on how specialized these companies are. 179. To what extent is it necessary for market participants executing orders in NMS securities to purchase market data from all SROs? Please explain in detail. 180. How does the market for proprietary data differ from the market for consolidated data? Please explain in detail. 181. Do you believe that exchanges have significant market power in the market for proprietary data products? Why or why not? Please explain in detail. 182. In what situations can top of book data products serve as substitutes for SIP data in the equities market? In what situations are top of book data products not viable substitutes for SIP data? Please explain in detail. 183. Do you agree with the Commission’s assessment of the market for connectivity services? Why or why not? Please explain in detail. Do you believe that exchanges have significant market power with respect to connectivity services? Why or why not? Please explain in detail. What is the magnitude of this market? What are the total expenses incurred by brokerdealers on connectivity services? What are the total revenues earned by exchanges on connectivity services? Who else incurs costs or earns revenues on connectivity services? 184. Do you agree with the Commission’s assessment of the market for trading services? Why or why not? Please explain in detail. How does market data and connectivity relate to the market for trading services? Can market power in one market translate into market power in another? Please explain in detail. 185. Characterizing competitors as producers (an entity that creates a good or service for trade) or intermediaries (an entity that facilitates the trading of goods or services produced by others) could have implications for the competitive landscape. To what extent are exchanges producers versus intermediaries in market data products and/or other services (e.g., execution services, connectivity services)? Please explain in detail. 186. To what extent is market execution on one exchange a substitute for execution on another exchange? To what extent are they complements? Please explain in detail. 187. To what extent is market data from one exchange a substitute for market data from another exchange? To what extent are they complements? Please explain in detail. E:\FR\FM\24MRP2.SGM 24MRP2 16822 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules C. Economic Effects of the Rule lotter on DSKBCFDHB2PROD with PROPOSALS2 1. Core Data and Consolidated Market Data The Commission preliminarily believes that the proposed enhancements to consolidated data, namely expanding core data and the amendments to the definitions of ‘‘national best bid and offer’’ and ‘‘protected bid or protected offer,’’ would result in numerous economic effects. These economic effects derive from codifying the definition of core data, from expanding the content of the core data, and from changing the prices that determine the NBBO and the protected quotes. The proposed change would have the benefit of mitigating the influence of existing conflicts of interest inherent in the existing exclusive SIP model.903 The proposed change establishes a required amount of data to be included in proposed consolidated market data, and thus reduces the divergence between exchanges’ proprietary DOB products and current SIP data. (a) Definitions of Consolidated Market Data, Core Data, Administrative Data, and Regulatory Data The Commission’s proposed definitions of ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘regulatory data,’’ ‘‘administrative data,’’ and ‘‘exchangespecific program data’’ under Regulation NMS would specify the quotation and transaction information in NMS stocks that must be collected, consolidated, and disseminated under rules of the national market system and pursuant to an effective national market system plan(s). This definition would codify the dissemination of certain current SIP data elements, and would include some additional data elements, but would not include some data that the exclusive SIPs currently disseminate. This section discusses the secondary economic effects of this proposed expansion to core data that would come from codifying the inclusion of some current SIP data in ‘‘core data,’’ while the next section discusses the economic effects of expanding the content of core data. These secondary effects are providing flexibility to the Data Plans for including new data elements, requiring that regulatory data would continue to be provided in the decentralized consolidation model, cost to update the national market system plan(s), and costs to obtain data that is currently in SIP data but not in proposed consolidated market data elsewhere. 903 For a discussion of these conflicts of interest, see supra Section VI.A.2. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 The proposed definitions of ‘‘exchange-specific program data,’’ ‘‘regulatory data’’ and ‘‘administrative data,’’ along with the proposed ability for the Equity Data Plans to add elements to these proposed definitions, promotes regulatory efficiency by providing flexibility for consolidated market data to include data elements beyond those explicitly defined as ‘‘consolidated market data’’ in the proposal. It provides a mechanism for the participants in the national market system plan(s) to propose to add additional data elements, such as elements similar to current retail liquidity programs. This would allow for organic change in consolidated market data that may become useful due to future market and regulatory developments. Further, while the underlying data elements of ‘‘regulatory data’’ are currently included in disseminated SIP data, the proposed definition of ‘‘regulatory data’’ would help ensure that market participants continue to have access to this information. The Commission recognizes that market data plans would incur one-time initial implementation costs in ensuring the plans are consistent with the proposed definitions of ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘administrative data,’’ ‘‘regulatory data,’’ and ‘‘exchange-specific program data,’’ but the plans would not incur significant ongoing costs as a result of the codification of these five definitions.904 These initial implementation costs would come from the operating committees needing to draft revisions to their respective plans that are consistent with the proposed definitions. The Commission preliminarily believes that not including some data elements that the exclusive SIPs currently transmit 905 in the definition of ‘‘consolidated market data’’ could have some costs to those market participants who would want to arrange to get this data elsewhere. As discussed above, the UTP SIP offers OTCBB quotation and transaction feeds for unlisted stocks, and the CTA Plan permits the dissemination of ‘‘concurrent use’’ data related to corporate bonds and indexes.906 As proposed, these data elements would not be defined as consolidated market data or core data elements. However, the proposal would not preclude the 904 Below in Section VI.C.1(b)(iv), the Commission discusses the costs of including data elements to the proposed definition of ‘‘core data’’ that are not currently in SIP data. 905 See supra Section III.B. 906 See supra Section III.C. PO 00000 Frm 00098 Fmt 4701 Sfmt 4702 provision of these data elements by the SROs via proprietary data products to market participants and investors who wish to receive them. (b) Expanding Core Data Content As discussed above,907 the Commission proposes to define core data to include certain odd-lot quote information, certain depth of book data, and information on orders participating in auctions. This section discusses the economic effects of expanding the core data content separately for each additional core data element and then discusses the additional economic effects that may accrue to market participants from the combined new core data elements, although market participants may choose not to take in all of the new core data elements in every instance. The economic effects discussed in this section depend on the fees for core data charged by the effective national market system plan(s) for NMS stocks and the competing consolidators. The fees for new core data are discussed later.908 (i) Effects of New Round Lot Definition The Commission proposes to define a round lot according to a tiered system based on the price of the stock.909 This definition would result in the inclusion of quotes at better prices in core data that were previously excluded from being reported because they consisted of too few shares. These new quotes would now become visible to anyone who subscribes to core data, thereby improving transparency. The Commission preliminarily believes that the proposed changes to the round lot definition would create an economic benefit for market participants who currently rely exclusively on SIP data to obtain market information, and for market participants who post odd-lot quotes at prices superior to the NBBO. These market participants would benefit from being able to see more information on these smaller quotes at better prices before they send in their orders, which could improve their trading decisions and order execution quality by providing an opportunity to realize gains from trade,910 as discussed below in this section.911 The proposed change 907 Id. 908 See infra Section VI.C.1(b)(iv). supra Section III.C.1(d)(i). 910 See supra note 754. 911 The proposed round-lot definition may benefit retail investors even without changes to their decision to submit orders based on seeing the priceimproving quotes. This is because the proposed round-lot definition would likely cause the NBBO to become narrower, and this would affect the execution quality provided by retail wholesalers to 909 See E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules could also improve price efficiency. This is because certain odd-lot information not currently disseminated as part of SIP data would be made available as part of proposed core data; therefore market participants who use SIP data who previously did not use the information contained in odd-lots would be able to incorporate this information into their trading decisions. These trading decisions are integral to how market prices are formed. Also, the proposed change could affect order routing and the share of order flow received by each exchange, since more traders will be aware of quotes at better prices that are currently in odd-lots sizes, and these may not be on the same exchange as the one that has the best 100 share quote. The Commission preliminarily believes that changing the round lot definition to include smaller-size orders would be a significant benefit for market participants who would have traded with price-improving odd-lot quotes in certain stocks but do not do so because they cannot see information on odd-lot quotes.912 Under the proposed rule, some of these quotes at better prices would be reported as the NBBO in the new core data. This would mean that these traders would be able to see the quotes,913 and make a decision about whether to trade based on this newly visible, improved price. This may benefit traders because they would be able to realize the gains from trade that are available in this situation and are not currently occurring because of the lack of information. Also, some traders may wish to exchange an odd-lot quantity of a stock by posting a limit order for an odd-lot amount. Currently, this order’s price is not visible to traders who rely solely on SIP data, and thus lotter on DSKBCFDHB2PROD with PROPOSALS2 retail investors. See infra Section VI.C.1(c)(i) for additional discussion on this point. 912 Currently, some information about odd-lot quotes ends up in core data through certain exchanges rolling up odd lot quotes. But even in this case, the rolled up quote is reported to the exclusive SIPs at the worst price out of all the oddlots that were rolled up to produce the quote, so the full amount of price improvement available on that exchange is still not visible to market participants relying solely on exclusive SIPs for market data. 913 The traders able to see these quotes as a result of the proposed round-lot definition would include retail investors as a result of the Vendor Display Rule, among others. See supra Section III.C.1(d)(i). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 there may be delays in getting this limit order filled, since such traders would not send market orders in. Thus, adding smaller-size quotes in core data for certain stocks would result in a benefit to both the market participants who would submit the market orders and the market participants who post the oddlot quotes they execute against. The magnitude of this benefit depends on the amount of additional trading generated by the inclusion of odd-lot information. In particular, the Commission preliminarily believes that to the extent many market participants who rely solely on SIP data and lack information on odd-lot quotes would have traded frequently against odd-lot quotes had they known about them, the benefit would be large. However, if it is uncommon for market participants who would trade frequently against odd-lot quotes to rely solely on SIP data and to lack information on odd-lot quotes, then the Commission preliminarily believes that the associated economic benefit from including odd-lot quotes in core data would be small. The Commission preliminarily believes it is not possible to observe this willingness to trade but for lack of information with existing market data, and invites comments on this issue. However, the Commission can quantify the frequency with which the hypothetical trader discussed above would see better prices under the new round lot definition in the current market environment. Based on this quantification, the Commission preliminarily believes that market participants relying on new core data would see a significant improvement in quoted spreads within a large percentage of the dollar volume of stock trading. Specifically, Table 4 shows the percentage of instances in a sample of MIDAS data that the NBBO provided at the time by an exclusive SIP 914 was inferior in price to the price of a round lot computed according to the new definition in the proposed rule. For instance, the table shows that for stocks with prices of $1,000 or greater, the new round lot definition would cause a 914 Since the source used for this SIP NBBO is an exclusive SIP itself, this quote includes quotes the exchanges produce by aggregating or ‘‘rolling up’’ odd-lots to obtain a round lot-sized quote. PO 00000 Frm 00099 Fmt 4701 Sfmt 4702 16823 quote to be displayed that improved on the current round lot quote 92.2% of the time. The frequency of this instance of price improvement appears to increase uniformly through the round lot tiers in the sample, starting lower at 9.7% for the $50.01–$100 tier. This analysis shows that, within each round lot tier in which the round lot size would change, there is a significant number of instances in which the new round lot definition would improve the quoted spread. The quantity of instances of price improvement as a result of the new round lot definition depends on the volume of stocks in the tiers for which the round lot size would change. Table 1 above documents the number of stocks in each tier. It shows that while most stocks (80.9%) would remain unaffected by the new round lot definitions, most of the dollar trading volume, around 68.3%, currently is in stocks that would have a new round lot definition under the proposed rule. Based on this analysis, the Commission preliminarily believes that a meaningful amount of dollar volume is concentrated in stocks that would have significant changes to the quoted spread displayed under the new round lot definition. The amount of price improvement available in the event that any price improvement is available, is also a relevant consideration when deciding whether to trade. Table 5 quantifies the average price improvement offered by the best quote under the new round lot definition, conditional on the event that price improvement is available in the first place. The table shows, for example, that the new round lot definition in the $50.01–$100 tier could yield an 8 basis point reduction in the spread (conditional on a price improving quote being available). Since the average quoted half spread is 31 basis points, this represents a significant reduction in the half spread. In the case of the $1000+ tier, the difference of 8.8 basis points represents an even more significant fraction of the 17 basis point average half spread. Based on this analysis, the Commission preliminarily believes that the size of price improvement, conditional on it being available, is also substantial. E:\FR\FM\24MRP2.SGM 24MRP2 16824 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules TABLE 4—INSTANCES OF PRICE IMPROVEMENT Instances of price improvement (%) 3 Round lot tier 1 2 Best bid 1. 2. 3. 4. 5. < = $50 ..................................................................................................................................... $50.01–$100 ............................................................................................................................ $100.01–$500 .......................................................................................................................... $500.01–$1000 ........................................................................................................................ 1000.01+ .................................................................................................................................. Best ask n/a 5.3 11.5 46.8 73.5 n/a 5.0 11.4 50.1 70.5 Best bid or best ask n/a 9.7 20.6 72.8 92.2 1 Tier based on the stock’s prior calendar month’s average closing price on the primary listing exchange in August 2019. stocks were excluded due to trading in round lots different than 100 shares (i.e., 1 or 10 shares: Symbols BH, BH.A, BRK.A, DIT, MKL, NVR, and SEB). 3 Overall frequency of price improving NBBO quotes during September 2019 using the proposed round lot tier criteria versus the current 100 share round lot criteria (see footnote 4 of Table 5 for more details). An instance of a price improving quote is calculated from a sample of MIDAS data, which consists of hourly snapshots from 10:30 a.m. to 3:30 p.m. for each trading day in September 2019. Calculation is based on the difference between the best bid/best ask calculated under the new round lot tier definition (source: direct feeds) compared to the NBBO based on the current 100 share round lot criteria (source: SIP). 2 Seven TABLE 5—SIZE OF PRICE IMPROVEMENT Round lot 1. 2. 3. 4. 5. Best bid: Average price improvement ($) 3 tier 1 2 < = $50 ................................................................................. $50.01–$100 ........................................................................ $100.01–$500 ...................................................................... $500.01–$1000 .................................................................... 1000.01+ .............................................................................. Best ask: Average price improvement ($) 3 n/a 0.09 0.15 0.79 1.35 Average difference in quoted half spread (%) 4 n/a 0.12 0.14 0.89 1.36 n/a 0.080 0.044 0.080 0.088 SIP: Average quoted percent half spread (%) n/a 0.31 0.14 0.22 0.17 1 Tier based on the stock’s prior calendar month’s average closing price on the primary listing exchange in August 2019. stocks were excluded due to trading in round lots different than 100 shares (i.e. 1 or 10 shares: Symbols BH, BH.A, BRK.A, DIT, MKL, NVR, and SEB). 3 Overall frequency of price improving NBBO quotes during September 2019 using the proposed round lot tier criteria versus the current 100 share round lot criteria. Conditional on a the instance of a price improving quote, stock-day average price improvement is calculated from a sample of MIDAS data, which consists of hourly snapshots from 10:30 am to 3:30 pm for each trading day in September 2019. Calculation is based on the difference between the best bid/best ask calculated under the new round lot tier definition (source: direct feeds) compared to the NBBO based on the current 100 share round lot criteria (source: SIP). 4 Conditional on a the instance of a price improving quote (bid or ask), stock-day average difference in percent quoted half spread is calculated by SIP NBBO quoted percent half spread minus the new percent quoted half spread under the proposed round lot tier criteria. Quoted half spread is defined by: Quoted half-spread = QSit = 100 * (Askit¥Bidit) / (2*Mit), where M is the midpoint between the best bid and best ask. 2 Seven lotter on DSKBCFDHB2PROD with PROPOSALS2 The Commission preliminarily believes that the new round-lot definition would benefit market participants who utilize strategies related to order routing, provided that they do not already obtain information on odd-lots from proprietary feeds. For instance, traders who wish to fill an order at the best possible price, including at sizes of less than 100 shares, would be better able to do so if the new round lot sizes are visible to them, e.g., the exchange with the best 100 share quote may not be the exchange with the best 10 share quote.915 The use of this information could improve order execution quality 915 Battalio, Corwin, and Jennings (2016) examines the frequency of trading at inferior prices as compared to available unprotected odd-lot quotes in a sample of 10 high-priced stocks during one week in 2015. They find that there was an unprotected odd-lot limit order available at a better price for 2.52% of the trades that occurred. See Robert Battalio et al, Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks, 12 J. Trading 35 (2016). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 and facilitate best execution for these traders.916 The Commission preliminarily believes that many of the market participants who utilize such strategies already have access to full odd-lot information via proprietary feeds; for these traders the proposal would not produce a direct benefit.917 Also, the Commission preliminarily believes that there may be market participants that would start running these order routing strategies if the data were available to them at prices comparable to SIP data. These market 916 For discussion of order execution quality and the provision of execution services by brokerdealers, see supra Section VI.B.3(e). 917 The new round-lot definition may benefit those market participants who already obtain oddlot information by providing them with alternatives to proprietary feeds. For discussion of this effect, see infra Section VI.C.4(a). Also, the Commission preliminarily understands that some market participants who use proprietary feeds as their main source of market data also use the SIP feeds as a backup. For such market participants, the change in the round lot definition may improve the value of a core data feed as a backup. PO 00000 Frm 00100 Fmt 4701 Sfmt 4702 participants might currently find that the value of attempting such strategies without information on odd-lots is too low to justify running the strategies, but they might find that access to data on such orders through the new round-lot definition would enable them to run such strategies effectively. To the extent that such market participants exist, the change to the round-lot definition would be a benefit to them as well.918 The Commission preliminarily believes that the new round lot definition could improve price efficiency. The wider availability of information about smaller-sized quotes could mean that more market participants (who currently rely solely on SIP data) would incorporate the information contained in those quotes into their trading decisions. This could have the effect of improving the 918 For further discussion of new entrants to the competitive order routing business, see infra Section VI.C.4(b). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules efficiency with which this information becomes reflected in prices.919 The Commission preliminarily believes that the new round lot definition could cause changes to order flow as market participants change their trading strategies to take advantage of newly visible quotes.920 This could mean that there would be changes to the share of order flow each exchange receives as a result of this rule. The Commission is uncertain about the magnitude and direction of this effect, and invites comments on the issue. The Commission preliminarily believes that the use of the previous calendar month’s average closing price on the primary listing exchange to determine the round lot tier for a given stock balances certain tradeoffs that should be considered when selecting such a benchmark. The Commission is balancing a more up-to-date stock price estimate against the costs imposed on market participants from having to frequently make updates to systems and practices to account for changes to a stock’s round lot tier. A more recent average (e.g., the past week’s average closing price) may better reflect the stock’s current price level, and thereby lead to the stock being placed in the correct tier more frequently. However, such a recent estimate may be more volatile and thus more prone to causing frequent changes to the stock’s status, especially if the stock’s price level is close to a round lot tier cutoff point, which could then require more frequent adjustments from market participants, including SROs and competing consolidators, to account for what a stock’s round-lot tier is and what the NBBO for that stock would be given its tier. lotter on DSKBCFDHB2PROD with PROPOSALS2 (ii) Effects of Addition of Depth of Book Information The Commission proposes to add certain depth of book information to the definition of core data, which would result in this information becoming available to anyone who subscribes to this element of core data. The Commission preliminarily believes that this information could be useful in trading, and therefore disseminating this 919 For additional discussion of the price efficiency point, see infra Section VI.D.1. 920 For example, currently a market participant, relying on SIP data, may submit an order to the exchange with the exclusive SIP NBBO and in the process trade at an inferior price to an odd-lot quote that the market participant was not aware of on another exchange. If the market participant would have preferred to route to the price-improving oddlot quote, and if that quote would count as a roundlot under the proposal, then under the proposal the market participant would send the order to the exchange with the smaller, price improving quote. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 information as an element of core data could have the effect of causing changes to the trading strategies of those market participants who currently rely solely on SIP data. This could potentially lead to these traders being able to reduce their execution costs and facilitate best execution, changes in order flow to different exchanges, improvements in price efficiency of markets, and gains from trade that are not currently being realized. The Commission preliminarily believes that adding the depth of book information as an element of core data would benefit traders who previously relied exclusively on SIP data and who, as a result of the proposed rule, would receive information they previously did not get. Academic research has found evidence that valuable trading information can be obtained from the full depth of a limit order book.921 As noted above, market participants also believe that depth of book information is valuable.922 Currently, only traders who subscribe to exchanges’ proprietary data feeds can receive this information. As a result of the proposed amendments, additional depth of book information would become available to anyone who subscribes to these elements of core data. The Commission preliminarily believes that market participants that currently rely solely on SIP data could use the additional depth of book information to improve trading strategies and to lower execution costs. To the extent that the advantage of having this information depends on other traders not having it, this economic effect would represent a transfer from the current users of depth of book information to those market participants who would now get access to, and would be able to utilize, this information. In particular, a more widespread dissemination of depth of book information may cause market prices to adjust to this information more rapidly as more people react to this information. Once market prices settle to a level that reflects this information, the opportunity to profit from having 921 See Lawrence E. Harris and Venkatesh Panchapagesan, The Information Content of the Limit Order Book: Evidence from NYSE Specialist Trading Decisions, 8 J. Fin. Mkts. 25 (2005); Jonathan Brogaard et al., Price Discovery without Trading: Evidence from Limit Orders, 74 J. Fin. 1621–1658 (2019); Shmuel Baruch, Who Benefits from an Open Limit-Order Book?, 78 J. Bus 1267 (2005), available at https://www.jstor.org/stable/ 10.1086/430860 (presenting some theoretical results showing that liquidity takers benefit more from an open limit order book). 922 See supra Section III.C.2(c) (describing how market participants have stated that they believe they need depth of book information in order to run their businesses). PO 00000 Frm 00101 Fmt 4701 Sfmt 4702 16825 additional depth of book information may be lost. The Commission preliminarily believes that market participants who utilize strategies related to order routing, order placement, and order execution, could benefit from the new depth of book information, provided that currently they do not already obtain this information via proprietary data feeds. For instance, traders may seek to get priority in the queue at a particular price level behind the top of book by posting a limit order. Such a strategy could benefit from being able to see the depth at these price levels at multiple exchanges in order to evaluate which exchange’s queue would provide the order with the highest execution priority. To the extent this is the case, the Commission believes that the traders who previously did not have access to additional depth of book information would benefit by being able to better run such strategies. This could improve order execution quality for these traders.923 The Commission preliminarily believes that many of the market participants who utilize such strategies already have access to full depth of book information via subscriptions to proprietary feeds; for these traders the rule would not produce a direct benefit.924 The Commission is unable to quantify the number of market participants who currently run these types of strategies without using depth of book information because the Commission does not have access to information on specific strategies utilized by individual traders in the market.925 Also, the Commission preliminarily believes that there may be market participants that would start running these order routing strategies if the data were available to them at core data 923 For discussion of order execution quality and the provision of execution services by brokerdealers, see supra Section VI.B.3(e). 924 The inclusion of depth of book information may benefit those market participants who already use depth of book information by providing alternatives to proprietary feeds. For discussion of this effect, see infra Section VI.C.1(b)(iv). Also, the Commission preliminarily understands that some market participants who use proprietary feeds as their main source of market data also use the exclusive SIP feeds as a backup. For such market participants, the expansion of DOB information may improve the value of a core data feed as a backup. 925 The Commission preliminarily believes that it is possible that the inclusion of this information in the proposed definition of core data, along with reductions in the latency differential that would result from the decentralized consolidation model, could benefit market participants who do not currently run these strategies but who would choose to start running them as a result of the proposed changes. For more discussion on this possibility, see infra Section VI.C.4(b). E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16826 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules prices. These market participants might currently find that the value of attempting such strategies without DOB data is too low to justify them, but that access to additional DOB data through these elements of new core data would enable them to run such strategies effectively. To the extent that such market participants exist, the additional DOB data would be a benefit to them as well. The revision in trading strategies discussed above could result in changes to the decisions traders make about where to route their orders among the various exchanges. Market participants may find that depth of book information suggests trading opportunities on exchanges to which they would not have otherwise routed their orders. The Commission is uncertain about the magnitude of this effect or which exchanges may gain or lose order flow as a result. The Commission cannot determine how many market participants may choose to change routing strategies as a result of the new depth of book information, nor to what extent the new depth of book information would cause market participants to change where they route their orders. The Commission invites comments on this issue. Also, the Commission preliminarily believes that the more widespread dissemination of depth of book information could result in more efficient pricing.926 The Commission preliminarily believes that as more traders take advantage of information contained in the depth of book data, prices would reflect this information more quickly. Therefore, more widespread dissemination of depth of book information has the potential to lead to pricing that better reflects available information. If many current users of SIP data are capable of utilizing the information in the new core depth of book data, this effect may be large, but if only a few choose to make use of the new data or are capable of utilizing it, then this effect would be small. The size of this effect depends on the willingness and ability of current market participants who currently rely solely on SIP data to make use of the information in the new depth of book data, which is unobservable. The Commission preliminarily believes that there may be gains from trade that would be realized as a result of adding this depth of book information as an element of core data. The possibility for this benefit to materialize relies on the extent to which there exist 926 For further discussion of this point, see infra Section VI.D.1. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 traders who would be willing to send orders that ‘‘walk the book’’ 927 but currently do not do so because they do not see what is beyond the top of the book. This situation represents an economic inefficiency because there are potential gains from trade that are not realized because of a lack of information. This would presumably be a benefit to both the trader walking the book and the traders who posted orders behind the BBO that would be filled as a result of the trade. Relatively few orders actually execute at prices outside the NBBO,928 which implies that trading against quotes away from the NBBO on a single exchange, using a single marketable order, does not occur frequently. In addition, an analysis of a sample of trading in ten stocks on the Nasdaq exchange found that an average of 0.65% of market orders walked through the best displayed price level for these ten stocks.929 Therefore, the Commission preliminarily believes that there may be limited benefits from additional DOB information in the particular hypothetical case of traders who currently rely solely on SIP data for market information and who would submit market orders to trade against limit orders beyond the top of the book on a single exchange if the depth of book information were available. However, the size of the benefit depends on the willingness of traders to walk the book after receiving the new DOB information, as well as their trading interest, and this is unobservable in the current market. (iii) Effects of Addition of Auction Information The Commission proposes to add ‘‘auction information’’ as an element of core data. This proposal would result in all auction information currently disseminated by exchanges via proprietary data feeds being made available to subscribers of these elements of core data feeds. The Commission preliminarily believes that the addition of auction information as an element of core data would make this information more readily available to anyone who subscribes to these elements of core data and would have effects that include changes to market participants’ trading strategies, gains from trade as a result of new 927 See supra note 814. supra note 814. 929 See Nikolaus Hautsch and Ruihong Huang, Limit Order Flow, Market Impact and Optimal Order Sizes: Evidence from NASDAQ TotalViewITCH Data, at 10, Table 3 (Aug. 22, 2011), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=1914293. 928 See PO 00000 Frm 00102 Fmt 4701 Sfmt 4702 participation in auctions, potential improvements to price discovery in auctions, changes to order routing decisions, and a significant reduction in the value of dedicated proprietary auction feeds. As discussed above, some auction information is currently available to market participants through specialized feeds for a lower price than full DOB feeds,930 and also a limited set of auction information is available through the current SIP feeds.931 This enables access to a limited set of auction information for some market participants, at lower prices than full DOB feeds. To the extent that any market participants find these auction feeds sufficient for their trading needs, the Commission preliminarily believes that the addition of all auction information as an element of core data will have a limited effect on these market participants. To the extent that these market participants make up a large share of the market participants who would be interested in using additional auction information, the Commission preliminarily believes that the effect of adding auction information may be limited.932 The Commission preliminarily believes that the extent of this limitation is reduced by the fact that not all auction information is available to market participants through such feeds. The Commission does not have data on the number of market participants with proprietary feed subscriptions. The Commission preliminarily believes that auction information contains insights useful to traders in devising and executing trading strategies.933 Therefore, the Commission preliminarily believes that adding this information as an element of core data would produce a benefit for those traders who currently do not access such information. To the extent that these traders can exploit this auction information, the addition of this information as an element of core data should enable them to produce better trading strategies and lower execution costs, as well as facilitate best execution. To the extent that the advantages of possessing auction information come from exploiting the 930 See supra Section VI.B.2(a). supra Section VI.B.2(a). 932 Since the cost to integrate multiple auction feeds into a single feed is a fixed cost in producing a market data feed, the Commission preliminarily believes that there would still be a benefit from the rule in the form of competing consolidator integrated auction feeds, which could be cheaper for market participants than integrating the feeds themselves. 933 See supra notes 344–346. 931 See E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules trading decisions of market participants who lack this information, this effect would represent a transfer from those traders who currently have auction information to those traders who would obtain access to it through this rule and are able to exploit it to improve their trading strategies. The Commission preliminarily believes that this auction information could potentially be used across all trading venues, including exchange auctions, continuous exchange trading, and off-exchange venues. The Commission preliminarily believes that there may be potential gains from trade that would be realized through the addition of auction information as an element of core data. The Commission believes that there may be market participants who would trade in auctions but currently do not trade in auctions because they do not access auction data. To the extent such traders exist, the addition of auction information as an element of core data would give them that data. This trade could benefit both sides of the trade, thus resulting in an economic benefit. To the extent that market participants who start trading in auctions as a result of gaining access to auction information possess insights beyond what can be inferred from auction information, increasing the number of participants in auctions as described above should improve price discovery in the auction process. The Commission preliminarily believes that those who do not participate in auctions because they do not access auction information are unlikely to possess insights beyond what can be inferred from auction information. This is because any market participant who has such insights would find it worthwhile to purchase auction information and participate in the auction so as to exploit the value of the insights. Therefore, this benefit could be small. The size of this effect depends on the relative number of traders who possess such insights to those who do not who start participating in auctions as a result of this rule and the size of their auction traders in that event, both of which are unobservable in the current market. The Commission preliminarily believes that the addition of auction information as an element of core data may affect the order routing decisions of market participants who currently do not have access to auction information. For example, some off-exchange trading venues cross market-on-close orders before the closing auction takes place and later settle the trades at the closing auction price. Having access to auction imbalance information may affect VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 market participants’ decision to route a closing order to either an off-exchange venue or to the closing auction on the primary listing exchange. For example, a market participant who gets access to auction information through a subscription to these elements of new core data might decide not to route the order to an off-exchange venue so as to be able to participate in the auction using the new information available. This auction information could also affect decisions made during the time when auction information is disseminated about whether to send orders to continuous trading venues instead of auctions or off-exchange venues. However, the Commission preliminarily believes that the overall effect of auction information on order routing decisions is uncertain and likely would vary based on market conditions. The Commission preliminarily believes that the value of dedicated auction feeds would be substantially reduced as a result of the proposed addition of auction information to core data, and that this would result in a loss of revenue for those exchanges who offer such feeds. Since the full set of all auction information currently available in the market would be included in the definition of core data proposed by this rule, the Commission preliminarily believes that the value of any existing data product that provides only auction data 934 that is not currently in the exclusive SIP feeds would be substantially reduced. The Commission expects that many market participants who are executing a trade, either for themselves or for a client, have, and would continue to have, a subscription to core data. Therefore, when this subscription includes all available auction information, the value of dedicated proprietary auction data feeds could be substantially reduced. (iv) General Costs To Expanding Consolidated Data The Commission preliminarily believes that there are three potential costs to adding the new core data elements proposed in this rule, which are common across all these elements. The first potential cost is the cost to the new competing consolidators that would be necessary to implement or upgrade existing infrastructure and software in order to handle the dissemination of the additional core data message traffic. The second cost is the technological investments market participants might have to make in order to receive the new core data message traffic. The third cost is the cost 934 See PO 00000 supra note 335. Frm 00103 Fmt 4701 Sfmt 4702 16827 to users of certain kinds of trading strategies that may currently be relying on the fact that this data is not widely distributed today. The Commission preliminarily believes that the cost for firms that wish to become competing consolidators to implement or upgrade infrastructure to handle the dissemination of new round lot quotes, depth of book information, and auction information would be limited. As discussed in more detail below,935 the Commission preliminarily believes that the new competing consolidators will likely be firms that already have the technological infrastructure necessary to process full depth of book data and to generate the NBBO using this data. Therefore, for these firms, requiring the competing consolidators to be able to process the new message traffic resulting from the additional core data may add only a minimal cost to becoming a competing consolidator. However, for a firm that does not currently subscribe to, or process data from, exchange proprietary feeds, the new core data message volume would increase the cost of becoming a competing consolidator beyond what it would have cost if the rule did not propose to expand core data. In particular, if the existing exclusive SIPs should decide to enter the competing consolidator business, they may incur such costs as they do not currently disseminate full depth of book data.936 The Commission preliminarily believes that there would be limited infrastructure investment required on the part of SROs to provide the information necessary to process and disseminate new core data. This is because the SROs currently provide all elements of new core data over their proprietary feed infrastructure.937 In addition, the Commission preliminarily believes that many competing consolidators would be firms that already subscribe to these feeds,938 and 935 See infra Section VI.C.2(a) for a discussion of the technological capabilities of firms the Commission preliminarily believes are most likely to become competing consolidators. It is possible that the addition of this proposed definition of core data would make consolidation more difficult for core data than it is currently, and that this added difficulty would result in additional latency. However, the Commission preliminarily believes that the risk of this is minimal, again because of the technological capabilities of competing consolidators and the market forces that will be in effect in the decentralized consolidation model. 936 These costs are included in the discussion of costs for current exclusive SIPs to provide competing consolidator services. See infra Section VI.C.2(d). 937 See supra Section VI.B.2(a). 938 See infra Section VI.C.2(a). E:\FR\FM\24MRP2.SGM 24MRP2 16828 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 thus, the SROs would likely not have a large amount of new data connections to service and therefore would not need to invest in infrastructure to handle them. However, exchanges, particularly primary markets, may incur some infrastructure costs related to the dissemination of new regulatory data.939 Currently, the new regulatory data component to the proposed consolidated market data is distributed through the SIPs. In order for this information to be distributed through the new decentralized consolidation model, the rule requires the exchanges to provide a feed to competing consolidators and self-aggregators that contains the regulatory data. The Commission preliminarily believes that the infrastructure and operational processes provide such a feed is currently not completely in place and would require investment on the part of exchanges.940 The Commission preliminarily believes that the costs for infrastructure investment on the part of market participants 941 that choose to receive the new DOB and auction information components of core data would have only a limited impact.942 Adding these components to core data could substantially increase the total message traffic in core data,943 and this increase in message traffic may be accompanied by costs to market participants to set up the infrastructure required to handle this new level of traffic. However, the proposed amendments would not require market participants to receive (or display) the complete set of proposed consolidated market data, and competing consolidators would not be required to deliver all proposed consolidated market data for each data product they offer.944 Therefore, those market participants who do not want to incur the costs associated with the expanded core data message traffic due 939 As discussed above, this new regulatory data would consist of all the same messages as current regulatory data distributed through the exclusive SIPs. See supra Section III.D. 940 The costs to SROs to produce a feed for such regulatory data is included in the numbers for the general costs to SROs for providing the data necessary to generate consolidated market data in Section V.D.6. 941 These market participants would include any entity that subscribes to the new consolidated market data. 942 See also supra Section VI.C.1(b)(i). 943 The Commission preliminarily believes that the addition of DOB information, in particular, may substantially increase message traffic. See supra note 294. 944 A market participant that has obligations under Rule 603(c) would have to receive all data necessary to generate consolidated market data to comply with the rule. The specific cost associated with some of this data is discussed below. See infra Section VI.C.1(c)(i). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 to additional depth of book information or auction information would be able to choose not to receive any such additional information. Presumably, a market participant would therefore only seek to obtain the full set of consolidated market data if it believed that the benefits of receiving the data justified the costs. Thus, the Commission preliminarily believes that no market participant who does not consider this cost of the infrastructure investments necessary to receive the new core data worthwhile would have to incur it. For those market participants who do wish to incur the cost, the Commission is unable to estimate the associated costs because it does not have access to information about the infrastructure expenses a market participant incurs to process market data and because of the likelihood that such costs depend on each market participant’s existing infrastructure. The Commission preliminarily believes that adding the depth of book and auction information to core data could impose a cost on traders who rely on strategies that take advantage of the fact that the information in depth of book and auction data is not widely distributed (i.e., those traders who are beneficiaries of existing informational asymmetries). To the extent that some of the value of depth of book and auction information lies in the fact that they currently are not observed by a number of market participants, the Commission preliminarily believes that the dissemination of this data would adversely impact the profitability of such trading strategies. For traders using trading strategies based on depth of book information, the magnitude of the cost caused by the proposed amendments would depend on the extent to which the five aggregated levels of depth proposed in this rule approximate the information contained in the full depth of book information. To the extent that these strategies exploit the lack of information on the part of exclusive SIP-reliant traders, this cost would represent a partial transfer to traders who currently rely solely on SIP data. The Commission is unable to estimate the size of this effect, since it does not have a method for detecting the use of such trading strategies from market data or determining what the profit on such strategies would be if they could be detected. The Commission invites comments on the issue. Regarding the proposed amendment to change the round lot definition, the Commission preliminarily believes that the proposed amendment may negatively affect certain trading PO 00000 Frm 00104 Fmt 4701 Sfmt 4702 strategies, but the associated costs are likely to be small. First, the Commission preliminarily believes that there may be traders who currently attempt not to display their orders to wide public view by posting them in odd-lot sizes, in pursuit of trading strategies that take advantage of a market’s limited knowledge of odd-lot size quotes. The Commission understands that certain traders (ones who are the most likely to recognize any advantage being sought in this manner) obtain proprietary feeds and so currently can see these odd-lot quotes. This means that this strategy cannot be used to hide quotes from users of proprietary feeds. To the extent that it is necessary to hide the quotes from such users in order for the strategy to work, the benefits of such a trading strategy are likely to be minimal. If this is the case, then to the extent that the new round lot definition makes this strategy more difficult, the Commission preliminarily believes that the cost to these traders of losing such an opportunity would also be minimal. On the other hand, if there is some benefit to posting quotes in odd-lot sizes to hide them from view (or at least from the view of exclusive SIP users) despite the fact that users of proprietary feeds can still see the quotes, the Commission preliminarily believes that to the extent that the new round lot definition makes this strategy more difficult, there could be a cost to the traders who use such a strategy. The Commission cannot observe whether an odd-lot quote is being used to hide the order or not but invites comments on the issue. Second, there may be costs to those traders who currently enjoy the position of being among the traders who can see odd-lot quotes via proprietary data feeds. The Commission preliminarily believes that odd-lot quotes are more easily taken advantage of by those traders who can see the quotes. Currently, this advantage is available only to those traders who purchase proprietary data feeds. The Commission preliminarily believes that this gives these traders an advantage over other traders by improving their order execution costs. Under the proposed changes to core data, this advantage is likely to be reduced. If this were to happen, it would be because other traders would obtain the advantage as well and may take advantage of these quotes before the current direct feed subscribers do. To the extent that this happens, this cost to current direct feed subscribers from losing this advantage represents a transfer to the traders who can see the liquidity currently in oddlots. The Commission is uncertain about E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 the size of the loss in advantageous trading opportunities to traders who subscribe to the proprietary data. To quantify this requires knowing (among other things) when an odd-lot quote is traded with by a participant who had access to full odd-lot information and when it was traded with by a participant who did not know the quote was there, and this is not observable from available market data. However, the Commission invites comments on the issue. (v) Request for Comments The Commission requests comments on its analysis of the economic effects the proposed amendments regarding core data and consolidated market data. In particular, the Commission solicits comment on the following: 188. Do you agree with the Commission’s analysis of the economic effects of creating definitions for ‘‘consolidated market data,’’ ‘‘core data,’’ ‘‘administrative data,’’ and ‘‘regulatory data’’? Why or why not? Please explain in detail. 189. Do you agree with the Commission’s analysis of the economic effects of expanding the content of core data? Why or why not? Please explain in detail. 190. To what extent would the expansion of core data reduce the value of current market data products? What would be the economic effect of any reduction? Who would benefit and who would incur costs of any value reduction? Would the reduced value result in a net welfare gain or loss? Please explain in detail and quantify if possible. 191. To what extent would market participants who wish to receive information currently contained in the exclusive SIP feeds that will not be included in the proposed definition of consolidated market data be able to obtain this information from other sources? What would be the likely price of such sources? 192. The Commission requests comments on the potential uses of expanded core data content. How would market participants use the expanded core data? Which market participants would be likely to use the additional depth of book data? To what extent would the users or uses differ from current users and uses? What would be the potential economic effects of the expanded core data? Please be specific. 193. The Commission requests comment on the capacity requirements needed by exchanges, competing consolidators, and users resulting from expanded core data. Would any of these participant types need to upgrade systems to be able to handle the VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 expanded data? If so, what would be the aggregate one-time and ongoing expenses of these upgrades? Would such expenses vary by type of entity or other factors? If so, what factors might affect these expenses and what would a reasonable range of expenses be for exchanges, competing consolidators, and users? Would the expansion of core data increase any data latencies relative to today? If so, what would be the economic effect of the increased latency? Please be specific. 194. The Commission requests that commenters provide any insights they may have as to the effect of the addition of depth of book information, smaller quotes (from the definition of round lot), and the inclusion of auction information on the share of order flow received by various exchanges, ATSs, and other trading systems. If you expect the inclusion of such information to alter order routing decisions, please explain the factors that could determine the winners and losers and whether such changes would result in net welfare gains or losses. Please provide estimates of these potential effects. 195. The Commission requests that commenters provide any insights they may have as to the effect of adding the depth of book, smaller quotes, and auction information to the core data on traders who currently benefit from information asymmetries. Would any losses to these traders be offset by gains to others? If so, would there be net welfare gains or losses? Please explain in detail and also submit any insights you may have as to the size this effect. 196. The Commission requests that commenters provide any insights they may have as to the effect of the proposed round lot definition on the informational advantage currently possessed by those traders who obtain odd-lot quotes via proprietary feeds. Would any transfers between those who currently have access to this data and those who do not result in any welfare gains or losses? What effect would the proposed round lot definition have on trading strategies that exploit the hidden nature of odd-lots? Please explain in detail. 197. Do you agree with the Commission’s assessment that the traders currently reliant on SIP data, who will be able to see price-improving odd-lot quotes in certain stocks, could create additional trades that do not currently take place? Why or why not? Please explain in detail. 198. The Commission requests that commenters provide any insights they may have as to the effect of including depth of book information in core data on trading strategies that exploit the PO 00000 Frm 00105 Fmt 4701 Sfmt 4702 16829 information in current depth of book data products. 199. The Commission requests that commenters provide any insights they may have as to the effect of including depth of book information in core data on the informational advantage currently possessed by those traders who obtain depth of book via proprietary feeds. Would any transfers between those who currently have access to this data and those who do not result in any welfare gains or losses? Please explain in detail. 200. The Commission requests that commenters provide any insights they may have as to the use of depth of book information in running strategies that attempt to establish priority in the queue at a particular price level behind the top of book. Are such strategies ever run without access to depth of book information? How common are such strategies in the market? 201. Would the inclusion of depth of book information in core data strain current throughput, processing, or storage capacities? If so, by how much? How costly would it be and who would incur the costs of upgrading capacity to handle depth of book information in core data? 202. Do you agree that the inclusion of odd-lot or depth of book information in core data would result in more efficient pricing? Why or why not? Please explain in detail. 203. To what extent would any benefits of including depth of book information in core data depend on the degree to which orders ‘‘walk the book’’? Which benefits, if any, depend on this? Please explain how. 204. To what extent would adding all auction information to core data result in such information being more widely disseminated, and what role do existing dedicated auction feeds play in this? If so, how would market participants use this more widely disseminated data and what would be the economic effect of this usage? Please explain in detail. 205. Would disseminating auction information in core data increase participation in auctions? Why or why not? What would be the economic effect of any change in auction participation? Would this change in auction participation improve price discovery? Please explain. 206. What are the initial and ongoing technology costs that competing consolidators would incur to collect, compile, process, and disseminate the expanded core data? How would these costs vary across potential competing consolidators—current exclusive SIPs, current market data aggregators and selfaggregators, and new entrants? Would E:\FR\FM\24MRP2.SGM 24MRP2 16830 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules these costs constitute a significant barrier to entry to becoming a competing consolidator? Why or why not? Please explain and provide quantified costs. 207. What are the initial and ongoing technology costs that exchanges would incur to disseminate the expanded core data to competing consolidators? Please quantify these costs. Do commenters agree that these costs would be minimal to the extent that exchanges are already disseminating such information in proprietary data feeds? Why or why not? Please explain. 208. What would be the initial and ongoing technology expenses incurred by market participants to receive and process the expanded core data for their intended uses? Please quantify these expenses. Do you agree that such technology expenses would be minimal for those market participants that currently receive and process such information from proprietary data feeds? Why or why not? Do you agree that such technology expenses would be mitigated by the fact that only those market participants that would significantly benefit from receiving and using such data would choose to receive it? Why or why not? Please explain in detail. 209. Do you agree with the Commission’s range of the potential increase in message traffic associated with the expansion of market data? Please explain and provide alternate estimates as necessary. How would the costs incurred by exchanges, competing consolidators, and data users depend on the increase in message traffic? Would the relation between message traffic and costs for each of these entities be linear, concave, or something else? lotter on DSKBCFDHB2PROD with PROPOSALS2 (c) Amendments to the NBBO and Protected Quotes and Other Conforming Changes The proposal to change the round lot size for stocks with prices greater than $50 would mechanically change NBBO spreads for these stocks, as explained below. Specifically, almost all stocks with prices above $50 would experience narrower NBBO spreads. In addition to the direct effect of narrower quoted spreads, the Commission recognizes that these mechanical changes to the NBBO may affect other Commission or SRO rules and regulations. For some of these rules and regulations, the Commission is proposing conforming changes, which themselves can have economic effects. For other rules and regulations, the Commission analyzes below the followon economic effects of the mechanical changes to the NBBO. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 (i) Changes in the National Best Bid and Offer and Protected Quotes As discussed in detail above,945 the proposed amendments would reduce the number of shares included in the definition of a round lot for NMS stocks for which the prior calendar month’s average closing price on the primary listing exchange was greater than $50.00.946 Higher priced stocks would be grouped into tiers based on their price and stocks in higher price tiers would have fewer shares in their definition of a round lot. In addition, the proposed amendments would, as part of the proposed definition of core data, require that the best bid and offer and national best bid and offer include odd-lots that, when aggregated, are equal to or greater than a round lot and that such aggregation shall occur across multiple prices and shall be disseminated at the least aggressive price of all such aggregated odd-lots.947 The Commission preliminarily believes that these amendments could potentially change the spread between national best bid and offer for these higher priced stocks because the NBBO would now be calculated based off of the smaller round lot size. To the extent that odd-lot shares exist in these stocks at prices that are better than the national best bid and offer (i.e., at prices higher than the national best bid and prices lower than the national best offer), the new national best bid and offer under the proposed amendments may be at a higher/lower price because fewer oddlot shares would need to be aggregated together (possibly across multiple price levels) to form a round lot. This could result in a quoted spread that is calculated based off of the NBBO being smaller for these stocks. The Commission preliminarily believes that the reduction in spreads would be greater in higher priced stocks because stocks in higher priced tiers would have fewer shares included in the definition of a round lot.948 The proposed amendments would also change the definition of a protected 945 See supra Section III.C.1(d). round lot size for the twelve stocks that currently have round lot sizes less than 100 shares could also change as a result of the proposed amendments. For some of these stocks, the round lot size may increase, which could cause the quoted spread derived from the NBBO to widen. See supra Section III.C.1. 947 See supra Section III.C.1. Several exchanges already aggregate odd-lot orders into round lots and report such aggregated odd-lot orders as quotation information to the exclusive SIPs. See supra notes 157–158 and accompanying text. 948 See supra Section III.C.1. Also, for additional analysis of the narrowing of spreads as a result of the new round lot definition, see supra VI.C.1(b)(i). 946 The PO 00000 Frm 00106 Fmt 4701 Sfmt 4702 quote from a round lot to 100 shares.949 This would increase the number of shares required for a quote to be protected for the twelve stocks that currently have round lot sizes of less than 100 shares.950 Additionally, the proposed amendments would only allow odd-lot orders at a single price point to be aggregated together to form a protected quote.951 As discussed above, several exchanges already aggregate odd-lot orders across different price levels into round lots and report such aggregated odd-lot orders as protected quotes to the exclusive SIPs.952 To the extent that a stock currently has odd-lot shares inside the NBBO, the Commission preliminarily believes the proposed amendments could cause the protected quotes to widen because odd-lot shares at multiple price levels could no longer be aggregated together to create a protected quote.953 Additionally, if stocks have periods of time when they do not have 100 aggregated shares at the same price point, then under the proposed amendments, they could have increased periods of time during which they might not have a protected quote. The Commission cannot quantify to what extent protected quotes would widen because the effects would partially depend on how market participants adjust their order submissions based on the new round lot size, which the Commission is unable to predict. However, the Commission preliminarily believes that these effects would vary based on the price of the stock. For stocks with prices in the lowest proposed round lot tier, i.e. stocks with prices of $50.00 or less, the Commission preliminarily believes that the effects would be minimal because the round lot size would not change for these stocks and because there is evidence that these stocks have fewer odd lots inside the current NBBO.954 The Commission preliminarily believes that the effect on protected quotes would be greater for stocks with higher prices. Since higher priced stocks appear to have more odd lots inside the current NBBO,955 the Commission preliminarily believes that under the proposed amendments their protected quotes could widen. The 949 See supra Section III.C.1(d)(i). supra notes 141, 251. 951 See supra Section III.C.1. 952 See supra note 85 and accompanying text. 953 Although such a widening of the protected quote could impact execution quality of orders, the Commission preliminarily believes that best execution obligations of broker-dealers may mitigate this result. 954 See supra Section III.C.1(b) (discussing staff odd-lot analysis). 955 Id. 950 See E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 Commission preliminarily believes that both the amount by which, and the proportion of time, the protected quote would be wider under the proposed amendments would increase with the price of the stock.956 The Commission invites comments and analysis in order to estimate to what extent the protected quotes would widen under the proposed amendments. The Commission preliminarily believes that the change in the round lot and protected quote definition could have an effect on retail order flow internalization businesses. Currently, some wholesalers,957 by arranging to execute orders on behalf of retail brokerdealers, offer superior prices relative to the existing NBBO (i.e., price improvement) to retail investors. As part of this arrangement, the wholesaler typically agrees that some percentage of the broker-dealer’s orders will execute at prices better than the NBBO and/or agrees to certain execution quality metrics. The Commission expects that the new definition of a round lot will, at times, make the NBBO narrower for the affected stocks because the new definition would include orders that are at superior prices to the 100 share NBBO at a size less than 100 shares. As a result, it may become more difficult for the retail execution business of wholesalers to provide price improvement and execution quality metrics at levels similar to those provided under the 100 share round lot definition today. It is also possible that by the same mechanism retail investors could experience an improvement in execution quality from these wholesalers.958 Assuming that the NBBO has narrowed, and wholesalers continue to agree to provide a certain level of price improvement off of the narrower spread, this would lead to better execution prices for retail investors. To the extent that retail wholesalers are held to similar execution quality standards by retail broker-dealers in a narrower spread environment, this could have a negative effect on the profitability of the retail execution business for wholesalers, given that there would be less ‘‘spread profit’’ available to the wholesaler in a 956 The Commission preliminarily believes that under the proposed amendments some high priced stocks that currently have round lot sizes of less than 100 shares may not have a protected quote in place for much of the trading day because they might have price levels with size greater than or equal to 100 shares. 957 See supra note 892 for discussion of wholesalers and retail internalization. 958 This improvement may not be transparent to the retail investor. See infra note 976 for further discussion of this point. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 narrow spread environment. This is, in part, because the wholesaler may often keep a portion of the spread profit that is not given as price improvement to the investor who submitted the order. Therefore, if the NBBO has narrowed and price improvement must still be provided, there would be less revenue for the wholesaler.959 To the extent this happens, it would be a transfer from the wholesaler to retail investors. To make up for lower revenue per order filled in a narrower spread environment, wholesalers could respond by changing how they conduct their business in a way that could affect retail broker-dealers. There are several possibilities, including but not limited to, reducing per order costs associated with their internalization programs, such as reducing any payments for order flow or reducing the agreed upon metrics for price improvement. In the event that wholesalers reduce payments for order flow, retail broker-dealers could respond by changing certain aspects of their business. The Commission is uncertain as to how wholesalers may respond to this proposal, and, in turn, how retail broker-dealers may respond to those changes, and the Commission is uncertain as to the extent of these effects. The effect of lost revenue for wholesalers discussed above may be reduced if wholesalers use proprietary feeds to trade, to the extent they already see and respond to odd-lot quotations inside the NBBO and currently provide execution quality to customers based upon the superior odd-lot quotations. The Commission preliminarily believes that the change in the NBBO and the protected quote caused by this proposal could change the share of order flow captured by each exchange. Currently, Rule 611 requires that the trading center on which the order is executed prevent executions that result in trade-throughs of protected quotes,960 and exchange rules provide for the aggregation or ‘‘rolling up’’ of odd-lots of different prices to produce protected quotes.961 With the NBBO based off of the new round lot definition, the protected quote remaining at 100 share quotes, and a change in the ‘‘roll up’’ practice for odd-lot quotes, the Commission preliminarily believes that there would be changes in how orders 959 The NBBO based off of the new round-lot definition would be relevant to the spread considered by the wholesalers because, among other things, it would be used for Rule 605 execution statistics. See infra Section VI.C.1(c)(iii) for further discussion of Rule 605 statistics. 960 See supra notes 234–235. 961 See supra note 157. PO 00000 Frm 00107 Fmt 4701 Sfmt 4702 16831 are routed to fulfill both best execution requirements and protected quote requirements. These changes might not be uniform across exchanges, and it is possible that some exchanges would see an increase in order flow. This particular effect would represent a transfer of business (and therefore transaction fees) between the exchanges. Also, the Commission preliminarily believes that changes in the NBBO caused by the new round lot and protected quote definitions could also affect other trading venues, including exchanges and ATSs.962 Exchanges and ATSs have a number of order types that are based off of the national best bid and offer.963 Changes in the NBBO could affect how these order types perform and could also affect other orders they interact with. Some ATS matching engines also derive their execution prices based off of price improvement measured against the NBBO. Changes in the definition of the NBBO could affect execution prices on these platforms. Overall, the Commission preliminarily believes that these interactions could affect order execution quality on different trading platforms, but it is uncertain of the direction or magnitude of these effects. Changes in execution quality could in turn affect competition for order flow between different trading venues, with trading venues that experience an improvement/decline in execution quality attracting/losing order flow. However, the Commission is uncertain of the direction or magnitude of these effects. The Commission preliminarily believes that market participants who currently rely solely on core data to obtain NBBO feeds would incur some infrastructure investment costs as a result of the proposed amendment to change the definition of a round lot. This is based on the Commission’s belief that the proposed amendment would lead to more frequent updates to the NBBO and that this would result in an increase in message traffic for NBBO feeds.964 The Commission acknowledges that having an NBBO feed is an essential component of the brokerdealer business. The Commission is unable to estimate the associated costs because it does not have access to 962 See supra Section VI.C.1(c)(iii) for additional discussion of effects on exchange rules. 963 For example, the apparent price improvement over the NBBO calculated off of core data that is offered by a midpoint crossing network would be reduced as a result of these changes to the NBBO. 964 As discussed previously, this will happen more in high-priced stocks where the new round lot definition will have more of an effect. See supra Section III.C.1(d)(i). E:\FR\FM\24MRP2.SGM 24MRP2 16832 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 information about the infrastructure expenses a broker-dealer incurs to process market data and because of the likelihood that such costs vary substantially according to the existing infrastructure of broker-dealers, but the Commission invites comments on the issue. For certain core data use cases, the costs described in the preceding paragraph are likely to be minimal. Many broker-dealers, when accessing data for the purposes of visual display, currently obtain NBBO quotes from the exclusive SIPs with a ‘‘per query’’ use case. This use case is set up so that a quote is only sent when it is asked for. The Commission preliminarily believes that this setup has very little technological cost associated with it and that furthermore whatever cost there is to receiving such a feed would not be impacted by increasing the number of times the NBBO is updated over a given time period. Thus, the Commission believes that for those broker-dealers who rely on per query use cases for their quotes, the upgrade costs resulting from changing the round lot definition would be minimal.965 Trading venues and broker-dealers could also experience implementation costs from having to modify and reprogram their systems, including matching engines and SORs, to account for the changes in the NBBO and protected quotes caused by the proposed amendments. For costs to trading venues as a result of changes to the protected quotations, NBBO, and the new restriction on roll up quotes, the Commission does not have detailed information on the operation of exchange matching engines. However, the Tick Size Pilot required reprogramming of exchange matching engines as well. For that pilot, CHX estimated that total costs for implementing the pilot were $140,000 per SRO and market center.966 The Commission preliminarily believes that this number may provide some sense of the level of cost associated with the changes SROs, ATSs, and other offexchange trading venues would have to make in order to comply with the new rules regarding protected quotes. In addition, there could be variation in this cost between different market centers or categories of market centers depending 965 This conclusion is contingent on the assumption that competing consolidators would choose to offer a per query service to market participants so that this arrangement could continue after the rule takes effect. 966 See Letter to Brent J. Fields, Secretary, Commission, from James G. Ongena, General Counsel, Chicago Stock Exchange, Inc. (Dec. 22, 2014). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 on the existing state of their infrastructure. The Commission invites comments on the reasonableness of this number as an approximation for the cost to update matching engines. Broker-dealers may also incur implementation costs. For example, a broker-dealer who runs an SOR off of core data alone would now have to adapt this system to keep track of the NBBO separately from the protected quote. This is particularly relevant for the submission of Intermarket Sweep Orders (‘‘ISOs’’), where the brokerdealer assumes responsibility for preventing trade-throughs. For ISOs, the broker-dealer’s SOR would now have to simultaneously target liquidity available at the NBBO while keeping track of protected quotes to prevent tradethroughs. The Transaction Fee Pilot required re-programming of SORs as well, and forms a basis for an estimate of these costs. For that pilot, the Commission estimated that the costs of a one-time adjustment to the order routing systems of a broker-dealer would $9,000 per broker-dealer.967 The Commission preliminarily believes that this number may provide some sense of the level of cost associated with changes that broker-dealers, as well as other entities making real-time order routing decisions based off of SIP data, would have to make as a result of the proposed changes to the NBBO and protected quote and other implementation costs discussed below.968 Such costs are likely to vary substantially across broker-dealers according to the state of their existing infrastructure. The Commission invites comment on the reasonableness of this number as an approximation for the costs to update trading systems to deal with this implementation cost and the implementation costs discussed below. The Commission is also deleting the reference to ‘‘The Nasdaq Stock Market, Inc.’’ from the definition of protected bid or offer and believes that this changes would have no economic effects. As explained above in Section III.C.1(d)(ii), Nasdaq is now a national securities exchange and is thus otherwise bound by the definition. 967 See Securities Exchange Act Release No. 84875 (Dec. 19, 2018), 84 FR 5202 (Feb. 20, 2019) (Transaction Fee Pilot for NMS Stocks). 968 The Commission preliminarily believes that this $9,000 estimate would cover the changes that would have to be made as a result of the proposed distinction between the NBBO and the protected quote as well as changes that would result from the effect of the proposal on locked or crossed markets. These costs are discussed below, see infra Section VI.C.1(c)(ii). PO 00000 Frm 00108 Fmt 4701 Sfmt 4702 (ii) Amendments to Locked/Crossed Markets The Commission preliminarily believes that the proposed amendments could cause an increase in the frequency of locked and crossed NBBOs in certain stocks.969 This is expected to occur due to the fact that the existing locked and crossed markets prohibition, as affected by the proposed amendments, would only apply to protected quotations (or the PBBO) and not to the new round lot sizes, which may often constitute the NBBO. As described above in Section III.C.1(d)(ii), Rule 610(d), which requires trading centers to establish procedures to prevent orders being entered that would lock or cross markets, is based solely on protected quotations, which, as proposed to be defined, may not be the NBBO. If a locked and crossed NBBO is not prohibited by rule, it is more likely to occur. The Commission preliminarily believes that this increase is unlikely to have much economic effect. The new round lot definition may cause the NBBO to narrow. The Commission preliminarily understands that it can sometimes happen that a market becomes locked or crossed in odd-lot orders. To the extent that these odd-lots are included in the new definition of a round lot, the NBBO will appear locked or crossed on occasion. The Commission preliminarily anticipates that the fact that they will now be classified as a locked or crossed NBBO will not make much difference, because these locked or crossed conditions already occur in odd-lots. Furthermore, the effect of having these locked or crossed quotes visible to market participants who rely solely on core data is unlikely to be different from the general effects discussed for the added information as a result of the change in the round lot definition. In particular, to the extent that these crosses and locks in odd-lot sizes represent a profitable trading opportunity to those market participants who rely solely on exclusive SIPs, being able to observe the occurrence of these events as a result of the proposed change to the round-lot definition would be a benefit to these 969 Locked and crossed markets already occur with respect to odd-lot quotes and are observable to market participants who subscribe to proprietary feeds. See supra note 256 and accompanying text. Even if there is no increase in the frequency of locked and crossed markets, their occurrence may still be observed by a higher number of market participants under the proposed amendments because of the change in the round lot definition. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 market participants.970 Also, to the extent that market participants who currently subscribe to proprietary feeds are able to profit from being the only market participants to observe crossed or locked odd-lots, the proposed change will represent a cost to them.971 To the extent that the ability to profit from observing crossed or locked odd-lot quotes comes from exploiting those market participants who cannot see the crosses or locks, this change will represent a transfer from those who currently trade on this information to those who acquire the information through new core data and are able to use it effectively.972 It is also possible that traders avoid sending orders because of the risk of being exploited if they cross or lock the market. To the extent that this happens, and to the extent that the proposed expansion of core data addresses this concern, the increase in trading that would result would represent a benefit to both sides of the trade.973 The Commission preliminarily believes that some crossed or locked quotes represent traders who are not aware at the time they post their quote that the quote could be filled by a marketable order elsewhere. To the extent this happens it represents a cost to this trader since the posted order is exposed to the risk that it will be executed with a marketable order at a price inferior to what is available on the market to the trader who posted the order. Market participants would also experience implementation costs in order to modify their systems to account for locked and crossed NBBOs. The Commission preliminarily believes that to the extent that market participants currently rely on the exclusive SIPs to keep track of whether trading restrictions imposed by Rule 610(d) would apply, their systems would have to be updated to take into account the fact that the NBBO is no longer the price point at which such restrictions are triggered. Instead, they would have to keep track of both the NBBO for trading purposes, and the new protected bid and offer in order to monitor whether a 610(d) restriction would apply. The 970 See supra Section VI.C.1(b)(i) for further discussion of such benefits resulting from the new round-lot definition. 971 See supra Section VI.C.1(b)(iv) for further discussion of such costs resulting from the new round-lot definition. 972 See supra Sections VI.C.1(b)(i) and VI.C.1(b)(iv) for further discussion of transfers resulting from the changes to the round-lot definition. 973 See supra Section VI.C.1(b)(i) for further discussion of such benefits resulting from the new round-lot definition. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 costs to make such changes are covered by the estimate provided above for costs to implement changes that would result from changes to the NBBO and protected quote, since that estimate is related to trading system adjustments.974 Such costs are likely to vary substantially across market participants depending on their existing infrastructure. An increase in the frequency of locked and crossed markets could also have additional economic effects. As discussed above, it could cause a change in order routing behavior and order flow between trading venues. Furthermore, as discussed below, it could also affect the calculation of Rule 605 execution statistics. (iii) Other Rules and Regulations The changes to core data, particularly the changes to the definition of ‘‘national best bid and national best offer’’ affect how other rules and regulations operate. In particular, this change affects which orders determine the reference price for numerous rules, including rules under the Exchange Act, SRO rules, and NMS plans. The Commission discussed many of these above in Section III.C.1(d)(i). Specifically, the Commission preliminarily believes that the changes to the NBBO may present changes to the benchmark prices used in Regulation SHO, LULD, retail liquidity programs, market maker obligations, and certain exchange order types and recognizes that the change in the benchmark price could result in economic effects. Further, changing the NBBO would alter the estimation mechanics for Rule 605 metrics, resulting in implementation costs. In addition, the proposed round lot definition would result in economic effects through its impact on the Rule 606 compliance. Finally, the Commission preliminarily believes that the proposed rules, though appearing to change the requirements of several other rules and regulations, would not necessarily have an economic impact through these other rules and regulations. For Rule 201 of Regulation SHO, the reference bid for the execution of a short sale transaction could be higher under that proposal than it is currently, potentially slightly increasing the burdens on short selling. Currently, after the Short Sale Circuit Breaker triggers, short sales can only execute at prices greater than the NBB. While short sales are currently permitted to execute against any odd-lot quotations that exist above the NBB, the proposed round lot 974 See PO 00000 supra note 968 and accompanying text. Frm 00109 Fmt 4701 Sfmt 4702 16833 definition would reduce the instances of such odd-lot quotations. Therefore, the proposal could result in a higher NBB and thus result in a slightly higher benchmark price for short sale executions in stocks priced more than $50, reducing the fill rate of short sales or increasing the time to fill for short sales. In addition, a potentially higher NBB price or potentially lower protected best bid could marginally affect the trigger of the Short Sale Circuit Breaker. In particular, the proposal could result in slight delays in or a reduction in the number of Short Sale Circuit Breaker triggers, or it could have the opposite effect. In particular, an NBB that includes smaller round lots could result in a higher-priced execution relative to an NBB that does not include smaller round lots. This higher-priced execution could be above the price that would trigger the Short Sale Circuit Breaker whereas an execution on a 100-share quote would have triggered the circuit breaker. This could delay the trigger if the price continues downward, such that the circuit breaker still triggers, or the circuit breaker may not trigger at all if the price rebounds after such an execution. On the other hand, if the proposal results in a lower protected bid, it could have the opposite effect on circuit breaker triggers: Triggering sooner and more often. The Commission preliminarily believes that the economic effects of the potential impact on the Short Sale Circuit Breaker are unlikely to be significant. These effects should not create implementation costs, and the Short Sale Circuit Breaker should continue to function consistent with its stated purpose. Notably, if the proposal would result in not triggering as many Short Sale Circuit Breakers, it could reduce ongoing compliance costs in situations in which the price rebounds despite the lack of a price test on short sales. Similarly, a potentially higher bid price or lower offer price could affect the trigger of a Limit State under the LULD Plan. A lower-priced NBO or a high-priced NBB could result in that quote being more likely to touch a price band, thus triggering a Limit State, when it otherwise would not have. Depending on whether the quote would have otherwise rebounded, this could increase the number of Limit States and/ or Trading Pauses or could merely trigger such Limit States or Trading pauses sooner. As in the case of the Short Sale Circuit Breaker, the effects should not create implementation costs, and LULD should continue to function consistent with its stated purposes. In E:\FR\FM\24MRP2.SGM 24MRP2 16834 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules addition, the economic effects of this potential marginal change depends largely on how often odd-lot quotations lead price declines or lead price increases. As discussed above,975 a number of Rule 605 execution quality statistics are benchmarked to the NBBO. Under the proposed amendments, the NBBO would be based on the proposed tiered, price-based round lot sizes, which means any Rule 605 execution quality statistics that rely on the NBBO as a benchmark would reflect the modified definition of the NBBO. This could cause certain execution quality statistics to change in higher priced stocks. As discussed above, the Commission preliminarily believes that the NBBO would become narrower for some stocks in higher price tiers. This could cause execution quality statistics that are measured against the NBBO to change because they would be measured against the new, narrower NBBO. For example, execution quality statistics on price improvement for higher priced stocks may show a reduction in the number of shares of marketable orders that received price improvement because price improvement would be measured against a narrower NBBO. However, the Commission preliminarily believes that some of these changes may cause some Rule 605 statistics to more accurately reflect actual execution quality because the NBBO based on the new definition for round lots may now take into account more liquidity that the current NBBO ignores.976 The Commission preliminarily believes that these effects would be larger for stocks in higher price tiers because their new round lot definition would include fewer shares. In addition, the NBBO midpoint in stocks priced higher than $50 could be different under the proposal than it otherwise would be, resulting in changes in the estimates for Rule 605 statistics calculated using NBBO midpoint, such as effective spreads. In particular, at times when bid odd-lot quotations exist within the current 975 See supra Section III.C.1(d)(i). the hypothetical case of a stock in which there are often valuable odd-lot quotes, brokerdealers trading in this stock can currently use these odd-lot quotes to improve on the NBBO, and this improvement might be reflected in Rule 605 statistics. Under the proposed change, if this stock is priced over $50 per share, then some of these odd-lot quotes could end up being defined as round lots under the new definition and thereby end up the basis for the NBBO. With these quotes as the NBBO, the broker-dealer would no longer appear to be improving over the NBBO in its execution, and Rule 605 statistics may appear to indicate a decrease in execution quality. However, they would, in fact, merely be reflecting a more accurate picture of the market circumstances at the time of execution. lotter on DSKBCFDHB2PROD with PROPOSALS2 976 In VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 NBBO but no odd-lot offer quotations exist (and vice versa), the midpoint of the proposed NBBO would be higher than the current NBBO midpoint. For example, if the NBB is $60 and the NBO is $60.10, the NBBO midpoint is $60.05. Under the proposal a 50 share buy quotation at $60.02 would increase the NBBO midpoint to $60.06. Using this proposed midpoint, effective spread calculations for buy orders would be lower but would be higher for sell orders. More broadly, the proposal would have these effects whenever the new round lot bids do not exactly balance the new round lot offers. However the Commission does not know to what extent or direction that odd-lot imbalances in higher priced stocks currently exist, so it is uncertain of the extent or direction of the change. Additionally, a change in the rate of locked and crossed markets could also affect how Rule 605 execution quality statistics are calculated. The Commission preliminarily believes that orders received when the NBBO is crossed for more than 30 seconds are generally not included in Rule 605 execution statistics. To the extent the changes in the definitions of round lots and protected quotes cause an increase in the frequency or length of crossed markets, more orders could end up being excluded from Rule 605 execution statistics, which could cause some Rule 605 execution statistics to less accurately reflect actual execution quality. Finally, the Commission recognizes that such changes could force market centers (or their third-party service providers) to revise their processes for estimating the Rule 605 execution statistics. Such changes would result in implementation costs. The Commission recognizes that the NBBO serves as a benchmark in SRO rules in addition to Exchange Act rules and NMS plans. For example, the NBBO acts as a benchmark for various retail liquidity programs on exchanges, for exchange market maker obligations, for some order types, and for potentially many other purposes.977 As such, including smaller quotes in the NBBO would change how these rules operate and these changes could have economic effects. For example, having to post more aggressive limit orders into retail liquidity programs could reduce the already low volume by reducing the liquidity available but could result in 977 For a discussion of the effect of changes to the NBBO on order types and to exchange odd-lot ‘‘rollup’’ practices for protected quotes, see supra Section VI.C.1(c)(i). For discussion related to changes to round lot size for stocks with round lots of less than 100 shares, see supra note 946. PO 00000 Frm 00110 Fmt 4701 Sfmt 4702 better prices for those retail investors able to execute against that liquidity. In addition, a narrower NBBO could effectively increase some market maker obligations, which could improve execution quality for investors and/or provide a disincentive to being a market maker on the margin. Alternatively, the exchanges with such retail liquidity programs, order types, or market maker obligations could elect to propose rule changes to maintain the current operation of these rules. Such proposals could mitigate any follow-on economic effects (both benefits and costs) but would require exchanges to incur the expenses associated with proposing amendments to their rules. The Commission understands that the proposed changes to the NBBO could affect numerous other SRO rules and requests comment on any significant follow-on economic effects. As discussed above,978 the proposed definition of round lot could result in an increase in the number of indications of interest in higher priced stocks that would be required to be included in 606(b)(3) reports. Depending on the number of potential indications of interest included as a result of the proposed rule, the Commission preliminarily believes that these changes could increase the benefits of Rule 606(b)(3) with little to no effect on costs.979 In particular, the inclusion could result in clients receiving information on order routing for more of their orders, with the resulting benefits. Further, because the incremental cost of adding orders to the reports is low, the Commission does not expect that adding additional indications of interest to the reports would significantly increase costs. In addition, the Commission preliminarily believes that the proposal may result in some rules appearing to change but such changes might not result in economic effects. For example, the proposed amendments may impact the compliance with Rules 602(a), 602(b), 604(a)(1), 604(a)(2), and Rule 610(c). It is unclear whether these impacts would have economic effects. For example, exchanges may already have procedures to collect and make available their best bids and offers to vendors, regardless of the size of those best bids and offers. Further, brokerdealers may already treat all bids and offers as firm quotes regardless of size and may already display all customer limit orders regardless of size. Finally, 978 See supra Section III.C1 (discussion of how the definition impacts Rule 606). 979 See 606 Adopting Release, supra note 227, for a discussion of the benefits of 606(b)(3). E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 exchanges may already pay the same rebates or charge the same access fees regardless of order size. To the extent that these practices are in place, there would be no economic effect from these changes. To the extent that these practices are not in place, the proposal may result in some additional compliance costs. The Commission invites comments on the impact of the proposal with compliance cost for Rules 602(a), 602(b), 604(a)(1), 604(a)(2), and Rule 610(c). (iv) Request for Comments The Commission requests comments on its analysis of the economic effects of the proposed amendments to the NBBO, protected quotes, and other conforming changes. In particular, the Commission solicits comment on the following: 210. Effectively, the proposed round lot definition reduces the minimum quotation size for the NBBO, depending on the price of the security. The Commission requests that commenters provide any insights they may have as to the economic effects of priceimproving odd-lot quotes being reported as the NBBO in the new core data. 211. Do you agree with the Commission’s data analysis of the potential frequency of improvements to the NBBO and the magnitude of improvements to the NBBO spread? Why or why not? Please provide additional data analysis as needed to support your answer. 212. What would be the economic effects of the proposed changes to the PBBO? For the twelve stocks that currently have a round lot defined as one share, how often would such securities not have a protected best bid (‘‘PBB’’) or protected best offer (‘‘PBO’’)? What would be the economic effects of not having a PBB or PBO in these stocks? For stocks that tend to have a significant number of odd-lots that are rolled-up into the current PBBO, the proposed changes to the PBBO could widen the PBBO spread. What would the magnitude of this increased spread be and how often would the PBBO be wider? Would a wider PBBO necessarily result in higher transaction costs for investors? If so, by how much would transaction costs increase? Please explain and provide any data analysis needed to support your answer. 213. How do exchanges currently calculate their protected quotes? If the proposal were to allow odd-lots to be rolled up across prices to create a protected quote, how would the PBBO be different than the proposed PBBO? Would the economic effects of such a change be different than the economic VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 effects of the proposed protected quotes? Please explain. 214. How would the changes to the NBBO and protected quotes affect offexchange executions? What benchmark price would ATSs, internalizers, and other off-exchange venues use to price transactions? Would this differ from current practice? Please explain. What would be the effect of this on transaction costs of off-exchange executions? How large would any change in transaction costs be? 215. How would the proposed changes to the NBBO and protected quotes affect transaction costs incurred by various investor types—e.g., active institutional investors, passive institutional investors, and retail investors? Please explain. How large would any change in transaction costs be for each investor type? Please provide any data analysis needed to support your answer. 216. How would the proposed changes to the NBBO and PBBO affect order routing decisions and the share of order flow captured by each exchange and off-exchange venue? Would some exchanges or other venues gain order flow while others lose order flow? What are the factors that could determine a gain or loss in order flow? Can you quantify this change in order flow? What would be the economic effects of any changes in order flow? Would such changes result in net welfare gains or losses? Please explain in detail. 217. Under the proposed NBBO, what would ATSs and other off-exchange venues use as a benchmark to price executions on their system? How would this affect execution quality for investors? How would the proposed NBBO affect the operation of certain orders types on ATSs? Please explain. 218. To what extent would the proposed NBBO result in additional message traffic for those market participants who currently rely on SIP data and, under the proposal, would receive and use NBBO but not depth of book information? Would these market participants incur significant initial costs to prepare to receive and use such additional message traffic? Would these market participants incur significant ongoing costs in receiving and using such additional message traffic? Do you agree that most such broker-dealers currently pay for SIP NBBO data on a ‘‘per query’’ basis and, therefore, would not incur significant initial or ongoing costs as a consequence of any increase in message traffic? Please explain. 219. To what extent would the proposal result in exchanges and other trading venues incurring costs to reprogram their matching engines to PO 00000 Frm 00111 Fmt 4701 Sfmt 4702 16835 account for changes in the NBBO and protected quotes? 220. Do you agree with the Commission’s assessment about the implementation costs for implementing a definition of the protected quote that differs from the NBBO? Why or why not? Please also submit any insights you may have as to the size and scope of the effect of this change. 221. Would the change to the NBBO result in an increase in the proportion of time in which the market is locked or crossed? Why or why not? If so, what would be the economic effects of this increase? Would this effect vary across securities? Please explain in detail. 222. How often do locks or crosses occur between odd lot orders today? Please provide any data analysis needed to support your answer. 223. Would an increase in locked or crossed markets result in market participants incurring additional implementation costs to account for this increase? If so, what would be the magnitude of the additional implementation costs? Please quantify. Do you agree with the Commission’s assessment of the relevant costs? 224. Do you agree that the proposed definition of the NBBO could change the benchmark price for short sale executions following a trigger of Rule 201 of Regulation SHO? What would be the economic effects of the changes in the benchmark? Would the proposal significantly increase the burdens on short selling following a trigger? Please explain. 225. Do you agree that the proposed definition of the NBBO could reduce the frequency of triggers of Rule 201 of Regulation SHO? Would such a reduction have significant economic effects? Why or why not? Please explain. 226. How would the proposal alter the operation of Rule 605? If so, would such changes have any economic effects? Would execution quality appear better or worse for all market participants or would it affect the relative appearance of execution quality? Would the changes result in actual changes to execution quality or just apparent changes in execution quality? Would the changes result in fewer orders being included in the Rule 605 statistics? Please explain. 227. The proposed changes to the NBBO and Protected Quotes likely affect the operation of numerous SRO rules. Please provide information on the number and type of SRO rules that rely on the NBBO or protected quotes. Assuming the SROs do not propose amendments to these rules, what would be the effect of the proposed changes to the NBBO and protected quotes on the E:\FR\FM\24MRP2.SGM 24MRP2 16836 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules operation of these SRO rules and the likely resulting economic effects? How much would SROs expend in proposing to amend their rules, assuming the SROs choose to amend their rules? Please provide estimates of such costs. 2. Decentralized Consolidation Model This section focuses on the economic effects pertaining to the proposed decentralized consolidation model. The section first discusses relevant broad economic considerations and economic benefits and costs of the proposed model with regards to competing consolidators, then addresses economic benefits and costs for self-aggregators, and concludes with the discussion of conforming changes. lotter on DSKBCFDHB2PROD with PROPOSALS2 (a) Broad Economic Considerations About the Decentralized Consolidation Model The economic analysis of the effects of the decentralized consolidation model assumes that upon the introduction of the model, a sufficient number of competing consolidators would enter the market so that competitive market forces would have a significant effect on their behavior. Several factors affect the reasonableness of this assumption: Competing consolidators’ ability to offer differentiated products, barriers to entry into the competing consolidator space, the fees for data content and consolidation and dissemination services, and the uncertainty regarding connectivity charges for proposed consolidated market data. While the Commission recognizes uncertainty in these factors and that certain economic impacts depend on this assumption, the Commission believes that the risk of few or zero competing consolidators is low. Further, the Commission notes that it would consider the state of the market and the general readiness of the competing consolidator infrastructure in determining whether to approve an NMS plan amendment that would effectuate a cessation of the operation of the existing exclusive SIPs. (i) Factors This section discusses the factors affecting the reasonableness of the assumption that a sufficient number of competing consolidators would enter the market. a. Competing Consolidators’ Ability To Offer Differentiated Products The first factor that may affect the number of firms willing to register as competing consolidators is firms’ ability to offer differentiated products. Market participants’ demand for proposed VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidated market data is likely to be heterogeneous because there are many different investor types (e.g., retail investors, small banks, market participants focused on value investment) that have differing investment strategies. The ability of competing consolidators to attract different investor types would depend on fees set by the national market system plan(s) and competing consolidators’ ability to differentiate among themselves.980 Competing consolidators’ ability to differentiate may be necessary to ensure multiple competing consolidators are serving the market for the following reasons. As discussed above, the production of consolidated data involves relatively higher fixed costs and lower variable costs.981 In such markets, the firms have additional incentives to increase the number of their customers in order to spread the fixed cost across a larger base of consumers. Therefore, due to the fixedcost nature of the market and resulting economies of scale, without differentiation, the competing consolidator market could consist of only one competing consolidator because the largest competing consolidator would be able to offer the most competitive price. However, the Commission preliminarily believes that the competing consolidators would be able to differentiate among themselves by product customization; by focusing on different segments of demand; and/or by offering varying levels of other services such as customer service, ease of user interface, analytics, data reformatting and normalization services, and latency rates. Competing consolidators could offer different consolidated data products that range from full consolidated market data to subsets of consolidated market data such as top of book products. In addition, because exchanges offer different connectivity options, some competing consolidators could differentiate themselves by specializing in lower latency data. Other competing consolidators could target data users who might prefer not to have the lowest latency product if the higher latency products came with a lower price or additional analytics. Competing consolidators could offer a range of user interfaces and analytics (e.g., various ways to display consolidated data, or provide forecasting services) that appeal to different data users or could even 980 See infra Section VI.C.2(a)(iii) for a discussion of the influence of fees on the ability to differentiate. 981 See supra Section VI.B.3(a). PO 00000 Frm 00112 Fmt 4701 Sfmt 4702 offer an analytical environment to customize analytics (e.g., offer software tools allowing market participants to analyze and summarize consolidate data). Differentiation along these dimensions would allow competing consolidators to offer different services at potentially different prices to different types of end users. Therefore, the market would be able to sustain multiple competing consolidator businesses, and this would encourage further entry into the market. b. Barriers to Entry The second factor that would affect the number of competing consolidators is the barriers to entry into the competing consolidator space. Potential entrants into the competing consolidator business could incur two types of barriers to entry: Business implementation costs that emerge from the technical necessities of becoming a competing consolidator and regulatory compliance costs. The business implementation costs would include creation or modification of technical systems to receive, consolidate, and disseminate the proposed consolidated market data. Competing consolidators would need to have systems and connections in place to receive data content from all SROs and then to disseminate the proposed consolidated market data to a variety of market participants who would purchase their products. Further, based on the proposed rule, potential entrants would need to satisfy two compliance requirements to become competing consolidators. The first is the Regulation SCI requirements 982 that would be applicable to competing consolidators because the proposed rule amends Rule 1000 of Regulation SCI to expand the definition of ‘‘SCI entity’’ and include competing consolidators. The second is the proposed Rule 614 requirements, including the Form CC requirements.983 There would be both initial implementation and ongoing costs to comply with these two regulatory requirements. Both the business implementation and regulatory compliance costs would differ based on the entrant type. As discussed above,984 the Commission preliminarily believes that five types of entities may register to become competing consolidators: (1) Market data aggregation firms, (2) broker-dealers that currently aggregate market data for internal uses, (3) the existing exclusive SIPs, (4) new nonSRO entrants, and (5) SROs. The 982 See supra Section IV.B.2(e)(ii). supra Section IV.B.2(e). 984 See supra Section V.D.2. 983 See E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules barriers to entry would differ across these five types of entities. The Commission preliminarily believes that the existing market data aggregation firms and some brokerdealers that currently aggregate market data for internal uses could face large barriers to entry to become competing consolidators. Because they currently collect, consolidate, and, in some cases, disseminate market data to their customers, much like competing consolidators would, the Commission preliminarily believes that firms and broker-dealers that currently aggregate proprietary market data would not have to extensively modify their systems. However, the Commission preliminarily believes that each of these firms and broker-dealers would incur costs to expand their bandwidth and purchase hardware to receive information that is not currently disseminated in the exchange proprietary market data feeds, such as the proposed regulatory data and administrative data. Further, based on the proposed rule, current market data aggregators and broker-dealers that currently aggregate market data for internal uses would incur new compliance costs to satisfy the two regulatory compliance requirements to become competing consolidators. As discussed below,985 these costs could be large and therefore may affect entry and the benefits of the decentralized consolidation model. The Commission preliminarily believes that barriers to entry for exclusive SIPs to become competing consolidators are low and are likely lower than the barriers to entry of the existing market data aggregation firms and some broker-dealers that currently aggregate market data for internal uses. The Commission preliminarily believes that the existing exclusive SIPs may choose to become competing consolidators due to their years of experience in collecting, consolidating, and disseminating market data. Because the systems used by the exclusive SIPs already collect information in quotations and transactions from the SROs, aggregate it, and disseminate it, the Commission preliminarily believes that the exclusive SIPs would not have to extensively modify their systems.986 The Commission preliminarily believes lotter on DSKBCFDHB2PROD with PROPOSALS2 985 See infra Section VI.C.2(e)(ii). on Commission staff expertise, the Commission understands that existing exclusive SIPs’ protocols for receiving direct data from exchanges are not standardized and introduce additional operational complexities. However, the operators of exclusive SIPs, the exchanges, have figured out how to aggregate direct feeds for the purposes of their exchange matching engines, so they have the technology that would be deployable in the new decentralized consolidation model. 986 Based VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 that each exclusive SIP would incur costs to expand their bandwidth and connections to consume and disseminate the expanded consolidated data as well as to transmit it with lower latency, and to program feed handlers to receive and normalize the different formats of the data feeds developed by the exchanges. Additionally, the exclusive SIPs would have some compliance costs. The exclusive SIPs already are required to satisfy Regulation SCI requirements since they are currently SCI entities. And they also have experience with the consolidated market data business. Thus, any exclusive SIP entering the competing consolidator business would only have ongoing Regulation SCI and initial and ongoing compliance costs. The Commission preliminarily believes that the difference between compliance costs to satisfy these requirements and current exclusive SIP compliance costs are small.987 The Commission anticipates that firms without prior experience in the market data aggregation business may become competing consolidators but that they would have the highest barriers to entry because they would have to build new systems to comply with the proposed rules. The new entrants would incur costs to program feed handlers to be able to receive and normalize exchange data in different formats, and purchase bandwidth and connections to exchanges and colocation. These costs increase the fixed costs of participating as a competing consolidator in the market, further contributing to the barriers to entry. New entrants would also have the highest compliance costs among all potential entrants, since they would have to build compliance systems from scratch to satisfy both Regulation SCI and proposed Rule 614, including Form CC, requirements. Therefore, the Commission preliminarily believes that there may be a limited number of firms that could enter the market data aggregation business for the first time. The Commission anticipates that SROs may choose to become competing consolidators. Although SROs may be able to leverage existing systems in developing a system compliant with the proposed rules, the Commission preliminarily believes that SROs would likely have to build at least some new systems and thus may incur initial costs.988 At the same time, despite higher initial costs, the Commission preliminarily believes that the barriers to entry for SROs are relatively low due 987 See 988 See PO 00000 infra Sections VI.C.2(d) and VI.C.2(e)(ii). supra Section V.D.2(e). Frm 00113 Fmt 4701 Sfmt 4702 16837 to their current unique position in the industry and their particular infrastructure and expertise. Similar to the existing exclusive SIPs, SROs already are required to comply with Regulation SCI. SROs that have experience in the consolidated market data business (e.g., exchanges that currently operate an exclusive SIP) would only incur ongoing Regulation SCI and initial and ongoing Form CC compliance costs. SROs that do not have experience in consolidated market data business would incur some initial Regulation SCI costs in addition to the ongoing Regulation SCI costs. These SROs would also incur initial and ongoing proposed Rule 614, including Form CC, compliance costs. The Commission preliminarily believes that SROs that wish to become competing consolidators could find it convenient to arrange an affiliate to do this work so as to avoid having their competing consolidator business subject to the same regulatory regime as an SRO.989 c. Fees for Consolidated Market Data Another factor that would affect the number of competing consolidators relates to the fees that the effective national market system plan(s) would set for the proposed consolidated market data content and the price competing consolidators would charge market participants for consolidation and dissemination services.990 If these fees are set too high or have the effect of limiting product differentiation,991 they could limit the opportunities for competing consolidators to build profitable businesses. Regarding the fees for the proposed consolidated market data content, the Commission recognizes uncertainty in these fees. The fees charged by the effective national market system plan(s) for the data content necessary to create proposed consolidated market data would be proposed by the operating committee(s) of the national market system plan(s) and filed with the Commission.992 Because such fees depend on future action by the effective national market system plan(s), the Commission cannot be certain of the level of those fees or whether such fees would provide discounts for those end users who wish to receive subsets of 989 As explained above, SROs that wish to act as competing consolidators would not be required to register with the Commission on Form CC. See supra note 537. 990 See infra Section VI.C.2(b) (discussing economic analysis of data content, consolidation, and dissemination, and connectivity fees). 991 See supra Section VI.C.2(a)(i)a. (discussing potential dimensions of product differentiation by competing consolidators). 992 See supra Section IV.B.2(c). E:\FR\FM\24MRP2.SGM 24MRP2 16838 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidated market data.993 As discussed further below, while these fees would not be set by competition, they must be fair and reasonable and not unreasonably discriminatory. Assuming that such fees would be reasonably related to costs,994 the Commission believes the resulting data content fees could be set at a level that could help sustain the competing consolidator business. Further, if the national market system plan(s) choose(s) to offer discounts for subsets of consolidated market data, competing consolidators would have greater opportunity to offer differentiated products to market participants. Likewise, exchanges continuing to offer connectivity at different latencies would further promote product differentiation by competing consolidators. The Commission preliminarily believes that the national market system plan(s) could propose such discounts because at least one exchange has suggested tiered SIP data products.995 The fees charged by competing consolidators to market participants would also determine how many competing consolidators could profitably exist. Given the high fixedcost nature of the business, with multiple competing consolidators each competing consolidator’s fixed costs would be spread over fewer customers than the costs with just one or few competing consolidators. However, the market for consolidated market data is relatively large enough 996 that the Commission preliminarily believes that the average cost per customer is likely to be reasonable enough to support multiple competing consolidators. lotter on DSKBCFDHB2PROD with PROPOSALS2 d. Connectivity The fourth factor affecting the number of competing consolidators is the uncertainty regarding connectivity charges for proposed consolidated market data and their effects on the viability of the decentralized model. The data connectivity fees would continue to be set forth in the exchanges’ fee schedules.997 Connectivity fees for the provision of consolidated market data would be a fixed input cost for competing 993 See infra Section VI.C.2(b)(ii) for further discussion. 994 See supra note 439. (The Commission has previously stated that similar fees can be shown to be fair and reasonable if they are reasonably related to costs.) 995 See supra note 316 (citing an NYSE proposal to enhance the exclusive SIPs by offering depth of book, odd-lot quotes, and primary auction imbalance information in three new tiers of service, each of which with different levels of data content). 996 See supra Section VI.B.2(c). 997 See supra note 440. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidators, and, therefore, the level of connectivity fees for proposed consolidated market data may affect the economies of scale and the resulting number of competing consolidators. The Commission invites comments on the likely effects of connectivity fees for consolidated market data on the proposed competing consolidator business. (ii) Impact on Economic Effects of Decentralized Consolidation Model As discussed in the previous section, there are several factors that may affect the number of competing consolidators entering the market. While the Commission recognizes uncertainty in some of these factors, the Commission preliminarily believes that the risk of few competing consolidators entering the market is low. The Commission also preliminarily believes that the risk of zero competing consolidators is even lower because the possibility of being the only consolidator in the market for proposed consolidated market data could represent a substantial business opportunity—especially given market participants’ different preferences for data content and latency—thus leading to entry into the competing consolidator market space. In particular, a monopolist in the market for proposed consolidated market data would be able to charge high prices for the service fee portion of the overall price 998 and thus capture supra-competitive profits from all market participants.999 Based on the discussion above, the Commission preliminarily believes that entry into the competing consolidator market space will continue until competing consolidators’ profits decrease to competitive levels. The assumption that there would be a sufficient number of competing consolidators entering the market affects some economic effects of the decentralized consolidation model. Generally, many of the benefits and competitive considerations below depend on this assumption. For example, the Commission preliminarily believes that a higher number of competing consolidators would lead to lower fees paid by market participants for proposed consolidated market data,1000 larger gains in efficiency in the delivery of proposed consolidated market data and market data communication innovations,1001 as well as a reduction in data consolidation and 998 See infra Sections VI.C.2(b) and VI.C.2(c). profits are profits above what can be sustained in a competitive market. 1000 See infra Section VI.C.2(b). 1001 See infra Section VI.C.2(c). 999 Supra-competitive PO 00000 Frm 00114 Fmt 4701 Sfmt 4702 dissemination latencies.1002 In addition, some of the costs discussed below also depend on this assumption. For example, the transition to a competing consolidator model would decrease regulatory compliance costs imposed by Regulation SCI on existing exclusive SIPs that may register as competing consolidators, by changing their status from ‘‘critical SCI systems’’ to standard ‘‘SCI systems.’’ 1003 While the Commission preliminarily believes that the risk of few competing consolidators is low, as discussed above,1004 in determining whether to approve an NMS plan amendment that would effectuate a cessation of the operation of the existing exclusive SIPs, the Commission would consider the state of the market and the general readiness of the competing consolidator infrastructure. Examples of some of the things that the Commission could consider include the status of registration, testing, and operational capabilities of multiple competing consolidators, self-aggregators, and market participants; capabilities of competing consolidators to provide monthly performance metrics and other data required to be published pursuant to proposed Rule 614(d)(5)-(6); and the consolidated market data products offered by competing consolidators. Therefore, the Commission believes the economic analysis below represents a reasonable assessment of the potential economic effects of the proposal notwithstanding the assumption of sufficient competing consolidators. (b) Analysis of the Impact on Data Fees This section discusses potential effects of the introduction of the decentralized consolidation model on prices market participants pay for consolidated market data. When comparing data fees for proposed consolidated market data with current data fees, this economic analysis holds data content constant. In other words, the fee comparison in this analysis is between what market participants would pay under the proposed rule versus what they currently would have to pay to access the same content of the proposed consolidated market data. After analyzing how fees could change for the same data content, the analysis then considers the costs to various market participants, including those market participants who are likely to expand the content of data from that 1002 Id. 1003 See infra Section VI.C.2(e)(ii) (discussing heightened requirements for ‘‘critical SCI systems’’ versus standard requirements for ‘‘SCI systems’’). 1004 See supra Section IV.B.6. E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules they currently utilize. This last analysis is critical to understanding the potential for many of the benefits and costs discussed above in Section VI.C.1 and below in Section VI.D.1. The Commission preliminarily believes that the fees for consolidated market data could be lower than fees that market participants pay for equivalent data today, but recognizes significant uncertainty. The Commission also recognizes uncertainty in the fees that subscribers choosing to receive a subset of consolidated market data would pay under the proposed rule and that these subscribers could pay higher or lower fees than they do today for equivalent data. lotter on DSKBCFDHB2PROD with PROPOSALS2 (i) Fees for Proposed Consolidated Market Data Content The Commission first considers the effect of the proposed rule on fees market participants would pay for proposed consolidated market data versus what they currently would have to pay to access the same content of the proposed consolidated market data. The Commission preliminarily believes that fees for proposed consolidated market data could be lower than fees for equivalent data today, but recognizes significant uncertainty about how the effective national market system plan(s) would set the fees for the data content and how SROs would set the fees for connectivity necessary to create proposed consolidated market data as well as how the competing consolidators would price their services. For the purposes of this section, the Commission assumes that the effective national market system plan(s) would set fees for the proposed consolidated market data content that are reasonably related to costs.1005 The Commission preliminarily believes that three sets of fees may be affected as a result of the proposed rule: fees for the data content necessary to create proposed consolidated market data, fees for the consolidation and dissemination of proposed consolidated market data, and fees for the connectivity services necessary to receive the components of proposed consolidated market data from the SROs. Regarding the SIP data, the first two fees are currently bundled into a single fee, which covers SROs’ data and the exclusive SIPs’ operations such as consolidation and dissemination of data. The proposed rule would unbundle these two components and 1005 See supra note 439. (The Commission has previously stated that similar fees can be shown to be fair and reasonable if they are reasonably related to costs.) VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 would allow competing consolidators to provide the data consolidation and dissemination services. Under the proposed rule, the fee for data content would be set by the effective national market system plan(s).1006 The operating committee(s) of the effective national market system plan(s) would propose the data content fees for the SROs’ data required to create proposed consolidated market data and would then file the proposed fees with the Commission for consideration pursuant to Rule 608.1007 Competing consolidators would charge a second fee for their consolidation and dissemination services, which could also include associates costs for data access at exchanges and transmission of data between data centers. The fees for data consolidation and dissemination would be determined by competition among competing consolidators. Finally, SROs currently charge connectivity fees for both exclusive SIP and proprietary data feeds. Under the proposal, SROs could charge connectivity fees to competing consolidators and self-aggregators, which must be consistent with statutory standards.1008 Competing consolidators could charge connectivity fees to end users, which would be subject to competitive forces. First, the Commission preliminarily believes that how the proposed rule would affect the fees for the data content used to create proposed consolidated market data is uncertain, primarily because they depend on future action by the effective national market system plan(s), but the Commission preliminarily believes that such fees would likely be lower than today’s fees for the equivalent data. Currently, market participants who would like to access content equivalent to the data content of the proposed consolidated market data would need to separately purchase SIP data and additional data elements via proprietary data feeds. Under the proposed rule, market participants would be able to receive substantially similar content from one source.1009 Further, market 1006 See supra note 96 (discussing amendments to the provision regulating NMS plan(s) fee filings). 1007 See supra Section IV.B.4; supra note 433. 1008 Currently, connectivity fees are charged to the market participants that connect to the exchange and not to end users. See infra note 1017. 1009 Currently, fees for SIP data and proprietary data are generally charged based on the number and type of end user of the data. For example, the CTA/ CQ Plan Schedule of Charges distinguishes fees by professional and non-professional subscribers and the number of devices. See CTA Plan, Schedule of Market Data Charges, supra note 851. The Nasdaq UTP Plan, Exhibit 2 provides separate fees for nonprofessionals and per device fees. See Nasdaq UTP PO 00000 Frm 00115 Fmt 4701 Sfmt 4702 16839 participants would pay the data content fees set by the effective national market system plan(s) for NMS stocks, which would be filed with the Commission under Rule 608 and be subject to public comment.1010 Therefore, the analysis of the potential impact on data content fees depends on, among other things, whether the current fees for the proprietary data content that will be included in the newly defined consolidated market data are fair and reasonable and on how costs are likely to change. As discussed above, the Commission does not believe that the proposal would significantly increase SRO costs specifically for distributing data.1011 The proposal could, on the other hand, increase the allocation of fixed exchange costs to consolidated market data because the data content would expand.1012 However, the Commission lacks the necessary information to ascertain those impacts.1013 The Commission can deduce, however, that data content fees for the proposed consolidated market content are unlikely to increase. As discussed above,1014 the Commission understands that SRO proprietary feeds for depth of book data are significantly more expensive than the exclusive SIP feeds. The effective national market system plan(s) for NMS stocks would be unlikely to implement fees for the proposed consolidated market data content that are higher than the current fees for equivalent data unless it is demonstrated that the higher proposed fees are justified under the applicable legal standard. Plan, supra note 13. Similar user distinctions are made in proprietary data products. See Nasdaq, Price List—U.S. Equities, available at www.nasdaqtrader.com/ Trader.aspx?id=DPUSdata#tv (last accessed Jan. 30, 2020) (showing Nasdaq TotalView usage fees, which provide fees for professional and nonprofessional subscribers); NYSE Proprietary Market Data Fees (as of Nov. 4, 2019), available at https:// www.nyse.com/publicdocs/nyse/data/NYSE_ Market_Data_Fee_Schedule.pdf (showing the NYSE Integrated Feed fee schedule, which distinguishes between professional and non-professional users). 1010 Rule 608 of Regulation NMS, 17 CFR 242.608. 1011 See supra Section VI.C.1(b)(iv). 1012 See infra Section VI.C.4(a) for a discussion of the likely effects of the proposal on the revenues exchanges receive for proprietary data. 1013 In a comment letter, IEX provided data that the SRO markups on proprietary data may be large. In particular, IEX compared its own costs of providing proprietary market data with the fees charged by other exchanges for comparable produces and found markups of 900–1,800 percent. See Katsuyama Letter II; Letter to Brent J. Fields, Secretary, Commission, from John Ramsay, Chief Market Policy Officer, Investors Exchange LLC (Feb. 4, 2019) (discussing the ‘‘all-in’’ cost to trade concept advocated by other exchanges). 1014 See supra Section VI.B.2(c). E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16840 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules The Commission preliminarily believes that the proposal is likely to reduce data content fees. The Commission expects that unless the Commission approves a filing for data content fees that would set fees at a level that the effective national market system plan(s) has shown is consistent with statutory standards, the fees for the proposed consolidated market data— which is equivalent to the existing exclusive SIP data plus additional proprietary DOB data product elements—would remain at current SIP data fee levels and thus would be lower than the current fees for the equivalent data.1015 Absent information on data costs, the Commission, at this time, recognizes that such fees could be lower than current exclusive SIP fees, similar to current exclusive SIP fees, greater than current exclusive SIP fees but less than the fees for the current equivalent of proposed consolidated market data, or similar to the current equivalent of proposed consolidated market data. However, the Commission preliminarily believes that such data content fees would be lower than current fees for equivalent data because, between 2010 and 2018, the proprietary data feed portion of the current fees for equivalent data appears to have increased at a rate that seems unlikely that costs have matched.1016 Second, the Commission preliminarily believes that data consolidation and dissemination fees for proposed consolidated market data would be lower than consolidation and dissemination fees market participants currently pay to receive equivalent data. Consolidation and dissemination fees that competing consolidators would charge would cover several associated costs, including fixed costs of hardware and software; processing to take in data; processing for consolidation (including compiling the NBBO and protected quotes); distribution of the data; and connectivity fees paid to exchanges to acquire the data for consolidation. The variable costs of the competing consolidators would be minor in comparison because additional data users would have a minimal impact on the costs of competing consolidators. The fixed costs of the competing consolidators could be spread out among its subscribers, including subscribers utilizing other proprietary data services provided by competing 1015 See supra note 96 (noting the Commission’s proposal to rescind the provision of Rule 608 that allows a proposed amendment to an effective national market system plan(s) to become effective upon filing if the proposed amendment establishes or changes a fee or other charge). 1016 See supra Section VI.B.2(c). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidators that are not covered by the fees established by the effective national market system plan(s). To receive data equivalent to proposed consolidated market data today, market participants would have to pay separately for a portion of exclusive SIPs’ cost to perform consolidation and dissemination of market data and a fee for consolidation and dissemination of additional data elements of proposed consolidated market data that are available via thirdparty providers of proprietary market data, who face competitive pressures. As discussed above,1017 exclusive SIPs are not constrained by competition and thus have lower incentives to reduce their costs. By comparison, the Commission preliminarily expects that the competition among competing consolidators would put downward pricing pressure on these service fees. The Commission recognizes that the stronger the competition among competing consolidators, the harder it would be for any given competing consolidator to increase its consolidation and dissemination fees and make supra-competitive profits from these services.1018 Further, because having more subscribers could help competing consolidators spread their fixed costs out, any increase in the number of subscribers of current market data aggregators who would become competing consolidators would reduce the service fees of those aggregators in equivalent data. For these reasons, the Commission preliminarily believes that the competition among competing consolidators would lead to lower consolidation and dissemination fees for proposed consolidated market data as compared to these fees for equivalent data today. Third, the Commission preliminarily believes that connectivity fees charged by competing consolidators for proposed consolidated market data would also be lower than connectivity fees market participants would currently have to pay to receive equivalent data. To receive data equivalent to proposed consolidated market data today, market participants currently have to pay separately a connectivity fee to the exchanges to access SIP data and a connectivity fee to the exchanges or market data aggregators to access additional data elements of proposed consolidated market data that are not part of SIP data. Under the proposed rule, the Commission expects that market participants would pay only one 1017 See 1018 See PO 00000 supra Section VI.A.2. supra Section VI.C.2(c). Frm 00116 Fmt 4701 Sfmt 4702 connectivity fee for proposed consolidated market data, set by competing consolidators, and this connectivity fee would be subject to competition among competing consolidators. By contrast, current exchange connectivity fees are not as competitive because an exchange has sole control over its own connectivity charge for its proprietary market data. Therefore, the Commission preliminarily believes that connectivity fees that would be charged by competing consolidators for proposed consolidated market data would be lower than the connectivity fees for equivalent data today. The Commission recognizes that SROs would charge connectivity fees to competing consolidators and selfaggregators. The exchanges could continue to set connectivity fees for data feeds as part of their SRO fee schedules and these fees must continue to meet statutory standards.1019 The exchanges’ connectivity fees are not currently based on the number of end users, and therefore the Commission preliminarily believes that the connectivity fees for proposed consolidated market data would not be directly passed through to the end users. SRO connectivity fees would be fixed costs incurred by selfaggregators and by competing consolidators, a cost the latter could spread out among their end users as a part of the consolidation and dissemination fees. Additionally, because the total fees for the equivalent of proposed consolidated market data are likely to decline as a result of the proposal, some market participants may choose to purchase more consolidated market data content than they purchase today, such as purchasing the expanded core data. The likelihood of this outcome would depend on the difference between total fees for proposed consolidated market data and current total fees for equivalent data content. The economic effect of more market participants purchasing expanded core data is discussed above in Section VI.C.1(b). (ii) Fees for the Content of Current SIP Data The Commission also considers the effect of the proposed rule on fees market participants currently pay for SIP data content versus what they would pay for equivalent content under the decentralized consolidation model. 1019 For example, under Section 6(b)(4) of the Exchange Act, the rules of an exchange must ‘‘provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities.’’ 15 U.S.C. 78f(b)(4). E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules The Commission recognizes that a significant proportion of market participants currently purchase only SIP data and/or the unconsolidated equivalent of SIP data.1020 Under the proposed rule and conditional on fees for proposed consolidated market data, while some of these market participants would choose to purchase more data than they purchase today, other market participants would continue to purchase content equivalent to current SIP data (e.g., NBBO and TOB). The Commission preliminarily believes that data fees paid for equivalent data content could be higher than current SIP data fees or could be lower than current SIP data fees. Whether the fees are higher or lower depends on several factors: the data content fee structure proposed by the effective national market system plan(s) for NMS stocks, how competing consolidators allocate their costs of processing (i.e., receiving, consolidating, and disseminating) consolidated market data, and any connectivity fees charged by competing consolidators for consolidated market data. The Commission preliminarily believes that the data content fee structure proposed by the effective national market system plan(s) for NMS stocks under the decentralized consolidation model is an important factor in determining whether total data fees (i.e., the sum of data content fees, consolidation and dissemination fees, and connectivity fees) for the equivalent of current SIP data could be higher or lower under the proposed rule.1021 The Commission recognizes that because of the expanded scope of proposed consolidated market data relative to the current SIP data, the data content fee market participants would pay for data necessary to create proposed consolidated market data might be higher than the portion of current SIP data fees that accounts for the data content. Until the effective national market system plan(s) propose fees for the data content necessary to create proposed consolidated market data, the Commission is unable to determine whether this fee structure would charge lower fees for end users who wish to receive subsets of consolidated market data from competing consolidators. In other words, the Commission is unable to determine whether the effective national market system plan(s) for NMS stocks would propose a fee structure reflecting different tiers of data content for the proposed consolidated market data. Without such a structure, all 1020 See 1021 See supra Section VI.B.2(a). supra Section VI.B.2(c). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 subscribers to consolidated market data would pay the same data content fee regardless of whether they wish to receive all or a subset of consolidated market data. As a result, the proposal could increase the content fees for the equivalent of SIP data. This potential outcome is highly dependent on the effective national market system data plan(s) and fee proposals.1022 The fees for data consolidation and dissemination depend on how competing consolidators allocate fixed costs among subscribers receiving different subsets of data. As discussed above,1023 the Commission expects competing consolidators to offer a menu of products and services, regardless of the data structure of the effective national market system plan(s). Competing consolidators could elect to charge lower consolidation and dissemination fees to subscribers receiving subsets of data compared to fees charged to subscribers receiving all consolidated market data. In fact, the Commission preliminarily believes that competitive pressure could result in such a fee structure. As a result, the data consolidation and dissemination component of total fees charged to those who purchase content equivalent to SIP data could be lower than this component of current SIP data fees today. The fees for connectivity services paid by end users are likely to decline for some users but could increase for others. Currently, some SIP data users connect to the exchanges that are the administrators of exclusive SIPs and pay connectivity fees to access the SIP data. These connectivity fees are paid directly to the exchanges and do not go to the exclusive SIPs. There are also SIP data users that do not connect to the exchanges and thus do not pay SRO connectivity fees for SIP data, but may pay fees to other market data service providers. Under the proposed rule, both types of current SIP data subscribers may be charged a connectivity fee by competing consolidators when they subscribe to proposed consolidated market data. The Commission acknowledges that there is uncertainty over whether the competing consolidator connectivity fees would be larger or smaller than what some of the SIP data users currently pay in connectivity fees. The overall connectivity fees under the proposed rule may be larger if competing consolidators are not constrained by competition such that they can charge higher connectivity fees without concern for subscribers’ scope of content. On the other hand, as discussed above 1024 and given the potential connectivity options available, the Commission preliminarily believes competing consolidators will be under competitive pressure, and as such, they may offer a range of connectivity fees, including based on market participants’ scope of data content and speed choice. In that case, SIP data subscribers who currently pay connectivity fees to the exchanges may see their connectivity fees decline. (c) Benefits of the Decentralized Consolidation Model Pertaining to Competing Consolidators As discussed above,1025 currently SIP data is collected, calculated, and disseminated to market participants through a centralized consolidation model with an exclusive SIP for each NMS stock. Even though current exclusive SIPs are selected through a bidding process,1026 the Commission preliminarily believes that a competitive marketplace is more capable of producing the benefits that come from competitive forces than the process of soliciting bids for exclusive contracts.1027 In particular, the Commission preliminarily believes that the decentralized consolidation model would have three potential benefits for market participants. First, the Commission believes that the decentralized consolidation model offers the potential for more gains in efficiency in the delivery of consolidated market data, which may include cost savings that could be passed on to market participants, to emerge over time. Second, the Commission believes the model would enable consolidated market data delivery to continue to keep up with market data communication innovations in the future, in a way that the current centralized consolidation model has not. Third, the Commission preliminarily expects the new model would significantly reduce the various types of content and latency differentials that currently exist between SIP data and proprietary data products.1028 The Commission preliminarily believes that introducing competition into the provision of consolidated 1024 See supra Section VI.C.2(b)(i). supra Sections IV.A, VI.B.2(b). 1026 See supra Section VI.B.1. 1027 See supra Section VI.A.2; infra Section VI.D.2. 1028 See supra Section VI.B.2(b). 1025 See 1022 The Commission has proposed an order to modernize the governance of the data plans. See supra note 8. 1023 See supra Section VI.C.2(a). PO 00000 Frm 00117 Fmt 4701 Sfmt 4702 16841 E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16842 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules market data and dissemination services would present more incentives for reducing costs and lowering prices for those services,1029 and innovating on product offerings more tailored to the needs of the consumers. It is therefore the Commission’s preliminary expectation that the decentralized consolidation model would result in a meaningful increase in investments intended to lower costs and/or improve quality in the provision of consolidated market data. This represents an economic benefit for the industry, some of which would be kept by competing consolidators as profit, and some of which would be received by market participants in the form of lower fees and/or improved quality for competing consolidator services. As discussed above,1030 some market participants may benefit as a result of the introduction of the decentralized consolidation model because of the lower price for proposed consolidated market data relative to today’s price for consolidated market data holding data content constant. These market participants are likely interested in expanded consolidated market data, and currently would have to pay to obtain additional data elements via proprietary data feeds. Therefore, these market participants could pay a lower price for expanded consolidated market data under the decentralized consolidation model. The Commission preliminarily believes that the decentralized consolidation model would provide a benefit to market participants by increasing the amount of innovation in the consolidation and dissemination of consolidated market data. This is a benefit because it represents an improvement over the current system for dissemination of SIP data, in which the lack of competitors reduces the incentives of the exchanges that govern SIPs to innovate.1031 As mentioned above, the Commission preliminarily believes that the current system of disseminating SIP data through exclusive SIPs, which are managed by Equity Data Plans’ operating committees, is not well suited to keep up with the pace of innovation in data processing and communication in the market.1032 The decentralized consolidation model would place the task of determining the method of consolidation and dissemination to free market forces, which the Commission preliminarily believes would make it 1029 See infra Section VI.D.2. supra Section VI.C.2(b). 1031 See supra Section VI.A.2. 1032 Id. 1030 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 easier to innovate rapidly and maintain competitive parity with other market participants. The end result of this improved efficiency in investment decisions by consolidators would be to improve the quality and reliability of market data consolidation and dissemination services, which would result in market participants having better data to make trading decisions.1033 The Commission preliminarily believes this would lead to better trading decisions, lower execution costs, and would help reduce information asymmetries between market participants that currently solely rely on SIP data and market participants who purchase the exchanges’ proprietary data products. The Commission preliminarily believes that the magnitude of this benefit depends on the assumption that there would be a sufficient number of competing consolidators entering the market. The Commission preliminarily believes that another benefit of the decentralized consolidation model would be to substantially reduce the latency differential between proposed consolidated market data and proprietary data. This belief is based upon the Commission’s assumption that the business practices of current market data aggregators, some of which will likely become competing consolidators, would serve as a model for how competing consolidators would operate under the decentralized consolidation model.1034 Current market data aggregators have achieved connectivity, transmission, consolidation, and distribution speeds that are meaningfully faster than SIP data even as they process larger amounts of data than SIP data.1035 Therefore, the Commission believes that competition among competing consolidators would keep market data consolidation and distribution feeds close to the speeds achieved in the private market currently. The Commission preliminarily believes that all forms of latency discussed previously—geographic, consolidation, and transmission latency 1036—have the potential to be the source of these reductions in the latency differential. The Commission 1033 See infra Section VI.D.1. supra Section VI.C.2(a). 1035 The Commission preliminarily believes that if the existing exclusive SIPs choose to become competing consolidators in the decentralized consolidation model, the competition with other competing consolidators will incentivize them to improve their connectivity, transmission, consolidation, and distribution speeds to the levels of other competing consolidators. 1036 See supra Section VI.B.2(b). 1034 See PO 00000 Frm 00118 Fmt 4701 Sfmt 4702 understands that the existing market data aggregator business does not rely on the single-instance consolidator model but instead produces a separate consolidated feed at each data center. This has the potential to substantially reduce geographic latency for data centers that are not co-located with one of the existing exclusive SIPs because it means new information at a data center can be used immediately at that data center instead of being returned to the processing center first. The Commission therefore expects that the decentralized consolidation model would serve to substantially reduce geographic latency in the same way for market participants. For instance, the existing market data aggregators already have infrastructure in place to consolidate market data in the described way. And if the existing exclusive SIPs become competing consolidators, they would also have to produce separate consolidated feeds at each data center to be able to compete with other competing consolidators. Therefore, the Commission preliminarily believes that the geographic latency reduction in the decentralized consolidation model can be achieved even if one existing market data aggregator enters the competing consolidator business. Therefore, the benefit of the decentralized consolidation model with regard to geographic latency would not rely heavily on the assumption that a large number of consolidators would enter the market.1037 Importantly, as discussed above,1038 geographic latency is the biggest cause of latency differentials between current SIP data distributed by exclusive SIPs and current proprietary data feeds. Also, the Commission understands that many current market data aggregators rely on wireless communications to receive data from various exchange data centers, using fiber connections as a backup in case of bad weather. To the extent that wireless communications are faster than current transmission methods for SIP data, the Commission expects the decentralized consolidation model to reduce transmission latency as well. In addition, to the extent that existing market aggregators have developed faster consolidation methods, the Commission expects that the decentralized consolidation model would also reduce consolidation latency. The Commission preliminarily believes that the effect of the decentralized consolidation model on the consolidation and transmission 1037 See 1038 See E:\FR\FM\24MRP2.SGM supra Section VI.C.2(a). supra Section VI.B.2(b). 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules latencies depends on robust competition among competing consolidators going forward. The Commission preliminarily believes that to the extent that the benefits of faster access to market data come from the ability to engage in more timely participation in the provision of liquidity, this effect represents an economic benefit to the equity market generally because it would provide more fair and equal access to market data and would reduce information asymmetries among market participants. In particular, to the extent that the existing advantages of having access to fast proprietary data feeds are derived from trading strategies exploiting differentials in the speed of access to market data (i.e., exploiting traders in the market who currently rely solely on slower SIP data), this benefit would represent a transfer from current users of faster proprietary data to the users of proposed consolidated market data in the decentralized consolidation model that would now also have access to faster data.1039 In order for both economic benefits and transfers to be realized, at least some market participants that are new users of fast and more content-rich consolidated market data would need to possess the technological capability to take advantage of the speed improvements the decentralized consolidation model is likely to provide. It is the Commission’s preliminary understanding that such technological capabilities are expensive to acquire, and this fact would reduce the amount of benefit and the degree to which individual market participants can profit (through the transfers mentioned above) from the decrease in data latency. If even a small delay remains between the typical competing consolidator’s consolidated market data feed and proprietary data feeds, then the benefits of increased consolidated market data delivery speed described above are likely to be smaller. This belief is based on the Commission’s preliminary understanding that speed gains at these timescales only matter insofar as to help a market participant react to new information faster than other market participants.1040 Additionally, the Commission notes two other potential benefits of the proposed amendments. First, market participants could potentially save on the cost of consolidated market data 1039 See also Don Bollerman, A NYSE Speed Bump You Weren’t Aware Of, IEX available at https://iextrading.com/about/press/op-ed/ (last accessed Jan. 8, 2020) (discussing the effect of speed differentials on trading). 1040 See supra Section VI.B.2(b). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 because they will only need to subscribe to one competing consolidator instead of two exclusive SIPs (i.e., Nasdaq UTP and CTA/CTQ). To the extent market participants can subscribe to one competing consolidator, they could save money by not having to pay the costs of processing consolidated market data to two different providers. Additionally, market participants may also save on their infrastructure costs if they have the ability to customize their data purchases and receive, for example, narrower data content than proposed consolidated market data. Market participants may achieve this if competing consolidators offer tiered levels of service with different data contents and different service fees based on the needs of specific types of investors similar to what one SIP proposed recently.1041 Second, expanding Regulation SCI to include competing consolidators would help ensure that competing consolidators’ systems involved in the collection, consolidation, and dissemination of proposed consolidated market data are able to maintain their operational capability, including the ability to maintain effective operations, minimize or eliminate the effect of performance degradations, and have sufficient backup and recovery capabilities. The Commission preliminarily believes that competing consolidators being subject to the Regulation SCI requirements would lead to, among other things, fewer interruptions in the data delivery process and, thus, may result in better trading decisions.1042 (d) Costs of the Decentralized Consolidation Model Pertaining to Competing Consolidators The Commission preliminarily believes that the proposed amendments that introduce a decentralized consolidation model are likely to have both direct and indirect costs on potential competing consolidators, SROs, existing exclusive SIPs, and market participants, as detailed below. As explained below, the Commission preliminarily estimates that the direct costs to each potential competing consolidator would be between around $5.12 MM and $5.13 MM in ongoing annual costs, and total one-time costs of up to between approximately $897,000 and $2.40 MM, depending on entity type.1043 Further, the Commission preliminarily estimates that costs to 1041 See supra Section VI.C.2(b); supra note 267. infra Section VI.C.2(e)(i). 1043 These costs do not include the costs of compliance with expanded Regulation SCI, which are discussed below. See infra Section VI.C.2(e)(ii). 1042 See PO 00000 Frm 00119 Fmt 4701 Sfmt 4702 16843 each SRO from the proposed amendments regarding the decentralized consolidation model include up to around $246,000 in the direct one-time costs, and around $128,000 in the ongoing annual costs. The Commission expects, however, that the proposed amendments that introduce a decentralized consolidation model would have additional indirect costs. Some of these direct and indirect costs are likely to be passed on to investors. As discussed above,1044 the Commission preliminarily believes that five types of entities may register to become competing consolidators and would have to build systems, or modify existing systems, that comply with the proposed rules: (1) Market data aggregation firms, (2) broker-dealers that currently aggregate market data for internal uses, (3) the existing exclusive SIPs, (4) new entrants, and (5) SROs. The Commission preliminarily estimates that all direct ongoing annual costs and some one-time costs would be common among all competing consolidators and that some one-time costs would vary depending on entity type. For purposes of the PRA,1045 the Commission preliminarily estimates that direct ongoing costs for each competing consolidator, except for SROs, would be $5,126,167 and consist of the following costs: Costs of $5,744 to amend Form CC prior to the implementation of material changes to pricing, connectivity, or products as well as to correct inaccurate or incomplete information; 1046 costs of $25 to obtain digital IDs for the purposes of signing the Form CC annually,1047 costs of around $5.07 MM associated with operating and maintaining a competing consolidator system; 1048 costs of $120 to ensure that it has posted the correct direct URL hyperlink to the Commission’s website on its own website; 1049 costs of $4,360 of recordkeeping; 1050 and costs of 1044 See supra Sections V.D.2, VI.C.2(a). costs cited in this section are quantified from estimates in the PRA. See supra Section V. 1046 See supra Section V.D.1(b); supra note 671. 1047 See supra Section V.D.1(b). 1048 These costs are composed of labor costs of $176,250, external costs of $123,725 to operate and maintain systems to comply with Rules 614(d)(1)– (d)(4), external costs of $168,000 to purchase market data from the SROs, and an additional annual ongoing external cost of $4,602,720 to co-locate itself at four exchange data centers. See supra Section V.D.2(f). 1049 See supra Section V.D.2(h); supra note 724. 1050 See supra Section V.D.3(b). 1045 Direct E:\FR\FM\24MRP2.SGM 24MRP2 16844 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules $45,222 to prepare and make publicly available a monthly report.1051 The Commission preliminarily estimates that direct ongoing costs for each SRO as a competing consolidator would be $5,120,398 and would consist of the same costs as for all other competing consolidators excluding the costs of $5,744 to amend Form CC prior to the implementation of material changes to pricing, connectivity, or products as well as to correct inaccurate or incomplete information, and the costs of $25 to obtain digital IDs for the purposes of signing the Form CC.1052 The Commission preliminarily estimates that direct one-time costs that are common across all competing consolidators would be $89,348 and consist of the following costs: Costs of $120.50 to publicly post the Commission’s direct URL hyperlink to its website upon filing of the initial Form CC; 1053 costs of $8,720 to keep and preserve at least one copy of all documents made or received by it in the course of its business and in the conduct of its business; 1054 and costs of $80,507 to produce the monthly reports.1055 The Commission preliminarily estimates that the total direct costs to each market data aggregation firm or each broker-dealer that currently aggregate market data for internal uses that would decide to register as a competing consolidator would include $5,126,167 in ongoing annual costs, as discussed above, and total one-time costs of $896,542. The one-time costs are composed of costs of $93,540 to complete the initial Form CC; 1056 costs of $50 to obtain digital IDs for the purposes of signing the initial Form CC; 1057 costs of $5,604 to file two amendments to Form CC; 1058 labor costs of $293,750; 1059 external costs of $206,250 to modify its systems to comply with Rules 614(d)(1)–(d)(4), external costs of $14,000 to purchase market data from the SROs, an additional initial external cost of $194,000 to co-locate itself at four exchange data centers; 1060 as well as $89,348 in costs that are common to all 1051 See supra Section V.D.4(b); supra note 732. costs are excluded because SROs are not required to file Form CC. See supra Section V.D.1(a). 1053 See supra Section V.D.2(g); supra note 721. 1054 See supra Section V.D.3(a); supra note 726. 1055 See supra Section V.D.4(a); supra note 727. 1056 See supra Section V.D.1(a); supra note 664. 1057 See supra Section V.D.1(a). 1058 Id. 1059 See supra Sections V.D.2(a), V.D.2(b); supra notes 676, 683. 1060 See supra Sections V.D.2(a), V.D.2(b). competing consolidators, as described above. The Commission preliminarily estimates that the total direct costs to each existing SIP that would decide to register as a competing consolidator would include $5,126,167 in ongoing annual costs, as discussed above, and total one-time costs of $1,396,542. The one-time costs per existing SIP are composed of costs of $93,540 to complete the initial Form CC; 1061 costs of $50 to obtain digital IDs for the purposes of signing the initial Form CC; 1062 costs of $5,604 to file two amendments to Form CC; 1063 labor costs of $587,500; 1064 external costs of $412,500 to modify its systems to comply with Rules 614(d)(1)–(d)(4), external costs of $14,000 to purchase market data from the SROs, an additional initial external cost of $194,000 to co-locate itself at four exchange data centers; 1065 as well as $89,348 in costs that are common to all competing consolidators, as described above. The Commission preliminarily estimates that the total direct costs to each new entrant in the competing consolidator space would include $5,126,167 in ongoing annual costs, as discussed above, and total one-time costs of $2,396,542. The one-time costs are composed of costs of $93,540 to complete the initial Form CC; 1066 costs of $50 to obtain digital IDs for the purposes of signing the initial Form CC; 1067 costs of $5,604 to file two amendments to Form CC; 1068 labor costs of $1.175 MM,1069 external costs of $825,000 to build its systems to comply with Rules 614(d)(1)–(d)(4), external costs of $14,000 to purchase market data from the SROs, an additional initial external cost of $194,000 to co-locate itself at four exchange data centers; 1070 as well as $89,348 in costs that are common to all competing consolidators, as described above. The Commission preliminarily estimates that the total direct costs to each SRO that would decide to register as a competing consolidator would include $5,120,398 in ongoing annual costs, as discussed above, and total onetime costs of $2,297,348. The one-time costs are composed of labor costs of lotter on DSKBCFDHB2PROD with PROPOSALS2 1052 These VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 1061 See 1062 See supra Section V.D.1(a); supra note 664. supra Section V.D.1(a). 1063 Id. 1064 See supra Section V.D.2(c); supra note 691. supra Section V.D.2(c). 1066 See supra Section V.D.1(a); supra note 664. 1067 See supra Section V.D.1(a). 1068 Id. 1069 See supra Sections V.D.2(d), V.D.2(e); supra notes 698, 705. 1070 See supra Sections V.D.2(d), V.D.2(e). 1065 See PO 00000 Frm 00120 Fmt 4701 Sfmt 4702 $1.18 MM; 1071 external costs of $825,000 to build systems to comply with Rules 614(d)(1)–(d)(4), external costs of $14,000 to purchase market data from the SROs, an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,1072 as well as $89,348 in costs that are common to all competing consolidators, as described above. Separately, the Commission preliminarily estimates that the total direct costs to each SRO would include $128,064 in ongoing annual costs, and total one-time costs of $246,005. The ongoing annual costs are composed of costs to collect the information necessary to generate proposed consolidated market data required by proposed Rule 603(b).1073 The total onetime direct costs include up to $175,140 to prepare an amendment to the effective national market system plan for NMS stocks,1074 and labor costs of $70,865 of legal, compliance, information technology, and business operations personnel to collect the information necessary to generate consolidated market data as required by proposed Rule 603(b).1075 The Commission preliminarily believes that the proposed amendments that introduce a decentralized consolidation model are likely to have indirect costs to existing exclusive SIPs, some market participants, and investors. The Commission preliminarily believes that the proposed amendments may impose a substantial cost for existing exclusive SIPs in terms of loss of business because exclusive SIPs would no longer be exclusive consolidators and disseminators of consolidated market data, and at least one of the exclusive SIPs—Nasdaq UTP—would no longer be paid out of the NMS plan for its processing costs.1076 The Commission preliminarily believes that this loss of business would be mitigated by the opportunity for the exclusive SIPs to become competing consolidators. If exclusive SIPs decide 1071 See supra Sections V.D.2(d), V.D.2(e); supra notes 698, 705. 1072 See supra Sections V.D.2(d), V.D.2(e). 1073 See supra Section V.D.2(f). 1074 Half of these costs, or $87,570, would be incurred to comply with the timestamps required by the proposed rule, including a review and any applicable change of the respondent’s technical systems and rules. A quarter of these costs, or $43,785, would be incurred to compose the form of annual report on competing consolidator performance. Additionally, $8,340 would be incurred to compile and confirm the primary listing exchange for each NMS stock. See supra Section V.D.5; supra note 734. 1075 See supra Section V.D.6; supra note 737. 1076 This does not apply to CTA/CQ Plan that, as discussed above, is paid differently. See supra Section VI.B.2(c). E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules to become competing consolidators, they would compete for business with each other and with other competing consolidators. This competition may lead to revenue that is lower than their current revenue. This potential decrease in revenue would represent a transfer of resources to other competing consolidators and to market participants potentially increasing social welfare. On the other hand, the exclusive SIPs have the benefit of having been in this business for a long time. The exclusive SIPs have significant connectivity to market participants and vendors and can leverage their existing customer base and established relationships with vendors and purchasers at firms. If the exclusive SIPs decide to become competing consolidators, their experience with this market may give them a competitive advantage and help mitigate their potential revenue losses. Some market participants may also incur indirect costs as a result of the introduction of the decentralized consolidation model. First, as discussed above,1077 the price that some market participants would pay for proposed consolidated market data may be higher than today’s price for consolidated market data, holding data content constant. These market participants are likely interested in the current scope of SIP data, and, therefore, may have to pay a higher price for expanded data content that they are not interested in. Second, the Commission preliminarily believes that there would be an implementation cost for market participants to switch from using current exclusive SIP providers or proprietary data feeds to using competing consolidators. This cost is likely to vary among types of market participants; for instance, existing purchasers of proprietary DOB data products are likely to assume limited additional costs while new customers of proposed consolidated market data from competing consolidators would need, for example, to establish new connectivity and integrate a larger set of data into their operations. This implementation cost would include administrative costs for subscribing to a new provider of the data, as well as any infrastructure investments that may be needed to handle the data as delivered by the competing consolidator. The Commission is uncertain about the size of these costs but notes that these costs and the magnitude of their effect may vary by market participant. Additionally, one of the current exclusive SIPs, SIAC, processes and disseminates the academic TAQ dataset. 1077 See supra Section VI.C.2(b). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 If SIAC discontinues its SIP business, there may be interruptions to the availability of this data, which would create a cost for both the academic community and investors that otherwise benefit from regulators’ use of this dataset. Other data vendors also provide comprehensive historical data products that may become more readily available from competing consolidators.1078 The Commission is unable to quantify the incremental social welfare cost of the interruption of availability of the TAQ dataset and invites comments on this issue. Finally, the Commission preliminarily believes that the decentralized consolidation model may result in multiple NBBO quotes observed by different market participants due to different aggregation methods used by competing consolidators. As discussed above,1079 currently market participants may already observe multiple NBBO quotes. Therefore, the Commission preliminarily believes that the decentralized consolidation model would result in no meaningful difference in practice with respect to the existence of multiple NBBOs. The proposed amendments would impose a cost for SROs from losing SIP fees. However, the Commission preliminarily believes that this loss of fees would be offset by the data content and access fees paid to SROs by competing consolidators. (e) Economic Effects of Competing Consolidators Being Subject to Regulation Systems Compliance and Integrity The proposed rule amends Rule 1000 of Regulation SCI by expanding the definition of ‘‘SCI entities’’ to include ‘‘competing consolidators.’’ 1080 Under the proposed rule, competing consolidators would be subject to the standard requirements of Regulation SCI (i.e., requirements for SCI systems that are not critical SCI systems).1081 The Commission preliminarily believes that expanding Regulation SCI to include competing consolidators would help prevent market disruptions due to one or more competing consolidators’ systems issues and reduce the severity and duration of any effects that may result if a systems issue were to occur for a competing consolidator. But expanding Regulation SCI to include 1078 See, e.g., MayStreet, Market Data, available at https://maystreet.com/products/market-data/ (last accessed Jan. 2, 2020). 1079 See supra Section VI.B.2(b). 1080 See supra Section IV.B.2(f) and note 557 and accompanying text. 1081 See supra Section IV.B.2(f) and note 563 and accompanying text. PO 00000 Frm 00121 Fmt 4701 Sfmt 4702 16845 competing consolidators would also impose costs on various entities, most significantly on competing consolidators. Competing consolidators would incur a number of direct and indirect compliance costs, such as initial and on-going paperwork burdens as well as competing consolidators’ potential switching costs to find vendors that can satisfy the Regulation SCI requirements. Additionally, Regulation SCI would impose some indirect costs on other market participants because of their specific business relationships with competing consolidators. For example, third-party vendors employed by competing consolidators to provide services used in their SCI systems would incur Regulation SCI compliance costs similar to those incurred by competing consolidators. (i) Benefits To Expanding Regulation SCI To Include Competing Consolidators Currently, the exclusive SIPs are SCI entities and the benefits discussed in Regulation SCI already apply to them and to market participants.1082 Under the proposed amendments, competing consolidators would also be considered SCI entities and the benefits of Regulation SCI would apply to them and would continue to apply to market participants, i.e., maintain the status quo, if the exclusive SIPs cease operating as exclusive plan processors. This section discusses the benefits that would apply to competing consolidators and would continue to apply to market participants from adding competing consolidators to the list of SCI entities.1083 The Commission preliminarily believes that at least three benefits would continue to apply by expanding Regulation SCI to include competing consolidators.1084 First, imposing the requirements of Regulation SCI on competing consolidators would help 1082 See Regulation SCI Adopting Release, supra note 28, at 72404. 1083 More specifically, the benefits discussed in this section are not measuring a change from the baseline but are discussing the benefits that would continue to apply from including competing consolidators in the list of SCI entities. 1084 As discussed in detail above, the Commission preliminarily believes that a number of entities who would become competing consolidators are already subject to Regulation SCI. The Commission preliminarily believes that many of the benefits described below would not apply to these entities, because they already have systems that meet the requirements for Regulation SCI. Instead, the Commission preliminarily believes that many of the benefits from extending Regulation SCI to include competing consolidators would come from new entities who become competing consolidators who are not currently subject to Regulation SCI. See supra Section V.G. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16846 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules prevent market disruptions due to one or more competing consolidators’ systems issues. Second, it would help reduce the severity and duration of any effects that may result if a systems issue were to occur for one of these competing consolidators, which could also help prevent potential catastrophic events that might start out as a minor systems problem but then quickly spread across the national market system, potentially causing damage to market participants, including investors. Third, expanding the Regulation SCI framework would help ensure more effective Commission oversight of competing consolidators’ systems. The Commission preliminarily believes that adding competing consolidators to the list of SCI entities would help prevent market disruptions by strengthening the infrastructure and improving the resiliency of the systems of new competing consolidators who are not currently SCI entities. The proposed amendments to Regulation SCI would help new competing consolidators who are not currently SCI entities establish robust systems that are less likely to experience a system disruption by requiring these competing consolidators to establish, maintain and enforce written policies and procedures reasonably designed to ensure that their SCI systems have levels of capacity, integrity, resiliency, availability, and security, adequate to maintain the SCI entity’s operational capability and promote the maintenance of fair and orderly markets.1085 The Commission preliminarily believes that some potential new competing consolidators may already have policies and procedures in place to maintain and test critical systems. However, the Commission preliminarily believes that the requirements of Regulation SCI would strengthen these policies and procedures, which would help improve the robustness of critical systems. The Commission preliminarily believes that complying with the provisions of Regulation SCI would help reduce the severity and duration of any effects that may result if a systems issue were to occur for one of the new competing consolidators who are not currently SCI entities. For example, Rule 1002(a), which requires an SCI entity to take corrective action if an SCI event occurs, could reduce the length of systems disruptions, systems compliance issues, and systems intrusions, and thus reduce the negative effects of those interruptions on the competing consolidator and market participants. Additionally, each SCI 1085 See supra Section IV.B.2(f). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 entity must establish, maintain and enforce business continuity and disaster recovery plans that include maintaining backup and recovery capabilities sufficiently resilient and geographically diverse and that are reasonably designed to achieve next business day resumption of trading and two-hour resumption of critical SCI systems following a widescale disruption. These plans would help competing consolidators restore their systems more quickly in the event of a disruption. The Commission also preliminarily believes that the requirement for competing consolidators to establish procedures to disseminate information about SCI events to responsible SCI personnel, competing consolidator subscribers, and the Commission would help reduce the duration and severity of any system distributions that do occur for one of the new competing consolidators who are not currently SCI entities. The procedures would help these competing consolidators quickly provide the affected parties with critical information in the event that it experiences a system disruption. This could allow the affected parties to respond more quickly and more appropriately to the incident, which could help shorten the duration and reduce the effects of a system event. This could also potentially help prevent an event that might start out as a minor systems issue from becoming a catastrophic problem that quickly spreads across the national market system, potentially causing damage to market participants, including investors. Additionally, the Commission believes that the requirement for a competing consolidator to conduct testing of its business continuity and disaster recovery plans with its designated participants and other industry SCI entities would help detect and improve the coordination of responses to system issues that could affect multiple market participants in the NMS stock market. This testing should help prevent these system disruptions from occurring and help reduce the severity of their effects, if they do occur. The Commission preliminarily believes expanding Regulation SCI to include competing consolidators would help ensure more effective Commission oversight of new competing consolidators who are not currently SCI entities. As SCI entities, these competing consolidators would have to immediately notify the Commission upon the occurrence of an SCI event (unless de minimis) and, each quarter, would have to inform the Commission of any planned material changes to its PO 00000 Frm 00122 Fmt 4701 Sfmt 4702 SCI systems and the security of indirect SCI systems, as well as any SCI events that had a de minimis impact on its operations or on market participants. Each year these competing consolidators would also have to provide the Commission with an SCI review of their compliance with Regulation SCI. This information would help ensure more effective Commission oversight by enhancing the Commission’s review of these competing consolidators and helping make the Commission aware of potential areas of weakness in the competing consolidator’s systems that may pose risk to the entity or the market as a whole, as well as areas of noncompliance with Regulation SCI. Additionally, the Commission preliminarily believes that the exclusive SIPs could realize an incremental benefit relative to the baseline from lower SCI-related costs. Because the Commission assumes that enough competing consolidators would enter the market to provide for multiple viable sources of consolidated market data,1086 the Commission preliminarily believes that if the exclusive SIPs become consolidators then they would be considered SCI entities subject to the standard obligations of Regulation SCI, rather than subject to the additional costs associated with being subject to the heightened requirements applicable to ‘‘critical SCI systems.’’ (ii) Costs of Expanding Regulation SCI To Include Competing Consolidators Competing consolidators would incur both paperwork and non-paperwork related direct and indirect compliance costs as SCI entities. Because Regulation SCI imposes some indirect requirements on other market participants interacting with SCI entities (e.g., vendors providing SCI systems to SCI entities), those market participants would also incur indirect costs from competing consolidators being defined as SCI entities. The Commission preliminarily believes that the 2018 estimates of initial paperwork burdens for new SCI entities and ongoing paperwork burdens for all SCI entities under Regulation SCI are largely applicable to potential entrants into the competing consolidator business.1087 The 2018 PRA Extension includes estimates distinguishing between new versus existing SCI entities. The Commission preliminarily believes that, using the same new versus existing SCI entity framework, the 12 estimated entrants into the competing 1086 See supra Section VI.C.2(a) for a discussion of this assumption. 1087 See supra note 740. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidator business could be divided into three groups: Entrants that are existing SCI entities with experience in the consolidated market data business (e.g., exclusive SIPs or exchanges or entities affiliated with an exchange that currently operate an exclusive SIP); entrants that are existing SCI entities but with no experience in the consolidated market data business and needing to performing a new function with new SCI systems (e.g., a national securities association or national securities exchanges that do not currently operate an exclusive SIP); and finally, entrants that are entirely new SCI entities that are not currently subject to Regulation SCI (e.g., third-party aggregators that are not currently subject to Regulation SCI). As discussed above,1088 the Commission preliminarily believes that the existing SCI entities in the first category would not have any initial burden, whereas the existing SCI entities in the second category would incur approximately 50% of the Commission’s initial burden estimates for an entirely new SCI entity. Further, the 2018 ongoing burden estimates for existing SCI entities in both of these categories would continue to be applicable. Similarly, the Commission preliminarily believes that new SCI entities in the third category would have the same estimated initial paperwork burdens as those estimated for new SCI entities and the same ongoing paperwork burdens as all other SCI entities. As SCI entities, competing consolidators would also incur nonpaperwork related direct compliance costs. In 2014, the Regulation SCI adopting release estimated that an SCI entity would incur an initial cost of between approximately $320,000 and $2.4 million.1089 Additionally, an SCI entity would incur an annual ongoing cost of between approximately $213,600 and $1.6 million.1090 The Commission preliminarily believes that similar to the paperwork burden estimates, these nonpaperwork related costs are also largely applicable to competing consolidators. But the Commission is uncertain about the actual level of costs competing consolidators would incur, because these costs could differ based on the type of potential entrant into the competing consolidator business. The Commission preliminarily believes that there are two reasons why competing consolidators’ costs are likely to be on the lower end of these cost estimates. supra Section V.G. SCI Adopting Release, supra note 28, at notes 1943–1944. 1090 Id. at notes 1945–1946. First, these cost estimates include costs of having part of an SCI entity’s system be a ‘‘critical SCI system,’’ and therefore be subject to certain heightened resilience and information dissemination provisions of Regulation SCI. For instance, as discussed above,1091 the existing exclusive SIPs currently represent single points of failure and are subject to heightened requirements for ‘‘critical SCI systems.’’ Under the proposed rule, competing consolidators’ systems are not included within the scope of ‘‘critical SCI systems.’’ The Commission preliminarily believes that if competing consolidators’ systems are subject to the standard requirements of Regulation SCI, they would not incur compliance costs of the heightened requirements for ‘‘critical SCI systems.’’ To the extent that the incremental costs of being subject to the heightened requirements for ‘‘critical SCI systems’’ versus the standard requirements for ‘‘SCI systems’’ is small, these cost savings could be low. Second, among all of the SCI entities, competing consolidators have relatively simpler systems and fewer functions, and thus would have compliance costs closer to the lower end of the above cost estimates. The above cost estimates provide an average for all SCI entities, without distinguishing between different categories of SCI entities. However, the Regulation SCI adopting release explains that compliance costs would depend on the complexity of SCI entities’ systems and they would be higher for SCI entities with more complex systems.1092 Competing consolidators would likely have simpler systems and fewer functions relative to some of the other SCI entities, such as exchanges. As a result, the Commission preliminarily believes that competing consolidators’ compliance costs are likely to be on the lower end of the average cost estimates for all SCI entities. Additionally, the Commission preliminarily believes that some of competing consolidators’ subscribers associated with the testing of business continuity and disaster recovery plans would incur Regulation SCI-related connectivity costs. Rule 1004 of Regulation SCI sets forth the requirements for testing an SCI entity’s business continuity and disaster recovery plans with its designated members or participants.1093 Competing consolidators and their designated 1088 See 1091 See 1089 Regulation 1092 Regulation VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 supra Section IV.B.2(f). SCI Adopting Release, supra note 28, at 634. 1093 Id.; Rule 1004. PO 00000 Frm 00123 Fmt 4701 subscribers would be subject to these same costs. The Regulation SCI adopting release estimated connectivity costs as part of these business continuity and disaster recovery plans to be approximately $10,000 per SCI entity member or participant.1094 The Commission preliminarily believes that these connectivity cost estimates would also be applicable to competing consolidators’ designated subscribers. The Commission preliminarily believes that competing consolidators and various other market participants would incur certain indirect costs related to compliance requirements for competing consolidators as SCI entities. The Commission preliminarily believes that the costs to comply with Regulation SCI discussed above would also fall on third-party vendors employed by competing consolidators to provide services used in their SCI systems. Regulation SCI requires that any system provided by a vendor to an SCI entity and used by that entity in its SCI system must also comply with Regulation SCI requirements. The Commission preliminarily believes that all costs discussed above for competing consolidators to comply with Regulation SCI would also fall on third-party vendors employed by competing consolidators in the course of providing consolidated market data. Examples of such vendors may include communications firms employed by competing consolidators to transport data from exchanges to the competing consolidator’s aggregation servers at various data centers. If many third-party vendors are employed by potential competing consolidators in their consolidated market data business, the size of this cost could be significant. The Commission invites comment on the issue. Additionally, the Commission preliminarily believes there is the potential for these costs to cause the vendors to end existing business relationships with market participants who become competing consolidators. It is possible that third-party vendors would not want to incur the costs that competing consolidators may impose to assure that the competing consolidator can comply with Regulation SCI requirements, and as a result be unwilling to provide services to the competing consolidator’s consolidated market data business. To the extent that this happens, competing consolidators would incur costs from having to find new vendors, form a new business relationship, and adapt their systems to the infrastructure of the new vendor. 1094 Id. Sfmt 4702 16847 E:\FR\FM\24MRP2.SGM at note 2065. 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16848 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Competing consolidators may also elect to perform the relevant functions internally. To the extent that competing consolidators either find new vendors or perform the functions internally, it would represent an increased inefficiency in the market, since presumably the current market data vendors are the most efficient means of performing these functions. The Commission preliminarily believes that the technology supporting some of the services provided by vendors to current data aggregators (notably communications, such as microwave transmission) require significant expertise in order to be competitive and are difficult to replicate. To the extent this is the case, and to the extent that Regulation SCI requirements prevent competing consolidators from using these vendors, the ability of competing consolidators to provide consolidated market data in a manner that rivals current third-party aggregation practices could be significantly reduced. consolidated market data, in which case they would be additionally charged for the proprietary data and connectivity services pursuant to the individual exchange fee schedules. In this case, the potential price gain would be limited to the price decline for the portion of the data corresponding to the proposed consolidated market data. The Commission is uncertain about the extent of this effect. Market participants that currently effectively act as self-aggregators and that would choose to become selfaggregators under the proposed decentralized consolidation model may incur some switching costs, especially if the exchanges provide components of the consolidated market data with feeds and connections other than what these market participants currently use. However, since these market participants already have the infrastructure to receive the proprietary data products from the exchanges, the Commission expects these switching costs to be minimal. (f) Economic Effects of the Decentralized Consolidation Model Pertaining to SelfAggregators As discussed above,1095 a number of market participants currently purchase proprietary data products from the exchanges and consolidate this data for their internal use. To permit selfaggregation under the proposed decentralized consolidation model, the Commission proposes to define a selfaggregator as a broker or dealer that would receive information from the exchanges necessary to generate consolidated market data solely for internal use.1096 Market participants that currently effectively self-aggregate and that decide to become self-aggregators under the proposed decentralized consolidation model will have two choices regarding the use of the exchanges’ proprietary data products. First, they may decide to limit the use of exchange data to the creation of proposed consolidated market data, in which case they would be charged for proposed consolidated market data pursuant to the fee schedules of the effective national market system plan(s) for NMS stocks. In this case, market participants would likely benefit from lower data fees as compared to current fees they pay for proprietary data and connectivity products.1097 Second, they may decide they need data beyond the scope of proposed (g) Other Conforming Changes The Commission is proposing conforming changes for some of the previous Commission or SRO rules and regulations, which themselves can have economic effects. This section discusses the conforming changes and corresponding economic effects. 1095 See supra Section IV.B.2(e)(iii). (i) Amendments to Regulation SHO As described above in section III.D.1, the Commission is proposing amendments to Regulation SHO to adjust the process of determining whether a Short Sale Circuit Breaker has been triggered and disseminating such trigger information. First, the primary listing exchange would decide how to obtain the consolidated data necessary to determine whether a Short Sale Circuit Breaker should be triggered. Second, the primary listing exchange would be responsible for notifying competing consolidators and selfaggregators rather than a single plan processor. The first change allows the primary listing exchange to select the most cost-effective means of fulfilling its responsibilities. The second change could entail some compliance costs for competing consolidators but is necessary to ensure that all competing consolidators are on a level playing field. The resulting compliance costs for exchanges are included in the Commission’s general compliance estimate above.1098 The resulting compliance costs for competing consolidators are included in the 1096 Id. 1097 See Commission’s estimate of the general costs to becoming a competing consolidator above.1099 In addition, the Commission is proposing to define ‘‘primary listing exchange’’ in Regulation NMS and to amend the definition of ‘‘listing market’’ in Regulation SHO to refer to the proposed definition of primary listing exchange. The Commission preliminarily believes that this change would have no direct economic effects, other than harmonizing Regulation SHO with Regulation NMS. (ii) Effective Changes to Responsibilities Under the Limit Up Limit Down Plan and Market Wide Circuit Breaker Rules The proposed definition of ‘‘regulatory data’’ requires the primary listing exchange to be the entity responsible for monitoring, calculating, and disseminating certain information necessary to implement the LULD Plan and the MWCB rules. These functions are currently the responsibility of a single exclusive SIP, however, the Commission is proposing that the primary listing exchanges be responsible for disseminating information regarding Price Bands and Limit States and the primary listing exchange with the largest portion of S&P 500 Index stocks be responsible for determining whether an MWCB has been triggered. While the Commission preliminarily believes that these amendments could result in implementation and ongoing costs for primary listing markets that currently do not operate a SIP, these amendments ensure a single set of Price Bands and a consistent message that MWCBs have triggered. The Commission preliminarily believes that the additional cost of calculating the information necessary to implement the LULD Plan and WMCB rules would be minimal. The cost imposed on these primary listing markets is included in the general compliance cost the Commission has estimated for SROs above.1100 (h) Request for Comments The Commission requests comments on its analysis of the economic effects pertaining to the proposed decentralized consolidation model. In particular, the Commission solicits comment on the following: 228. Do you agree with the reasonableness of the Commission’s assumption that the proposed amendments would lead to multiple competing consolidators participating in 1099 See infra Section VI.C.4. VerDate Sep<11>2014 19:07 Mar 23, 2020 1098 See Jkt 250001 PO 00000 supra Section V.D.6. Frm 00124 Fmt 4701 Sfmt 4702 1100 See E:\FR\FM\24MRP2.SGM supra Section V.B.2. id. 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules the consolidated market data business and distributing data to market participants? Why or why not? Please explain in detail. 229. Are you an organization that would want to provide the competing consolidator service described? If so, please include an estimate of how much effort would be required for you to begin providing this service in the market. If you are willing to provide price estimates, please do so as well. 230. What factors are likely to influence the decision of various market participants to become competing consolidators? How large would be the barriers to entry to becoming a competing consolidator? Would there be any sources of barriers to entry other than building the technological infrastructure, filing Form CC, and complying with the other regulatory requirements associated with being a competing consolidator? 231. Which market participants would be likely to become competing consolidators? Are the current exclusive SIPs likely to become competing consolidators? Why or why not? Would existing market aggregation firms become competing consolidators? Why or why not? Would any other types of firms likely become competing consolidators? Why or why not? 232. How would the Commission’s assessment of the economic effects of the rule be affected by too few competing consolidators? Please be specific. 233. To what extent would the adoption of the various proposals in Section III independently respond to some or all of the issues the proposed competing consolidator model is intended to address? 234. Do you agree with the Commission’s assessment of the potential effect of the proposal on data fees? In particular, do commenters agree with the Commission’s conclusion that the proposal could reduce overall data fees? What is the likely effect of the proposal on each of the components of the overall data fees, fees for consolidated market data, fees for proprietary market data, and fees for connectivity? What are some of the important factors that could result in fee increases and decreases? Please explain in detail. 235. The Commission requests that commenters provide any insights or data they may have as to potential changes in connectivity fees and the effect of these new connectivity fees on the proposed competing consolidator business. 236. Do you agree that there would be three potential benefits from the VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 increased competition provided by the decentralized consolidation model: Efficiency gains in the delivery of consolidated market data, improvements in technological innovation in consolidated market data, and reductions in latency? Why or why not? If not, which benefits do you disagree with? Please explain. 237. What are the benefits of expanding Regulation SCI to define competing consolidators as ‘‘SCI entities’’? What are the costs of expanding Regulation SCI to define competing consolidators as ‘‘SCI entities’’? Please explain and provide cost estimates, if available. 238. The Commission requests that commenters provide relevant data and analysis to assist in analyzing how the total price of proposed consolidated market data (including the data fee paid to the operating committee(s) of the effective national market system plan(s) for NMS stocks and service fees paid to competing consolidators) in the decentralized consolidation model would compare to current pricing of SIP data. More specifically, how would the aggregate fees paid by various types of market participants under the decentralized consolidation model likely compare to the aggregate fees paid by the same types of market participants for the same data today, assuming the content of the data consumed by market participants remains constant but the providers of that data change? Would any market participant types be likely to expand the data they purchase if such data is included in the definition of consolidated market data? Please explain. How would the aggregate fees paid by such market participants under the decentralized consolidation model likely compare to the aggregate fees paid by them today, assuming such market participants expand the data they purchase? Please quantify if possible. 239. Do you agree with the Commission’s assessment of the costs incurred by potential competing consolidators as a result of the proposal? Specifically, do you agree that potential competing consolidators would incur initial costs of $0.6 million to $3.9 million and ongoing costs of $2 million and $2.6 million? Why or why not? Please provide revised cost estimates, if possible. How would these costs vary across the types of entities likely to become competing consolidators? What costs would be common across competing consolidators? 240. Do you agree with the Commission’s assessment of the costs to each SRO of amending effective national market system plan(s) for NMS stocks to implement the proposed decentralized PO 00000 Frm 00125 Fmt 4701 Sfmt 4702 16849 consolidation model? Why or why not? Please explain and provide alternative cost estimates, if possible. 241. Would existing SIPs and exchanges lose business as a result of the proposed decentralized consolidation model? If so, what is the nature and potential magnitude of the business they would lose? Could any exclusive SIPs or exchanges gain business as a result of the decentralized consolidation model? Please explain. 242. Would the proposed decentralized consolidation model result in more NBBOs than could be viewed today? If so, would this increase the complexity of our markets? Why or why not? Please describe any economic effects resulting from an increase in multiple NBBOs. 243. Do you agree with the Commission’s assessment of the costs to data users of potentially switching from purchasing market data from exclusive SIPs and/or exchanges to purchasing market data from competing consolidators? Why or why not? Please explain. Do you agree that these costs are likely to vary among types of market participants? 244. Would the proposed amendments result in the interruption of data available for research by the academic community and investors, such as TAQ data? If so, the Commission requests that commenters provide relevant data and analysis to assist us in determining the incremental social welfare cost of such interruption of data to the academic community and investors. 245. How costly would be the proposed changes to the entities responsible for requirements of Regulation SHO, LULD and MWCB for listing exchanges? What is the magnitude of such costs that derive from implementing processes to continuously calculate and track data metrics for compliance with the proposed changes? What is the magnitude of such costs that derive from notifying the competing consolidators and others of price bands and triggers? Does the magnitude of such costs depend on the number of competing consolidators? 246. Do you agree with the Commission’s assessment of the benefits of subjecting competing consolidators to Regulation SCI requirements? Why or why not? 247. Do you agree with the Commission’s assessment of the costs of subjecting competing consolidators to Regulation SCI requirements? Why or why not? Do you agree with the Commission’s estimates of the costs involved? Please explain in detail. E:\FR\FM\24MRP2.SGM 24MRP2 16850 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 248. Are geographically diverse backup systems a standard practice among firms likely to become competing consolidators today? What effect does the answer to this question have on the likely cost for competing consolidators to maintain geographically diverse backup systems? 249. Do you agree with the Commission’s assessment on the impact of Regulation SCI requirements on thirdparty vendors employed by competing consolidators? Why or why not? To what extent do potential competing consolidators contract with third-party vendors for systems that would meet the definition of an SCI system? What is the magnitude of costs to third-party vendors who operate these systems to make sure these systems meet the requirements of Regulation SCI? What effect will this impact have on the ability of competing consolidators to provide reliable data products? Please explain and provide estimates, if possible. 250. Do you believe that the amendments to Regulation SCI could reduce innovation among new competing consolidators? Please explain. If so, which provisions of Regulation SCI affect innovation the most and how? Please explain. 251. How significant is the barrier to entry provided by Regulation SCI requirements on potential competing consolidators? Do you believe this will have a significant impact on the number of entities who enter the competing consolidator business? Why or why not? 3. Economic Effects of Form CC As discussed above in Section IV.B, the proposed amendments would not let a person, other than an SRO, act as a competing consolidator, i.e., generating proposed consolidated market data for dissemination to non-affiliated persons, unless that person files with the Commission an initial Form CC and the initial Form CC has become effective. The proposed amendments would require the public disclosure of Form CC, which requires a number of disclosures about a competing consolidator’s services and fees and operations, and metrics related to the performance of competing consolidators. As a result, the proposed amendments would provide transparency for investors who might purchase the products and services of a competing consolidator. The Commission preliminarily believes that the information provided in Form CC and the resulting transparency would help market participants make betterinformed decisions about which competing consolidator to subscribe to VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 in order to achieve their trading or investment objectives. Additionally, the Commission preliminarily believes that the process for the Commission to declare an initial Form CC ineffective would improve the quality of information the Commission receives from competing consolidators, which would allow the Commission to better protect investors from potentially incomprehensible or incomplete disclosures that would misinform market participants about the operations and services of a competing consolidator. (a) Public Disclosure of Form CC and Other Competing Consolidator Information The proposed Form CC would require competing consolidators to publicly disclose four sets of information on the Commission website.1101 First, proposed Form CC would require competing consolidators to disclose general information, along with contact information. Second, proposed Form CC would require competing consolidators to disclose information regarding their business organizations. Third, proposed Form CC would require competing consolidators to disclose information regarding their operational capabilities. Fourth, proposed Form CC would require competing consolidators to disclose information regarding their services and fees. The proposed rule also includes requirements for amendments under defined circumstances and a notice of cessation of operations at least 30 business days before the date the competing consolidator ceases to operate as a competing consolidator. Proposed Form CC, any amendments to it, and any notices of cessation would be made public via posting on the Commission’s website. The proposed rule also has a disclosure requirement about competing consolidators’ performance metrics on their own websites. Additionally, the proposed rule would require competing consolidators to disclose operational information on their websites related to vendor alerts, data quality and systems issues, and clock drift in the clocks they use to create timestamps. Generally, these requirements promote transparency and competition among competing consolidators and effective regulatory oversight within a streamlined approach to avoid significant barriers to entry. The business organization disclosures would give market participants a window into the ownership as well as the organizational structures of 1101 See PO 00000 supra Section IV.B.2(e). Frm 00126 Fmt 4701 Sfmt 4702 competing consolidators. The Commission preliminarily believes that this information would help market participants make better-informed decisions about which competing consolidator to subscribe to as well as how to avoid any potential conflicts of interest. For example, if a broker-dealer is considering subscribing to a competing consolidator for consolidated data and any other potential additional services such as analytics, they may search for a competing consolidator that is not owned by a competitor or an affiliate of a competitor in the brokerdealer space. Purchases of data and additional market intelligence services between two competitors could potentially create conflicts of interest. Thus, the required disclosure of a competing consolidator’s business organization—which would, for example, clarify the ownership information—would provide transparency on its potential conflicts of interest. The information on operational capabilities would provide market participants detailed information about each competing consolidator’s product portfolio and technical capabilities. Since market participants vary in their data and technical capability needs, information on competing consolidators operational capabilities would allow the market participants to make betterinformed purchase decision. For example, market participants who trade frequently and who need robust backup systems might choose competing consolidators with those capabilities. Whereas other market participants who have longer term investment strategies with potentially less frequent trades might prefer competing consolidators with less aggressive backup systems. Proposed Form CC disclosures would facilitate a better match between market participants’ needs and competing consolidators’ offerings, and would also help to ensure consistent disclosures between competing consolidators. With the consistent disclosures on services and fees, market participants could compare and contrast the various services provided and the corresponding fees asked by competing consolidators. Market participants could then make better purchase decisions, based on their individual needs. Additionally, the service and fee transparency resulting from these disclosures would promote competition in similar products and/or services across different competing consolidators, which could result in similar prices, and would help to protect market participants from unfair and unreasonable prices. E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules The Commission preliminarily believes that the proposed requirement for competing consolidators to amend Form CC prior to implementing material changes to their pricing, products, or connectivity options would provide transparency into changes in the operations of competing consolidators and better inform subscribers and other market participants about significant changes in the fees and services offered by a competing consolidator. This would allow subscribers to a competing consolidator to better evaluate if it would continue to serve their business needs. Additionally, it would facilitate effective oversight by the Commission. Similarly, the Commission preliminarily believes that the requirement for a notice of cessation would also benefit subscribers to the competing consolidator, because it would give them advanced notice before the competing consolidator ceases to operate. Thus those subscribers would have more time to find another competing consolidator to supply them with consolidated market data. The fact that the information on Form CC would be in a single location instead of dispersed across the competing consolidators’ own websites would aid market participants by introducing only minimal search costs when evaluating and comparing potential competing consolidators to decide which one best suits their business interests. As discussed above,1102 the Commission preliminarily believes the proposed rule would cause each competing consolidator, except for SROs, to incur an approximately $93,540 in implementation compliance cost in order to collect the information required to fill out and file an initial Form CC as well as $5,744 in ongoing costs in order to file amendments to an effective Form CC. The Commission believes these requirements are streamlined to include only what is necessary to achieve the benefits discussed above without creating significant barriers to entry that would discourage entities from becoming competing consolidators. Competing consolidators would also experience implementation costs because initial Form CC and any amendments to Form CC would be required to be filed electronically with the Commission. The Commission preliminarily believes that requiring Form CC to be filed electronically would reduce filing costs compared to requiring the competing consolidator to file paper forms. 1102 See supra Sections V.D.1(a), VI.C.2(d); supra note 664. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 To file a form CC, competing consolidators would need to access the Commission’s EFFS system. Each competing consolidator would have to submit an application and register each individual who would access the EFFS system on behalf of the competing consolidator. The Commission believes that each competing consolidator would initially designate two individuals to access the EFFS system, with each application taking 0.15 hours for a total of 0.3 hours per competing consolidator. On an ongoing basis, each competing consolidator will add one individual to access the EFFS system for amendments, adding 0.15 hours per competing consolidator. To make a submission into the EFFS system, the competing consolidator must download a proprietary viewer; however, the Commission would cover the cost of the license for all competing consolidators, as it currently does for other filers that use the EFFS system. Because the EFFS system is not available to the public, when the Commission makes an effective Form CC available to the public, the Commission will transform the data into an unstructured format, meaning that it is not machine-readable. Market participants that would use the Form CC data to evaluate and compare competing consolidators would bear the costs of locating, comparing, and evaluating the information on the Commission’s website and take steps to put the information ‘‘side by side’’ for comparison purposes. The Commission preliminarily believes that the public disclosure of performance metrics and additional information would introduce transparency to the operations of competing consolidators. These metrics would allow subscribers and potential subscribers to better evaluate the performance and current and future capabilities of a competing consolidator. Market participants, based on their individual needs, could review competing consolidators’ performance statistics and choose ones that would best serve their trading needs. While the requirements to post the monthly performance metrics and operational information on websites would introduce transparency, it would not completely eliminate costs incurred when market participants want to compare competing consolidators because collecting the information would involve market participants expending some resources to go to each competing consolidator’s website. Competing consolidators would also incur implementation and ongoing compliance costs in order to setup and PO 00000 Frm 00127 Fmt 4701 Sfmt 4702 16851 maintain systems required to calculate and produce the information for the performance metrics as well as other information the competing consolidator would be required to post to its website. Each month, competing consolidators would be required to post the monthly performance metrics and operational information on their own websites. Excluding the cost of preparing the information, the Commission estimates an average competing consolidator would incur a one-time cost of $2,651 (6 hours (for website development) × $308.50 per hour (blended rate for a senior systems analyst ($285) and senior programmer ($332)) + $800 for an external website developer to develop the web page = $2,651) for posting the required information to a website, and would incur an ongoing annual cost of up to $3,702 (1 hour (for website updates) × $308.50 per hour (blended rate for a senior systems analyst ($285) and senior programmer ($332)) × 12 monthly postings = $3,702) to update the relevant web page each month. Because the monthly performance metrics and operational information may be posted in any format the competing consolidator finds most convenient, market participants that would use the data to evaluate and compare competing consolidators would bear the costs of locating, comparing, and evaluating the information on each competing consolidator’s website. The Commission preliminarily believes that the operational information that competing consolidators would be required to publicly disclose on their websites would create a mechanism for market participants to hold competing consolidators accountable for any systems issues they may experience. One strong accountability mechanism market participants have is their purchasing power. The disclosure requirements would alert market participants to any system breaches or any data quality or systems issues a competing consolidator experiences. Market participants could hold competing consolidators accountable by abandoning competing consolidators that repeatedly experience system issues and gravitating toward competing consolidators that demonstrate more reliable systems through their disclosures. This demand shift could cause competing consolidators with less reliable systems to exit the market. In addition to the requirements of Regulation SCI promoting competing consolidators to develop resilient E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16852 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules systems,1103 the requirement that competing consolidators publicly disclose information on systems issues as well as performance metrics regarding system availability could also encourage competing consolidators to make investments that would ensure the resiliency of their systems. These disclosures would help market participants determine which competing consolidators have more reliable systems. Competing consolidators who display more reliable systems with greater system availability would attract more subscribers. This should incentivize competing consolidators to invest in better backup systems or other technology that would improve the resiliency of their systems and increase their system uptime. The Commission preliminarily believes that information from the disclosures in Form CC and the performance metrics and operational information competing consolidators would provide on their websites would promote effective regulatory oversight of competing consolidators and increased investor protection by providing the Commission and relevant SROs with information about competing consolidators. With this information, the Commission and the SROs could identify competing consolidators that are not properly complying with the proposed amendments or parts of them. The Commission and SROs, then, could utilize this information to help prioritize examinations and possibly help identify potential issues. The Commission preliminarily believes that the public disclosure of the information in Form CC and the performance metrics and operational information competing consolidators would provide on their websites could also increase competition between competing consolidators and also expose some competing consolidators to certain competitive effects. If the public disclosures show that certain competing consolidators have higher fees or poorer performance, it may result in those competing consolidators losing subscribers and earning lower revenues. Similarly, competing consolidators who display lower prices or superior system performance may be able to attract more subscribers and earn more revenue. The public disclosure of the fee and performance information on the Commission and competing consolidator websites would facilitate competing consolidator comparison and would also promote competition. Greater competition between competing consolidators could in turn incentivize 1103 See supra Section VI.C.2(e)(i). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 competing consolidators to innovate— particularly in terms of their technology—so that they can attract more subscribers.1104 Therefore, the Commission preliminarily believes that a competing consolidator would be incentivized to submit Form CC disclosures that are complete and comprehensive to avoid bearing the costs of resubmitting a Form CC filing or of having its Form CC declared ineffective. The Commission recognizes that the registration process would create uncertainty about whether the form would be declared ineffective. This uncertainty could create a disincentive for entities to become competing consolidators, which could potentially reduce competition in the competing consolidator market.1105 (b) Commission Review and Process for Declaring Initial Form CC Ineffective The Commission preliminarily believes that the process of reviewing an initial Form CC would allow the Commission to evaluate, among other things, the completeness and comprehensibility of the competing consolidators’ disclosures and, if necessary, declare the Form CC ineffective. To be a consolidated market data provider, a competing consolidator is required to have a Form CC that has become effective pursuant to proposed Rule 614(a)(1)(v). Thus, for competing consolidators that submit low quality and potentially inaccurate data, the Commission’s review and declaration of their Form CC ineffective could start an iterative cycle of increasingly better information provision, until the competing consolidator can have an effective Form CC. The Commission preliminarily believes that this public disclosure and review process would improve the quality of information the Commission receives from competing consolidators, which would allow the Commission to better protect investors from potentially incomprehensible or incomplete disclosures that would misinform market participants about the operations of the competing consolidator. Additionally, an entity cannot operate as a competing consolidator without an effective Form CC. The Commission’s review would be designed to ensure that the competing consolidators serving the investors would be the ones that meet the Commission’s qualification requirements. The Commission preliminarily believes that the filing requirements of Form CC and the Commission review period could impose costs on competing consolidators. The Commission preliminarily believes that declaring a Form CC ineffective could impose costs on a competing consolidator—such as delaying the start of operations while the competing consolidator resubmits its Form CC—and could impose costs on individual market participants and the overall market for competing consolidators resulting from a potential reduction in competition. However, competing consolidators and market participants would not incur these costs unless the competing consolidator submitted a deficient Form CC. (c) Request for Comments The Commission requests comments on its analysis of the economic effects of proposed Form CC. In particular, the Commission solicits comment on the following: 252. Do you agree that Form CC would help market participants make better-informed decisions about which competing consolidators to subscribe to in order to achieve their trading or investment objectives? Why or why not? 253. Do you agree that the process for the Commission to declare an initial Form CC ineffective would promote the quality of information the Commission receives from competing consolidators? Do you agree that the quality would affect the ability of the Commission to protect investors? Why or why not? 254. Do you agree with the Commission’s assessment of the costs of Form CC? Please explain and provide cost estimates, if available. 255. Do you agree that filing initial Form CC and amendments to Form CC electronically with the Commission through the EFFS system would reduce filing costs and increase benefits compared to filing paper forms? Please explain. 256. The Commission has provided cost estimates that competing consolidators would incur for accessing and filing using the Commission’s EFFS system. Do you believe these cost estimates are accurate? If not, please explain. Do you believe there are other costs potential competing consolidators would incur related to using the EFFS system that the Commission should consider? 257. Do you agree that the proposed performance metrics would create operational transparency of competing consolidators and allow subscribers and potential subscribers to evaluate and compare the performance of competing 1104 See infra Section VI.D.2 (discussing the potential effects of the proposal on competition). 1105 See infra Section VI.D.2 (discussing the potential effects of the proposal on competition). PO 00000 Frm 00128 Fmt 4701 Sfmt 4702 E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidators? Please explain. Do you agree that posting the monthly performance metrics on the websites of the competing consolidators would limit the ability to compare competing consolidators relative to posting or filing the metrics in a central location? Please explain. 258. How costly would it be for competing consolidators to calculate and post the performance metrics? Please explain and provide cost estimates. 259. The Commission has provided cost estimates that competing consolidators would incur for posting monthly statistics on their websites. Do you believe these cost estimates are accurate? If not, please explain. Do you believe there are other costs competing consolidators would incur related to posting monthly statistics on their websites that the Commission should consider? Please explain. 260. Do you agree with the Commission’s assessment of the costs imposed by the process for declaring an initial Form CC ineffective, including the uncertainty it would create? Please explain. 4. Economic Effects From the Interaction of Changes to Core Data and the Decentralized Consolidation Model The Commission preliminarily believes that the proposed amendments would have a number of economic effects that are only possible as a result of a combination of the expanded content of core data and latency reductions due to the introduction of the decentralized consolidation model.1106 Specifically, the Commission preliminarily believes that the combination of these factors would affect proprietary data feed business; market participants who choose to engage in market making, smart order routing, and other latency sensitive trading businesses; the Consolidated Audit Trail; and data vendor business. lotter on DSKBCFDHB2PROD with PROPOSALS2 (a) Economic Effects on the Proprietary Data Feed Business The Commission preliminarily believes that the expanded content of core data and latency reduction due the introduction of the decentralized consolidation model could make proposed consolidated market data a reasonable alternative to exchange proprietary data feeds for some market participants. This would have the effect of providing these market participants with a potentially lower cost option 1106 See supra Section VI.C.2(c) (discussing the effect of the decentralized consolidation model on consolidated market data latency). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 (relative to proprietary feeds) for low latency, high content market data. The lower cost of either self-aggregating proposed consolidated market data or obtaining a competing consolidator’s data feed would come at the expense of losing the full set of data currently available via proprietary feeds, because the proposed consolidated market data definition does not include all data elements currently available via proprietary data feeds. Nevertheless, some market participants may find that the expanded content of core data makes the trade-off worth it and may choose to drop their proprietary feed subscriptions in favor of the proposed consolidated market data. This effect would represent a transfer from exchanges who sell proprietary data feeds to the market participants who would save money by either selfaggregating proposed consolidated market data or subscribing to a competing consolidator’s data feed. In the latter case, a portion of the benefit is also transferred to the competing consolidator in the form of additional business. The Commission preliminarily believes that a transfer from the exchanges to market participants may help market participants enhance their product and service offerings to their customers. Additional business and revenues for competing consolidators may enhance competing consolidators’ efforts to offer higher quality products and a wider range of product offerings.1107 It is possible that changes to the pricing and customer base of core and proprietary data feeds may not have a uniform impact across all exchanges. Some exchanges currently have more proprietary feed revenue than others, and some exchanges may currently rely more on revenue from SIP data fees than other exchanges. To the extent that an exchange receives a large share of revenue from its proprietary feed business, the impact of these potential reductions in proprietary feed subscriptions could be large for that exchange. To the extent that an exchange receives only a small portion of its revenue from proprietary feed subscriptions, the impact of these potential reductions in subscriptions could be small for that exchange. The Commission invites comment on the issue. The Commission also notes that the exchanges’ revenues from connectivity services may increase or decrease, depending on any new data connectivity fees that the exchanges may propose for data content use cases. 1107 See PO 00000 The connectivity fees for proposed consolidated market data must be fair and reasonable and not unreasonably discriminatory.1108 If these new connectivity fees are higher than current fees, there is a possibility that the exchanges’ overall revenue from connectivity services would increase. It is also possible that exchanges could lose revenue from existing customers reducing the number of ports or the amount of bandwidth they purchase as they switch to competing consolidators for some use cases. The overall effect on the exchanges’ connectivity revenues is uncertain, and the impact on connectivity revenues could differ across different exchanges. The Commission preliminarily believes that these competitive pressures on the exchange proprietary feed and connectivity business could also have the effect of causing the exchanges to lower the fees they charge for these services in an effort to stay competitive with the proposed consolidated market data. This effect represents a transfer from the exchanges to the customers of these services. To the extent that existing customers of these services invest the money saved from lower fees in new products (such as expanding brokerage services) this effect will also have benefit of encouraging the creation of new products and services. To the extent that the lower fees for these services enable new market participants to subscribe to these feeds and offer the services that these feeds are required for (such as high quality execution brokerage services), this effect will also represent a benefit in the form of new competition in the broker-dealer business. The Commission preliminarily believes, however, that if a small latency differential between competing consolidator feeds and the proprietary data feeds remains, then the above effects are likely to be small, owing to the nature of high speed competition.1109 However, this limitation would only be for the case where current subscribers to proprietary data feeds switch to using a competing consolidator feed. In the case of those proprietary feed subscribers who become self-aggregators, the Commission preliminarily believes that it is unlikely that this would result in a latency differential compared to receiving proprietary data.1110 It is also 1108 See supra note 620. supra Section VI.B.2(b). 1110 More generally, the proposed rule would enable some reduction in the latency differential between current market participants to the extent that such market participants would be willing to 1109 See supra Section VI.C.2(c). Frm 00129 Fmt 4701 Sfmt 4702 16853 Continued E:\FR\FM\24MRP2.SGM 24MRP2 16854 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules possible that the data that would remain exclusive to proprietary feeds would also reduce the incentives for market participants to switch to using consolidated market data only, further reducing the size of the above effects. In the event that proprietary data feed subscribers are willing to switch to receiving new consolidated market data and a latency differential remains between these feeds and feeds provided by competing consolidators, the effects discussed in this section would apply only to those market participants who become self-aggregators. The Commission preliminarily believes that the set of current subscribers of proprietary feeds willing to become selfaggregators may be smaller than the set of current subscribers willing to switch to using a competing consolidator, as it is possible that subscribing to a competing consolidator would be more convenient or less costly. To the extent this is the case, the size of the effects described in this section will be reduced. Furthermore, these selfaggregators may continue to enjoy a latency advantage over customers of competing consolidators. To the extent that the changes to proprietary feed subscriptions described above are realized, the exchanges would have corresponding losses in revenue or profit from the provision of proprietary data. Since the Commission is unable to determine how many broker-dealers or other market participants would no longer want to use proprietary data feeds as a result of this rule, it is unable to determine the size of this potential reduction in revenue or profit. (b) New Entrants Into the Market Making, Broker-Dealer and Other Latency Sensitive Trading Businesses lotter on DSKBCFDHB2PROD with PROPOSALS2 The Commission preliminarily believes that proposed amendments may lead to new market participants entering the market making, smart order routing broker-dealer, and other latency sensitive trading businesses. For instance, it is possible that currently there are broker-dealers who would try to compete in the business of sophisticated order routing but choose not to because of the cost of the market data necessary to be competitive. To the extent that the expanded content of new core data and the latency reductions due make the necessary technology and personnel investments to take advantage of the latency reductions provided by the decentralized consolidation model. Thus, while some differences in latency may remain, the barriers to entry for market participants to compete in the latency sensitive businesses at various levels of sophistication and competitiveness would be reduced. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 to the introduction of the decentralized consolidation model make consolidated market data a viable data product for smart order routing, the Commission preliminarily believes that these changes could induce these brokerdealers to enter the business.1111 This would have the benefit of increasing competition in the sophisticated order routing broker-dealer business. The Commission preliminarily believes that access to this new, faster consolidated market data could encourage new entrants into the automated market maker business. This would not only improve the competitiveness of this business but also may increase liquidity in the corresponding markets. The Commission preliminarily believes that if these new entrants would want to use a competing consolidator, and if a small latency differential between competing consolidator feeds and the proprietary data feeds remains, then this effect is likely to be small.1112 If instead these potential new entrants were to become self-aggregators, then this limitation would be reduced, because the Commission preliminarily believes that there is unlikely to be a significant latency differential between being a selfaggregator and using proprietary data feeds. However, if self-aggregation is required to be a new entrant in these businesses, the number of potential new entrants could be small, since using a competing consolidator may be more convenient or less costly than selfaggregating.1113 It is also possible that potential participants in the sophisticated SOR, automated market making, and other latency sensitive trading businesses find that they cannot compete effectively without using the data that would remain exclusive to proprietary feeds. To the extent this is the case, the effects discussed above would be further limited. (c) Effects From the Interaction With the Consolidated Audit Trail (i) CAT Baseline Rule 613 of Regulation NMS requires the national securities exchanges and national securities associations (‘‘selfregulatory organizations’’) to jointly develop and submit to the Commission 1111 These would be broker dealers who have not entered these businesses because, currently, the only way to obtain the benefits associated with the new, expanded core data and decentralized consolidation model is to subscribe to proprietary data feeds, which the Commission preliminarily expects to remain more expensive than core data. 1112 See supra Section VI.B.2(b). 1113 For related discussion on latency advantages, see supra note 1110. PO 00000 Frm 00130 Fmt 4701 Sfmt 4702 a national market system plan to create, implement and maintain a consolidated audit trail (‘‘CAT’’).1114 At the time of adoption, and even today, trading data was and is inconsistent across the selfregulatory organizations and certain market activity is difficult to compile because it is not aggregated in one, directly accessible consolidated audit trail system. The goal of Rule 613 was to create a system that provides regulators with more timely access to a sufficiently comprehensive set of trading data, enabling regulators to more efficiently and effectively reconstruct market events, monitor market behavior, and identify and investigate misconduct. Rule 613 thus aims to modernize a reporting infrastructure to oversee the trading activity generated across numerous markets in today’s national market system. On November 15, 2016, the Commission approved the national market system plan required by Rule 613 (‘‘CAT NMS Plan’’ or ‘‘Plan’’) that was submitted by the self-regulatory organizations.1115 In the CAT NMS Plan, the Participants described the numerous elements they proposed to include in the CAT, including, (1) requirements for the plan processor responsible for building, operating and maintaining the Central Repository,1116 (2) requirements for the creation and functioning of the Central Repository, (3) requirements applicable to the reporting of CAT Data by plan participants and their members. ‘‘CAT Data’’ is defined in the CAT NMS Plan as ‘‘data derived from Participant Data, Industry Member Data, SIP Data, and such other data as the Operating Committee may designate as ‘CAT Data’ from time to time.’’ 1117 The CAT NMS Plan requires plan participants and their members to record and report various data regarding orders by 8:00 a.m. the day following an order event.1118 The Plan requires industry members to record timestamps for order events in millisecond or finer increments with a clock synchronization standard of within 50 milliseconds.1119 The CAT NMS Plan Processor, FINRA CAT, is then required to process the order data into a uniform format, link the entire lifecycle of each order, and combine it with other CAT 1114 See supra note 624. id. 1116 The Central Repository is the repository responsible for the receipt, consolidation, and retention of all information reported to the CAT. See CAT NMS Plan, supra note 624, at Section 1.1. 1117 See id. The Operating Committee is the governing body of the CAT NMS Plan. 1118 See id. at Sections 6.3 and 6.4. 1119 See id. at Section 6.8. 1115 See E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Data such as SIP Data.1120 The Plan Processor is also required to store the CAT Data to allow the ability to return results of queries on the status of order books at varying time intervals.1121 Regulators, such as the Commission and SROs will use the resulting CAT Data only for regulatory purposes such as reconstructing market events, monitoring market behavior, and identifying and investigating misconduct.1122 At this time, the Commission has little information about what specific data, in addition to CAT Data, such as proprietary depth of book and auction data, the SROs currently intend to include in their enhanced surveillance systems.1123 lotter on DSKBCFDHB2PROD with PROPOSALS2 (ii) Economic Effects on CAT The Commission recognizes that the proposal could affect the Consolidated Audit Trail, resulting in benefits to investors from improved regulatory oversight, costs to CAT from potentially switching from a current SIP to a competing consolidator, costs to CAT from integrating consolidated market data into the CAT Data model, and costs to SROs of updating their enhanced surveillance systems to use consolidated market data provided by the CAT.1124 Specifically, the Plan Processor for the Consolidated Audit Trail, FINRA CAT, is required to incorporate all data from SIPs or pursuant to an NMS plan into the Consolidated Audit Trail. If the Commission were to approve these amendments, the CAT NMS Plan Operating Committee could choose to purchase such data from a different entity and would be required to purchase the expanded consolidated data. The Commission believes that the incorporation of the expanded data into CAT would improve regulatory oversight to the benefit of investors. As explained in the Approval order for the Consolidated Audit Trail, the expected benefits of the CAT include ‘‘improvements in regulatory activities such as the analysis and reconstruction of market events, in addition to market analysis and research . . ., as well as market surveillance, examinations, investigations, and other enforcement functions,’’ and derive from improvements in four data qualities: Accuracy, completeness, accessibility, 1120 See id. at Section 6.5. id. at Section 6.5(c)(ii). 1122 See id. at Section 6.5(g); CAT NMS Plan Approval Order, supra note 624, at 84833–4. 1123 See Rule 613(f) of Regulation NMS. 1124 See supra Section IV.B.5 for a more detailed discussion of how the proposal would alter the requirements of the Consolidated Audit Trail NMS Plan. 1121 See VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 and timeliness.1125 Accuracy refers to whether the data about a particular order or trade is correct and reliable. Completeness refers to whether a data source represents all market activity of interest to regulators, and whether the data is sufficiently detailed to provide the information regulators require. Accessibility refers to how the data is stored, how practical it is to assemble, aggregate, and process the data, and whether all appropriate regulators could acquire the data they need. Timeliness refers to when the data is available to regulators and how long it would take to process before it could be used for regulatory analysis. The Commission believes that the expanded consolidated data from the proposal could improve the completeness and accessibility of CAT Data.1126 In particular, the proposal would improve the completeness of CAT Data because CAT Data would contain quotes smaller than 100 shares, depth of book information, and auction information. While the CAT will contain query functionality capable of recreating limit order books, the depth of book information would allow regulators to see the displayed order books that others see around the time of the order events. While the Commission does not know if SROs plan to incorporate depth of book and auction information into their enhanced surveillance systems or other regulatory activities using CAT Data, the proposal would improve the accessibility of consolidated market data for SRO and Commission CAT-related uses because SROs would have access to such data in a standardized format through the Consolidated Audit Trail instead of through the variety of formats currently used in proprietary data. The proposal would also improve accessibility because the SROs and Commission 1125 See CAT Approval Order, supra note 624, at 84802–3. 1126 The Commission believes the proposal would not affect the accuracy or timeliness of CAT Data. The Commission does not believe that the proposal would alter the accuracy of timestamps of trades and quotes. While some competing consolidators might offer data that more accurately represents the data observed by certain market participants at the time of an order event, the Commission does not expect that all market participants would observe the exact same data at that order event, much like the case today. In addition, industry member clock synchronization and timestamps on the order events in CAT Data are not fine enough for the latency improvements to affect the accuracy of assigning an order event to the consolidated market data likely observed at the time of the order event. Finally, the order data in CAT is not required to be reported until 8:00 a.m. the day following an order event. Hence, because latency improvements from the proposal would be measured in microseconds, the Commission does not believe that the proposal would improve the timeliness of CAT Data. PO 00000 Frm 00131 Fmt 4701 Sfmt 4702 16855 would have such data on the same system as CAT Data. The Commission believes that the potential improvements in completeness and accessibility would facilitate more efficient regulatory activities using CAT Data that would benefit investors. In particular, the proposal could make broad-based market reconstructions using CAT Data more efficient by increasing the depth of information that could be incorporated into such reconstructions with CAT Data alone. The Commission believes that depth of book information, quote information in sizes less than 100 shares, and auction information are all valuable in a broad-based market reconstruction. Further, the improvements would allow for more targeted surveillances and risk-based examinations using CAT Data alone. For example, the depth of book information would be valuable when building surveillances to detect spoofing or in investigating spoofing because spoofing often involves creating a false impression of depth at prices outside of the best bid or offer. In addition, the auction information would facilitate auction market reconstruction to evaluate manipulation concerns and inform policy. Quote information in sizes less than 100 shares would facilitate analysis by regulators of broker-dealers’ best execution practices by providing potential execution prices that are better than the current NBBO.1127 The Commission recognizes that the interaction between the proposal and the Consolidated Audit Trail could also create additional costs. Such additional costs are likely to be borne by SROs and their members. These costs could include switching costs, additional data costs, and data storage and processing costs. The proposal would result in switching costs if the CAT Central Repository has to obtain the data from a different source. The source of the switching costs could be from changing data input formats and technical specifications, which would require one-time implementation costs. The Commission recognizes that the SIP technical specifications change a few times a year such that the switching costs associated with the proposal would be the costs in excess of the regular costs incurred when the SIP technical specifications change.1128 The 1127 See supra Section VI.C.1(b)(i) for data showing that odd-lot quotes in higher priced securities often improve upon the current NBBO. 1128 See CTA, Technical Documents, available at https://www.ctaplan.com/tech-specs (last accessed Jan. 30, 2020) (showing the SIP tech specs version E:\FR\FM\24MRP2.SGM Continued 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 16856 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Commission at this time, cannot judge whether switching data providers would result in higher or lower on-going data intake costs but data intake costs presumably could be factored into the selection of a competing consolidator. The Commission recognizes that increasing the amount of data managed and analyzed by CAT would increase the costs of data storage and processing to integrate the expanded data with other CAT Data. However, the Commission does not expect the proposal to substantially increase the costs of operating the CAT because any marginal increase in cost associated with consolidated market data would be dwarfed by the processing costs already incurred by CAT, which includes processing for all options quotation activity among other order lifecycle events and is significantly larger in size than consolidated market data. The Commission recognizes that the proposal would result in SROs incurring costs to integrate additional CAT Data into their surveillances. Even if the SROs would otherwise include depth of book and auction information in the CAT-related surveillances, they would incur costs in changing their surveillances to use the data in CAT rather than using data from proprietary feeds. The Commission also considered whether the requirements in CAT would impose costs as a result of CAT’s effect on the competition among competing consolidators. Because the Commission does not believe CAT would significantly affect the competition among competing consolidators,1129 it would not impose additional costs resulting from this effect. The Commission preliminary believes that CAT implementation milestones will not be impacted by the infrastructure proposal given that sufficient lead time would be available and integration efforts could be scheduled as part of standard release planning. The Commission believes that switching market data providers and expanding consolidated market data within CAT would require limited resources relative to the current implementation activities. Further, any resources devoted by SROs to updating their surveillances are separate from the efforts to implement CAT. history, which identifies the changes over the years); UTP Data Feed Services Specification, supra note 142 (showing the SIP tech specs version history, which identifies the changes over the years). 1129 See infra Section VI.D.2 for a discussion of the interaction between the proposal and CAT on competition among competing consolidators. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 (d) Effects on Data Vendors The Commission preliminarily believes that the proposed amendments would have an effect on the broad financial data services industry. To the extent that the amendments lead to cheaper (relative to proprietary data feeds) and higher content consolidated market data, the Commission preliminarily expects that costs to data vendors would go down and the ability of such vendors to grow their customer base would increase. It is also possible that data vendors may increase the range and quality of products they offer using the new expanded core data and that new firms enter the data vendor business. To the extent that the risk of price increases for core data is realized instead, the Commission believes these businesses could potentially face higher costs, which when passed on to clients could cause their customer base to shrink. In the event that these outcomes are severe, it is possible that some data vendors could exit the market. The Commission is uncertain about the potential size and scope of these effects because it is unable to determine both the role of these costs in producing the products supplied by the data services industry and the extent to which the enhanced quality of new core data could play a role in the quality of their products. The Commission invites comments on the issue. (e) Request for Comments The Commission requests comments on its analysis of the economic effects from the interaction of changes to core data and the decentralized consolidation model. In particular, the Commission solicits comment on the following. 261. Do you agree with the Commission’s analysis of the effect of the proposal on the proprietary data business? Why or why not? Please explain in detail. 262. Would exchanges lose proprietary data business as a result of the proposed decentralized consolidation model? Why or why not? Please explain. Would any market participants still elect to purchase proprietary data feeds from exchanges? If so, which market participants? Please explain in detail. What would be the net effect of any changes in this business? 263. The Commission invites comment on the role of SIP data revenue and proprietary feed revenue in the overall data revenue of exchanges. To what extent do exchanges rely on each source of revenue? Please explain in detail. 264. Do you agree with the Commission’s analysis of the effects of PO 00000 Frm 00132 Fmt 4701 Sfmt 4702 the proposed amendments on the broad financial industry data services industry? Why or why not? Please explain in detail. Would the proposal lead to new broker-dealers developing SORs, new market makers, or other new latency sensitive traders? If so, what would be the economic effect of these new players? Please explain in detail. 265. Do you agree with the Commission’s analysis of the effects of the interaction between the proposal and the Consolidated Audit Trail? Why or why not? Please explain. 266. Would the proposal result in more complete and/or accessible CAT Data? Please explain. How would regulators use the additional CAT Data resulting from the proposal and how would investors benefit from this usage? Please explain. 267. To what extent would the proposal alter the SROs enhanced surveillances using CAT Data? Please explain. Would the proposal result in SROs incorporating more depth of book and auction information into their surveillances? What would be the costs and benefits of doing so? Please explain. 268. If the proposal resulted in FINRA CAT switching data providers, what would be the switching costs? How would the proposed amendments affect the implementation and ongoing costs of CAT? Please provide estimates if possible. 269. Do you agree that the proposal would not affect the implementation of CAT? Please explain. 270. Do you agree with the Commission’s analysis of the effects of the proposal on data vendors? Why or why not? Please explain. 5. Request for Comments on the Economic Effects of the Proposed Rule The Commission requests comment on its analysis of the economic effects of the proposed amendments. In particular, the Commission solicits comment on the following: 271. Do you believe the Commission’s analysis of the potential economic effects of the proposed amendments is reasonable? Why or why not? Please explain in detail. 272. Do you believe the proposed amendments may have unintended consequences that are not captured by the Commission’s analysis of the potential economic effects? Why or why not? Please explain in detail. 273. Do you agree with the Commission’s analysis of the benefits of the proposed amendments? Why or why not? Please explain in detail. 274. Do you agree with the Commission’s analysis of the costs of E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules the proposed amendments? Why or why not? Please explain in detail. 275. The Commission requests that commenters provide relevant data and analysis to assist us in determining the economic consequences of the proposed amendments. In particular, the Commission requests data and analysis regarding the costs SROs, exclusive SIPs, and market participants may incur, and benefits they may receive, from the proposed amendments. D. Impact on Efficiency, Competition, and Capital Formation lotter on DSKBCFDHB2PROD with PROPOSALS2 1. Efficiency The Commission preliminarily believes that the proposed amendments would have a number of different effects on efficiency. In particular, the Commission preliminarily believes that the proposed amendments would: Lead to more efficient gains from trade, improve the efficiency of order execution for some market participants, improve price efficiency, and affect how efficiently core data is distributed. The rest of this section discusses these different effects of the proposed amendments on efficiency in detail. The Commission solicits comments whether the proposed amendments might have a significant impact on other forms of efficiency. As discussed above, the Commission preliminarily believes that the expansion of core data under the proposed amendments would increase transparency for market participants who do not currently access proprietary DOB feeds and allow them to more easily find liquidity that they can trade against.1130 Currently, some of these market participants may not trade because they cannot see the quotes available to them, either through a lack of information about odd-lots, depth of book, or auction information. The Commission preliminarily believes that the proposed amendments would alleviate some of this information shortage and would allow traders to more easily find counterparties. This may result in more voluntary trades occurring between market participants, which could lead to more efficient gains from trade, since these are trades which currently do not take place only because of a lack of information.1131 However, if the inclusion of additional odd-lot, depth of book, or auction information does not induce additional voluntary trading from market participants who do not currently access proprietary DOB feeds, then the proposed amendments 1130 See supra Section VI.C.1(b). 1131 Id. VerDate Sep<11>2014 may not produce more efficient gains from trade.1132 The Commission preliminarily believes that the expansion of core data could also improve the efficiency with which some market participants, or their broker-dealers, execute orders. As discussed above, by adding odd-lot, depth of book, and auction information to core data, the proposed amendments would reduce information asymmetry between broker-dealers and other market participants who subscribe to proprietary data feeds and users of current SIP data. This could improve the ability of broker-dealers and other market participants who currently do not have access to this information to trade against those market participants who do. As a result, this could improve the efficiency with which they execute their orders by allowing them to select a better trading venue or method of executing their order. Furthermore, for market participants who currently rely on exclusive SIPs for their order executions, the reduction in latency provided by the decentralized consolidation model could reduce the risk that their orders are picked off, which could reduce their adverse selection costs. This could potentially reduce their transaction costs and allow them to more efficiently achieve their investment or trading objectives or those of their clients.1133 As discussed previously, the Commission preliminarily believes that there is some potential for new brokerdealers to become competitive in the market for sophisticated order execution as a result of this rule because they may be able to use the expanded content and lower latency of core data to develop SORs or other tools that allow them to compete more effectively with brokerdealers who currently base order execution decisions off of proprietary DOB data.1134 To the extent that this happens, the clients of these brokerdealers could see their orders executed more efficiently and their execution costs reduced. The current lack of certain odd-lot quote, depth of book, and auction information in SIP data could affect price efficiency. The gap in information between data provided by exclusive SIPs and proprietary data products may cause prices in some securities to be less efficient, i.e., to deviate further from fundamental values, if market participants with access to proprietary data products do not incorporate this information into prices quickly enough 19:07 Mar 23, 2020 Jkt 250001 through their trading or quoting activity. However, the Commission does not know the extent of this possible effect, but it preliminarily believes the effect could be larger in less actively traded securities where the gap in information between SIP data and proprietary data products is larger. The Commission preliminarily believes that, to the extent that there is information in the new core data elements that is not currently reflected in market prices, the proposed amendments may improve price efficiency.1135 In particular, the proposed introduction of odd-lot quote, depth of book, and auction information into core data could result in the information becoming impounded in prices more rapidly and accurately as a result of the more widespread dissemination of this information. As the Commission understands that the most sophisticated traders already have access to this information and likely already compete to profit from it, the Commission expects that the size of this gain in price efficiency would be small because this information is already impounded quickly into prices. Finally, under the current rule, the exclusive SIPs operate like public utilities in their consolidation and distribution of the NMS stock data.1136 The proposed changes would unbundle the data fees for consolidated market data from the fees for its consolidation and distribution.1137 The decentralized consolidation model would subject the fees charged by competing consolidators for the consolidation and distribution of consolidated market data to competition. The Commission preliminarily believes that the proposed decentralized consolidation model would lead to consolidated market data being distributed in a more timely, efficient, and cost-effective manner. The Commission preliminarily believes that the proposed changes to the consolidation and distribution of consolidated data is economically similar to the restructuring of public utilities and may have an impact on the efficiency with which the consolidation and distribution is carried out. In particular, as discussed above, the proposed decentralized consolidation model is anticipated to produce better investment to lower costs and improve quality in the consolidation and distribution of consolidated market data, as well as promote better price competition (all of which translates into a more efficient allocation of capital) 1132 Id. 1135 See 1133 Id. 1136 See 1134 See PO 00000 supra Section VI.C.4(b). Frm 00133 Fmt 4701 Sfmt 4702 16857 supra Section VI.B.2(a). supra note 390. 1137 See supra Section VI.C.2(c). E:\FR\FM\24MRP2.SGM 24MRP2 16858 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules than the bidding process currently in place.1138 The Commission acknowledges the uncertainty in this conclusion. The literature on the economics of restructuring of public utilities does not provide clear guidance. Some papers show efficiency gains from regulatory restructuring,1139 yet others claim no efficiency gains or efficiency declines after regulatory restructuring of public utilities.1140 The likely impact of the proposed changes rests on the strengths and weaknesses of the existing exclusive SIP model. The Commission preliminarily believes that the existing exclusive SIP model has an important weakness: It does not provide sufficient competitive incentives.1141 SIPs have significant market power in the market for core and aggregated market data products and, as a result, do not need to compete hard to capture demand for their products. The Commission preliminarily believes that the adoption of the decentralized consolidation model would open up the consolidation and distribution services to data consolidators that would need to vigorously compete to capture some demand for the data they provide. This need to compete for market share would create incentives to reduce costs. As discussed above, the Commission preliminarily believes that this competition could incentivize competing consolidators to pass on some of those cost savings to customers by charging lower service fees in order to capture market share.1142 The focus to capture market share might also lead to technological improvements for competing consolidators to be able to differentiate themselves in the eyes of the customers and generate demand.1143 1138 See id. e.g., Kira R. Fabrizio et al., Do Markets Reduce Costs? Assessing the Impact of Regulatory Restructuring on US Electric Generation Efficiency, 97 a.m. ECON. REV. 1250 (2007). 1140 See, e.g., Severin Borenstein, The Trouble with Electricity Markets: Understanding California’s Restructuring Disaster, 16 J. ECON. PERSP. 191 (2002). 1141 See supra Section VI.B.3(a) (discussing SIPs market power). 1142 See supra Section VI.C.2(b). However, the Commission also acknowledges the possibility that fees for the consolidation and distribution of consolidated market data may remain the same or increase, because consolidated market data will contain more information and/or there might not be enough competition among competing consolidators. 1143 Several studies found evidence of efficiency gains and technological improvements from restructuring in the public utilities sector. In the electricity industry, for example, the introduction of competition to the electricity generation services created strong incentives to become more cost efficient and technologically advanced to improve operating performance. If a plant could not become lotter on DSKBCFDHB2PROD with PROPOSALS2 1139 See, VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 The Commission preliminarily believes that these improvements in data provision technology and the introduction of competitive forces on fees for the consolidation and distribution of consolidated market data could result in a more efficient allocation of capital. Additionally, the decentralized consolidation model could allow market participants to receive consolidated market data more efficiently. Instead of having to receive separate consolidated market data feeds from two exclusive SIP plan processors, UTP and CTA/CQ Plans, market participants would have the option to receive all of their consolidated market data from one competing consolidator.1144 This could allow market participants to achieve efficiencies in the design and in making modifications to their systems for the intake of consolidated market data because they would only have to configure their systems to intake consolidated market data from one source. 2. Competition As discussed previously, the Commission preliminarily believes this proposed rule would have a substantial impact on competition. The Commission preliminarily identifies seven markets or areas of the market for which the proposed rule would have a substantial impact on competition. The Commission acknowledges that the seven markets or areas may not be a comprehensive list of all markets or areas for which the proposed rule might have an impact on competition. However, the Commission preliminarily believes that competition in these seven markets or areas are most likely to be impacted substantially by the proposed rule. The Commission solicits comments regarding whether the efficient enough to compete, it would lose business and have to exit the market. Craig and Savage (2013) establish a 9% increase in efficiency in investor-owned electricity plants in response to the restructuring and increasing competition in the electricity sector. Similarly, Davis and Wolfram (2012) argue that electricity market restructuring is associated with a 10 percent increase in operating performance for nuclear plants generating electricity. The authors state that increasing competition led to managers focusing more attention on financial costs of outages. See J. Dean Craig and Scott J. Savage, Market Restructuring, Competition and the Efficiency of Electricity Generation: Plant-level Evidence from the United States 1996 to 2006, 34 ENERGY J. 1 (2013); Lucas W. Davis and Catherine D. Wolfram, Deregulation, Consolidation, and Efficiency: Evidence from US Nuclear Power, Am. Econ. J.: Applied Econ. (Oct. 2012), at 194. 1144 The Commission acknowledges that market participants may subscribe to more than one competing consolidator for different core data products or as a backup feed. PO 00000 Frm 00134 Fmt 4701 Sfmt 4702 proposed rule might have a substantial impact on competition in other markets or areas of the market. First, the proposed rule introduces a competitive marketplace for the consolidation and dissemination of consolidated market data to replace the centralized consolidation model, which is not currently subject to competitive pressures.1145 Under the proposed amendments multiple competing consolidators would be able to distribute consolidated market data to market participants. The Commission preliminarily believes that, since market participants could freely select the competing consolidator that charged the lowest distribution fee or offered better quality (i.e., lower latency, a more reliable system, etc.), the competing consolidators would be subject to competitive forces and the marketplace for the consolidation and dissemination of proposed consolidated market data would be competitive if enough competing consolidators enter the market.1146 As discussed above, the Commission preliminarily believes that this introduction of competition could reduce the prices competing consolidators charge for the consolidation and distribution of consolidated market data and improve the quality of consolidated market access.1147 The Commission recognizes the risk that there could be too few competing consolidators to realize these benefits fully, in which case the proposed competitive changes may have a number of costs,1148 including higher prices for the consolidation and dissemination of consolidated market data, which could increase the overall prices market participants pay for consolidated market data.1149 The Commission recognizes that the extension of Regulation SCI to include competing consolidators could impact competitive dynamics in the competing consolidator market. The Commission preliminarily believes the costs associated with being an SCI entity could raise the barriers to entry for firms seeking to become competing consolidators who are not already SCI entities, including market data aggregation firms.1150 Exclusive SIPs and SROs who seek to become competing consolidators could gain a 1145 See supra Sections IV.B.2, VI.B.3(a). Commission assumes that enough competing consolidators will enter the market in order to make it competitive. See supra Section VI.C.2(a). 1147 See supra Sections VI.C.2(a), VI.C.2(b), VI.C.2(c). 1148 See supra Sections VI.C.2(a), VI.C.2(d). 1149 See supra Section VI.C.2(a). 1150 See supra Sections VI.C.2(a)(i)b., VI.C.2(e)(ii). 1146 The E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules competitive advantage over these firms because they would face lower barriers to entry since they are currently SCI entities and already incur many of these costs.1151 Therefore, the extension of Regulation SCI to competing consolidators could result in fewer firms seeking to become competing consolidators which could lead to less competition in the competing consolidator market. Less competition and less innovation would reduce the incentives of competing consolidators to reduce the costs and improve the speed and quality of their consolidated market data aggregation and dissemination services. Additionally, the Commission preliminarily believes that the public disclosure of the information in Form CC and the performance metrics and operational information competing consolidators would provide on their websites would enhance competition between competing consolidators.1152 The public disclosure of competing consolidator fees and performance metrics would allow market participants to more easily compare competing consolidators and select the ones that charged the lowest fees or offered the best performance. This could enhance competition between competing consolidators. For example, if the public disclosures show that certain competing consolidators have higher fees or poor performance, it may result in those competing consolidators losing subscribers and earning lower revenues. Similarly, competing consolidators who display lower prices or superior system performance may be able to attract more subscribers and earn more revenue. This in turn could enhance competition by incentivizing competing consolidators to lower fees and/or innovate and make investments in their systems in order to improve system performance in order to attract more subscribers. In theory, the Commission acknowledges that the public disclosure of Form CC could harm competition by making firms reluctant to enter the competing consolidator market and reducing the incentives of competing consolidators to innovate if it discloses certain information that a competing consolidator might view as a ‘‘trade secret’’ or giving it a competitive advantage. However, the Commission believes that these effects are not likely to occur because it preliminarily believes that the disclosures on Form CC are not detailed enough to allow other market participants to reproduce a competing consolidator’s ‘‘trade secret.’’ Additionally, the Commission preliminarily believes that the delayed public disclosure of material amendments to Form CC should prevent another competing consolidator from replicating a competing consolidator’s innovations before it has a chance to implement them.1153 The Commission recognizes that the registration process for Form CC could create uncertainty about whether a Form CC would be declared ineffective. This could potentially harm competition in the market for competing consolidators by raising the barriers to entry and creating a disincentive for entities to become competing consolidators. However, the Commission preliminarily believes that these effects will not be significant because the Commission would not declare a Form CC ineffective without notice and opportunity for hearing. Additionally, entities whose Form CC is declared ineffective would still have the opportunity to file a new Form CC with the Commission. The Commission considered the effect of the interaction between the proposal and the CAT NMS Plan on competition among competing consolidators, but believes that this interaction would not have a significant effect on the competitive landscape. In particular, the Commission considered two effects: First, the effect in the event that there is a bias toward an exchange-operated competing consolidator over other competing consolidators and second, any competitive advantage for the competing consolidator selected for the CAT NMS Plan. In relation to any bias, the Commission notes that the CAT NMS Plan would be only one of many potential customers of the competing consolidator, so this bias is not likely to affect the market unless the selection produces a competitive advantage. In particular, a competing consolidator could enjoy a competitive advantage only if broker-dealers believe that market surveillances would be less likely to appear to show violations if the broker-dealers made trading decisions using the same data used in SRO surveillances. However, the latency differences across the competing consolidators are likely to measure in the microseconds while the clock synchronization requirements for industry members in the CAT NMS Plan is 50 milliseconds for electronic order flow.1154 Therefore, the Commission does not believe the CAT’s choice of competing consolidator would confer any regulatory value on the competing 1153 See 1151 See supra Sections V.G.,ViC.2(a)(i)b. 1152 See supra Section VI.C.3. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 supra Sections IV.B.2(e), VI.C.3. CAT NMS Plan, supra note 624, at Section 6.8. 1154 See PO 00000 Frm 00135 Fmt 4701 Sfmt 4702 16859 consolidator or their broker dealer clients. Second, the Commission preliminarily believes that the expanded content and reduced latency of consolidated market data would make it a more viable substitute for proprietary data feeds.1155 The Commission preliminarily believes that this would increase competition between consolidated market data and exchange proprietary data feeds. These competitive pressures could lead to lower prices for proprietary data feeds and may reduce the data costs that market participants pay, at the expense of the SROs who charge the fees.1156 The Commission recognizes the risk that the extension of Regulation SCI to include competing consolidators could lead to less competition in the competing consolidator market, which could reduce the incentives of competing consolidators to reduce the cost and improve the speed and quality of consolidated market data. If this occurs, it could make consolidated market data less of a viable substitute for proprietary data feeds, which would reduce the competitive pressures consolidated market data would impose on proprietary data feeds. Third, the Commission preliminarily expects the new decentralized consolidation model for proposed consolidated market data to create competitors to market data aggregators for two reasons. First, the potential revenues from becoming a competing consolidator may cause new firms to enter the market for the consolidation and distribution of market data. Second, some market participants who currently use market data aggregators may switch to getting proposed consolidated market data from a competing consolidator. This could have two effects: The competition could lead to lower prices and higher quality in the market data aggregator business, but it could also lead to fewer market data aggregators if the competition from the proposed consolidated market data system makes it no longer viable for some market data aggregators to offer their services.1157 1155 However, consolidated market data would not be a perfect substitute for the proprietary data feeds because it would not contain all the information in proprietary data feeds. For example, the expanded core data would not include full depth of book information or information on all odd-lots. See supra Section VI.C.4. 1156 See supra Section VI.C.4(a). 1157 The Commission acknowledges that fewer competitors could decrease or increase efficiency in the market data aggregator business. On the one hand, fewer competitors could reduce the incentives for market data aggregators to innovate, which could reduce efficiency. On the other hand, E:\FR\FM\24MRP2.SGM Continued 24MRP2 16860 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 The latter could lead to higher prices in the market data aggregator space.1158 In addition, some of these market data aggregators may choose to become competing consolidators, which could have two effects: It could cause market data aggregators to leave the proprietary feed aggregation space thereby reducing the competition in that space, or it could cause market data aggregators to use the economies of scale and the additional profits they derive from being a competing consolidator to improve their offerings as a market data aggregator of proprietary feeds. Depending on which effect dominates, competition in the market data aggregator space could increase or decrease, which in turn could lead to lower or higher prices, respectively. The Commission recognizes that the extension of Regulation SCI to include competing consolidators could diminish the ability of market data aggregators who become competing consolidators to compete in the market data aggregator space. If a market data aggregator becomes a competing consolidator, the requirements of being an SCI entity could also extend to their aggregation of proprietary market data.1159 These requirements could raise their costs, which could reduce their ability to compete with other market data aggregators that are not competing consolidators. Fourth, the Commission preliminarily expects that the expanded content and reduced latency of core market data provided by this proposed rule may increase competition in the brokerdealer business by improving the ability of some broker-dealers who currently access core data to execute orders.1160 It is the Commission’s understanding that some broker-dealers that do not subscribe to all of the current proprietary DOB feeds rely solely on the exclusive SIPs today and that this makes them uncompetitive in the market for offering execution services to the most transaction-cost-sensitive market participants. The new decentralized consolidation model with expanded core data would reduce the latency and expand the information delivered to broker-dealers who subscribe to core fewer competitors could also improve efficiency if the firms that exited the market did not aggregate market data as efficiently as the firms that remained. 1158 As discussed above, consolidated market data would not be a perfect substitute for proprietary data feeds, so there would still be demand for proprietary data. Since not all firms aggregate proprietary data themselves, there would still be a demand for third-party aggregators to perform this function. 1159 See supra Section VI.C.2(e)(ii). 1160 See supra Section VI.C.4(b). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 data, possibly without raising data prices. This in turn would allow brokerdealers that subscribe to consolidated data to improve their order execution services and compete more effectively with broker-dealers who subscribe to proprietary DOB feeds. This would lead to greater competition between brokerdealers, which could benefit investors by resulting in lower prices for and higher quality of broker-dealer execution services.1161 Fifth, the Commission preliminarily believes that the proposed rule could affect competition between exchanges. As discussed above, the proposed enhancements to core data could increase competition between proposed consolidated market data and proprietary data feeds, which could lead to exchanges charging lower fees for proprietary market data.1162 If these lower fees do not result in more subscribers to proprietary market data, it would lead to a decline in revenues from proprietary market data for SROs.1163 Additionally, the proposed amendments could affect competition in the market for exchange data connectivity. If some current subscribers to proprietary market data decide to only receive consolidated market data from competing consolidators, they could also reduce the exchange connectivity services that they currently use. In turn, this could reduce the revenue that some exchanges earn from connectivity services. Additionally, new connectivity fees may be proposed for core data use cases, which could potentially increase or decrease the revenue exchanges earn from connectivity.1164 It is the Commission’s understanding that revenues from proprietary market data and connectivity services are a substantial portion of overall revenues for many exchanges.1165 The Commission recognizes that it is possible that an exchange group could close some or all of its exchanges if the revenues from proposed consolidated market data did not increase and revenues from proprietary market data and connectivity services were to decline to a level that a given exchange or exchange group is no longer able to cover operating expenses. The Commission is unable to quantify the 1161 See supra Sections VI.B.3(e), VI.C.4(b). supra Section VI.C.4(a). 1163 In addition to adjusting fees, SROs could also redesign their proprietary market data product lines to try and increase revenue. However, it is possible that demand for these new products would not be sufficient to offset the decline in revenues from proprietary market data. 1164 See supra Section VI.C.4(a). 1165 See supra Section VI.B.3(b). 1162 See PO 00000 Frm 00136 Fmt 4701 Sfmt 4702 likelihood that an exchange will cease operating because it would depend on the fees and revenue allocation for consolidated market data. However, the Commission preliminarily believes that it is unlikely exchanges will be forced to leave the market. Even if an exchange were to exit, the Commission does not believe this would significantly impact competition in the market for trading services because the market is served by multiple competitors, including off-exchange trading venues. Consequently, if an exchange were to exit the market, demand is likely to be swiftly met by existing competitors. The Commission recognizes that small exchanges may have unique business models that are not currently offered by competitors, but the Commission preliminarily believes a competitor could create similar business models if demand were adequate, and if they did not do so, it seems likely new entrants would do so if demand were sufficient. Sixth, the Commission preliminarily believes that the proposed rule would affect competition between traders.1166 The Commission preliminarily believes that traders will be affected differently based on the type of market data they use when making trading decisions. Traders who subscribe to different types of market data can broadly be grouped into three categories: (1) Traders who use proprietary DOB feeds received directly from the SROs and selfaggregate, (2) traders who use market data aggregators to aggregate proprietary DOB feeds, and (3) traders who use core data (currently from the exclusive SIPs and, under the proposed rule, competing consolidators).1167 The Commission preliminarily believes that under the proposed rule the core data would be of higher quality, and thus the value to traders from acquiring proprietary DOB data would decrease.1168 As a result, it would be harder for traders who use proprietary DOB feeds (both self-aggregators and traders who use market data aggregators) to generate profits and the competition between those traders would increase. For traders who use core data, the Commission believes that the 1166 In this context the term traders could refer to either proprietary traders executing orders on their own behalf or broker-dealers executing orders on behalf of their clients. 1167 Traders who currently subscribe to proprietary DOB feeds may also subscribe to the exclusive SIPs as part of their backup systems. However, the Commission preliminarily believes that these traders primarily rely on proprietary DOB feeds when making trading decisions because proprietary DOB feeds contain more information and have lower latency than the exclusive SIPs. 1168 See supra Section VI.C.4(a). E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules competition between those traders would increase because the proposed amendments would reduce the latency and expand the information included in core data, which would allow those traders to devise better trading strategies with bigger profit potential. The Commission preliminarily believes that the most substantial change in competition would occur between traders who use proprietary DOB feeds (both self-aggregators and traders who use market data aggregators) and traders who use core data. As described, the proposed rule expands the information and reduces the latency of core data, thereby closing the gap between core data and proprietary DOB feeds. This would allow traders who use core data to compete on a more level playing field with traders who use proprietary DOB feeds. The Commission preliminarily believes that this would lead to a transfer of profits from traders who use proprietary DOB feeds to traders who use proposed consolidated market data. Seventh, the Commission preliminarily believes that the proposed rule changes would affect competition between off-exchange trading venues and exchanges in the market for trading services. As discussed above, the Commission preliminarily believes that the proposed amendments would reduce the latency of core data.1169 This could improve the competitive positions of some off-exchange trading venues in the market for trading services. Offexchange trading venues that currently rely on the exclusive SIPs to calculate the NBBO would benefit from the latency reductions in the distribution of core data provided by the competing consolidators.1170 These venues would now receive a more timely view of the NBBO, which could improve the execution quality of trades that take place on these venues. This could make them more attractive venues to trade on and they could attract more order flow, from both exchanges and other offexchange venues. Off-exchange trading venues that currently subscribe to proprietary data feeds could also see their competitive positions improve. If the new core data represents a viable alternative to the proprietary data feeds for their order executions, they could substitute core data for proprietary data, which could lower their costs. They might be able to pass along these cost reductions as reduced fees to subscribers, which could improve their competitive position relative to exchanges and other off-exchange trading venues. Reductions in the fees 1169 See supra Section VI.C.2(c). 1170 Id. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 charged by these off-exchange trading venues could in turn potentially benefit investors if broker-dealers who subscribe to these venues passed along these cost savings by, in turn, reducing their fees.1171 3. Capital Formation The Commission preliminarily believes the proposed amendments would have only a modest impact on capital formation. However, the Commission is unable to quantify the effects on capital formation because, as discussed above, it is unable to quantify the additional gains from trade and the effects of improvements in order routing that may be realized from the proposed amendments.1172 However, in the section below the Commission provides a qualitative description of the effects it preliminarily believes the proposed amendments would have on capital formation and invites comments on the subject. As discussed above, the Commission preliminarily believes that the addition of information about odd-lot quotes, depth of book, and auction information to core data may result in more voluntary trades occurring between market participants, which could lead to more efficient gains from trade.1173 Improved gains from trade may result in a more efficient allocation of capital, which would improve capital formation. Additionally, the Commission preliminarily believes that the proposed amendments would improve order execution for market participants who currently rely upon SIP data, which may lower their transaction costs.1174 Lower transaction costs could reduce firms’ cost of raising capital.1175 This, in turn could improve capital formation. 4. Request for Comments on Impact on Efficiency, Competition, and Capital Formation The Commission requests comments on its analysis of the impact of the proposed amendments on efficiency, competition, and capital formation. In particular, the Commission solicits comment on the following: 1171 Broker-dealer subscribers could potentially pass along the cost savings from the reduction in off-exchange trading venue fees to investors either directly, if they reduced fees for investors who were clients of the broker-dealer, or indirectly, if they reduced fees for institutional clients, such as mutual funds, who, in turn, passed along the cost savings to their end investors. 1172 See supra Sections VI.C.1(b), VI.D.1. 1173 See supra Section VI.D.1. 1174 See supra Sections VI.C.1(b), VI.D.1. 1175 See Yakov Amihud and Haim Mendelson, Asset Pricing and the Bid—Ask Spread, 17 J. Fin. Econ. 223 (1986). PO 00000 Frm 00137 Fmt 4701 Sfmt 4702 16861 276. Do you agree with the Commission’s analysis of the effects the proposed amendments might have on efficiency, competition and capital formation? Why or why not? Please explain in detail. 277. Do you believe the proposed amendments may have unintended consequences that are not captured by the Commission’s analysis of the effects the proposed amendments may have on efficiency, competition and capital formation? Why or why not? Please explain in detail. 278. Do you agree that the proposed amendments would lead to gains from trade? Do you agree that the proposed amendments would improve the efficiency or order execution? Do you agree that the proposed amendments would improve price efficiency? Do you agree that the proposed amendments would improve the efficiency of how core data is distributed? Please explain. 279. To what extent does the gap in information between SIP data and proprietary DOB products affect price efficiency? Are these effects larger in less actively traded securities where the gap in information between SIP data and proprietary DOB products is larger? Please explain in detail. 280. Do you believe the proposed amendments would have effects on efficiency that the Commission has not recognized? Please explain in detail. 281. Do you agree with the Commission’s analysis that the proposal will have a substantial impact on competition in several markets? In particular, do you agree that the decentralized consolidation model improves the competition in the market to distribute consolidated market data? Do you agree that the decentralized consolidation model creates more viable substitutes for proprietary exchange data? Do you agree that the proposal increases competition to provide smart order routing? Do you agree that the proposal could affect competition among exchanges to provide transaction services? Do you agree that the proposal could affect competition among traders? Do you agree that the proposal could affect competition among exchanges and off-exchange trading venues? Please explain in detail. 282. Do you agree that the public disclosure of Form CC and the performance metrics promote competition more than if such information were not disclosed? Please explain. 283. Do you agree that the extension of Regulation SCI to include competing consolidators could raise the barriers to entry for competing consolidators and reduce competition in the competing E:\FR\FM\24MRP2.SGM 24MRP2 16862 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidator market? Why or why not? Please explain in detail. 284. Do you agree that the purchase of consolidated market data from a competing consolidator by the CAT would not have a significant effect on competition among competing consolidators? Why or why not? Please explain in detail. 285. Would the public disclosure of Form CC or the performance metrics risk revealing any trade secrets that could harm competition? Please explain. 286. Do you believe the proposed amendments would have effects on competition that the Commission has not recognized? Please explain in detail. 287. Do you agree that the proposal would only have a modest impact on capital formation? Why or why not? Please explain in detail. 288. Do you believe the proposed amendments would have effects on capital formation that the Commission has not recognized? Please explain in detail. lotter on DSKBCFDHB2PROD with PROPOSALS2 E. Alternatives The Commission considered potential alternatives to the proposed amendments that broadly fall into two categories: Introduce the decentralized consolidation model and make alternative changes to the core data definition, and make changes in the core data definition as proposed in the amendments and consider alternative models of SIP competition. 1. Introduce Decentralized Consolidation Model With Additional Changes in Core Data Definition The Commission considered an alternative that would introduce the decentralized consolidation model and expand core data more than the proposal does. For example, the Commission considered expanding core data to include information on quotations and aggregate size at all prices in the limit order book (‘‘full depth of book’’) in addition to the depth of book information contained in the proposal, i.e., five price levels from the protected quotes.1176 Alternatively, the Commission considered expanding core data to include information on all oddlot sized quotes instead of only information on quotes at or above the proposed round lot size.1177 Under both alternatives, the definition of a round lot for the purposes of determining the NBBO and a protected quote would remain the same as in the proposed amendments, which means the costs 1176 See 1177 See supra Section III.C.2. supra Section III.C.1. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 and benefits associated with the changes in the definition of the NBBO and protected quotes would be similar to the proposal.1178 Relative to the proposal, full depth of book information would provide market participants who currently do not access proprietary DOB feeds, as well as market participants who currently access proprietary DOB feeds and would have switched to using consolidated market data under the proposal, with additional information on liquidity provision across more price levels. To the extent that these market participants can utilize full depth of book information, the Commission preliminarily believes that this alternative could result in increased benefits to such market participants relative to the proposal.1179 Certain commenters on the Roundtable stated that without full depth of book information, broker-dealers may not be able to provide best execution to their clients,1180 indicating that full depth of book information would provide valuable information to market participants. However, as discussed above, the Commission preliminarily believes that the marginal benefit of including additional information on price levels further away from the best quotes may decrease as the price level moves away from the best quote because orders at these price levels are less likely to execute.1181 Relative to the proposal, the inclusion of full depth of book information in core data would increase the ability of market participants to use it as a substitute for proprietary DOB feeds.1182 Currently, market participants interested in full depth of book data rely on proprietary DOB feeds offered by exchanges, which provide varying degrees of the depth of book information. To the extent that there are market participants who utilize full depth of book information via proprietary DOB feeds in trading, this alternative could increase the benefits for some of these market participants 1178 See supra Section VI.C.1(c). alternative could increase costs relative to the proposal for market participants that access full depth of book information and execute trading that earn profits at the expense of other market participants who do not access this information. As discussed above, this cost would represent a partial transfer from traders who currently have access to depth of book to those who do not. See supra Section VI.C.1(b)(iv). 1180 See supra notes 284–285. 1181 See supra Sections VI.C.1(b)(ii), III.C.2. 1182 Including full depth of book information in core data would not make it a perfect substitute for all proprietary DOB feeds. For example, some proprietary DOB feeds contain more detailed information than full depth of information, such as messages on individual orders. 1179 This PO 00000 Frm 00138 Fmt 4701 Sfmt 4702 relative to the proposal by potentially reducing their data costs if they would switch to using core data under this alternative but would not have done so under the proposal. Subscribers of proprietary DOB feeds would realize these cost savings if they switched to receiving proposed consolidated market data through a competing consolidator or if they registered as a selfaggregator.1183 The Commission preliminarily believes that the alternative to include full depth of the book in core data would result in greater costs for exchanges than would the proposal. To the extent that the alternative results in fewer market participants subscribing to proprietary DOB data or purchasing connectivity services from the exchanges than under the proposal, exchanges’ business for their proprietary feeds and connectivity services could be less profitable.1184 Additionally, to the extent that not all exchanges sell full depth of book, certain exchanges would incur additional costs to set up systems and produce full depth of book information to be included in the core data. However, the Commission is unable to quantify this cost because it lacks information on the modifications exchanges would need to make to their systems in order to provide full depth of book information, but the Commission invites comments on the issue. Compared to the proposal, this alternative could result in additional costs for competing consolidators to create infrastructure and expand capacity to distribute full depth of book information.1185 The costs are likely to vary substantially according to the existing infrastructure of the entity seeking to be a competing consolidator. The Commission preliminarily believes that these incremental costs for market data aggregators and existing exclusive SIPs will be small, because they already work with proprietary DOB data. However, the Commission invites comments on the issue. Additionally, including full depth of book information would require market participants who subscribed to core data and wished to receive the additional depth of book information to make more extensive upgrades to their systems than 1183 See supra Section VI.C.2(b). broadly, this could have differential effects between exchanges who derive significant revenue from proprietary data feeds and those who derive significant revenue primarily from SIP revenue. These effects would also depend on the NMS plan(s) fees for consolidated market data as well as their method for allocating revenue received from consolidated market data among the SROs. See supra Section VI.C.4(a). 1185 See supra Section VI.C.2(d). 1184 More E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules under the proposal. However, the Commission is unable to estimate the associated costs because it does not have access to information about the infrastructure expenses a market participant incurs to process market data and because of the likelihood that such costs vary substantially according to the existing infrastructure of the market participant, but the Commission invites comments on the issue. To the extent that some market participants who subscribe to the exclusive SIPs do not need full depth of book information, they would not need to expand their own proprietary technology or that of a third-party vendor to process the full depth of the book data. Therefore, this alternative would not result in additional costs for these market participants compared to the proposal. In addition to the alternative of adding full depth of book information, the Commission also considered expanding core data to include information on all odd-lot sized quotes instead of only information on quotes at or above the proposed round lot size.1186 The proposed rule is specifically designed to leave out oddlot quotes for low priced stocks. Under this alternative, market participants who subscribe to core data would have oddlot information for low priced stocks. Furthermore, compared to the proposal, this alternative would provide market participants who subscribe to core data with more detailed information about at which prices odd-lot liquidity exists (i.e., instead of rolling up odd-lot quotes at different prices to the highest price) for higher priced stocks. To the extent that market participants who currently do not have access to this information utilize the more detailed odd-lot information in order routing and execution, this alternative could improve their execution quality relative to the proposal.1187 However, as discussed above,1188 Commission and commenter analysis shows that there is a higher percentage of odd-lot trades in higher priced stocks. This could imply that there are fewer odd-lot quotes present in low priced stocks, which could mean that the marginal benefit of including odd-lot information in low lotter on DSKBCFDHB2PROD with PROPOSALS2 1186 See supra Section III.C.1. alternative could increase costs relative to the proposal for market participants that access all odd-lot quotes and execute trading that earn profits at the expense of other market participants who do not access this information. As discussed above, this cost would represent a partial transfer from traders who currently have access to all oddlot quotes to those who do not. See supra Section VI.C.1(b)(iv). 1188 See supra note 178 and accompanying text. 1187 This VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 priced stocks may be smaller than including it in stocks with higher prices. The Commission preliminarily believes that the inclusion of all odd-lot data would not significantly change the processing costs for competing consolidators relative to the proposal. Under the current proposal, competing consolidators would already be processing all odd-lot data in order to calculate exchange round lot BBOs and the round lot NBBO that would be contained in the proposed core market data. Competing consolidators may incur some additional infrastructure expenses in order to disseminate the additional message volume associated with all odd-lot information to market participants. These costs are likely to vary according to the existing infrastructure of the entity seeking to be a competing consolidator, but the Commission preliminarily believes that these additional infrastructure costs are likely to be small.1189 However, the Commission invites comments on the issue. Additionally, the Commission preliminarily estimates that market participants and data vendors would need to make additional upgrades to their systems beyond the proposal in order to receive the additional odd-lot data. However, the Commission does not have access to information about the infrastructure expenses a market participant incurs to process market data and because of the likelihood that such costs vary substantially according to the existing infrastructure of market participants, but the Commission invites comments on the issue. 2. Introduce Changes in Core Data and Introduce a Distributed SIP Model The Commission considered an alternative that would expand the core data as proposed and would introduce a distributed SIP model whereby the current exclusive SIP processors would establish multiple instances of their systems in multiple data centers.1190 As some commenters and panelists suggested at the Roundtable,1191 this alternative would achieve a similar reduction in exclusive SIP geographic latency to the proposal by allowing firms to consume data under the current structure without making any changes or to consume data at the nearest exclusive SIP instance depending on the firms’ latency concerns. However, this alternative would still provide exclusive rights to one operator to provide exclusive SIP services for a given tape. This Commission preliminarily believes that this alternative would produce lower benefits compared to the proposed decentralized consolidation model.1192 Under this alternative, the exclusive SIPs would not be subject to the same competitive forces that competing consolidators may be subject to under the decentralized consolidation model.1193 This lack of competition would reduce the incentives to innovate and would not improve efficiency or reduce the transmission and aggregation latencies of core data as much as the proposal. If core data does not achieve the same overall latency reduction as under the proposal, then market participants would be less likely to substitute using core data for proprietary data than they would be under the proposal. This could mean that the decline in profits from exchanges’ proprietary data fees may not be as large as they would be under the proposal.1194 Under this alternative, the exclusive SIPs would still need to make upgrades to their systems to account for the expansion of core data and would still need to install systems in multiple data centers. The Commission preliminarily believes that the costs of these SIP system upgrades would be similar to those under the proposal.1195 However, under this alternative, market participants may experience higher costs to access core data compared to the proposal. Instead of having the option to receive all core data from one competing consolidator, as they would under the proposal, market participants would still need to receive data from both exclusive SIP plan processors.1196 This means that under this alternative, the total price market participants would pay to access core data may be greater than under the proposal because it would include the costs of the two plan processors to aggregate and transmit the data. Under the proposal, the total price market participants would pay to receive core data may only include the costs of one processor, because market participants would have the option to receive all of their core data from one competing consolidator.1197 1192 See supra Sections VI.C.2, IV.C.1. supra Sections VI.C.2, VI.D.2. 1194 See supra Section VI.C.4(a). 1195 See supra Section VI.C.2(d). 1196 See supra Section VI.B.2. 1197 See supra Section VI.C.2(c). 1193 See 1189 See supra Section VI.C.2(d). also a discussion about a single SIP alternative, supra Section IV.C.2. 1191 See supra Section IV.C.1(a). 1190 See PO 00000 Frm 00139 Fmt 4701 Sfmt 4702 16863 E:\FR\FM\24MRP2.SGM 24MRP2 16864 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 3. Require Competing Consolidators’ Fees B e Subject to the Commission’s Approval The Commission considered an alternative to the decentralized consolidation model that would require competing consolidators’ fees to be subject to the Commission’s regulatory approval. The Commission preliminarily believes that, relative to the proposal, this alternative would potentially reduce the risk and uncertainty surrounding the total price of consolidated market data. This alternative would provide for Commission review and approval of the fees of competing consolidators. Therefore, compared to the proposal, this alternative could reduce the risk that market participants are exposed to unreasonable fees, which could reduce the risk that some market participants or data vendors would no longer provide services in the equity market because the price of consolidated market data becomes too high.1198 The Commission preliminarily believes, however, that this alternative would impose additional regulatory burdens on the competing consolidator business compared to the proposal, and may inhibit competing consolidators from being able to respond effectively and quickly to free market forces. These burdens would reduce the incentive for firms to become competing consolidators and lead to less robust competition in the decentralized consolidation model than under the proposal.1199 With less competitive forces to discipline competing consolidators’ service fees, competing consolidators’ would have less incentive to innovate in their consolidating business. Moreover, less competing consolidators in the market would reduce the extent to which the pricing is based on market forces. 4. Do Not Extend Regulation SCI To Include Competing Consolidators The Commission considered an alternative that would not extend Regulation SCI to include competing consolidators. Under this alternative, the Commission would have required competing consolidators to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that its systems involved in the collection, consolidation, and dissemination of consolidated market data have levels of capacity, integrity, resiliency, availability, and security adequate to maintain operational capability and to assure the prompt, accurate, and reliable delivery of consolidated market data. These policies and procedures could address, among other things, data security and integrity; reasonable current and future capacity estimates; business continuity and disaster recovery plans; periodic capacity stress tests of critical systems; procedures to review and keep current system development and testing methodology; periodic reviews to assess the vulnerability of its systems and operations to internal and external threats, physical hazards, and natural disasters; and an annual independent audit to ensure that these requirements are satisfied, together with a review by senior management of a report containing the commendations and conclusions of the independent review. The Commission preliminarily believes that this alternative would reduce some of the benefits as well as some of the costs compared to extending Regulation SCI to include competing consolidators.1200 The Commission preliminarily believes that this alternative could result in some competing consolidators producing systems that would be less secure and resilient than they would be under the proposed amendments because they would not be subject to all of the requirements of being an SCI entity.1201 If competing consolidators produce less secure and resilient systems compared to if they were SCI entities, then there could be a greater risk of more market disruptions due to systems issues in competing consolidators compared to the proposed amendments.1202 Additionally, if a competing consolidator does experience a systems issue, it could result in more severe and longer disruptions compared to the proposed amendments. However, the increase in competing consolidator systems issues compared to the proposal may not be significant. Under this alternative, competing consolidators would still have to establish policies and procedures to ensure that their systems have levels of capacity, integrity, resiliency, availability, and security adequate to maintain operational capability. They would also still need to post information on systems issues on their websites as well as monthly reports containing statistics on their capacity and systems availability.1203 This would place competitive pressure on competing consolidators to ensure that their 1200 See 1201 See 1198 See 1199 See 1202 Id. supra Section VI.C.2(d). supra Section VI.C.2(a). VerDate Sep<11>2014 19:07 Mar 23, 2020 supra Section VI.C.2(e). supra Section VI.C.2(e)(i). 1203 See Jkt 250001 PO 00000 supra Section VI.C.3(a). Frm 00140 Fmt 4701 Sfmt 4702 systems are reliable and resilient. Otherwise, they could lose subscribers to competing consolidators that had more reliable and resilient systems. The Commission preliminarily believes that this alternative would result in lower costs for some competing consolidators compared to the proposed amendments. Under this alternative, competing consolidators would not incur the costs that are associated with SCI entities that are discussed above.1204 Instead, the Commission preliminarily estimates that requiring a competing consolidator to establish, maintain, and enforce written policies and procedures reasonably designed to ensure that its systems involved in the collection, consolidation, and dissemination of consolidated market data have levels of capacity, integrity, resiliency, availability, and security adequate to maintain operational capability and to assure the prompt, accurate, and reliable delivery of consolidated market data would require an average initial expense of $68,710 per competing consolidator.1205 The Commission based these estimates upon those it used with regards to establishing similar policies and procedures for Security-Based Swap Data Repository Registration, Duties and Core Principles.1206 Once these policies and procedures are established, the Commission preliminarily estimates that, on average, a competing consolidator will incur an ongoing cost of $21,810 annually to maintain these policies and procedures.1207 1204 See supra Section VI.C.2(e)(ii). Commission estimates a total of 210 initial burden hours per competing consolidator. The Commission estimates a total monetized initial burden of $68,710 per competing consolidator. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Compliance Manager at $310 for 80 hours) + (Attorney at $417 for 80 hours) + (Sr. Systems Analyst at $285 for 25 hours) + (Operations Specialist at $137 for 25 hours)] = 210 initial burden hours per competing consolidator and $68,710. 1206 See Securities Exchange Act Release No. 74246, supra note 554, at 14523; 17 CFR 242.13n– 6. 1207 The Commission preliminarily estimates that it will take, on average, 60 annual hours to maintain these policies and procedures per competing consolidator. The Commission estimates the monetized burden for this requirement to be $21,810. The Commission derived this estimate based on per hour figures from SIFMA’s Management & Professional Earnings in the Securities Industry 2013, modified by Commission staff to account for an 1,800-hour work-year and inflation, and multiplied by 5.35 to account for bonuses, firm size, employee benefits and overhead: [(Compliance Manager at $310 for 30 hours) + 1205 The E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 The Commission preliminarily believes that, compared to the proposed amendments, this would lower the barriers to entry for new competing consolidators who are not currently SCI entities, including market data aggregators.1208 This could result in more firms becoming competing consolidators and could increase competition in the competing consolidator market compared to the proposal. Increased competition could lower the costs and increase the speed and quality of consolidated market data compared to the proposed amendments. This, in turn, could make consolidated market data a more viable substitute for proprietary data feeds and result in greater competition between consolidated market data and proprietary data feeds compared to the proposed amendments. 5. Require Competing Consolidators To Submit Form CC in the EDGAR System Using the Inline XBRL Format The Commission considered the alternative of requiring competing consolidators to submit Form CC using the Commission’s EDGAR system and using the Inline XBRL format. Requiring this could create benefits for market participants by enabling more efficient retrieval, aggregation and analysis of disclosed information and facilitating comparisons across competing consolidators. This alternative also could allow a competing consolidator to efficiently benchmark key aspects of its operations (e.g., operational capabilities or fee structures) against the rest of the potential competing consolidator population. However, the benefits to market participants of efficient aggregation and comparison and the benefits to potential competing consolidators of efficient benchmarking depend on the number of competing consolidators that ultimately register with the Commission, which we estimate to be relatively low at twelve. Additionally, many potential competing consolidators may not be familiar with Inline XBRL and thus could incur increased costs if they need to learn Inline XBRL compared to the proposal’s requirement to submit Form CC and various exhibits through EFFS— a system with which we believe many potential competing consolidators are already familiar. However, to the extent that potential competing consolidators already have experience filing information in EDGAR in an XML format, costs associated with learning a (Attorney at $417 for 30 hours)] = 60 annual burden hours per competing consolidator and $21,810. 1208 See supra Sections VI.C.2(a)(i)b., VI.D.2. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 new system and format may be mitigated. We request comment on the specific benefits and costs of filing Form CC in EDGAR using the Inline XBRL format. 6. Require Competing Consolidators To Submit Monthly Disclosures in the EDGAR System Using the Inline XBRL Format The Commission considered the alternative of requiring competing consolidators to submit their monthly performance metrics and operational information using the Commission’s EDGAR system and using the Inline XBRL format. This alternative could create benefits for market participants by having the monthly information of each competing consolidator in a centralized location. Additionally, it could allow for more efficient retrieval, aggregation and analysis of disclosed information and facilitate comparisons across competing consolidators and time periods. To the extent there are a small number of potential competing consolidators, the magnitude of such benefits would be reduced. Additionally, competing consolidators would incur increased costs to file the information with the Commission compared to the proposal’s requirement to post the monthly information on the competing consolidator’s website in any format. The difference in costs would likely vary across competing consolidators, depending on the systems and processes they currently have in place, such as for internal reporting, posting of website updates, and submission of regulatory filings, and the manner in which competing consolidators currently maintain data required for the additional disclosures. In addition, similar to submitting Form CC information on EDGAR using the Inline XBRL format, competing consolidators may need to learn Inline XBRL. We request comment on the specific benefits and costs of filing the monthly disclosures in EDGAR using the Inline XBRL format. 7. Prescribing the Format of NMS Information The Commission considered an alternative in which it would prescribe a single format that SROs would use to provide NMS information to competing consolidators and self-aggregators. Each SRO would still be required to make all methods of access available to competing consolidators and selfaggregators as such SRO makes available to any other person.1209 Each SRO would still be able to offer proprietary data products in other formats. By prescribing the format, the Commission could better ensure consistency of the data. Compared to the proposal, a standard format could reduce the costs for competing consolidators and self-aggregators to aggregate the data to create consolidated market data. However, the Commission preliminarily believes that these costs may not be significantly reduced. As discussed above, the SROs currently use a variety of formats for their proprietary data feeds and some broker-dealers, market data aggregators, and the SIPs are already adept and experienced in aggregating and normalizing the data across different formats.1210 Therefore, some potential competing consolidators and self-aggregators may not experience significant cost reductions relative to the proposal if the Commission required that SROs provide NMS information in a prescribed format. Requiring a single format for SROs to deliver NMS information to competing consolidators and self-aggregators would also increase the costs to SRO’s compared to the proposal. SROs would incur a greater cost to conform their existing data to a format they do not already use. It could also increase the costs of exchanges making future changes to their data because they may need to make alterations to both their proprietary data products and to data in the standard format they would supply to competing consolidators and selfaggregators, assuming the changes would need to be included in consolidated market data. Additionally, compared to the proposal, this increased cost could reduce the likelihood that the effective NMS plan(s) for NMS stocks or SROs introduce additional elements into consolidated data in the future.1211 Requiring the SROs to deliver data to competing consolidators and selfaggregators in a single format could also impact the latency between consolidated market data and aggregated proprietary DOB feeds. On the one hand, receiving all of the data in a single format should expedite the aggregation and normalization process for consolidated data. This could potentially reduce the latency differential between consolidated market data and aggregated proprietary data feeds compared to the proposal. However, it is possible that the format of certain proprietary data feeds may allow for faster aggregation initially than the single format specified by the Commission because of certain SROs’ 1210 See 1209 See PO 00000 supra note 428. Frm 00141 Fmt 4701 1211 See Sfmt 4702 16865 E:\FR\FM\24MRP2.SGM supra Section VI.B.2(b). supra Sections III.C, III.D. 24MRP2 16866 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 existing familiarity with its format. If this occurred, it could increase the latency differential compared to the proposal. In addition, if the SROs are required to transform their existing data to a different format, it could hinder the timeliness of the data competing consolidators receive compared to data delivered via the proprietary feeds. Any changes in the timeliness with which the competing consolidators receive the data or any difference in latency between consolidated core data and proprietary data feeds would affect the viability of consolidated core data as a substitute for proprietary data feeds and affect many of the benefits of the decentralized consolidation model.1212 If the latency differential is reduced, more market participants may substitute consolidated market data for proprietary data feeds and the benefits of the decentralized consolidation model could increase compared to the proposal. If competing consolidators receive less timely data or the latency differential increases, fewer market participants would switch to consolidated market data and the benefits would be smaller than under the proposal. 8. Request for Comments on Alternatives The Commission requests comments on its analysis of alternatives to the proposed amendments. In particular, the Commission solicits comment on the following: 289. Should the Commission adopt an alternative approach? Why or why not? What alternatives should the Commission consider? What are the benefits and costs of such an approach? Please explain in detail. 290. Do you agree with the Commission’s analysis of the alternative to further increase the content of core data to include the full depth of book and/or all odd-lot quotes? Would additional depth of book information, beyond what is include in the proposal, be valuable? Why or why not? How much larger would consolidated market data be if it included the full depth of book and/or all odd-lots? How much larger than the proposal would the costs of this alternative be for exchanges, competing consolidators, and other market participants? Please provide estimates, if possible. 291. Do you agree with the Commission’s analysis of the distributed SIP alternative? Why or why not? Please explain. How would the competitive effects of the distributed SIP alternative 1212 See supra Section VI.C.2(c). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 compare to the competitive effects of the proposed decentralized consolidated model? As such, how would the benefits of the distributed SIP model compare to the benefits of the decentralized consolidation model? How would the costs of the distributed SIP model compare to the costs of the decentralized consolidation model? How would the distributed SIP model affect aggregate data fees paid by market participants for market data? How would the distributed SIP model affect the types of products and services available to purchase consolidated data? 292. Do you agree with the Commission’s analysis of the relative economic effects of the alternative to not extend Regulation SCI to include competing consolidators? Why or why not? Please explain. Would this alternative increase the risk of a competing consolidator experiencing a system disruption? If so, how economically significant would this increase be? Would this alternative lower the barriers to entry for competing consolidators compared to the proposed amendments? Would this alternative result in more new competing consolidators? Would this alternative increase competition among competing consolidators? Would this alternative increase innovation in the competing consolidator market? Would this alternative increase competition between consolidated market data and proprietary depth of book feeds? Please explain and provide estimates if possible. 293. Do you agree with the Commission’s analysis of the relative economic effects of the alternative to require that competing consolidator fees be subject to Commission approval? Why or why not? Please explain. Should the Commission be concerned that the proposal does not require an approval process for competing consolidators’ market data fees? What is the risk and how large is that risk? Would the alternative reduce this risk? If so, how economically significant would this reduction be? How burdensome would it be for competing consolidators to have to obtain Commission approval for their fees? Please explain and provide cost estimates if possible. 294. Do commenters agree with the Commission’s analysis of the alternative to require all disclosures be filed in the EDGAR system using the Inline XBRL format? Why or why not? Please explain in detail. Would the alternative further help market participants evaluate and compare the merits of competing consolidators? Would the alternative promote consistency relative to the proposal? Would the disclosures be PO 00000 Frm 00142 Fmt 4701 Sfmt 4702 more accessible in EDGAR than if they were on the Commission’s website or on competing consolidators’ websites? Please explain in detail. What are the costs of using EDGAR and the Inline XBRL format relative to the proposal? Please explain and provide estimates if possible. 295. Do you agree with the Commission’s analysis of the relative economic effects of the alternative in which the Commission would prescribe a single format that SROs would use to provide NMS information to competing consolidators and self-aggregators? Why or why not? Please explain. What effects would the Commission prescribing NMS information be provided in a single format have on the costs of SROs, competing consolidators, and selfaggregators? How economically significant would these effects be? What effects would the alternative have on the latency of consolidated market data compared to aggregated proprietary data feeds? What effects would the alternative have on the timeliness of the data competing consolidators and selfaggregators would receive? Please explain and provide estimates if possible. 296. Are there other reasonable alternatives for the proposed amendments to Regulation NMS to update the content of the consolidated market data and introduce competition into the distribution of that consolidated market data? If so, please provide additional alternatives and how their costs and benefits, as well as their potential impacts on the promotion of efficiency, competition, and capital formation, would compare to the impact of the proposed amendments. 297. Is the competing consolidator approach necessary to achieve the economic benefits of the proposal related to expanding consolidated market data? Are there alternatives to the decentralized consolidation model with competing consolidators that would achieve the Commission’s objectives at lower cost? If so, how would their costs and benefit compare to the proposed decentralized consolidation model? Please explain and provide estimates if possible. F. Request for Comments on the Economic Analysis The Commission is sensitive to the potential economic effects, including the costs and benefits, of the proposed amendments to Regulation NMS to update the content of core data and introduce the decentralized consolidation model into the distribution of consolidated market data. The Commission has identified E:\FR\FM\24MRP2.SGM 24MRP2 16867 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules above certain costs and benefits associated with the proposal and requests comment on all aspects of its preliminary economic analysis, including with respect to the specific questions posed above. The Commission encourages commenters to identify, discuss, analyze, and supply relevant data, information, or statistics regarding any such costs or benefits. VII. Consideration of Impact on the Economy For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (‘‘SBREFA’’),1213 the Commission requests comment on the potential effect of the proposed amendments on the United States economy on an annual basis. The Commission also requests comment on any potential increases in costs or prices for consumers or individual industries, and any potential effect on competition, investment, or innovation. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. lotter on DSKBCFDHB2PROD with PROPOSALS2 VIII. Regulatory Flexibility Certification The Regulatory Flexibility Act (‘‘RFA’’) 1214 requires Federal agencies, in promulgating rules, to consider the impact of those rules on small entities. Section 603(a) 1215 of the Administrative Procedure Act,1216 as amended by the RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on ‘‘small entities.’’ 1217 Section 605(b) of the RFA states that this requirement shall not apply to any proposed rule or proposed rule amendment which, if adopted, would not have a significant economic impact on a substantial number of small entities.1218 The proposed rule would apply to national securities exchanges registered with the Commission under Section 6 of the Exchange Act, national securities associations registered with the 1213 Public Law 104–121, Title II, 110 Stat. 857 (1996) (codified in various sections of 5 U.S.C., 15 U.S.C., and as a note to 5 U.S.C. 601). 1214 5 U.S.C. 601 et seq. 1215 5 U.S.C. 603(a). 1216 5 U.S.C. 551 et seq. 1217 Although Section 601(b) of the RFA defines the term ‘‘small entity,’’ the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term ‘‘small entity’’ for purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 0–10, 17 CFR 240.0–10. 1218 See 5 U.S.C. 605(b). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 Commission under Section 15A of the Exchange Act, and competing consolidators. None of the exchanges registered under Section 6 that would be subject to the proposed amendments are ‘‘small entities’’ for purposes of the RFA.1219 There is only one national securities association, and the Commission has previously stated that it is not a small entity as defined by 13 CFR 121.201.1220 For purposes of the Commission rulemaking in connection with the RFA 1221 as it relates to competing consolidators, a small entity includes a SIP that ‘‘(1) Had gross revenues of less than $10 million during the preceding fiscal year (or in the time it has been in business, if shorter); (2) Provided service to fewer than 100 interrogation devices or moving tickers at all times during the preceding fiscal year (or in the time that it has been in business, if shorter); and (3) Is not affiliated with any person (other than a natural person) that is not a small business or small organization under this section.’’ 1222 The Commission preliminarily believes that no competing consolidators would be ‘‘small entities’’ for purposes of the RFA. For the above reasons, the Commission certifies that the proposed amendments to Rules 600 and 603 and the new Rule 614, if adopted, would not have a significant economic impact on a substantial number of small entities for purposes of the RFA. The Commission invites commenters to address whether the proposed rules would have a significant economic impact on a substantial number of small entities, and, if so, what would be the nature of any impact on small entities. The Commission requests that commenters provide empirical data to support the extent of such impact. IX. Statutory Authority Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6, 11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k–1, 78o, 78q, and 78w(a), the Commission proposes to amend Sections 240.3a51–1, 240.13h–1, 242.105, 242.201, 242.204, 242.600, 242.602, 242.603, 242.611, and 242.1000 of Chapter II of Title 17 of the Code of Federal Regulations and proposes Rule 614, as set forth below. List of Subjects 17 CFR Part 240 Brokers, Dealers, Registration, Securities. 17 CFR Part 242 and 249 Brokers, Reporting and recordkeeping requirements, Securities. For the reasons stated in the preamble, the Commission is proposing to amend title 17, Chapter II of the Code of Federal Regulations as follows: PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The authority citation for part 240 continues to read in part as follows: ■ Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b–3, 80b– 4, 80b–11, 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. 1376, (2010); and Pub. L. 112–106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. * * * * § 240.3a51–1 * [Amended]. 2. In § 240.3a51–1, amend paragraph (a) by removing the text ‘‘§ 242.600(b)(48)’’ and adding in its place ‘‘§ 242.600(b)(55)’’. ■ 1219 See 17 CFR 240.0–10(e). Paragraph (e) of Rule 0–10 states that the term ‘‘small business,’’ when referring to an exchange, means any exchange that has been exempted from the reporting requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is not affiliated with any person (other than a natural person) that is not a small business or small organization as defined in Rule 0–10. Under this standard, none of the exchanges subject to the proposed amendment to Rule 608 is a ‘‘small entity’’ for the purposes of the RFA. See also Securities Exchange Act Release Nos. 82873 (Mar. 14, 2018), 83 FR 13008, 13074 (Mar. 26, 2018) (File No. S7–05–18) (Transaction Fee Pilot for NMS Stocks Proposed Rule); 55341 (May 8, 2001), 72 FR 9412, 9419 (May 16, 2007) (File No. S7–06–07) (Proposed Rule Changes of Self-Regulatory Organizations Proposing Release). 1220 See, e.g., Securities Exchange Act Release No. 62174 (May 26, 2010), 75 FR 32556, 32605 n.416 (June 8, 2010) (‘‘FINRA is not a small entity as defined by 13 CFR 121.201.’’). 1221 See supra note 1217. 1222 17 CFR 240.0–10(g). PO 00000 Frm 00143 Fmt 4701 Sfmt 4702 § 240.13h–1 [Amended]. 3. In § 240.13h–1, amend paragraph (a)(5) by removing the text ‘‘§ 242.600(b)(47)’’ and adding in its place ‘‘§ 242.600(b)(54)’’. ■ PART 242—REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES 4. The authority citation for part 242 continues to read as follows: ■ Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), E:\FR\FM\24MRP2.SGM 24MRP2 16868 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a– 23, 80a–29, and 80a–37. § 242.105 [Amended]. 5. Amend § 242.105 by: a. In paragraph (b)(1)(i)(C) removing the text ‘‘§ 242.600(b)(23)’’ and adding in its place ‘‘§ 242.600(b)(29)’’ and ■ b. In paragraph (b)(1)(ii) removing the text ‘‘§ 242.600(b)(68)’’ and adding in its place ‘‘§ 242.600(b)(76)’’. ■ ■ § 242.201 [Amended]. 6. Amend § 242.201 by: a. In paragraph (a)(1) removing the text ‘‘§ 242.600(b)(48)’’ and adding in its place ‘‘§ 242.600(b)(55)’’; ■ b. In paragraph (a)(2) removing the text ‘‘§ 242.600(b)(23)’’ and adding in its place ‘‘§ 242.600(b)(29)’’; ■ c. Amending paragraph (a)(3) by removing the text ‘‘the term ‘‘listing market’’ as defined in the effective transaction reporting plan for the covered security’’ and adding in its place ‘‘the term ‘‘primary listing exchange’’ as defined in § 242.600(b)(67)’’; ■ d. In paragraph (a)(4) removing the text ‘‘§ 242.600(b)(43)’’ and adding in its place ‘‘§ 242.600(b)(50)’’; ■ e. In paragraph (a)(5) removing the text ‘‘§ 242.600(b)(51)’’ and adding in its place ‘‘§ 242.600(b)(58)’’; ■ f. In paragraph (a)(6) removing the text ‘‘§ 242.600(b)(59)’’ and adding in its place ‘‘§ 242.600(b)(66)’’; ■ g In paragraph (a)(7) removing the text ‘‘§ 242.600(b)(68)’’ and adding in its place ‘‘§ 242.600(b)(76)’’; and ■ h. In paragraph (a)(9) removing the text ‘‘§ 242.600(b)(82)’’ and adding in its place ‘‘§ 242.600(b)(93)’’. ■ i. Amending paragraph (b)(1)(ii) by removing the text ‘‘by a plan processor’’; ■ j. Amending paragraph (b)(3) by removing the text ‘‘notify the single plan processor responsible for consolidation of information for the covered security pursuant to § 242.603(b). The single plan processor must then disseminate this information’’ and adding in its place ‘‘make such information available as provided in § 242.603(b)’’. ■ ■ § 242.204 [Amended]. 7. In § 242.204, paragraph (g)(2) is amended by removing the text ‘‘§ 600(b)(68) of Regulation NMS (17 CFR 242.600(b)(68))’’ and adding in its place ‘‘§ 600(b)(76) of Regulation NMS (17 CFR 242.600(b)(76))’’. ■ 8. Amend § 242.600 by: ■ a. Redesignating paragraphs (b)(72) through (87) as paragraphs (b)(83) through (98); ■ b. Adding new paragraphs (b)(81) and (82); ■ c. Redesignating paragraphs (b)(69) through (71) as paragraphs (b)(78) through (80); lotter on DSKBCFDHB2PROD with PROPOSALS2 ■ VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 d. Adding new paragraph (b)(77); e. Redesignating paragraphs (b)(60) through (68) as paragraphs (b)(68) through (76); ■ f. Adding new paragraph (b)(67); ■ g. Redesignating paragraphs (b)(26) through (59) as paragraphs (b)(33) through (66); ■ h. Adding new paragraph (b)(32); ■ i. Redesignating paragraphs (b)(20) through (25) as paragraphs (b)(26) through (31); ■ j. Adding new paragraph (b)(25); ■ k. Redesignating paragraphs (b)(16) through (19) as paragraphs (b)(21) through (24); ■ l. Adding new paragraphs (b)(19) and (20); ■ m. Redesignating paragraphs (b)(14) and (15) as paragraphs (b)(17) and (18); ■ n. Adding new paragraph (b)(16); ■ o. Redesignating paragraphs (b)(4) through (13) as paragraphs (b)(6) through (15); ■ p. Adding new paragraph (b)(5); ■ q. Redesignating paragraphs (b)(2) and (3) as paragraphs (b)(3) through (4); ■ r. Adding new paragraph (b)(2); and ■ s. Revising newly redesignated paragraphs (b)(50) and (69). The additions and revisions read as follows: ■ ■ § 242.600 NMS security designation and definitions. (b) * * * (2) Administrative data means administrative, control, and other technical messages made available by national securities exchanges and national securities associations pursuant to the effective national market system plan or plans required under § 242.603(b) or the technical specifications thereto as of [date of Commission approval of this proposal]. * * * * * (5) Auction information means all information specified by national securities exchange rules or effective national market system plans that is generated by a national securities exchange leading up to and during an auction, including opening, reopening, and closing auctions, and disseminated during the time periods and at the time intervals provided in such rules and plans. * * * * * (16) Competing consolidator means a securities information processor required to be registered pursuant to Rule 614 or a national securities exchange or national securities association that receives information with respect to quotations for and transactions in NMS stocks and generates consolidated market data for dissemination to any person. * * * * * PO 00000 Frm 00144 Fmt 4701 Sfmt 4702 (19) Consolidated market data means the following data, consolidated across all national securities exchanges and national securities associations: (i) Core data; (ii) Regulatory data; (iii) Administrative data; (iv) Exchange-specific program data; and (v) Additional regulatory, administrative, or exchange-specific program data elements defined as such pursuant to the effective national market system plan or plans required under § 242.603(b). (20) Core data means the following information with respect to quotations for, and transactions in, NMS stocks. For purposes of the calculation and dissemination of core data by competing consolidators, and the calculation of core data by self-aggregators, the best bid and best offer, national best bid and national best offer, and depth of book data shall include odd-lots that when aggregated are equal to or greater than a round lot; such aggregation shall occur across multiple prices and shall be disseminated at the least aggressive price of all such aggregated odd-lots. For purposes of the calculation and dissemination of core data by competing consolidators, and the calculation of core data by self-aggregators, protected quotations shall include odd-lots at a single price that when aggregated are equal to or greater than 100 shares: (i) Quotation sizes; (ii) Aggregate quotation sizes; (iii) Best bid and best offer; (iv) National best bid and national best offer; (v) Protected bid and protected offer; (vi) Transaction reports; (vii) Last sale data; (viii) Odd-lot transaction data disseminated pursuant to the effective national market system plan or plans required under § 242.603(b) as of [date of Commission approval of this proposal]. (ix) Depth of book data; and (x) Auction information. * * * * * (25) Depth of book data means all quotation sizes at each national securities exchange, aggregated at each price at which there is a bid or offer that is lower than the best bid down to the protected bid and higher than the best offer up to the protected offer; and all quotation sizes at each national securities exchange, aggregated at each of the next 5 prices at which there is a bid that is lower than the protected bid and offer that is higher than the protected offer. * * * * * E:\FR\FM\24MRP2.SGM 24MRP2 lotter on DSKBCFDHB2PROD with PROPOSALS2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules (32) Exchange-specific program data means: (i) Information related to retail liquidity programs specified by the rules of national securities exchanges and disseminated pursuant to the effective national market system plan or plans required under § 242.603(b) as of [date of Commission approval of this proposal]; and (ii) Other exchange-specific information with respect to quotations for or transactions in NMS stocks as specified by the effective national market system plan or plans required under § 242.603(b). * * * * * (50) National best bid and national best offer means, with respect to quotations for an NMS stock, the best bid and best offer for such stock that are calculated and disseminated on a current and continuing basis by a competing consolidator or calculated by a self-aggregator and, for NMS securities other than NMS stocks, the best bid and best offer for such security that are calculated and disseminated on a current and continuing basis by a plan processor pursuant to an effective national market system plan; provided, that in the event two or more market centers transmit to the plan processor, a competing consolidator or selfaggregator identical bids or offers for an NMS security, the best bid or best offer (as the case may be) shall be determined by ranking all such identical bids or offers (as the case may be) first by size (giving the highest ranking to the bid or offer associated with the largest size), and then by time (giving the highest ranking to the bid or offer received first in time). * * * * * (67) Primary listing exchange means, for each NMS stock, the national securities exchange identified as the primary listing exchange in the effective national market system plan or plans required under § 242.603(b). * * * * * (69) Protected bid or protected offer means a quotation in an NMS stock that: (i) Is displayed by an automated trading center; (ii) Is disseminated pursuant to an effective national market system plan; and (iii) Is an automated quotation that is the best bid or best offer of at least 100 shares of a national securities exchange, or the best bid or best offer of at least 100 shares of a national securities association. * * * * * (77) Regulatory data means: (i) Information required to be collected or calculated by the primary VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 listing exchange for an NMS stock and provided to competing consolidators and self-aggregators pursuant to the effective national market system plan or plans required under § 242.603(b), including, at a minimum: (A) Information regarding Short Sale Circuit Breakers pursuant to § 242.201; (B) Information regarding Price Bands required pursuant to the Plan to Address Extraordinary Market Volatility (LULD Plan); (C) Information relating to regulatory halts or trading pauses (news dissemination/pending, LULD, MarketWide Circuit Breakers) and reopenings or resumptions; (D) The official opening and closing prices of the primary listing exchange; and (E) An indicator of the applicable round lot size. (ii) Information required to be collected or calculated by the national securities exchange or national securities association on which an NMS stock is traded and provided to competing consolidators and selfaggregators pursuant to the effective national market system plan or plans required under § 242.603(b), including, at a minimum: (A) Whenever such national securities exchange or national securities association receives a bid (offer) below (above) an NMS stock’s lower (upper) LULD price band, an appropriate regulatory data flag identifying the bid (offer) as non-executable; and (B) Other regulatory messages including subpenny execution and trade-though exempt indicators. (iii) For purposes of paragraph (i)(C) of this definition, the primary listing exchange that has the largest proportion of companies included in the S&P 500 Index shall monitor the S&P 500 Index throughout the trading day, determine whether a Level 1, Level 2, or Level 3 decline, as defined in self-regulatory organization rules related to MarketWide Circuit Breakers, has occurred, and immediately inform the other primary listing exchanges of all such declines. * * * * * (81) Round lot means: (i) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange (or the IPO price if the prior month’s average closing price is not available) was $50.00 or less per share, an order for the purchase or sale of an NMS stock of 100 shares; (ii) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange PO 00000 Frm 00145 Fmt 4701 Sfmt 4702 16869 (or the IPO price if the prior month’s average closing price is not available) was $50.01 to $100.00 per share, an order for the purchase or sale of an NMS stock of 20 shares; (iii) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange (or the IPO price if the prior month’s average closing price is not available) was $100.01 to $500.00 per share, an order for the purchase or sale of an NMS stock of 10 shares; (iv) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange (or the IPO price if the prior month’s average closing price is not available) was $500.01 to $1,000.00 per share, an order for the purchase or sale of an NMS stock of 2 shares; and (v) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange (or the IPO price if the prior month’s average closing price is not available) was $1,000.01 or more per share, an order for the purchase or sale of an NMS stock of 1 share. (82) Self-aggregator means a broker or dealer that receives information with respect to quotations for and transactions in NMS stocks, including all data necessary to generate consolidated market data, and generates consolidated market data solely for internal use. A self-aggregator may not make consolidated market data, or any subset of consolidated market data, available to any other person. * * * * * § 242.602 [Amended]. 9. Amend § 242.602 by: a. In paragraph (a)(5)(i) removing the text ‘‘§ 242.600(b)(77)’’ and adding in its place ‘‘§ 242.600(b)(88)’’ and ■ b. In paragraph (a)(5)(ii) removing the text ‘‘§ 242.600(b)(77)’’ and adding in its place ‘‘§ 242.600(b)(88)’’. ■ 10. Amend § 242.603 by revising paragraph (b) to read as follows: ■ ■ § 242.603 Distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks. * * * * * (b) Dissemination of information. Every national securities exchange on which an NMS stock is traded and national securities association shall act jointly pursuant to one or more effective national market system plans for the dissemination of consolidated market data. Every national securities exchange on which an NMS stock is traded and national securities association shall make available to all competing E:\FR\FM\24MRP2.SGM 24MRP2 16870 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules consolidators and self-aggregators its information with respect to quotations for and transactions in NMS stocks, including all data necessary to generate consolidated market data, in the same manner and using the same methods, including all methods of access and the same format, as such national securities exchange or national securities association makes available any information with respect to quotations for and transactions in NMS stocks to any person. * * * * * § 242.611 [Amended]. 11. In § 242.611, amend paragraph (c) by removing the text ‘‘§ 242.600(b)(31)’’ and adding in its place ‘‘§ 242.600(b)(38)’’. ■ 12. Add § 242.614 to read as follows: ■ lotter on DSKBCFDHB2PROD with PROPOSALS2 § 242.614 Registration and responsibilities of competing consolidators. (a) Competing consolidator registration. (1) Initial Form CC. (i) Filing and effectiveness requirement. No person, other than a national securities exchange or a national securities association, (A) May receive directly from a national securities exchange or national securities association information with respect to quotations for and transactions in NMS stocks; and (B) Generate consolidated market data for dissemination to any person unless the person files with the Commission an initial Form CC and the initial Form CC has become effective pursuant to paragraph (a)(1)(v) of this section. (ii) Electronic filing and submission. Any reports to the Commission required under this Rule 614 shall be filed electronically on Form CC (17 CFR 249.1002), include all information as prescribed in Form CC and the instructions thereto, and contain an electronic signature as defined in § 240.19b–4(j). (iii) Commission review period. The Commission may, by order, as provided in paragraph (a)(1)(v)(B) of this section, declare an initial Form CC filed by a competing consolidator ineffective no later than 90 calendar days from the date of filing with the Commission. (iv) Withdrawal of initial Form CC due to inaccurate or incomplete disclosures. During the review by the Commission of the initial Form CC, if any information disclosed in the initial Form CC is or becomes inaccurate or incomplete, the competing consolidator shall promptly withdraw the initial Form CC and may refile an initial Form CC pursuant to paragraph (a)(1). (v) Effectiveness; Ineffectiveness determination. (A) An initial Form CC VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 filed by a competing consolidator will become effective, unless declared ineffective, no later than the expiration of the review period provided in paragraph (a)(1)(iii) of this section and publication pursuant to paragraph (b)(2)(i) of this section. (B) The Commission shall, by order, declare an initial Form CC ineffective if it finds, after notice and opportunity for hearing, that such action is necessary or appropriate in the public interest, and is consistent with the protection of investors. If the Commission declares an initial Form CC ineffective, the competing consolidator shall be prohibited from operating as a competing consolidator. An initial Form CC declared ineffective does not prevent the competing consolidator from subsequently filing a new Form CC. (2) Form CC Amendments. A competing consolidator shall amend a Form CC: (i) Prior to the implementation of a material change to the pricing, connectivity, or products offered (‘‘Material Amendment’’); and (ii) No later than 30 calendar days after the end of each calendar year to correct information that has become inaccurate or incomplete for any reason and to provide an Annual Report as required under Form CC (each a ‘‘Form CC Amendment’’). (3) Notice of cessation. A competing consolidator shall notice its cessation of operations on Form CC at least 30 business days prior to the date the competing consolidator will cease to operate as a competing consolidator. The notice of cessation shall cause the Form CC to become ineffective on the date designated by the competing consolidator. (4) Date of filing. For purposes of filings made pursuant to this section: (i) The term business day shall have the same meaning as defined in § 240.19b–4(b)(2). (ii) If the conditions of this section and Form CC are otherwise satisfied, all filings submitted electronically on or before 5:30 p.m. Eastern Standard Time or Eastern Daylight Saving Time, whichever is currently in effect, on a business day, shall be deemed filed on that business day, and all filings submitted after 5:30 p.m. Eastern Standard Time or Eastern Daylight Saving Time, whichever is currently in effect, shall be deemed filed on the next business day. (b) Public disclosures. (1) Every Form CC filed pursuant to this section shall constitute a ‘‘report’’ within the meaning of sections 11A, 17(a), 18(a), and 32(a) of the Act (15 U.S.C. 78k–1, PO 00000 Frm 00146 Fmt 4701 Sfmt 4702 78q(a), 78r(a), and 78ff(a)), and any other applicable provisions of the Act. (2) The Commission will make public via posting on the Commission’s website, each: (i) Effective initial Form CC, as amended; (ii) Order of ineffective initial Form CC; (iii) Form CC Amendment. The Commission will make public the entirety of any Form CC Amendment no later than 30 calendar days from the date of filing thereof with the Commission; and (iv) Notice of cessation. (c) Posting of hyperlink to the Commission’s website. Each competing consolidator shall make public via posting on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in paragraph (b)(2) of this section. (d) Responsibilities of competing consolidators. Each competing consolidator shall: (1) Collect from each national securities exchange and national securities association, either directly or indirectly, the information with respect to quotations for and transactions in NMS stocks as provided in Rule 603(b). (2) Calculate and generate consolidated market data as defined in Rule 600(b)(19) from the information collected pursuant to paragraph (d)(1) of this section. (3) Make consolidated market data, as defined in Rule 600(b)(19), as timestamped as required by paragraph (d)(4) of this section and including the national securities exchange and national securities association data generation timestamp required to be provided by the national securities exchange and national securities association participants by paragraph (e)(1)(ii) of this section, available to subscribers on a consolidated basis on terms that are not unreasonably discriminatory. (4) Timestamp the information collected pursuant to paragraph (d)(1) of this section (i) upon receipt from each national securities exchange and national securities association; (ii) upon receipt of such information at its aggregation mechanism; and (iii) upon dissemination of consolidated market data to subscribers. (5) Within fifteen [15] calendar days after the end of each month, publish prominently on its website monthly performance metrics, as defined by the effective national market system plan(s) for NMS stocks, that shall include at least the following. All information must be publicly posted in E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 downloadable files and must remain free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. (i) Capacity statistics; (ii) Message rate and total statistics; (iii) System availability; (iv) Network delay statistics; and (v) Latency statistics for the following, with distribution statistics up to the 99.99th percentile: (A) When a national securities exchange or national securities association sends an inbound message to a competing consolidator network and when the competing consolidator network receives the inbound message; (B) When the competing consolidator network receives the inbound message and when the competing consolidator network sends the corresponding consolidated message to a subscriber; and (C) When a national securities exchange or national securities association sends an inbound message to a competing consolidator network and when the competing consolidator network sends the corresponding consolidated message to a subscriber. (6) Within fifteen [15] calendar days after the end of each month, publish prominently on its website the following information. All information must be publicly posted and must remain free and accessible (without any encumbrances or restrictions) by the general public on the website for a period of not less than three years from the initial date of posting. (i) Data quality issues; (ii) System issues; (iii) Any clock synchronization protocol utilized; (iv) For the clocks used to generate the timestamps described in paragraph (d)(4) of this section, the clock drift averages and peaks, and the number of instances of clock drift greater than 100 microseconds; and (v) Vendor alerts. (7) Keep and preserve at least one copy of all documents, including all correspondence, memoranda, papers, VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 books, notices, accounts and such other records as shall be made or received by it in the course of its business as such and in the conduct of its business. Competing consolidators shall keep all such documents for a period of no less than five years, the first two years in an easily accessible place; (8) Upon request of any representative of the Commission, promptly furnish to the possession of such representative copies of any documents required to be kept and preserved by it. (e) Amendment of the effective national market system plan(s) for NMS stocks. (1) The participants to the effective national market system plan(s) for NMS stocks shall file with the Commission, pursuant to Rule 608, an amendment that includes the following provisions within 60 calendar days from the effective date of Rule 614: (i) Conforming the effective national market system plan(s) for NMS stocks to reflect provision of information with respect to quotations for and transactions in NMS stocks that is necessary to generate consolidated market data by the national securities exchange and national securities association participants to competing consolidators and self-aggregators; (ii) The application of timestamps by the national securities exchange and national securities association participants on all consolidated market data, including the time that consolidated market data was generated as applicable by the national securities exchange or national securities association and the time the national securities exchange or national securities association made the consolidated market data available to competing consolidators and selfaggregators; (iii) Assessments of competing consolidator performance, including speed, reliability, and cost of data provision and the provision of an annual report of such assessment to the Commission; (iv) A list that identifies the primary listing exchange for each NMS stock. ■ 13. Amend § 242.1000 by: PO 00000 Frm 00147 Fmt 4701 Sfmt 4702 16871 a. In the definition of ‘‘Critical SCI systems,’’ removing the text ‘‘consolidated market data’’ in paragraph (1)(v) and adding in its place ‘‘market data by a plan processor’’; ■ b. Adding in alphabetical order the definition of ‘‘Competing consolidator’’; ■ c. In the definition of ‘‘Plan processor’’ removing the text ‘‘§ 242.600(b)(59)’’ and adding in its place ‘‘§ 242.600(b)(66)’’. ■ d. In the definition‘‘SCI entity’’ removing the period and adding at the end of the definition ‘‘, or competing consolidator.’’ The addition to read as follows: ■ § 242.1000 Definitions. * * * * * Competing consolidator has the meaning set forth in § 242.600(b)(16). * * * * * PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934 14. The general authority citation for part 249 continues to read in part as follows: ■ Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111–203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112–106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112–106, 126 Stat. 313 (2012), and Sec. 72001, Pub. L. 114–94, 129 Stat. 1312 (2015), unless otherwise noted. * * * * * 15. Add § 249.1002 to Subpart K to read as follows: ■ § 249.1002 Form CC, for application for registration as a competing consolidator or to amend such an application or registration. This form shall be used for application for registration as a competing consolidator, pursuant to section 11A of the Securities Exchange Act of 1934 (15 U.S.C. 78k–1) and § 242.614 of this chapter, or to amend such an application or registration. Note: The text of Form CC does not, and the amendments will not, appear in the Code of Federal Regulations. BILLING CODE 8011–01–P E:\FR\FM\24MRP2.SGM 24MRP2 16872 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Securities and Exchange Commission Washington, DC 20549 FORM CC INTENTIONAL MISSTATEMENTS OR OMISSIONS OF FACTS MAY CONSTITUTE CRIMINAL VIOLATIONS. Section I - Form Filing Information Page 1 of _ _ File No: FORMCC-[acronym]-YYYY-#### {Name of Competing Consolidator} is making the filing pursuant to Rule 614 under the Securities Exchange Act of 1934 Submission Type (select one) □ Rule 614(a)(l) Initial Form CC □ Rule 614(a)(2)(i) Material Amendment □ Rule 614(a)(2)(ii) Annual Report □ Rule 614(a)(3) Notice of Cessation o Date competing consolidator will cease to operate (mm/dd/yyyy). Section II - General Information □ Check Box if there is a change in information previously filed. 1) Legal name of applicant: _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ __ 2) DBA if operating under a different name than above: _ _ _ _ _ _ _ _ __ 3) Primary Street Address (Do not use a P.O. Box) 4) Street: - - - - - - - - - - - - - - - - - - - - - - - - - - 5) City- - - - - - - - - - - - - State- - - - - Zip Code- - - - 6) Mailing Address: Same as above City _ _ _ _ _ _ _ _ _ _ _ _ _, State_ _ _ _ _ Zip Code_ _ __ VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00148 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.000</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 Street: - - - - - - - - - - - - - - - - - - - - - - - - - - Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 7) Business Telephone(###) __-_ __ 8) Provide the website URL of the registrant: _ _ _ _ _ _ _ _ _ _ __ 9) Is the applicant a broker-dealer or affiliated with a broker-dealer registered with the 16873 Commission (yes/no) a) If yes, provide the full name of the registered broker-dealer as stated on Form BD: b) SEC File No: _ _ __ c) CRD No: _ _ _ __ 10) If applicant is a successor (within the definition of Rule 12b-2 under the Securities Exchange Act of 1934) to a previously registered competing consolidator, please complete the following: a) Date of Succession: mm/dd/yyyy b) Full name/address of predecessor registrant: _ _ _ _ _ _ _ _ _ _ __ 11) Legal Status (select one): a. Sole Proprietorship b. Corporation c. Partnership d. Limited Liability Company e. Other (Specify): _ _ _ _ _ _ _ _ __ If other than a sole proprietor, please provide the following: f. Date entity obtained legal status~' date of incorporation) (mm/dd/yyyy). g. State/country of formation: {pick list} VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00149 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.001</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 h. Statute under which entity was organized _ _ _ _ _ _ _ _ __ 16874 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Section III: Business Organization □ All Exhibits-Consolidated Document Attachment: The competing consolidator may choose to provide a consolidated document containing all Exhibits or individual documents for each Exhibit. If providing individual documents, use the attachment buttons in the Exhibit Table. If providing a consolidated document, please use the attachment buttons here: 12) Attach as Exhibit A to this application a list of any person as defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (see also Section 3(a)(19) of the Securities Exchange Act of 1934) who owns 10 percent or more of applicant's stock or who, either directly or indirectly, through agreement or otherwise, in any other manner, may control or direct the management or policies of the competing consolidator. Include the full name and title of each such person and attach a copy of the agreement or, if there is none written, describe the agreement or basis upon which such person exercises or may exercise such control or direction. Alternatively, if applicant is a broker-dealer, or is affiliated with a broker-dealer, you may provide the Schedule A of Form BD relating to direct owners and executive officers. □ In lieu of filing this Exhibit A (or providing Schedule A of Form BD), [name of entity] certifies that the information requested under this Exhibit is available at the Internet website below and is accurate as of the date of this filing. URL- - - - - - - - - - - - - - - - - - - - - 13) Attach as Exhibit B to this application a list of the present officers, directors, governors (and, grouped by committee), or persons performing functions similar to any of the foregoing, of VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00150 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.002</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 in the case of an applicant that is not a corporation, the members of all standing committees Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 16875 the competing consolidator. For each person provide (a) Name (last, first, middle); (b) Title (if any) and area ofresponsibility; (c) Length of time each present officer, director, or governor has held the same office or position, and (d) Any other business affiliations in the securities industry or securities information processing industry. Alternatively, if applicant is a broker-dealer, or is affiliated with a broker-dealer, you may provide the Schedule B of Form BD relating to indirect owners. □ In lieu of filing this Exhibit B (or providing Schedule B of Form BD), [name of entity] certifies that the information requested under this Exhibit is available at the Internet website below and is accurate as of the date of this filing. URL- - - - - - - - - - - - - - - - - - - - 14) Attach as Exhibit C to this application a narrative or graphic description of the organizational structure of the applicant. Note: If the securities information processing activities of the competing consolidator are conducted primarily by a division, subdivision, or other segregable entity within the applicant corporation or organization, describe the relationship of such division, subdivision, or other segregable entity within the overall organizational structure and attach as part of this Exhibit only such description as applies to the division, subdivision, or other segregable entity. 15) Attach as Exhibit D to this application a list of all affiliates (within the definition of Rule 12b-2 under the Securities Exchange Act of 1934) of the competing consolidator and indicate VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00151 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.003</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 the general nature of the affiliation. 16876 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Section IV: Operational Capability 16) Attach as Exhibit E to this application a narrative description of each consolidated market data service or function, including connectivity and delivery options for the subscribers, and a description of all procedures utilized for the collection, processing, distribution, publication and retention of information with respect to quotations for, and transactions in, securities. Section V - Services and Fees 17) Attach as Exhibit F to this application a description of all market data products with respect to consolidated market data or any subset of consolidated market data that are provided to subscribers. 18) Attach as Exhibit G to this application a description and identification of any fees or charges for use of the competing consolidator with respect to consolidated market data or any subset of consolidated market data, services, including the types of fees(~, subscription, connectivity), the structure of the fee(~, fixed, variable), variables that impact the fees, pricing differentiation among the types of subscribers, and range of fees (high and low). 19) Attach as Exhibit H to this application a description of any co-location and related services, the terms and conditions for co-location, connectivity, and related services, including connectivity and throughput options offered. Describe any other means besides co-location and related services to increase the speed of communication, including a summary of the VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00152 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.004</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 terms and conditions for its use. Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 20) 16877 Attach as Exhibit I to this application a narrative description, or the functional specifications, of each consolidated market data service or function, including connectivity and delivery options for the subscribers. Section VI: Contact Information Provide the following information of the contact employee at {the name of the competing consolidator} prepared to respond to questions for this submission: First Name: Last Name: Title: E-Mail: Telephone: Section VII: Signature Block and Consent to Service The {Entity Name} consents that service of any civil action brought by, or notice of any proceeding before, the SEC in connection with the competing consolidator's activities may be given by registered or certified mail or e-mail to the competing consolidator's contact employee at the primary street address or e-mail address, or mailing address if different, given in Section II above. The undersigned, being first duly sworn, deposes and says that he/she has executed this form on behalf of, and with the authority of, said competing consolidator. The undersigned and {Entity Name} represent that the information and statements contained herein, including exhibits, schedules, or other documents attached hereto, and other information filed herewith, all VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00153 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.005</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 of which are made a part hereof, are current, true, and complete. 16878 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Date {auto fill} {Entity Name} By:--------- Title- - - - - - - - - - - (Digital signature) Form CC General Instructions A. Use of the Form Form CC is the form a competing consolidator must file to notify the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) of its activities pursuant to Rule 614 of Regulation NMS, § 242.614 et seq. Filings submitted pursuant to Rule 614 shall be filed in an electronic format through an electronic form filing system (‘‘EFFS’’), a secure website operated by the Commission. Documents attached as exhibits filed through the EFFS system must be in a text-searchable format without the use of optical character recognition. If, however, a portion of a Form CC submission (e.g., an image or diagram) cannot be made available in a text-searchable format, such portion may be submitted in a non-text searchable format. B. Need for Careful Preparation of the Completed Form, Including Exhibits A competing consolidator must provide all of the information required by Form CC, including the exhibits, and must provide disclosure information that is accurate, current, and complete. The information in the exhibits must be provided in a clear and comprehensible manner. A filing that is incomplete or similarly deficient may be returned to the competing consolidator. Any filing so returned shall for all purposes be deemed not to have been filed with the Commission. See also Rule 0–3 under the Securities Exchange Act of 1934 (17 CFR 240.0–3). lotter on DSKBCFDHB2PROD with PROPOSALS2 C. When To Use the FORM CC Form CC is comprised of 4 types of submissions to the Commission required pursuant to Rule 614 of Regulation NMS. In filling out the Form CC, a competing consolidator shall select the type of filing and provide all information required by Rule 614 of Regulation NMS. The types of submissions are: (1) Rule 614(a)(1) Initial Form CC: Prior to commencing operations, a competing consolidator shall file an initial Form CC and the initial Form CC must become effective. (2) Rule 614(a)(2)(i) Material Amendment: The competing VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 consolidator shall file an amendment on Form CC prior to implementing a material change to the pricing, connectivity, or products offered of the competing consolidator. (3) Rule 614(a)(2)(ii) Annual Report: The competing consolidator shall file an Annual Report on Form CC correcting any information contained in the initial Form CC or in any previously filed amendment that has been rendered inaccurate or incomplete for any reason, and that has not previously been reported to the SEC, no later than 30 calendar days after the end of each calendar year in which the competing consolidator has operated. Competing consolidators filing the Annual Report must file a complete form, including all pages and answers to all items, together with all exhibits. The competing consolidator must indicate which items have been amended since the last Annual Report. (4) Rule 614(a)(3) Notice of Cessation: The competing consolidator shall file a notice of cessation of operations at least 30 business days prior to the date upon ceasing to operate as a competing consolidator. D. Documents Comprising the Completed Form The completed form filed with the Commission shall consist of Form CC, responses to all applicable items, and any exhibits required in connection with the filing. Each filing shall be marked on Form CC with the initials of the competing consolidator, the fourdigit year, and the number of the filing for the year (e.g., FormCC–acronym– YYYY–XXX). E. Contact Information; Signature; and Filing of Completed Form Each time a competing consolidator submits a filing to the Commission on Form CC, the competing consolidator must provide the contact information required by Section VI of Form CC. The contact employee must be authorized to receive all contact information, communications and mailings and must be responsible for disseminating that information within the competing consolidator’s organization. In order to file Form CC through the EFFS, a competing consolidator must request access to the Commission’s PO 00000 Frm 00154 Fmt 4701 Sfmt 4702 External Application Server. Initial requests will be received by contacting the Division of Trading & Markets at (202) 551–5777. An email will be sent to the requestor that will provide a link to a secure website where basic profile information will be requested. A duly authorized individual of the competing consolidator shall electronically sign the completed Form CC as indicated in Section VII of the form. F. Paperwork Reduction Act Disclosure Form CC requires a competing consolidator subject to Rule 614 of Regulation NMS to provide the Commission with certain information regarding the operation of the competing consolidator, material and other changes to the operation of the competing consolidator, and notice upon ceasing operation of the competing consolidator. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. Sections 3(b), 11A(a), 11A(c), 15(c), 17(a), 23(a) and 36(a) authorize the Commission to collect information on this Form CC from competing consolidators that are subject to Rule 614. See 15 U.S.C. 78c(b), 78k– 1(a), 78k–1(c), 78o(c), 78q(a), 78w(a) and 78mm(a). It is estimated that a competing consolidator will spend approximately 200.3 hours completing the initial operation report on Form CC, approximately 6.15 hours preparing each amendment to Form CC, and approximately two (2) hours preparing a cessation of operations report on Form CC. Any member of the public may direct to the Commission any comments concerning the accuracy of the burden estimate on the facing page of Form CC and any suggestions for reducing this burden. Form CC is designed to enable the Commission to determine whether a competing consolidator subject to Rule 614 of Regulation NMS is in compliance with Rule 614 and other federal securities laws. It is mandatory that a competing consolidator subject to Rule 614 file an initial Form CC, file an amendment to Form CC prior to making a material change, file Annual Reports E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.006</GPH> BILLING CODE 8011–01–C Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules lotter on DSKBCFDHB2PROD with PROPOSALS2 to Form CC to reflect changes not previously reported, and file notice on Form CC upon ceasing operation of the competing consolidator. All reports provided to the Commission on Form CC are subject to the provisions of the Freedom of Information Act, 5 U.S.C. 522 (‘‘FOIA’’) and the Commission’s rules thereunder (17 CFR 200.80(b)(4)(iii)). This collection of information has been reviewed by the Office of Management and Budget (‘‘OMB’’) in accordance with the clearance requirements of 44 U.S.C. 3507. The VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 applicable Privacy Act system of records is SEC–2 and the routine uses of the records are set forth at 40 FR 39255 (August 27, 1975) and 41 FR 5318 (February 5, 1976). G. Definitions Unless the context requires otherwise, all terms used in this form have the same meaning as in the Securities Exchange Act of 1934, as amended, and in the rules and regulations of the Commission thereunder. ■ 16. Revise subpart T, consisting of § 249.1900 to read as follows: PO 00000 Frm 00155 Fmt 4701 Sfmt 4702 16879 Subpart T—Form SCI, for filing notices and reports as required by Regulation SCI. § 249.1900. Form SCI, for filing notices and reports as required by Regulation SCI. Form SCI shall be used to file notices and reports as required by Regulation SCI (§§ 242.1000 through 242.1007). Note: The text of Form SCI does not, and the amendments will not, appear in the Code of Federal Regulations. BILLING CODE 8011–01–P E:\FR\FM\24MRP2.SGM 24MRP2 16880 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules Securities and Exchange Commission Washington, DC 20549 Form SCI Page1of _ __ File No. SCI-{name}-YYYY-### SCI Notification and Reporting by: {SCI entity name} Pursuant to Rules 1002 and 1003 of Regulation SCI under the Securities Exchange Act of 1934 □ □ Initial Withdrawal SECTION I: Rule 1002 -Commission Notification of SCI Event A. Submission Type {select one only) □ □ Rule 1002(b)(1) Initial Notification of SCI event Rule 1002(b)(2) Notification of SCI event □ Rule 1002(b)(3) Update of SCI event: #### Rule 1002(b)(4) Final Report of SCI Event □ Rule 1002(b)(4) Interim Status Report of SCI event If filing a Rule 1002(b)(1) or Rule 1002(b)(3) submission, please provide a brief description: □ B. SCI Event Type{s) {select all that apply) □ Systems compliance issue □ Systems disruption □ Systems intrusion C. General Information Required for {b){2) filings. 1) Has the Commission previously been notified of the SCI event pursuant to 1002(b)(1)? yes/no 2) Date/time SCI event occurred: mm/dd/yyyy hh:mm am/pm 3) Duration of SCI event: hh:mm, or days 4) Please provide the date and time when a responsible SCI personnel had reasonable basis to conclude the SCI event occurred: hh:mmam/pm mm/dd/yyyy 5) Has the SCI event been resolved? yes/no a) If yes, provide date and time ofresolution: mm/dd/yyyy hh:mmam/pm 6) Is the investigation of the SCI event closed? yes/no 7) Estimated number of market participants potentially affected by the SCI event: #### 8) Is the SCI event a major SCI event (as defined in Rule 1000)? yes/no VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00156 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.007</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 a) If yes, provide date of closure: mm/dd/yyyy Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 16881 D. Information about impacted systems: Name(s) of system(s): Type(s) of system(s) impacted by the SCI event (check all that apply): □ Trading D Clearance and settlement D Order routing □ Market data D Market regulation D Market surveillance □ Indirect SCI systems (please describe): Are any critical SCI systems impacted by the SCI event (check all that apply)? Yes/No 1) 2) Systems that directly support functionality relating to: □ Clearance and settlement systems of clearing agencies □ Openings, reopenings, and closings on the primary listing market □ Trading halts □ Initial public offerings □ The provision of market data by a plan processor □ Exclusively-listed securities □ Systems that provide functionality to the securities markets for which the availability of alternatives is significantly limited or nonexistent and without which there would be a material impact on fair and orderly markets (please describe): SECTION II: Periodic Reporting {select one only) A. Quarterly Reports: For the quarter ended: mm/dd/yyyy □ Rule 1002(b)(5)(ii): Quarterly report of systems disruptions and systems intrusions with no or a de minimis impact. □ Rule 1003(a)(1): Quarterly report of material systems changes □ Rule 1003(a)(2): Supplemental report of material systems changes B. SCI Review Reports □ Rule 1003(b)(3): Report of SCI review, together with any response by senior management Date of completion of SCI review: mm/dd/yyyy VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00157 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.008</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 Date of submission of SCI review to senior management: mm/dd/yyyy 16882 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules SECTION III: Contact Information Provide the following information of the person at the {SCI entity name} prepared to respond to questions for this submission: First Name: Last Name: Title: E-Mail: Telephone: Fax: Additional Contacts {Optional) Last Name: First Name: Title: E-Mail: Telephone: Fax: First Name: Last Name: Title: E-Mail: Fax: Telephone: SECTION IV: Signature Confidential treatment is requested pursuant to Rule 24b-2(g). Additionally, pursuant to the requirements of the Securities Exchange Act of 1934, {SCI Entity name} has duly caused this {notification}{report} to be signed on its behalf by the undersigned duly authorized officer: Date: By(Name) Title~----------~ VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 PO 00000 Frm 00158 Fmt 4701 Sfmt 4725 E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.009</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 "Digitally Sign and Lock Form" Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules 16883 Within 24 hours of any responsible SCI personnel having a reasonable basis to conclude that the SCI event has occurred, the SCI entity shall submit a written notification pertaining to such SCI event to the Commission, which shall be made on a good faith, best efforts basis and include: Exhibit :1: Rule :1002(b)(2) Notification of SCI Event Add/Remove/View (a) a description of the SCI event, including the system(s) affected; and (b) to the extent available as of the time of the notification: the SCI entity's current assessment of the types and number of market participants potentially affected by the SCI event; the potential impact of the SCI event on the market; a description of the steps the SCI entity has taken, is taking, or plans to take, with respect to the SCI event; the time the SCI event was resolved or timeframe within which the SCI event is expected to be resolved; and any other pertinent information known by the SCI entity about the SCI event. Exhibit 2: Rule :1002(b)(4) Final or Interim Report of SCI Event Add/Remove/View When submitting a final report pursuant to either Rule 1002(b)(4)(i)(A) or Rule 1002(b)(4)(i)(B)(g), the SCI entity shall include: (a) a detailed description of: the SCI entity's assessment of the types and number of market participants affected by the SCI event; the SCI entity's assessment of the impact of the SCI event on the market; the steps the SCI entity has taken, is taking, or plans to take, with respect to the SCI event; the time the SCI event was resolved; the SCI entity's rule(s) and/or governing document(s), as applicable, that relate to the SCI event; and any other pertinent information known by the SCI entity about the SCI event; (b) a copy of any information disseminated pursuant to Rule 1002(c) by the SCI entity to date regarding the SCI event to any of its members or participants; and (c) an analysis of parties that may have experienced a loss, whether monetary or otherwise, due to the SCI event, the number of such parties, and an estimate of the aggregate amount of such loss. When submitting an interim report pursuant to Rule 1002(b)(4)(i)(B)(!), the SCI entity shall include such information to the extent known at the time. Exhibit 3: Rule :1002(b)(5)(ii) Quarterly Report of De Minimis SCI Events Add/Remove/View The SCI entity shall submit a report, within 30 calendar days after the end of each calendar quarter, containing a summary description of systems disruptions and systems intrusions that have had, or the SCI entity reasonably estimates would have, no or a de minimis impact on the SCI entity's operations or on market participants, including the SCI systems and, for systems intrusions, indirect SCI systems, affected by such SCI events during the applicable calendar quarter. When submitting a report pursuant to Rule 1003(a)(1), the SCI entity shall provide a report, within 30 calendar days after the end of each calendar quarter, describing completed, ongoing, and planned material changes to its SCI systems and the security of indirect SCI systems, during the prior, current, and subsequent calendar quarters, including the dates or expected dates of commencement and completion. An SCI entity shall establish reasonable written criteria for identifying a change to its SCI systems and the security of indirect SCI systems as material and report such changes in accordance with such criteria. Exhibit 4: Rule :1003 (a) Quarterly Report of Systems Changes Add/Remove/View When submitting a report pursuant to Rule 1003(a)(2), the SCI entity shall provide a supplemental report of a material error in or material omission from a report previously submitted under Rule 100'.l(a)(1). Exhibit 5: Rule :1003(b)(3) Report of SCI review Add/Remove/View The SCI entity shall provide a report of the SCI review, together with any response by senior management, within 60 calendar days after its submission to senior management of the SCI entity. This exhibit may be used in order to attach other documents that the SCI entity may wish to submit as part of a Rule 1002(b)(1) initial notification submission or Rule 1002(b)(3) update submission. BILLING CODE 8011–01–C General Instructions for Form SCI A. Use of the Form Except with respect to notifications to the Commission made pursuant to Rule 1002(b)(1) or updates to the Commission VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 made pursuant to Rule 1002(b)(3), any notification, review, description, analysis, or report required to be submitted pursuant to Regulation SCI under the Securities Exchange Act of 1934 (‘‘Act’’) shall be filed in an electronic format through an electronic PO 00000 Frm 00159 Fmt 4701 Sfmt 4702 form filing system (‘‘EFFS’’), a secure website operated by the Securities and Exchange Commission (‘‘Commission’’). Documents attached as exhibits filed through the EFFS system must be in a text-searchable format without the use of optical character recognition. If, E:\FR\FM\24MRP2.SGM 24MRP2 EP24MR20.010</GPH> lotter on DSKBCFDHB2PROD with PROPOSALS2 Exhibit 6: Optional Attachments Add/Remove/View 16884 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules however, a portion of a Form SCI submission (e.g., an image or diagram) cannot be made available in a textsearchable format, such portion may be submitted in a non-text searchable format. B. Need for Careful Preparation of the Completed Form, Including Exhibits This form, including the exhibits, is intended to elicit information necessary for Commission staff to work with SCI self-regulatory organizations, SCI alternative trading systems, plan processors, exempt clearing agencies subject to ARP, and competing consolidators (collectively, ‘‘SCI entities’’) to ensure the capacity, integrity, resiliency, availability, security, and compliance of their automated systems. An SCI entity must provide all the information required by the form, including the exhibits, and must present the information in a clear and comprehensible manner. A filing that is incomplete or similarly deficient may be returned to the SCI entity. Any filing so returned shall for all purposes be deemed not to have been filed with the Commission. See also Rule 0–3 under the Act (17 CFR 240.0–3). lotter on DSKBCFDHB2PROD with PROPOSALS2 C. When to Use the Form Form SCI is comprised of six types of required submissions to the Commission pursuant to Rules 1002 and 1003. In addition, Form SCI permits SCI entities to submit to the Commission two additional types of submissions pursuant to Rules 1002(b)(1) and 1002(b)(3); however, SCI entities are not required to use Form SCI for these two types of submissions to the Commission. In filling out Form SCI, an SCI entity shall select the type of filing and provide all information required by Regulation SCI specific to that type of filing. The first two types of required submissions relate to Commission notification of certain SCI events: (1) ‘‘Rule 1002(b)(2) Notification of SCI Event’’ submissions for notifications regarding systems disruptions, systems compliance issues, or systems intrusions (collectively, ‘‘SCI events’’), other than any systems disruption or systems intrusion that has had, or the SCI entity reasonably estimates would have, no or a de minimis impact on the SCI entity’s operations or on market participants; and (2) ‘‘Rule 1002(b)(4) Final or Interim Report of SCI Event’’ submissions, of which there are two kinds (a final report under Rule 1002(b)(4)(i)(A) or Rule 1002(b)(4)(i)(B)(2); or an interim status report under Rule 1002(b)(4)(i)(B)(1)). VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 The other four types of required submissions are periodic reports, and include: (1) ‘‘Rule 1002(b)(5)(ii)’’ submissions for quarterly reports of systems disruptions and systems intrusions which have had, or the SCI entity reasonably estimates would have, no or a de minimis impact on the SCI entity’s operations or on market participants (‘‘de minimis SCI events’’); (2) ‘‘Rule 1003(a)(1)’’ submissions for quarterly reports of material systems changes; (3) ‘‘Rule 1003(a)(2)’’ submissions for supplemental reports of material systems changes; and (4) ‘‘Rule 1003(b)(3)’’ submissions for reports of SCI reviews. Required Submissions for SCI Events For 1002(b)(2) submissions, an SCI entity must notify the Commission using Form SCI by selecting the appropriate box in Section I and filling out all information required by the form, including Exhibit 1. 1002(b)(2) submissions must be submitted within 24 hours of any responsible SCI personnel having a reasonable basis to conclude that an SCI event has occurred. For 1002(b)(4) submissions, if an SCI event is resolved and the SCI entity’s investigation of the SCI event is closed within 30 calendar days of the occurrence of the SCI event, an SCI entity must file a final report under Rule 1002(b)(4)(i)(A) within five business days after the resolution of the SCI event and closure of the investigation regarding the SCI event. However, if an SCI event is not resolved or the SCI entity’s investigation of the SCI event is not closed within 30 calendar days of the occurrence of the SCI event, an SCI entity must file an interim status report under Rule 1002(b)(4)(i)(B)(1) within 30 calendar days after the occurrence of the SCI event. For SCI events in which an interim status report is required to be filed, an SCI entity must file a final report under Rule 1002(b)(4)(i)(B)(2) within five business days after the resolution of the SCI event and closure of the investigation regarding the SCI event. For 1002(b)(4) submissions, an SCI entity must notify the Commission using Form SCI by selecting the appropriate box in Section I and filling out all information required by the form, including Exhibit 2. Required Submissions for Periodic Reporting For 1002(b)(5)(ii) submissions, an SCI entity must submit quarterly reports of systems disruptions and systems intrusions which have had, or the SCI PO 00000 Frm 00160 Fmt 4701 Sfmt 4702 entity reasonably estimates would have, no or a de minimis impact on the SCI entity’s operations or on market participants. The SCI entity must select the appropriate box in Section II and fill out all information required by the form, including Exhibit 3. For 1003(a)(1) submissions, an SCI entity must submit its quarterly report of material systems changes to the Commission using Form SCI. The SCI entity must select the appropriate box in Section II and fill out all information required by the form, including Exhibit 4. Filings made pursuant to Rule 1002(b)(5)(ii) and Rule 1003(a)(1) must be submitted to the Commission within 30 calendar days after the end of each calendar quarter (i.e., March 31st, June 30th, September 30th and December 31st) of each year. For 1003(a)(2) submissions, an SCI entity must submit a supplemental report notifying the Commission of a material error in or material omission from a report previously submitted under Rule 1003(a). The SCI entity must select the appropriate box in Section II and fill out all information required by the form, including Exhibit 4. For 1003(b)(3) submissions, an SCI entity must submit its report of its SCI review, together with any response by senior management, to the Commission using Form SCI. A 1003(b)(3) submission is required within 60 calendar days after the report of the SCI review has been submitted to senior management of the SCI entity. The SCI entity must select the appropriate box in Section II and fill out all information required by the form, including Exhibit 5. Optional Submissions An SCI entity may, but is not required to, use Form SCI to submit a notification pursuant to Rule 1002(b)(1). If the SCI entity uses Form SCI to submit a notification pursuant to Rule 1002(b)(1), it must select the appropriate box in Section I and provide a short description of the SCI event. Documents may also be attached as Exhibit 6 if the SCI entity chooses to do so. An SCI entity may, but is not required to, use Form SCI to submit an update pursuant to Rule 1002(b)(3). Rule 1002(b)(3) requires an SCI entity to, until such time as the SCI event is resolved and the SCI entity’s investigation of the SCI event is closed, provide updates pertaining to such SCI event to the Commission on a regular basis, or at such frequency as reasonably requested by a representative of the Commission, to correct any materially incorrect information previously provided, or when new E:\FR\FM\24MRP2.SGM 24MRP2 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules material information is discovered, including but not limited to, any of the information listed in Rule 1002(b)(2)(ii). If the SCI entity uses Form SCI to submit an update pursuant to Rule 1002(b)(3), it must select the appropriate box in Section I and provide a short description of the SCI event. Documents may also be attached as Exhibit 6 if the SCI entity chooses to do so. D. Documents Comprising the Completed Form The completed form filed with the Commission shall consist of Form SCI, responses to all applicable items, and any exhibits required in connection with the filing. Each filing shall be marked on Form SCI with the initials of the SCI entity, the four-digit year, and the number of the filing for the year (e.g., SCI Name–YYYY–XXX). lotter on DSKBCFDHB2PROD with PROPOSALS2 E. Contact Information; Signature; and Filing of the Completed Form Each time an SCI entity submits a filing to the Commission on Form SCI, the SCI entity must provide the contact information required by Section III of Form SCI. Space for additional contact information, if appropriate, is also provided. All notifications and reports required to be submitted through Form SCI shall be filed through the EFFS. In order to file Form SCI through the EFFS, SCI entities must request access to the Commission’s External Application Server by completing a request for an external account user ID and password. Initial requests will be received by contacting (202) 551–5777. An email will be sent to the requestor that will provide a link to a secure website where basic profile information will be requested. A duly authorized individual of the SCI entity shall electronically sign the completed Form SCI as indicated in Section IV of the form. In addition, a duly authorized individual of the SCI entity shall manually sign one copy of the completed Form SCI, and the manually signed signature page shall be preserved pursuant to the requirements of Rule 1005. F. Withdrawals of Commission Notifications and Periodic Reports If an SCI entity determines to withdraw a Form SCI, it must complete Page 1 of the Form SCI and indicate by selecting the appropriate check box to withdraw the submission. G. Paperwork Reduction Act Disclosure This collection of information will be reviewed by the Office of Management and Budget in accordance with the clearance requirements of 44 U.S.C. VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 3507. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid control number. The Commission estimates that the average burden to respond to Form SCI will be between one and 125 hours, depending upon the purpose for which the form is being filed. Any member of the public may direct to the Commission any comments concerning the accuracy of this burden estimate and any suggestions for reducing this burden. Except with respect to notifications to the Commission made pursuant to Rule 1002(b)(1) or updates to the Commission made pursuant to Rule 1002(b)(3), it is mandatory that an SCI entity file all notifications, reviews, descriptions, analyses, and reports required by Regulation SCI using Form SCI. The Commission will keep the information collected pursuant to Form SCI confidential to the extent permitted by law. Subject to the provisions of the Freedom of Information Act, 5 U.S.C. 522 (‘‘FOIA’’), and the Commission’s rules thereunder (17 CFR 200.80(b)(4)(iii)), the Commission does not generally publish or make available information contained in any reports, summaries, analyses, letters, or memoranda arising out of, in anticipation of, or in connection with an examination or inspection of the books and records of any person or any other investigation. H. Exhibits List of exhibits to be filed, as applicable: Exhibit 1: Rule 1002(b)(2)— Notification of SCI Event. Within 24 hours of any responsible SCI personnel having a reasonable basis to conclude that the SCI event has occurred, the SCI entity shall submit a written notification pertaining to such SCI event to the Commission, which shall be made on a good faith, best efforts basis and include: (a) A description of the SCI event, including the system(s) affected; and (b) to the extent available as of the time of the notification: The SCI entity’s current assessment of the types and number of market participants potentially affected by the SCI event; the potential impact of the SCI event on the market; a description of the steps the SCI entity has taken, is taking, or plans to take, with respect to the SCI event; the time the SCI event was resolved or timeframe within which the SCI event is expected to be resolved; and any other pertinent information known by the SCI entity about the SCI event. Exhibit 2: Rule 1002(b)(4)—Final or Interim Report of SCI Event. When PO 00000 Frm 00161 Fmt 4701 Sfmt 4702 16885 submitting a final report pursuant to either Rule 1002(b)(4)(i)(A) or Rule 1002(b)(4)(i)(B)(2), the SCI entity shall include: (a) A detailed description of: The SCI entity’s assessment of the types and number of market participants affected by the SCI event; the SCI entity’s assessment of the impact of the SCI event on the market; the steps the SCI entity has taken, is taking, or plans to take, with respect to the SCI event; the time the SCI event was resolved; the SCI entity’s rule(s) and/or governing document(s), as applicable, that relate to the SCI event; and any other pertinent information known by the SCI entity about the SCI event; (b) a copy of any information disseminated pursuant to Rule 1002(c) by the SCI entity to date regarding the SCI event to any of its members or participants; and (c) an analysis of parties that may have experienced a loss, whether monetary or otherwise, due to the SCI event, the number of such parties, and an estimate of the aggregate amount of such loss. When submitting an interim report pursuant to Rule 1002(b)(4)(i)(B)(1), the SCI entity shall include such information to the extent known at the time. Exhibit 3: Rule 1002(b)(5)(ii)— Quarterly Report of De Minimis SCI Events. The SCI entity shall submit a report, within 30 calendar days after the end of each calendar quarter, containing a summary description of systems disruptions and systems intrusions that have had, or the SCI entity reasonably estimates would have, no or a de minimis impact on the SCI entity’s operations or on market participants, including the SCI systems and, for systems intrusions, indirect SCI systems, affected by such SCI events during the applicable calendar quarter. Exhibit 4: Rule 1003(a)—Quarterly Report of Systems Changes. When submitting a report pursuant to Rule 1003(a)(1), the SCI entity shall provide a report, within 30 calendar days after the end of each calendar quarter, describing completed, ongoing, and planned material changes to its SCI systems and the security of indirect SCI systems, during the prior, current, and subsequent calendar quarters, including the dates or expected dates of commencement and completion. An SCI entity shall establish reasonable written criteria for identifying a change to its SCI systems and the security of indirect SCI systems as material and report such changes in accordance with such criteria. When submitting a report pursuant to Rule 1003(a)(2), the SCI entity shall provide a supplemental report of a material error in or material omission from a report previously E:\FR\FM\24MRP2.SGM 24MRP2 16886 Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / Proposed Rules submitted under Rule 1003(a); provided, however, that a supplemental report is not required if information regarding a material systems change is or will be provided as part of a notification made pursuant to Rule 1002(b). Exhibit 5: Rule 1003(b)(3)—Report of SCI Review. The SCI entity shall provide a report of the SCI review, together with any response by senior management, within 60 calendar days after its submission to senior management of the SCI entity. Exhibit 6: Optional Attachments. This exhibit may be used in order to attach other documents that the SCI entity may wish to submit as part of a Rule 1002(b)(1) initial notification submission or Rule 1002(b)(3) update submission. I. Explanation of Terms lotter on DSKBCFDHB2PROD with PROPOSALS2 Critical SCI systems means any SCI systems of, or operated by or on behalf of, an SCI entity that: (a) Directly support functionality relating to: (1) Clearance and settlement systems of clearing agencies; (2) openings, reopenings, and closings on the primary listing market; (3) trading halts; (4) initial public offerings; (5) the provision of market data by a plan processor; or (6) exclusively-listed securities; or (b) provide functionality to the securities markets for which the availability of alternatives is significantly limited or nonexistent and without which there VerDate Sep<11>2014 19:07 Mar 23, 2020 Jkt 250001 would be a material impact on fair and orderly markets. Indirect SCI systems means any systems of, or operated by or on behalf of, an SCI entity that, if breached, would be reasonably likely to pose a security threat to SCI systems. Major SCI event means an SCI event that has had, or the SCI entity reasonably estimates would have: (a) Any impact on a critical SCI system; or (b) a significant impact on the SCI entity’s operations or on market participants. Responsible SCI personnel means, for a particular SCI system or indirect SCI system impacted by an SCI event, such senior manager(s) of the SCI entity having responsibility for such system, and their designee(s). SCI entity means an SCI selfregulatory organization, SCI alternative trading system, plan processor, or exempt clearing agency subject to ARP, or competing consolidator. SCI event means an event at an SCI entity that constitutes: (a) A systems disruption; (b) a systems compliance issue; or (c) a systems intrusion. SCI review means a review, following established procedures and standards, that is performed by objective personnel having appropriate experience to conduct reviews of SCI systems and indirect SCI systems, and which review contains: (a) A risk assessment with respect to such systems of an SCI entity; PO 00000 Frm 00162 Fmt 4701 Sfmt 9990 and (b) an assessment of internal control design and effectiveness of its SCI systems and indirect SCI systems to include logical and physical security controls, development processes, and information technology governance, consistent with industry standards. SCI systems means all computer, network, electronic, technical, automated, or similar systems of, or operated by or on behalf of, an SCI entity that, with respect to securities, directly support trading, clearance and settlement, order routing, market data, market regulation, or market surveillance. Systems Compliance Issue means an event at an SCI entity that has caused any SCI system of such entity to operate in a manner that does not comply with the Act and the rules and regulations thereunder or the entity’s rules or governing documents, as applicable. Systems Disruption means an event in an SCI entity’s SCI systems that disrupts, or significantly degrades, the normal operation of an SCI system. Systems Intrusion means any unauthorized entry into the SCI systems or indirect SCI systems of an SCI entity. By the Commission. Dated: February 14, 2020. Jill M. Peterson, Assistant Secretary. [FR Doc. 2020–03760 Filed 3–23–20; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\24MRP2.SGM 24MRP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 85, Number 57 (Tuesday, March 24, 2020)]
[Proposed Rules]
[Pages 16726-16886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-03760]



[[Page 16725]]

Vol. 85

Tuesday,

No. 57

March 24, 2020

Part II





Securities and Exchange Commission





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17 CFR Parts 240, 242, and 249





Market Data Infrastructure; Proposed Rule

Federal Register / Vol. 85, No. 57 / Tuesday, March 24, 2020 / 
Proposed Rules

[[Page 16726]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 240, 242, and 249

[Release No. 34-88216; File No. S7-03-20]
RIN 3235-AM61


Market Data Infrastructure

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/proposed.shtml); or
     Send an email to [email protected]. Please include 
File Number S7-03-20 on the subject line.

Paper Comments

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

    All submissions should refer to File Number S7-03-20. This file 
number should be included on the subject line if email is used. To help 
us process and review your comments more efficiently, please use only 
one method. The Commission will post all comments on the Commission's 
internet website (https://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on 
official business days between the hours of 10:00 a.m. and 3:00 p.m. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any materials will 
be made available on the Commission's website. To ensure direct 
electronic receipt of such notifications, sign up through the ``Stay 
Connected'' option at www.sec.gov to receive notifications by email.

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

SUPPLEMENTARY INFORMATION: The Commission is proposing to expand the 
content of NMS information that is required to be collected, 
consolidated, and disseminated as part of the national market system 
under Regulation NMS by proposing several new defined terms under Rule 
600 of Regulation NMS, including ``consolidated market data,'' ``core 
data,'' ``regulatory data,'' ``administrative data,'' and ``exchange-
specific program data.'' To implement the decentralized consolidation 
model, the Commission is proposing to amend Rule 603 under Regulation 
NMS to remove the requirement that all consolidated information for 
individual NMS stocks be disseminated through a single plan processor 
and to require each national securities exchange and national 
securities association to make available its NMS information in the 
same manner and using the same methods, including all methods of access 
and the same format, as the exchange or association makes available any 
quotation or transaction information for NMS stocks to any person. In 
addition, the Commission is proposing to add new Rule 614 and a new 
Form CC to govern the registration and responsibilities of competing 
consolidators. Further, the Commission is proposing that the effective 
national market system plan(s) for NMS stocks be amended to reflect the 
decentralized consolidation model. Finally, the Commission is proposing 
to amend Regulation SCI to expand the definition of ``SCI entities'' to 
include competing consolidators.
    In particular, the Commission is proposing: (1) Amendments to Rule 
600 [17 CFR 242.600] to add new definitions of ``administrative data,'' 
``auction information,'' ``competing consolidator,'' ``consolidated 
market data,'' ``core data,'' ``depth of book data,'' ``exchange-
specific program data,'' ``primary listing exchange,'' ``regulatory 
data,'' ``round lot,'' and ``self-aggregator;'' (2) amendments to Rule 
603 [17 CFR 242.603] to require national securities exchanges and 
national securities associations to make available NMS information to 
competing consolidators and self-aggregators and to remove the 
requirement that all consolidated information for individual NMS stocks 
be disseminated through a single plan processor; (3) adoption of Rule 
614 [17 CFR 242.614] and Form CC to require registration of competing 
consolidators; (4) that the participants to the effective national 
market system plan(s) relating to NMS stocks amend such plan(s) to 
reflect the definition of ``consolidated market data'' and the 
implementation of a decentralized consolidation model; (5) amendments 
to Rule 1000 [17 CFR 242.1000] to include competing consolidators in 
the definition of ``SCI entities;'' and (6) conforming changes and 
updating cross-references in Rule 201(a)(3) [17 CFR 242.201(a)(3)], 
Rule 201(b)(1)(ii) [17 CFR 242.201(b)(1)(ii)], Rule 201(b)(3) [17 CFR 
242.201(b)(3)], Rule 600(b)(43) [17 CFR 242.600(b)(43)], Rule 
600(b)(61) [17 CFR 242.600(b)(61)], and Rule 602 [17 CFR 242.602].

Table of Contents

I. Introduction
II. Current Market Data Infrastructure under Regulation NMS and the 
Equity Data Plans
    A. Consolidated Market Data and Proprietary Data
    B. NMS Regulatory Framework
    C. Other Regulatory Data
    1. Regulation SHO
    2. Limit-Up Limit-Down Plan
    3. Market-Wide Circuit Breakers
    4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders
III. Proposed Enhancements to NMS Information
    A. Introduction
    B. Proposed Definition of ``Consolidated Market Data''
    C. Proposed Definition of ``Core Data''
    1. Round Lot Size

[[Page 16727]]

    2. Depth of Book Data
    3. Auction Information
    D. Proposed Definition of ``Regulatory Data''
    1. Regulation SHO
    2. Limit Up-Limit Down Plan
    3. Market-Wide Circuit Breakers
    4. Other Regulatory Data
    E. Proposed Definition of ``Administrative Data''
    F. Proposed Definition of ``Exchange-Specific Program Data''
IV. Need for and Proposed Enhancements to Provision of Consolidated 
Market Data
    A. Existing Centralized Consolidation Model
    B. Proposed Decentralized Consolidation Model
    1. Access to Data
    2. Competing Consolidators
    3. Self-Aggregators
    4. Amendment to the Effective National Market System Plan(s) for 
NMS Stocks
    5. Effects on the National Market System Plan Governing the 
Consolidated Audit Trail
    6. Transition Period
    C. Alternatives to the Centralized Consolidation Model
    1. Distributed SIP Alternative
    2. Single SIP Alternative
V. Paperwork Reduction Act
    A. Summary of Collection of Information
    1. Registration Requirements and Form CC
    2. Competing Consolidator Duties and Data Collection
    3. Recordkeeping
    4. Reports and Reviews
    5. Amendment to the Effective National Market System Plan(s) for 
NMS Stocks
    6. Collection and Dissemination of Information by National 
Securities Exchanges and National Securities Associations
    B. Proposed Use of Information
    1. Registration Requirements and Form CC
    2. Competing Consolidator Duties and Data Collection
    3. Recordkeeping
    4. Reports and Reviews
    5. Amendment to the Effective National Market System Plan(s) for 
NMS Stocks
    6. Collection and Dissemination of Information by National 
Securities Exchanges and National Securities Associations
    C. Respondents
    D. Total Annual Reporting and Recordkeeping Burden
    1. Registration Requirements and Form CC
    2. Competing Consolidator Duties and Data Collection
    3. Recordkeeping
    4. Reports and Reviews
    5. Amendment to the Effective National Market System Plan(s) for 
NMS Stocks
    6. Collection and Dissemination of Information by National 
Securities Exchanges and National Securities Associations
    E. Collection of Information is Mandatory
    F. Confidentiality
    1. Registration Requirements and Form CC
    2. Competing Consolidator Duties and Data Collection and 
Maintenance
    3. Recordkeeping
    4. Reports and Reviews
    5. Amendment to the Effective National Market System Plan(s) for 
NMS Stocks
    6. Collection and Dissemination of Information by National 
Securities Exchanges and National Securities Associations
    G. Revisions to Current Regulation SCI Burden Estimates
    H. Request for Comments
VI. Economic Analysis
    A. Introduction and Market Failures
    1. Introduction
    2. Market Failures
    B. Baseline
    1. Current Regulatory Process for Equity Data Plans and SIP Data
    2. Current Process for Collecting, Consolidating, and 
Disseminating Market Data
    3. Competition Baseline
    4. Request for Comments on Baseline
    C. Economic Effects of the Rule
    1. Core Data and Consolidated Market Data
    2. Decentralized Consolidation Model
    3. Economic Effects of Form CC
    4. Economic Effects From the Interaction of Changes to Core Data 
and the Decentralized Consolidation Model
    5. Request for Comments on the Economic Effects of the Proposed 
Rule
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    4. Request for Comments on Impact on Efficiency, Competition, 
and Capital Formation
    E. Alternatives
    1. Introduce Decentralized Consolidation Model With Additional 
Changes in Core Data Definition
    2. Introduce Changes in Core Data and Introduce a Distributed 
SIP Model
    3. Require Competing Consolidators' Fees be Subject to the 
Commission's Approval
    4. Do Not Extend Regulation SCI to Include Competing 
Consolidators
    5. Require Competing Consolidators to Submit Form CC in the 
EDGAR System Using the Inline XBRL Format
    6. Require Competing Consolidators to Submit Monthly Disclosures 
in the EDGAR System Using the Inline XBRL Format
    7. Prescribing the Format of NMS Information
    8. Request for Comments on Alternatives
    F. Request for Comments on the Economic Analysis
VII. Consideration of Impact on the Economy
VIII. Regulatory Flexibility Certification
IX. Statutory Authority

I. Introduction

    The widespread availability of NMS information \1\ has been an 
essential element in the success of the U.S. securities markets. 
Congress recognized the importance of market information to the U.S. 
securities markets with the enactment of Section 11A of the Exchange 
Act. Section 11A(a)(2) of the Exchange Act \2\ directs the Commission, 
having due regard for the public interest, the protection of investors, 
and the maintenance of fair and orderly markets, to use its authority 
under the Exchange Act to facilitate the establishment of a national 
market system for securities in accordance with the Congressional 
findings and objectives set forth in Section 11A(a)(1) of the Exchange 
Act.\3\ Among the findings and objectives in Section 11A(a)(1) are that 
``[n]ew data processing and communications techniques create the 
opportunity for more efficient and effective market operations'' \4\ 
and ``[i]t is in the public interest and appropriate for the protection 
of investors and the maintenance of fair and orderly markets to assure 
. . . the availability to brokers, dealers, and investors of 
information with respect to quotations for and transactions in 
securities . . . '' \5\
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    \1\ See infra Section II.A for a discussion of the NMS 
information that is consolidated and disseminated in the U.S. 
securities markets.
    \2\ 15 U.S.C. 78k-1(a)(2).
    \3\ 15 U.S.C. 78k-1(a)(1).
    \4\ 15 U.S.C. 78k-1(a)(1)(B).
    \5\ 15 U.S.C. 78k-1(a)(1)(C). The Senate Report for the 
enactment of Section 11A stated that ``it is critical for those who 
trade to have access to accurate, up-to-the-second information as to 
the prices at which transactions in particular securities are taking 
place (i.e., last sale reports) and the prices at which other 
traders have expressed their willingness to buy or sell (i.e., 
quotations).'' S. Rep. No. 94-75 at 8 (1975) (``Senate Report''). 
The Senate Report continued that ``[f]or this reason, communications 
systems designed to provide automated dissemination of last sale and 
quotation information with respect to securities will form the heart 
of the national market system.'' Id. at 6.
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    As discussed below, the Commission exercised its authority under 
Section 11A of the Exchange Act through the adoption of a series of 
rules that have been incorporated into Regulation NMS. Those rules 
address both the content of, and the means by which, NMS information is 
collected, consolidated, and disseminated.\6\ In particular, Section 
11A(c)(1)(B) of the Exchange Act authorizes the Commission to prescribe 
rules, as necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Exchange Act, that ``assure the prompt, accurate, reliable, and 
fair collection, processing, distribution, and publication of 
information with respect to quotations for and transactions in such 
securities and the fairness and usefulness of the form and content of 
such information.'' \7\ Among other

[[Page 16728]]

things, the Commission required the self-regulatory organizations 
(``SROs'') to act jointly pursuant to NMS plans \8\ to disseminate, 
through a single plan processor, a consolidated national best bid and 
national best offer, along with last sale data, for each NMS stock.\9\ 
While the Commission has periodically revised certain of its NMS rules 
with the goal of ensuring that the regulatory framework continues to 
fulfill the goals of Section 11A of the Exchange Act,\10\ the 
Commission has not significantly updated the rules that govern the 
content and distribution of NMS information since their initial 
implementation in the late 1970s.
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    \6\ See 17 CFR 242.601-603; infra Section II.B.
    \7\ See 15 U.S.C. 78k-1(c)(1)(B); Senate Report, supra note 5, 
at 189 (``Examples of the types of subjects as to which the SEC 
would have the authority to promulgate rules under these provisions 
include: The hours of operation of any type or quotation system, 
trading halts, what and how information is displayed and 
qualifications for the securities to be included on any tape or 
within any quotation system.'').
    \8\ On January 8, 2020, the Commission issued a notice of 
proposed order directing the SROs to submit a new, single NMS plan 
for NMS stocks (``New Consolidated Data Plan''). See Securities 
Exchange Act Release No. 87906 (Jan. 8, 2020), 85 FR 2164 (Jan. 14, 
2020) (``Proposed Governance Order''). The existing NMS plans for 
NMS stocks are: (1) The Consolidated Trade Association (``CTA'') 
Plan; (2) the Consolidated Quotation (``CQ'') Plan; and (3) the 
Nasdaq Unlisted Trading Privileges (``Nasdaq UTP'') Plan 
(collectively the ``Equity Data Plans''). See infra note 13 and 
Section II.A. The Commission is proposing provisions in new Rule 614 
that would require the participants to amend the effective national 
market system plan(s) for NMS stocks. See infra Section IV.B.4. If 
adopted, the proposed amendments would apply to any effective 
national market system plan for NMS stocks. In response to the 
Proposed Governance Order, the NYSE submitted a comment letter that 
also discussed a number of market structure issues that are 
addressed in this release (e.g., expanding SIP data content and 
modernizing SIP data delivery such as through a potential competing 
consolidator model). See Letter from Elizabeth K. King, Chief 
Regulatory Officer, ICE, and General Counsel and Corporate 
Secretary, NYSE, to Vanessa Countryman, Secretary, Commission, 5 
(Feb. 5, 2020) (``NYSE Governance Letter''). As with various other 
comments referenced herein, including, without limitation, comments 
received in connection with the Roundtable on Market Data and Market 
Access, see infra note 17, the NYSE Governance Letter was not 
provided with reference to the specific proposals discussed in this 
release. To the extent that the NYSE or other commenters wish to 
modify or supplement their prior comments to reflect the particulars 
of the proposals discussed herein, the Commission welcomes such 
comments.
    \9\ See Exchange Act Rule 11Aa3-1 (renumbered and renamed as 
Exchange Act Rule 601, Dissemination of transaction reports and last 
sale data with respect to transactions in NMS stocks); Exchange Act 
Rule 11Ac1-1 (renumbered and renamed as Exchange Act Rule 602, 
Dissemination of quotations in NMS securities); Exchange Act Rule 
11Ac1-2 (renumbered and renamed as Exchange Act Rule 603, 
Distribution, consolidation, and display of information with respect 
to quotations for and transactions in NMS stocks.).
    \10\ See, e.g., Securities Exchange Act Release Nos. 51808 (June 
9, 2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release''); 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) 
(adopting amendments to Rule 606 to require additional disclosures 
by broker-dealers to customers regarding the handling of their 
orders).
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    The widespread availability of timely market information promotes 
fair and efficient markets and facilitates the ability of brokers and 
dealers to provide best execution to their customers.\11\ The structure 
of the equity markets has changed dramatically since the Commission 
adopted the rules now known as Regulation NMS in 2005 and approved the 
three existing Equity Data Plans under Rule 608 \12\ of Regulation 
NMS.\13\ In 2005, a substantial amount of trading was conducted on 
relatively slow manual markets, and for any given stock, concentrated 
on its listing exchange. Today, the U.S. equity markets have evolved 
into high-speed, latency-sensitive electronic markets where trading is 
dispersed among a wide range of competing market centers \14\ and even 
small degrees of latency affect trading strategies.\15\ Sophisticated 
order routing algorithms dependent on low-latency, high-quality market 
information are widely used to execute securities transactions.\16\ 
Despite the evolution of latency-sensitive markets, the provision of 
NMS information that is centrally consolidated and disseminated by the 
Equity Data Plans is meaningfully slower than certain proprietary 
market data products distributed by the exchanges.\17\ Today, the 
exchanges sell

[[Page 16729]]

proprietary data products that are fast, low-latency products designed 
for automated trading systems and include content, such as depth of 
book \18\ and order imbalance information for opening and closing 
auctions (``proprietary DOB products'') that are not provided under the 
Equity Data Plans.\19\ The Commission believes that the content and 
operating model under which NMS information is collected, consolidated, 
and disseminated have not kept pace with technological and market 
developments and are no longer satisfying the needs of many investors.
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    \11\ Section 11A(a)(1) of the Exchange Act, 15 U.S.C. 78k-
1(a)(1). See also Senate Report supra note 5, at 8; Securities 
Exchange Act Release No. 42208 (Dec. 9, 1999), 64 FR 70613, 70614 
(Dec. 17, 1999) (``Market Information Concept Release''); Concept 
Release on Equity Market Structure, Securities Exchange Act Release 
No. 61358 (Jan. 14, 2010), 75 FR 3593, 3600 (Jan. 21, 2010) 
(``Equity Market Structure Concept Release'').
    \12\ 17 CFR 242.608.
    \13\ The Equity Data Plans are effective national market system 
plans as defined in Rule 600(b)(22) for NMS stocks. See Second 
Restatement of the Plan Submitted to the Securities and Exchange 
Commission Pursuant to Rule 11Aa3-1 under the Securities Exchange 
Act of 1934, composite as of Dec. 6, 2019, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTA_Plan_Composite_as_of_December_6_2019.pdf; Restatement of Plan 
Submitted to the Securities and Exchange Commission Pursuant to Rule 
11Ac1-1 under the Securities Exchange Act of 1934, composite as of 
Dec. 6, 2019, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CQ_Plan_Composite_as_of_December_6_2019.pdf; Joint Self-Regulatory 
Organization Plan Governing the Collection, Consolidation and 
Dissemination of Quotation and Transaction Information for Nasdaq-
listed Securities Traded on Exchanges on an Unlisted Trading 
Privilege Basis, available at https://www.utpplan.com/DOC/Nasdaq-UTPPlan_after_46th_Amendment-Excluding_21st_36th_38th_42nd_44th_45th_Amendments.pdf; Proposed 
Governance Order, supra note 8.
    \14\ Rule 600(b)(38) defines a market center as ``any exchange 
market maker, OTC market maker, alternative trading system, national 
securities exchange, or national securities association.'' 17 CFR 
242.600(b)(38).
    \15\ See Eric Budish, et al., Will the Market Fix the Market? A 
Theory of Stock Exchange Competition and Innovation, University of 
Chicago, Becker Friedman Institute for Economics Working Paper No. 
2019-72 (May 2019), available at SSRN: https://ssrn.com/abstract=3391461; Andriy Shkilko and Konstantin Sokolov, Every Cloud 
Has a Silver Lining: Fast Trading, Microwave Connectivity and 
Trading Costs (Apr. 2019), available at https://ssrn.com/abstract=2848562; Equity Market Structure Concept Release, supra 
note 11 (``NYSE-listed stocks were traded primarily on the floor of 
the NYSE in a manual fashion until October 2006. At that time, NYSE 
began to offer fully automated access to its displayed 
quotations.''). In contrast to NYSE, stocks on the Nasdaq Stock 
Market LLC (``Nasdaq'') traded in a highly automated fashion at many 
different trading centers following the introduction of SuperMontage 
in 2002. See Securities Exchange Act Release No. 46429 (Aug. 29, 
2002), 67 FR 56862 (Sept. 5, 2002); Steven Quirk, Senior Vice 
President, Trader Group, TD Ameritrade, Testimony before the U.S. 
Senate Committee on Homeland Security and Governmental Affairs, 
Permanent Subcommittee on Investigations, Hearing on ``Conflicts of 
Interest, Investor Loss of Confidence, and High Speed Trading in 
U.S. Stock Markets'' (June 17, 2014), available at https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Quirk%20-%20TD%20Ameritrade%20(June%2017%202014).pdf%20 (citing statistics 
that average execution speed has improved by 90% since 2004--from 7 
seconds to 0.7 seconds in 2014). Today, trading speed is measured in 
microseconds and is moving towards nanoseconds. See, e.g., Vera 
Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall 
Street Journal (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173; 
Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech 
Upgrade, Wall Street Journal (Aug. 5, 2019), available at https://www.wsj.com/articles/nyse-aims-to-speed-up-trading-with-core-tech-upgrade-11565002800.
    \16\ See, e.g., Equity Market Structure Concept Release, supra 
note 11; Eric Budish, et al., supra note 15; Andrew Morgan, The 
impact of high frequency trading on algorithms and smart order 
routing, Algorithmic Trading & Smart Order Routing, 3d. ed. (2009), 
available at https://pdfs.semanticscholar.org/ba0b/5e952b27cc48513825cb7e4f6d15803e6973.pdf.
    \17\ See infra Section II.A. In addition, as discussed more 
fully below, on October 25-26, 2018, the Division of Trading and 
Markets hosted roundtables to gather information on market data and 
market access. See generally Equity Market Structure Roundtables, 
Oct. 25-26, 2018: Roundtable on Market Data and Market Access, 
https://www.sec.gov/spotlight/equity-market-structure-roundtables 
(``Roundtable''). Transcripts for both days of the Roundtable are 
available at https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102518-transcript.pdf (``Roundtable Day One Transcript'') and https://www.sec.gov/spotlight/equity-market-structure-roundtables/roundtable-market-data-market-access-102618-transcript.pdf 
(``Roundtable Day Two Transcript''). Panelists at the Roundtable 
noted that the geographical delays inherent in the nature of a 
centralized processor results in significant latencies between the 
Equity Data Plans' feeds and proprietary data feeds that cannot be 
eliminated in the current infrastructure. Roundtable Day One 
Transcript at 145 (Simon Emrich, Norges Bank Investment Management) 
(``And part of that, the most interesting part of the delay for me 
is really the location of the consolidator, the geographical delay 
that's introduced, and the data connection element to the 
consolidator. Right? So from our perspective, the latency of the 
consolidator itself, the consolidation engine, the improvements that 
we've made are remarkable over the years. But it just doesn't 
measure the physical reality of the brokers that we're using.''); 
148 (Michael Blaugrund, NYSE) (``[T]he method of transmission of 
that information and the timing of the aggregation of that 
information into a consolidated feed plays a role. As I think we all 
acknowledge, the aggregation time has improved dramatically. As 
we've seen that decline, it highlights the fact that the geographic 
latency becomes a more meaningful portion of the overall time 
line.''). See also Ivy Schmerken, Speeding Up the SIP Isn't Enough, 
Say Market Pros at Baruch Conference, InformationWeek: Wall Street & 
Technology (Oct. 17, 2014), available at https://www.wallstreetandtech.com/infrastructure/speeding-up-the-sip-isnt-enough-say-market-pros-at-baruch-conference/d/d-id/1316724.html 
(``Since the SIP is slower than proprietary data feeds that firms 
can obtain directly from exchanges, critics have said that the SIP 
enables `latency arbitrage' between high-speed traders using fast 
data and those trading off of stale quotes from the consolidated 
feed.'').
    \18\ ``Depth of book,'' or ``DOB,'' refers to open buy and sell 
orders resting on a limit order book at prices away from the top of 
book (i.e., orders to buy at prices that are below the best bid and 
orders to sell that are higher than the best offer).
    \19\ See, e.g., Nasdaq, Data Products, available at https://www.nasdaqtrader.com/Trader.aspx?id=DPSpecs (last accessed Jan. 7, 
2020) (describing low-latency DOB data products); NYSE, Real-Time 
Data, available at https://www.nyse.com/market-data/real-time (last 
accessed Jan. 7, 2020) (describing low-latency DOB data products); 
Cboe, Market Data Services: U.S. Equities, available at https://markets.cboe.com/us/equities/market_data_services/ (last accessed 
Jan. 7, 2020) (describing low-latency DOB data products). 
Particularly when aggregated, proprietary DOB market data products 
provide a consolidated view of the market with greater content and 
lower latency. The exchanges also sell other data products that are 
limited in content, such as an exchange's top of book (``TOB'') 
quotation information and transaction information, that are designed 
largely for the non-automated segment of the market (e.g., retail 
investors and wealth managers) that is less sensitive to latency 
(``proprietary TOB products''). Examples of such proprietary TOB 
products include NYSE BBO (https://www.nyse.com/market-data/real-time/bbo), NASDAQ Basic (https://business.nasdaq.com/intel/GIS/nasdaq-basic.html), and Cboe One Feed (https://markets.cboe.com/us/equities/market_data_services/cboe_one). NYSE BBO provides TOB data. 
Nasdaq Basic and Cboe One's Summary Feed provide TOB and last sale 
information. Nasdaq Basic also provides Nasdaq Opening and Closing 
Prices and other information, including Emergency Market Condition 
event messages, System Status, and trading halt information. Cboe 
One, however, also offers a Premium Feed that includes DOB data. 
Each of these products is sold separately by the relevant exchange 
group. See Letter from Matthew J. Billings, Managing Director, 
Market Data Strategy, TD Ameritrade, 5-8 (Oct. 24, 2018) (``TD 
Ameritrade Letter''), available at https://www.sec.gov/comments/4-729/4729-4560068-176205.pdf (stating that the lower cost of exchange 
TOB products, coupled with costs associated with the process to 
differentiate between retail professionals and non-professionals 
imposed by the Equity Data Plans, and associated audit risk, favors 
retail broker-dealer use of exchange TOB products).
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    Today, the dissemination of NMS information relies upon a 
centralized consolidation model, where the SROs provide certain NMS 
information for each NMS stock to an exclusive processor (``exclusive 
SIP'').\20\ The exclusive SIP then consolidates this NMS information 
and makes it available to market participants.\21\ Market participants 
also may independently consolidate NMS information by purchasing 
individual exchange proprietary market data products \22\ and 
consolidating that information for their own use, or obtain NMS 
information that has been consolidated by a vendor that provides a data 
aggregation service. As discussed further below, proprietary DOB 
products collected through this decentralized consolidation model 
typically contain enhanced information compared to the market 
information provided through the Equity Data Plans, such as information 
about all orders on an individual exchange's order book.\23\ Market 
participants also are able to consolidate and use the data obtained in 
this manner more quickly than market participants relying on NMS 
information provided through the Equity Data Plans.
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    \20\ An ``exclusive processor'' is defined in Section 
3(a)(22)(B) of the Exchange Act as ``any [SIP] or [SRO] which, 
directly or indirectly, engages on an exclusive basis on behalf of 
any national securities exchange or registered securities 
association, or any national securities exchange or registered 
securities association which engages on an exclusive basis on its 
own behalf, in collecting, processing, or preparing for distribution 
or publication any information with respect to (i) transactions or 
quotations on or effected or made by means of any facility of such 
exchange or (ii) quotations distributed or published by means of any 
electronic system operated or controlled by such association.'' 15 
U.S.C. 78c(a)(22)(B). A securities information processor (``SIP'') 
is defined in Section 3(a)(22)(A) of the Exchange Act as ``any 
person engaged in the business of (i) collecting, processing, or 
preparing for distribution or publication, or assisting, 
participating in, or coordinating the distribution or publication 
of, information with respect to transactions in or quotations for 
any security (other than an exempted security) or (ii) distributing 
or publishing (whether by means of a ticker tape, a communications 
network, a terminal display device, or otherwise) on a current and 
continuing basis, information with respect to such transactions or 
quotations.'' 15 U.S.C. 78c(a)(22)(A). See infra note 42 and 
accompanying text.
    \21\ See Rule 603(b) of Regulation NMS. Rule 603(b) provides 
that all information for an individual NMS stock must be 
disseminated through a single plan processor. 17 CFR 242.603(b). See 
Rule 600(b)(59), which defines a plan processor as ``any self-
regulatory organization or securities information processor acting 
as an exclusive processor in connection with the development, 
implementation and/or operation of any facility contemplated by an 
effective national market system plan.'' 17 CFR 242.600(b)(59).
    \22\ See infra Section II.A (discussing proprietary DOB and 
proprietary TOB).
    \23\ See supra note 19.
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    As noted above, Section 11A of the Exchange Act specifically 
highlights the importance of making information with respect to 
quotations for and transactions in securities available to brokers, 
dealers, and investors in a prompt, accurate, reliable, and fair manner 
and directs the Commission to act in accordance with this finding. 
Accordingly, the Commission proposes to amend Regulation NMS to better 
achieve the goal of assuring ``the availability to brokers, dealers and 
investors of information with respect to quotations for and 
transactions in securities'' \24\ that is prompt, accurate, reliable, 
and fair.\25\ The Commission preliminarily believes that the proposals 
described herein would promote fair and efficient markets and would 
facilitate the best execution of investor orders, and reduce 
information asymmetries between market participants who currently rely 
on market data provided through the exclusive SIPs and those who 
purchase the proprietary market data products offered by the national 
securities exchanges.\26\
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    \24\ Section 11A(a)(1)(C)(iii), 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \25\ Section 11A(c)(1)(B), 15 U.S.C. 78k-1(c)(1)(B). Section 
11A(c)(1)(B) provides the Commission with the authority to prescribe 
rules and regulations as necessary or appropriate in the public 
interest, for the protection of investors or otherwise in 
furtherance of the purposes of the Exchange Act to ``assure the 
prompt, accurate, reliable, and fair collection, processing, 
distribution, and publication of information with respect to 
quotations for and transactions in such securities and the fairness 
and usefulness of the form and content of such information.'' Id.
    \26\ See Section 11A(a)(1)(C), 15 U.S.C. 78k-1(a)(1)(C) (stating 
that it is in the public interest and appropriate for the protection 
of investors and the maintenance of fair and orderly markets to 
assure ``fair competition among brokers and dealers,'' ``the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities,'' and 
``the practicability of brokers executing investors' orders in the 
best market'').
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    The proposed amendments include two key parts, and the Commission 
preliminarily believes that the proposals are complementary, but can be 
independently justified. First, the amendments would update the content 
of the information with respect to quotations for and transactions in 
NMS stocks that must be made available under Regulation NMS. In 
particular, the Commission proposes to expand the NMS information that 
is required to be collected, consolidated, and

[[Page 16730]]

disseminated under Regulation NMS to include: (1) Information about 
orders in sizes smaller than the current round lot size for certain 
higher priced stocks; \27\ (2) information about certain orders that 
are outside of the best bid and best offer (i.e., certain depth of book 
data); and (3) information about orders that are participating in 
opening, closing, and other auctions. The Commission preliminarily 
believes that enhancing the content of NMS information in this manner 
should help ensure that all market participants have ready access to 
that market information in order to facilitate participation in today's 
markets.
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    \27\ See proposed Rule 600(b)(81) (defining ``round lot'' as 100 
shares, 20 shares, 10 shares, 2 shares, or 1 share depending upon 
the prior calendar month's average closing price for each NMS 
stock).
---------------------------------------------------------------------------

    Second, the amendments introduce a decentralized consolidation 
model whereby competing consolidators would assume responsibility for 
the collection, consolidation, and dissemination functions currently 
performed by the exclusive SIPs.\28\ To facilitate this decentralized 
consolidation model, the Commission proposes that each SRO would be 
required to make all of its market data that is necessary to generate 
consolidated market data (as proposed to be defined) directly available 
to two new categories of entities: (1) Competing consolidators and (2) 
self-aggregators. Competing consolidators would be either SROs or SIPs 
registered with the Commission pursuant to proposed Rule 614, and would 
be responsible for collecting, consolidating, and disseminating 
consolidated market data to the public. Self-aggregators would be 
brokers or dealers that elect to collect and generate consolidated 
market data for their own internal use.
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    \28\ The Commission is proposing to include competing 
consolidators in the definition of ``SCI entities;'' therefore, 
competing consolidators would be subject to the requirements of 
Regulation SCI. See Rule 1000(a) of Regulation SCI, 17 CFR 
242.1000(a). See Securities Exchange Act Release No. 73639 (Nov. 19, 
2014), 79 FR 72252 (Dec. 5, 2014) (``Regulation SCI Adopting 
Release''). See also infra Section IV.B.2(f).
---------------------------------------------------------------------------

    Non-SRO competing consolidators would be required to register with 
the Commission.\29\ All competing consolidators, SRO and non-SRO, would 
be subject to appropriate standards with respect to the promptness, 
accuracy, reliability, and fairness of their consolidated market data 
distribution. While self-aggregators would not be subject to a separate 
registration requirement, as registered broker-dealers, they would be 
subject to the full broker-dealer regulatory regime.\30\ To support 
this proposed decentralized consolidation model, each SRO would be 
required to make all of its own data that is necessary to generate 
consolidated market data available to competing consolidators and self-
aggregators directly from its data center, and in the same manner and 
using the same methods, including all methods of access and the same 
format, as it makes its proprietary market data products available to 
any market participant.
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    \29\ As discussed further below, only those entities that are 
SIPs would be required to register with the Commission pursuant to 
proposed Rule 614 and proposed Form CC. SROs that wish to act as 
competing consolidators would not be required to register pursuant 
to proposed Rule 614 and proposed Form CC but would be required to 
comply with the competing consolidator obligations set forth in 
proposed Rule 614(d). See infra Section IV.B.
    \30\ See infra Section IV.B.3.
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    Under the proposed structure, the effective national market system 
plan(s) would continue to serve an important role in the national 
market system by, among other things, governing the SROs' provision of 
the data necessary to generate consolidated market data, including 
setting fees for the provision of such SRO data to competing 
consolidators and self-aggregators.\31\ The Commission preliminarily 
believes that, by introducing competition and market forces into the 
collection, consolidation, and dissemination process, the decentralized 
consolidation model would help ensure that consolidated market data is 
delivered to market participants in a more timely, efficient, and cost-
effective manner than the current centralized consolidation model.\32\
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    \31\ See Proposed Governance Order, supra note 8.
    \32\ See infra Section IV.B.
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II. Current Market Data Infrastructure Under Regulation NMS and the 
Equity Data Plans

A. Consolidated Market Data and Proprietary Data

    Today, in accordance with the centralized consolidation model, the 
SROs act jointly pursuant to the three Equity Data Plans to collect, 
consolidate, and publicly disseminate real-time, NMS information.\33\ 
For each NMS stock, the SROs are required, pursuant to Regulation NMS 
and the Equity Data Plans, to provide certain quotation \34\ and 
transaction \35\ data to the designated exclusive SIP for each Equity 
Data Plan.\36\ Each exclusive SIP collects, consolidates, and 
disseminates NMS information to the public on the consolidated tape, 
described below. The NMS information that is consolidated and made 
available under the Equity Data Plans generally includes: ``(1) The 
price, size, and exchange of the last sale; (2) each exchange's current 
highest bid and lowest offer, and the shares available at those prices; 
and (3) the national best bid and offer (i.e., the highest bid and 
lowest offer currently available on any exchange).'' \37\ In general, 
these data elements form what historically has commonly been referred 
to as ``core data.''
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    \33\ See supra note 13.
    \34\ See Rule 602 of Regulation NMS, 17 CFR 242.602.
    \35\ See Rule 601 of Regulation NMS, 17 CFR 242.601.
    \36\ Rule 603(b) of Regulation NMS provides that ``the 
dissemination of all consolidated information for an individual NMS 
stock'' shall be through a single plan processor (i.e., exclusive 
SIP). 17 CFR 242.603(b).
    \37\ See In the Matter of the Application of Bloomberg L.P., 
Securities Exchange Act Release No. 83755 at 3 (July 31, 2018) 
(``Bloomberg Decision''), available at https://www.sec.gov/litigation/opinions/2018/34-83755.pdf; accord In the Matter of the 
Application of Sec. Indus. & Fin. Markets Ass'n for Review of Action 
Taken by Nyse Arca, Inc., & Nasdaq Stock Mkt. LLC, Securities 
Exchange Act Release No. 84432 (Oct. 16, 2018) (``In the Matter of 
the Application of SIFMA'') (citing NetCoalition v. SEC., 615 F.3d 
525, 529 (DC Cir. 2010)); Securities Exchange Act Release No. 87193 
(Oct. 1, 2019), 84 FR 54794, 54795 (Oct. 11, 2019) (``Effective on 
Filing Proposal'').
---------------------------------------------------------------------------

    In addition to disseminating core data, the exclusive SIPs collect, 
calculate, and disseminate certain regulatory data, including 
information required by the NMS Plan to Address Extraordinary Market 
Volatility (``LULD Plan''),\38\ information relating to regulatory 
halts and market-wide circuit breakers (``MWCBs''),\39\ and information 
regarding short sale circuit breakers pursuant to Rule 201.\40\ The 
exclusive SIPs also collect and disseminate other NMS stock data and 
disseminate certain administrative messages.\41\ For purposes

[[Page 16731]]

of this release, these existing market data elements, together with the 
historical ``core data'' described above, are referred to as ``SIP 
data.''
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    \38\ See Securities Exchange Act Release Nos. 85623 (Apr. 11, 
2019), 84 FR 16086 (Apr. 17, 2019) (approving LULD Plan on a 
permanent basis); 67091 (May 31, 2012), 77 FR 33498 (June 6, 2012) 
(approving LULD Plan, as modified by Amendment No. 1, on a pilot 
basis); Limit Up Limit Down Plan: Overview, available at https://www.luldplan.com/ (last accessed Dec. 16, 2019).
    \39\ See Securities Exchange Act Release No. 67090 (May 31, 
2012), 77 FR 33531 (June 6, 2012) (SR-BATS-2011-038; SR-BYX-2011-
025; SR-BX-2011-068; SR-CBOE-2011-087; SR-C2-2011-024; SR-CHX-2011-
30; SR-EDGA-2011-31; SR-EDGX-2011-30; SR-FINRA-2011-054; SR-ISE-
2011-61; SR-NASDAQ-2011-131; SR-NSX-2011-11; SR-NYSE-2011-48; SR-
NYSEAmex-2011-73; SR-NYSEArca-2011-68; SR-Phlx-2011-129).
    \40\ See Rule 201(b)(3) of Regulation SHO, 17 CFR 242.201(b)(3).
    \41\ The exclusive SIPs also provide other data regarding NMS 
stocks pursuant to SRO rules that are described in the Equity Data 
Plans' technical specifications, such as data relating to retail 
liquidity programs, market and settlement conditions, and the 
financial condition of the issuer. In addition, the Nasdaq UTP SIP 
separately provides Over-the-Counter Bulletin Board (``OTCBB'') 
data, and the CTA Plan allows participants to use the CTA/CQ SIP to 
disseminate last sale prices for corporate bonds and information 
about indices.
---------------------------------------------------------------------------

    The Equity Data Plans set the terms for the operation of the 
exclusive SIPs.\42\ There are two exclusive SIPs, each of which is 
physically located in a different data center. The exclusive SIP for 
the CTA and CQ Plans, which covers Tape A (i.e., securities listed on 
the New York Stock Exchange (``NYSE'')) and Tape B (i.e., securities 
listed on exchanges other than NYSE or Nasdaq),\43\ is located in 
Mahwah, New Jersey (``CTA/CQ SIP''), while the Nasdaq UTP Plan 
exclusive SIP, which covers Tape C (i.e., Nasdaq-listed securities), is 
located in Carteret, New Jersey (``Nasdaq UTP SIP''). Tapes A, B, and C 
are commonly referred to as the ``consolidated tapes.''
---------------------------------------------------------------------------

    \42\ See supra note 20. The exclusive SIPs are the plan 
processors for the Equity Data Plans. The Securities Industry 
Automation Corporation (``SIAC''), a wholly owned, indirect 
subsidiary of Intercontinental Exchange (``ICE''), of which the NYSE 
is also a subsidiary, is the plan processor for Tapes A and B; 
Nasdaq is the plan processor for Tape C.
    \43\ Tape B includes securities listed on exchanges other than 
NYSE or Nasdaq, including Cboe, NYSE Arca, and NYSE American.
---------------------------------------------------------------------------

    The exchanges' primary data centers are in four different physical 
locations, namely Mahwah, Carteret, Secaucus, and Weehawken, New 
Jersey, and they all have back-up data centers in Chicago.\44\ Broker-
dealers may report transactions effected otherwise than on an exchange 
(i.e., ``over-the-counter'' or ``OTC'') to trade reporting facilities 
(``TRFs''), which are facilities of FINRA. There are currently three 
active TRFs: FINRA/Nasdaq TRF in Carteret, FINRA/Nasdaq TRF in Chicago, 
and FINRA/NYSE TRF in Mahwah.\45\
---------------------------------------------------------------------------

    \44\ See NYSE Trader Update: NYSE and NYSE MKT Equity Emergency 
Procedures and New DR Plans (Sept. 9, 2016), available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_and_NYSE_MKT_DR_Trader_Update_Final.pdf; UTP Plan 
Administration Data Policies (Oct. 2018), available at https://www.utpplan.com/DOC/Datapolicies.pdf; NYSE Chicago Disaster Recovery 
FAQs (July 2019), available at https://www.nyse.com/publicdocs/nyse/markets/nyse-chicago/NYSE_Chicago_Disaster_Recovery_FAQs.pdf; Cboe: 
US Equities/Options Connectivity Manual, Version 10.0.0 (Oct. 7, 
2019), available at https://cdn.cboe.com/resources/membership/US_Equities_Options_Connectivity_Manual.pdf; Securities Exchange Act 
Release No. 78101 (June 17, 2016), 81 FR 41142, 41154 (June 23, 
2016).
    \45\ See FINRA, Trade Reporting Facility (TRF), available at 
https://www.finra.org/filing-reporting/trade-reporting-facility-trf 
(last accessed Jan. 22, 2020). As of October 2019, the FINRA/Nasdaq 
TRF in Carteret handled approximately 30% of the share volume in OTC 
reported transactions. See Cboe Global Markets, U.S. Equities Market 
Volume Summary (month-to-date), available at https://markets.cboe.com/us/equities/market_share/ (last accessed Oct. 21, 
2019).
---------------------------------------------------------------------------

    With this centralized consolidation model, each exchange and FINRA 
must first transmit its quotation and transaction information \46\ from 
its own data center to the appropriate exclusive SIP's data center for 
consolidation, at which point SIP data is then further transmitted to 
market data end-users, which are often located in other data centers. 
The SROs today typically transmit their market data through fiber optic 
cables to the exclusive SIPs and, in the case of the CTA/CQ SIP, 
through infrastructure owned and mandated by the NYSE.\47\
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    \46\ See supra notes 34-35 and accompanying text.
    \47\ The NYSE operates the CTA/CQ SIP and has required that 
access to the CTA/CQ SIP be through the use of the NYSE's IP local 
area network. The NYSE represents that this access requirement was 
mandated due to the IP network's security, resiliency, and 
redundancy. See Securities Exchange Act Release No. 86865 (Sept. 4, 
2019), 84 FR 47592, 47594, n.12 (Sept. 10, 2019) (``NYSE Low-Latency 
SIP Filing''). See also Consolidated Tape System (CTS) Participant 
Input Binary Specification, 60, available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_INPUT_SPECIFICATION.pdf, and Consolidated Quotation 
System (CQS) Participant Input Binary Specification, 42, available 
at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CQS_BINARY_INPUT_SPECIFICATION.pdf (both depicting that the 
participants of those plans use ICE Data Services' Secure Financial 
Transaction Infrastructure (``SFTI'') network to transmit data to 
those exclusive SIPs). SFTI provides connectivity to the individual 
ICE and NYSE Group markets including NYSE and NYSE Arca equities. 
SFTI also provides connectivity to the data center for the CTA and 
CQ Plans in Mahwah.
---------------------------------------------------------------------------

    In addition to the provision of SIP data pursuant to the Equity 
Data Plans, the national securities exchanges separately sell their 
individual proprietary market data products, which include the SIP data 
elements as well as a variety of additional data elements.\48\ As noted 
above, the proprietary DOB products are generally characterized as 
fast, low-latency products designed for automated trading systems that 
include additional content.\49\ In addition to SIP data, proprietary 
DOB products typically include odd-lot quotations; orders at prices 
above and below the best prices (i.e., depth of book data); and 
information about orders participating in auctions, including auction 
order imbalances.\50\
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    \48\ In adopting Regulation NMS in 2005, the Commission 
determined not to require that DOB information be included in core 
data, reasoning that investors who needed DOB information would be 
able to obtain such information from markets or third-party vendors. 
See Regulation NMS Adopting Release, supra note 10, at 37567. In 
making that determination, the Commission stated that this would be 
``a competition-driven outcome [that] would benefit investors and 
the markets in general.'' See id. at 37530.
    \49\ In contrast, proprietary TOB products are generally limited 
in content, such as the exchange's top of book quotation information 
and transaction information and are designed largely for the non-
automated segment of the market (e.g., retail or non-professional 
investors and wealth managers that access market data visually). But 
see CBOE One Feed Specification, CBOE, available at https://cdn.cboe.com/resources/membership/Cboe_US_Equities_Cboe_One_Feed_Specification.pdf (highlighting that 
CBOE offers a non-automated product with a five-level depth of book 
option).
    \50\ See, e.g., Nasdaq TotalView and NYSE Integrated.
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    In addition to proprietary DOB products, the exchanges offer a 
variety of connectivity options, such as co-location at primary data 
centers, fiber optic connectivity, wireless connectivity, and point-of-
presence connectivity at third-party data centers.\51\ Typically, the 
data for proprietary DOB products is transmitted directly from each 
exchange to the data center of the subscriber, where the subscriber's 
broker-dealer or vendor (or the subscriber itself) privately may 
consolidate such data with the proprietary data of the other exchanges. 
Furthermore, for many market participants, proprietary data is 
transmitted using wireless connectivity (often provided by the 
exchanges), such as microwave or laser technology,\52\ that allows 
faster data transmission than the fiber optic cables that are typically 
used by the exclusive SIPs for the purposes of transmitting SIP data. 
The exchanges charge fees for these proprietary data products,\53\ as 
well as for each of their connectivity options for co-location (e.g., 
physical ports, cross-connects, and field programmable gate array 
(``FPGA'') services) and for communications services providing 
connectivity between data centers (e.g., microwave and fiber optics). 
In the context of the Division of Trading and Markets' Roundtable on 
Market Data and Market Access in October 2018, some market participants 
commented that, in their view, they need the more content-rich 
proprietary data feeds and low latency connectivity to provide best 
execution to their clients

[[Page 16732]]

and to competitively participate in the markets.\54\
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    \51\ The exchanges have an inherent competitive advantage in the 
provision of connectivity services within exchange facilities, while 
connectivity options made available elsewhere, such as point-of-
presence connectivity at third-party data centers, are fully 
competitive.
    \52\ See, e.g., Nasdaq, Trade Management Services: Wireless 
Connectivity Suite, available at https://n.nasdaq.com/WirelessConnectivitySuite (last accessed Dec. 16, 2019); ICE Global 
Network, New Jersey Metro, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last 
accessed Dec. 16, 2019).
    \53\ See, e.g., Letter to Vanessa Countryman, Secretary, 
Commission, from Robert Toomey, Managing Director and Associate 
General Counsel, SIFMA, 1-2 (Jan. 13, 2020) (stating that exchange 
market data products are ``complementary'' and result in ``not only 
supra-competitive prices, but supra-monopoly prices'').
    \54\ See, e.g., Roundtable Day One Transcript at 27 (Doug Cifu, 
Virtu Financial). See also Sections III.C.1(c), III.C.2(c), and 
III.C.3(b).
---------------------------------------------------------------------------

B. NMS Regulatory Framework

    The Commission exercised its authority under Section 11A of the 
Exchange Act to facilitate the collection, consolidation, and 
dissemination of NMS information primarily by adopting five rules under 
Regulation NMS.\55\
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    \55\ See also supra Section I (discussing Section 11A of the 
Exchange Act).
---------------------------------------------------------------------------

    Rule 601 of Regulation NMS governs the dissemination of transaction 
reports \56\ and last sale data \57\ with respect to transactions in 
NMS stocks. In particular, Rule 601 requires each national securities 
exchange and association to file a transaction reporting plan with the 
Commission that, among other things, must specify the manner of 
collecting, processing, sequencing, making available, and disseminating 
transaction reports and last sale data.\58\
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    \56\ Rule 600(b)(84) defines a transaction report as ``a report 
containing the price and volume associated with a transaction 
involving the purchase or sale of one or more round lots of a 
security.'' 17 CFR 242.600(b)(84).
    \57\ Rule 600(b)(34) defines last sale data as ``any price or 
volume data associated with a transaction.'' 17 CFR 242.600(b)(34).
    \58\ 17 CFR 242.601(a)(2).
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    Rule 602 of Regulation NMS governs the dissemination of quotations 
in NMS securities. Specifically, under Rule 602 each national 
securities exchange and association is required to collect, process, 
and make available certain quotation data to vendors,\59\ including the 
best bid, best offer,\60\ quotation sizes,\61\ and aggregate quotation 
sizes.\62\
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    \59\ Rule 600(b)(87) defines a vendor as ``any securities 
information processor engaged in the business of disseminating 
transaction reports, last sale data, or quotations with respect to 
NMS securities to brokers, dealers, or investors on a real-time or 
other current and continuing basis, whether through an electronic 
communications network, moving ticker, or interrogation device.'' 17 
CFR 242.600(b)(87).
    \60\ Rule 600(b)(8) defines best bid and best offer as ``the 
highest priced bid and the lowest priced offer.'' 17 CFR 
242.600(b)(8).
    \61\ Under Rule 600(b)(67), quotation size, ``when used with 
respect to a responsible broker's or dealer's bid or offer for an 
NMS security, means: (i) [T]he number of shares (or units of 
trading) of that security which such responsible broker or dealer 
has specified, for purposes of dissemination to vendors, that it is 
willing to buy at the bid price or sell at the offer price 
comprising its bid or offer, as either principle or agent; or (ii) 
[i]n the event such responsible broker or dealer has not so 
specified, a normal unit of trading for that NMS security.'' 17 CFR 
242.600(b)(67).
    \62\ Rule 600(b)(2) defines aggregate quotation size as ``the 
sum of the quotation sizes of all responsible brokers or dealers who 
have communicated on any national securities exchange bids or offers 
for an NMS security at the same price.'' 17 CFR 242.600(b)(2).
---------------------------------------------------------------------------

    Rule 603 of Regulation NMS governs the distribution, consolidation, 
and display of information with respect to quotations for and 
transactions in NMS stocks. Specifically, Rule 603(a)(1) requires any 
exclusive processor,\63\ or any broker or dealer with respect to 
information for which it is the exclusive source, that distributes 
information with respect to quotations for or transactions in an NMS 
stock to a securities information processor \64\ to do so on terms that 
are fair and reasonable. Rule 603(a)(2) requires any national 
securities exchange, national securities association, broker, or dealer 
that distributes information with respect to quotations for or 
transactions in an NMS stock to a securities information processor, 
broker, dealer, or other persons to do so on terms that are not 
unreasonably discriminatory.\65\
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    \63\ See supra note 20.
    \64\ Id.
    \65\ See 17 CFR 242.603(a)(2). Proprietary data cannot be made 
available sooner than current core data is transmitted to the 
exclusive SIPs. See Regulation NMS Adopting Release, supra note 10, 
at 37567 (``[I]ndependently distributed data could not be made 
available on a more timely basis than core data is made available to 
a Network processor. Stated another way, adopted Rule 603(a) 
prohibits an SRO or broker-dealer from transmitting data to a vendor 
or user any sooner than it transmits the data to a Network 
processor.'').
---------------------------------------------------------------------------

    Rule 603(b) requires each national securities exchange and 
association to act jointly pursuant to one or more NMS plans to 
disseminate consolidated information, including an NBBO,\66\ on 
quotations for and transactions in NMS stocks.\67\ Further, the rule 
states that such plan or plans shall provide for the dissemination of 
all consolidated information for an individual NMS stock through a 
single plan processor.
---------------------------------------------------------------------------

    \66\ Rule 600(b)(43) defines national best bid and national best 
offer (``NBBO'') as ``with respect to quotations for an NMS 
security, the best bid and best offer for such security that are 
calculated and disseminated on a current and continuing basis by a 
plan processor pursuant to an effective national market system plan 
. . .'' 17 CFR 242.600(b)(43).
    \67\ 17 CFR 242.603(b).
---------------------------------------------------------------------------

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

C. Other Regulatory Data

    As noted above, certain regulatory data is required--pursuant to 
Commission and exchange rules and NMS plans--to be generated by primary 
listing exchanges and the exclusive SIPs and included in the current 
SIP data. The availability of this data is critical to allowing market 
participants to understand when and where permissible trading may 
occur.
1. Regulation SHO
    Rule 201(b)(1)(i) of Regulation SHO \68\ requires a trading center 
\69\ to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the execution or display of a 
short sale order of a covered security \70\ at a price that is less 
than or equal to the current national best bid,\71\ if the price of 
that covered security decreases by 10% or more from the covered 
security's closing price, as determined by the listing market \72\ for 
the covered security as of the end of regular trading hours \73\ on the 
prior day (the ``Short Sale Circuit Breaker''). The rule requires that 
the trading center impose the Short Sale Circuit Breaker for the 
remainder of the day and the following day when a national best bid for 
the covered security is calculated and disseminated on a current and 
continuing basis by a ``plan processor'' \74\ pursuant to an effective 
national market system plan.\75\
---------------------------------------------------------------------------

    \68\ 17 CFR 242.201(b)(1)(i).
    \69\ Rule 201(a)(9) states the term trading center shall have 
the same meaning as in 242.600(b)(82). 17 CFR 242.201(a)(9).
    \70\ Rule 201(a)(1) states the term covered security shall mean 
any NMS stock as defined in 242.600(b)(48). 17 CFR 242.201(a)(1).
    \71\ Rule 201(a)(4) states the term national best bid shall have 
the same meaning as in 242.600(b)(43). 17 CFR 242.201(a)(4).
    \72\ Rule 201(a)(3) states the term listing market shall have 
the same meaning as the term ``listing market'' as defined in the 
effective transaction reporting plan for the covered security. Rule 
201(a)(2) states the term effective transaction reporting plan for a 
covered security shall have the same meaning as in 242.600(b)(23). 
17 CFR 242.201(a)(2)-(3).
    \73\ Rule 201(a)(7) states the term regular trading hours shall 
have the same meaning as in 242.600(b)(68). 17 CFR 242.201(a)(7).
    \74\ Rule 201(a)(6) states the term plan processor shall have 
the same meaning as in 242.600(b)(59). 17 CFR 242.201(a)(6).
    \75\ Rule 201(c) provides an exception for a broker-dealer that 
has adopted and enforces its own such policies and procedures. More 
specifically, if such broker-dealer identifies a short sale order as 
being at a price above the current national best bid at the time of 
submission, such broker-dealer may mark the order as ``short 
exempt.'' However, such broker-dealer must establish, maintain, and 
enforce written policies and procedures reasonably designed to 
prevent incorrect identification of orders for purposes of the 
``short exempt'' exception. Policies and procedures designed to 
create the appearance of technical compliance with Rule 201 but 
which otherwise are designed to circumvent, or assist others in 
circumventing, the Rule, would not be compliant. For example, any 
arrangement between market participants in which the execution price 
appears to be compliant with the Short Sale Circuit Breaker, but 
also includes a post-trade payment (i.e., fee, commission, or other 
payment) that effectively renders the execution price non-compliant 
with the Short Sale Circuit Breaker, would not be consistent with 
the Rule's requirements. Further, in the Adopting Release for Rule 
201, the Commission stated that, ``any conduct by trading centers, 
or other market participants, that facilitates short sales in 
violation of Rule 201 could also lead to liability for aiding and 
abetting or causing a violation of Regulation SHO, as well as 
potential liability under the anti-fraud and anti-manipulation 
provisions of the Federal securities laws, including Sections 9(a), 
10(b), and 15(c) of the Exchange Act, and Rule 10b-5 thereunder.'' 
Securities Exchange Act Release No. 61595 (Feb. 26, 2010), 75 FR 
11232, 11260 (Mar. 10, 2010).

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[[Page 16733]]

    Rule 201(b)(3) of Regulation SHO provides that the determination 
regarding whether the Short Sale Circuit Breaker has been triggered 
shall be made by the listing market for the covered security, and, if 
the Short Sale Circuit Breaker has been triggered, the listing market 
shall immediately notify the ``single plan processor'' (i.e., the 
exclusive SIP responsible for consolidation of information for the 
covered security pursuant to Section 242.603(b)). The exclusive SIP 
must then disseminate this information.
2. Limit-Up Limit-Down Plan
    The LULD Plan \76\ sets forth procedures that provide for market-
wide limit up-limit down (``LULD'') requirements to prevent trades in 
individual NMS stocks from occurring outside of specified price bands 
and reduce the negative impacts of extraordinary volatility in NMS 
stocks caused by momentary gaps in liquidity or erroneous trades. These 
price bands are coupled with the provision of trading pauses to 
accommodate more fundamental price moves.
---------------------------------------------------------------------------

    \76\ See Securities Exchange Act Release Nos. 85623, supra note 
38; 67091, supra note 38.
---------------------------------------------------------------------------

    Under the LULD Plan, the applicable exclusive SIP for an NMS stock 
is required to perform certain key functions, including: (1) 
Calculating the applicable price bands,\77\ (2) disseminating flags 
identifying quotes that are not executable,\78\ (3) disseminating flags 
identifying quotes that are in a ``limit state,'' \79\ (4) 
disseminating trading pause messages received from the primary listing 
exchanges,\80\ and (5) disseminating reopening auction information from 
the primary listing exchanges.\81\
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    \77\ During regular trading hours for an NMS stock, the 
exclusive SIP for that stock uses a reference price, which it also 
calculates, to calculate and disseminate to the public a lower and 
upper price band. The reference price for each NMS stock equals the 
arithmetic mean price of eligible reported transactions for the NMS 
stock over the immediately preceding five-minute period (see LULD 
Plan Section V(A)(1)) and must remain in effect for at least 30 
seconds. See LULD Plan Section V(A)(2). The exclusive SIP calculates 
a pro-forma reference price on a continuous basis during regular 
trading hours, and when that price has moved by 1% or more from the 
reference price currently in effect, the pro-forma reference price 
becomes the reference price, and the plan processor disseminates new 
price bands based on the new reference price. See LULD Plan Section 
V(A)(2). The price bands for an NMS stock are calculated by applying 
the appropriate percentage parameter for the stock, specified by the 
LULD Plan, to the stock's reference price, with the lower price band 
as a percentage parameter below the reference price and the upper 
price band as a percentage parameter above the reference price. See 
LULD Plan Section V(A)(1).
    \78\ When a national best bid is below the lower price band or a 
national best offer is above the upper price band for an NMS stock, 
the exclusive SIP is required to disseminate the national best bid 
or national best offer with an appropriate flag identifying it as 
non-executable. See LULD Plan Section VI(A)(2).
    \79\ When a national best bid is equal to the lower price band 
or a national best offer is equal to the upper price band for an NMS 
stock, the exclusive SIP is required to distribute the national best 
bid or national best offer with an appropriate flag identifying it 
as a ``Limit State Quotation.'' See id.; LULD Plan Section VI(B)(2).
    \80\ If trading for an NMS stock does not exit a limit state 
within 15 seconds of entry during regular trading hours, then the 
primary listing exchange is required to declare a trading pause in 
that NMS stock and notify the exclusive SIP. See LULD Plan Section 
VII(A)(1). The exclusive SIP is required to disseminate trading 
pause information to the public. See LULD Plan Section VII(A)(3).
    \81\ Five minutes after declaring a trading pause for an NMS 
stock, if the primary listing exchange has not declared a regulatory 
halt, the primary listing exchange is required to attempt to reopen 
trading using its established reopening procedures. The exclusive 
SIP publishes the following information that the primary listing 
exchange provides to the exclusive SIP in connection with such 
reopening: Auction reference price; auction collars; and number of 
extensions to the reopening auction. See LULD Plan Section 
VII(B)(1). In addition, the applicable exclusive SIP for an NMS 
stock is required to receive and disseminate to the public 
information from primary listing exchanges regarding their inability 
to reopen trading due to a systems or technology issue. 
Specifically, the primary listing exchange is required to notify the 
exclusive SIP if it is unable to reopen trading in an NMS stock due 
to a systems or technology issue and if it has not declared a 
regulatory halt. The exclusive SIP is required to disseminate this 
information to the public. See LULD Plan Section VII(B)(2).
---------------------------------------------------------------------------

3. Market-Wide Circuit Breakers
    All of the equity exchanges and FINRA have adopted uniform rules, 
on a pilot basis, relating to MWCBs.\82\ The purpose of an MWCB is to 
address extraordinary market-wide volatility by halting trading across 
the markets when price declines reach certain specified levels.\83\ 
These levels are reached when the S&P 500 Index declines a specified 
percentage from the prior day's closing price. Currently, there are 
three thresholds: 7% (Level 1), 13% (Level 2), and 20% (Level 3). A 
Level 1 or Level 2 market decline after 9:30 a.m. ET and before 3:25 
p.m. ET would halt the equity and options markets for 15 minutes, while 
Level 1 and 2 declines at or after 3:25 p.m. ET would not halt trading. 
A Level 3 market decline at any time during the trading day would halt 
equity and options trading until the primary listing exchange opens the 
next trading day.
---------------------------------------------------------------------------

    \82\ See supra note 39.
    \83\ Id.
---------------------------------------------------------------------------

    The primary listing exchanges and the exclusive SIPs work together 
to implement the MWCB rules. The CTA/CQ SIP monitors the S&P 500 Index 
throughout the trading day and would send a message to the primary 
listing exchanges and the Nasdaq UTP SIP in the event a Level 1, Level 
2, or Level 3 circuit breaker was triggered. Upon receipt of such a 
message, the applicable primary listing exchange would impose a 
regulatory halt by sending the appropriate message to the applicable 
exclusive SIP, which would then disseminate the regulatory halt message 
to market participants. Trade resumption messages would be generated at 
the appropriate time by the primary listing exchange and similarly 
disseminated to market participants through the applicable exclusive 
SIP.
4. Odd-Lot Transaction Reports and Aggregated Odd-Lot Orders
    As discussed further below, while Regulation NMS only requires NMS 
stock quotation and transaction data in round lots to be reported to 
the exclusive SIPs, SRO rules and the Equity Data Plans include some 
odd-lot information in the SIP data.\84\ Pursuant to exchange rules, 
odd-lot quotations that, when aggregated, equal or exceed a round lot 
are reported to the exclusive SIPs as round lots.\85\ Moreover, the 
Equity Data Plans were amended in 2013 to include odd-lot transaction 
reports in the SIP data.\86\
---------------------------------------------------------------------------

    \84\ See infra Section III.C.1.
    \85\ See infra notes 159-160 and accompanying text.
    \86\ See infra notes 160-161 and accompanying text.
---------------------------------------------------------------------------

III. Proposed Enhancements to NMS Information

A. Introduction

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

[[Page 16734]]

bid or protected offer.'' The Commission preliminarily believes that 
these amendments will enhance the availability and usefulness of the 
NMS information that is required to be provided under the rules of the 
national market system for a wide variety of market participants. The 
Commission also preliminarily believes that expanding the content of 
NMS information would help to reduce information asymmetries between 
market participants who rely upon current SIP data and those who 
purchase proprietary data feeds from the national securities 
exchanges.\87\
---------------------------------------------------------------------------

    \87\ See supra note 26.
---------------------------------------------------------------------------

    The Commission's objectives in expanding and modernizing the 
content of NMS information that would be collected, consolidated, and 
disseminated under the rules of the national market system reflect that 
different market participants and different trading applications have 
different needs for NMS information. For example, the needs of some 
retail investors that visually consume NMS information (e.g., humans 
looking at quotes on a screen) differ from those of institutional 
trading systems that electronically consume NMS information (e.g., 
algorithmic trading systems or smart order routers (``SORs'').\88\ This 
proposal to expand and modernize the content of NMS information is not 
intended solely to meet the needs of a narrow segment of the NMS 
information market; rather, the proposal is intended to address the 
needs of a broad cross-section of market participants.\89\ The 
Commission intends for the NMS information to promote both fair and 
efficient markets, be useful to a broad cross-section of market 
participants, reduce information asymmetries, and facilitate best 
execution.\90\
---------------------------------------------------------------------------

    \88\ SORs employ the use of algorithms (e.g., by broker-dealers 
on behalf of a client) designed to optimally send parts of an order 
(child orders) to various market centers (e.g., exchange and ATSs) 
so as to optimally access market liquidity while minimizing 
execution costs.
    \89\ This proposal is also not designed to expand the content of 
NMS information to meet all needs of all market participants; the 
proprietary data market, which includes information that is not 
included in the proposed definition of core data, is expected to 
continue to fulfill additional needs beyond those that are met by 
the proposed definition of core data.
    \90\ While this proposal is intended to facilitate best 
execution, the Commission is not specifying minimum data elements 
needed to achieve best execution.
---------------------------------------------------------------------------

B. Proposed Definition of ``Consolidated Market Data''

    The Commission is proposing to amend Rule 600(b) to add a 
definition of ``consolidated market data'' that would include 
information that is currently disseminated by the exclusive SIPs as 
well as additional new information. Specifically, under proposed Rule 
600(b)(19), consolidated market data would be defined as the following 
data, consolidated across all national securities exchanges and 
national securities associations: (1) Core data; (2) regulatory data; 
(3) administrative data; (4) exchange-specific program data; and (5) 
additional regulatory, administrative, or exchange-specific program 
data elements defined as such pursuant to the effective national market 
system plan or plans required under Rule 603(b).
    As discussed below, the Commission proposes to add definitions of 
the terms ``core data,'' ``regulatory data,'' ``administrative data,'' 
and ``exchange-specific program data.'' The proposed definition of core 
data would include those data elements that are currently considered 
core data \91\ as well as reflect additional information that would be 
required to be collected, consolidated, and disseminated under 
Regulation NMS, including certain depth of book, odd-lot, and auction 
information, which would improve the usefulness of core data for market 
participants. The proposed definition of regulatory data would specify 
certain regulatory messages that must be provided under Regulation NMS, 
which would facilitate compliance with Commission, NMS plan, or SRO 
requirements. The proposed definition of administrative data would 
refer to the administrative or technical messages that are currently 
required by the Equity Data Plans, or their technical specifications, 
and would facilitate the efficient utilization of proposed consolidated 
market data. The proposed definition of ``exchange-specific program 
data'' would include information currently included in SIP data related 
to retail liquidity programs that certain exchanges have established, 
as well as information related to new programs that individual 
exchanges may develop in the future,\92\ but only if the effective 
national market system plan or plans required under Rule 603(b) are 
amended to include data elements related to any such new programs in 
consolidated market data.\93\
---------------------------------------------------------------------------

    \91\ See supra note 37 and accompanying text.
    \92\ Any new exchange programs would have to be filed with the 
Commission pursuant to Section 19(b) of the Exchange Act, 15 U.S.C. 
78s(b), and Rule 19b-4 thereunder, 17 CFR 240.19b-4.
    \93\ See infra Section III.F.
---------------------------------------------------------------------------

    Finally, the Commission proposes to include a provision that would 
allow for additional regulatory, administrative, or exchange-specific 
program data elements \94\ to be included within ``consolidated market 
data'' pursuant to amendments to the effective national market system 
plan(s).\95\ The Commission preliminarily believes that this provision 
would help to ensure that additional information in these specific 
categories may be proposed to be included in consolidated market data 
in the future in response to market and regulatory developments and 
that such additional information would be required to be made available 
by the SROs to competing consolidators and self-aggregators, and as a 
result, competing consolidators would be required to, among other 
things, calculate and generate consolidated market data that includes 
this additional information. The Commission preliminarily believes that 
new administrative, regulatory, and exchange-specific program data 
elements may emerge from time to time, and that the proposed definition 
of consolidated market data should provide flexibility for such data 
elements to be included by NMS plan amendment. This provision would 
also maintain the current practice whereby SIP data of this type can be 
expanded through the NMS plan amendment process.
---------------------------------------------------------------------------

    \94\ Amendments to the proposed definition of core data would 
only be able to be made by the Commission. To the extent that there 
are changes in the national market system, such as, in the provision 
of trading services, that suggest that the definition of core data 
should be updated, the Commission could exercise its authority to 
propose amendments to the proposed definition. See, e.g., Section 
11A(c)(1)(B) of the Exchange Act which provides that the Commission 
shall prescribe rules as necessary or appropriate in the public 
interest, for the protection of investors or otherwise to assure the 
prompt, accurate, reliable, and fair collection, processing, 
distribution, and publication of information with respect to NMS 
information and the fairness and usefulness of the form and content 
of such information.
    \95\ Pursuant to Rule 608(a)(1), any two or more SROs, acting 
jointly, may propose an amendment to an NMS plan. 17 CFR 
242.608(a)(1). The Equity Data Plans also have provisions regarding 
the proposal of amendments to the Plans, which currently require a 
vote of the Plans' operating committee. See CTA Plan, supra note 13, 
at Section IV(b)(i); CQ Plan supra note 13, at Section IV.(c)(i) of 
the CQ Plan; Nasdaq UTP Plan, supra note 13, at Sections IV.C.1.a. 
and XVI.
---------------------------------------------------------------------------

    National market system plans and amendments thereto must be filed 
with, and typically are not effective unless they are approved by, the 
Commission under Rule 608 of Regulation NMS.\96\

[[Page 16735]]

Pursuant to Rule 608(b), the Commission would publish for comment an 
amendment to add new consolidated market data elements, and thereafter, 
the Commission would evaluate any such proposed amendment and approve 
it if the Commission finds the amendment is ``necessary or appropriate 
in the public interest, for the protection of investors and the 
maintenance of fair and orderly markets, to remove impediments to, and 
perfect the mechanisms of, a national market system, or otherwise in 
furtherance of the purposes of the [Exchange] Act.'' \97\
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    \96\ A proposed NMS plan amendment may be put into effect upon 
filing if designated by the sponsors as: ``(i) Establishing or 
changing a fee or other charge collected on behalf of all of the 
sponsors and/or participants in connection with access to, or use 
of, any facility contemplated by the plan or amendment (including 
changes in any provision with respect to distribution of any net 
proceeds from such fees or other charges to the sponsors and/or 
participants); (ii) Concerned solely with the administration of the 
plan, or involving the governing or constituent documents relating 
to any person (other than a self-regulatory organization) authorized 
to implement or administer such plan on behalf of its sponsors; or 
(iii) Involving solely technical or ministerial matters.'' 17 CFR 
242.608(b)(3). As stated above, the Commission has proposed 
amendments to this provision. Effective on Filing Proposal, supra 
note 37 (proposing to rescind the provision of Rule 608 that allows 
a proposed amendment to an effective national market system plan(s) 
to become effective upon filing if the proposed amendment 
establishes or changes a fee or other charge).
    \97\ 17 CFR 242.608(b)(2).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed definition 
of consolidated market data, as well as the other definitions included 
therein, would, by expanding the NMS information that is required to be 
provided under the rules of the national market system, support more 
informed trading and investment decisions by market participants in 
today's markets and facilitate the best execution of customer orders by 
the full range of broker-dealers.\98\ In addition, the proposed 
definition would be referenced in the amendments to Rule 603(b) and 
proposed Rule 614, both of which propose to implement the decentralized 
consolidation model.\99\
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    \98\ As discussed below, the Commission is not requiring broker-
dealers to subscribe to or utilize every component of proposed 
consolidated market data to meet their regulatory obligations. See 
infra notes 306-309 and accompanying text.
    \99\ See infra Sections IV.B.1 and IV.B.2(e)(ii).
---------------------------------------------------------------------------

    The Commission requests comment on the proposed definition of 
consolidated market data under proposed Rule 600(b)(19). Throughout 
this release, we request comment from the points of view of all 
interested parties. With regard to any comments, we note that such 
comments are of greatest assistance to our rulemaking initiative if 
accompanied by supporting data and analysis of the issues addressed in 
those comments.
    In particular, the Commission solicits comment on the following:
    1. Do commenters believe that the Commission should adopt a 
definition of consolidated market data? Why or why not? Should the 
Commission take an alternative approach? Why or why not?
    2. Does the proposed definition of consolidated market data capture 
the market data that would be useful to market participants for trading 
and regulatory compliance purposes? Please explain. Does the proposed 
definition of consolidated market data include any market data that 
should not be included? Please explain. The Commission is seeking input 
from commenters on whether the proposed definition of consolidated 
market data should include additional market data or whether the 
definition should otherwise be modified.
    3. Should the definition of consolidated market data be set forth 
in an effective national market system plan(s) instead of, or in 
addition to, Rule 600(b)? Please explain. Do commenters have views on 
the most appropriate process through which the content of proposed 
consolidated market data should be expanded or modified? Do commenters 
believe that the proposed definition of consolidated market data should 
include a provision stating that additional regulatory, administrative, 
or exchange-specific program data elements can be defined pursuant to 
the effective national market system plan or plans required under 
Section 242.603(b)? Please explain. Should the proposed definition of 
core data be able to be amended through the effective national market 
system plan process (for example, should the term ``core data'' be 
included in proposed Rule 600(b)(19)(v))? Why or why not? Do commenters 
believe that any data elements should not require an amendment to the 
effective national market system plan(s) to be added to consolidated 
market data? Please explain and describe what process would be 
appropriate for adding any such data elements.

C. Proposed Definition of ``Core Data''

    Regulation NMS does not currently define core data. Rather, today, 
core data generally refers to the price, size, and exchange of the last 
sale; each exchange's highest bid and lowest offer (``BBO'') and the 
number of shares available at those prices; and the NBBO.\100\
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    \100\ See supra note 37 and accompanying text.
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    The core data that is provided today by the exclusive SIPs is of 
considerable utility to some market participants for certain 
purposes.\101\ However, it is of limited use to other market 
participants for other purposes (e.g., as the primary data source for 
automated trading systems) because of its limited content. The 
Commission preliminarily believes that the content of current core data 
has not kept pace with market developments. For example, decimalization 
in 2001 improved prices and narrowed spreads but also reduced the size 
of the top of book liquidity that is displayed and disseminated as part 
of current core data.\102\ Further, individual odd-lot quotations, 
especially for stocks with share prices that have risen 
substantially,\103\ have become more important to market participants 
as odd-lot quotations can represent significant amounts of liquidity 
that are not reflected in current core data.\104\ Finally, an 
increasing proportion of total trading volume is executed during 
opening and closing auctions, which are significant liquidity events 
every trading day, but important information about auctions is not 
included within current core data provided by the exclusive SIPs.\105\
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    \101\ For example, current core data includes the NBBO, which is 
useful to market participants for informational purposes and to 
inform trading and investment decisions. See, e.g., Roundtable Day 
One Transcript at 57 (Doug Cifu, Virtu Financial) (``. . . the SIP 
is an eyeball product.''); Roundtable Day One Transcript at 65 
(Mehmet Kinak, T. Rowe Price) (``So the SIP for us is kind of what 
we look at. Obviously, investment decisions are probably made by 
eyeballs and looking at the SIP itself from either our Bloomberg or 
FactSet terminals.''). It is also used as a back-up for automated 
trading systems that otherwise rely on proprietary data feeds from 
the exchanges and to support less sophisticated automated trading 
systems. See, e.g., Roundtable Day One Transcript at 140 (Mark 
Skalabrin, Redline Trading Solutions) (``the SIP . . . has been 
relegated to a backup feed, really. It's a fail-over to the real 
feed you need to do the job.'').
    \102\ See infra notes 276-279.
    \103\ See infra note 162.
    \104\ As explained below, odd-lot quotations are only reflected 
in SIP data to the extent that they are aggregated into round lots 
pursuant to exchange rules. See infra notes 157-158 and accompanying 
text.
    \105\ See infra notes 330-332.
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    Because the content of current core data does not reflect these 
important market developments,\106\ many market participants state that 
they are unable to rely solely on SIP data to trade competitively and 
provide best execution to customer orders in today's markets.\107\ The 
Commission preliminarily believes that the data that is required to be 
collected, consolidated, and disseminated under the rules of the 
national market system is no longer fulfilling the goals of Section 11A 
of the

[[Page 16736]]

Exchange Act.\108\ The Commission is proposing a definition of core 
data that would incorporate the information that is currently provided 
in SIP data as well as additional information, including quotation data 
for smaller-sized orders for higher-priced stocks, certain depth of 
book data, and additional auction information.\109\ As explained below, 
the Commission preliminarily believes that each of the new elements of 
core data, as proposed, would enhance the usefulness of the content of 
the NMS information that is collected, consolidated, and disseminated 
under the rules of the national market system.\110\
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    \106\ As discussed below, the existing centralized consolidation 
model for collecting, consolidating, and disseminating SIP data also 
has not kept pace with the needs of today's investors and market 
participants. See infra Section IV.A.
    \107\ See several of the Roundtable comments summarized below in 
Sections III.C.1, III.C.2, and III.C.3.
    \108\ See supra notes 2-5 and accompanying text.
    \109\ See infra Sections III.C.1-III.C.3 for detailed 
discussions of the proposed definitions of ``round lot,'' ``depth of 
book data,'' and ``auction information.''
    \110\ Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(B).
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    The Commission is proposing to define core data in Rule 600(b) to 
include all of the elements that currently are referred to as core 
data,\111\ as well as the following data elements that are not 
currently provided by the exclusive SIPs: (1) Quotation data for 
smaller-sized orders for higher-priced stocks (pursuant to a new 
definition of ``round lot''), (2) data on certain quotations below the 
best bid or above the best offer (pursuant to a new definition of 
``depth of book data''), and (3) information about orders participating 
in auctions (pursuant to a new definition of ``auction information''). 
As discussed below, certain OTCBB and corporate bond and index data 
that are currently provided by the exclusive SIPs would not be included 
in the proposed definition of core data.\112\ Further, as noted above, 
the proposed term core data is reflected in the proposed definition of 
consolidated market data, which is referenced in proposed Rule 603(b) 
and proposed Rule 614.\113\
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    \111\ See supra note 37 and accompanying text.
    \112\ See infra notes 122-127 and accompanying text.
    \113\ As explained below, pursuant to Rule 603(b), as proposed 
to be amended, national securities exchanges and associations would 
be required to make available to competing consolidators and self-
aggregators, as proposed to be defined, all data necessary to 
generate consolidated market data. See infra Section IV.B.1. 
Competing consolidators would be required to calculate and generate 
consolidated market data and make it available to subscribers. See 
proposed Rule 614(d).
---------------------------------------------------------------------------

    Specifically, under proposed Rule 600(b)(20), core data would be 
defined as the following information with respect to quotations for and 
transactions in NMS stocks: (1) Quotation sizes; (2) aggregate 
quotation sizes; (3) best bid and best offer; (4) national best bid and 
national best offer; (5) protected bid and protected offer; (6) 
transaction reports; (7) last sale data; (8) odd-lot transaction data 
disseminated pursuant to the effective national market system plan or 
plans required under Rule 603(b) as of [date of Commission approval of 
this proposal]; (9) depth of book data; and (10) auction information. 
For purposes of the calculation and dissemination of core data by 
competing consolidators, and the calculation of core data by self-
aggregators, the best bid and best offer, national best bid and 
national best offer, and depth of book data would include odd-lots that 
when aggregated are equal to or greater than a round lot, with such 
aggregation occurring across multiple prices and disseminated at the 
least aggressive price.\114\ Protected quotations, however, would only 
include odd-lots at a single price that when aggregated are equal to or 
greater than 100 shares.\115\
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    \114\ See infra notes 157-158 and accompanying text (discussing 
odd-lot aggregation).
    \115\ Id. A protected quotation is defined as ``a protected bid 
or a protected offer.'' See Rule 600(b)(62) of Regulation NMS, 17 
CFR 242.600(b)(62). A protected bid or protected offer is defined as 
``a quotation in an NMS stock that: (i) [i]s displayed by an 
automated trading center; (ii) [i]s disseminated pursuant to an 
effective national market system plan; and (iii) [i]s an automated 
quotation that is the best bid or best offer of a national 
securities exchange, the best bid or best offer of The Nasdaq Stock 
Market, Inc., or the best bid or best offer of a national securities 
association other than the best bid or best offer of The Nasdaq 
Stock Market, Inc.'' See Rule 600(b)(61) of Regulation NMS, 17 CFR 
242.600(b)(61).
---------------------------------------------------------------------------

    Some of the components of the proposed definition of core data--
namely, quotation sizes, aggregate quotation sizes, BBO, NBBO, 
protected quotations, transaction reports, last sale data, and odd-lot 
transaction data \116\--are already defined in Regulation NMS or are 
currently included in SIP data.\117\ The Commission preliminarily 
believes that these data elements continue to be necessary and useful 
for informed market participation. This baseline information about the 
best quotations and recent transactions across the national market 
system provides the foundation of transparency and price discovery in 
the U.S. securities markets, and the Commission preliminarily believes 
investors and other market participants need it today to make informed 
trading and investment decisions.\118\ Therefore, the Commission 
preliminarily believes that these data elements should be included in 
the definition of core data as proposed.
---------------------------------------------------------------------------

    \116\ See infra notes 159-161 and accompanying text (discussing 
the addition of odd-lot transaction data to SIP data through NMS 
plan amendments approved in 2013).
    \117\ As discussed below, some of these proposed data elements--
namely, the BBO and NBBO--will be derived from smaller sized 
quotations as a result of the Commission's proposed definition of 
round lot, and the Commission is proposing amendments to the 
definitions of protected bid and protected offer and national best 
bid and offer to accommodate its proposed amendments to expand 
consolidated market data and implement a decentralized consolidation 
model with competing consolidators and self-aggregators.
    In addition, today, the exclusive SIPs collect, consolidate, and 
disseminate protected quotations, which in almost all cases, are the 
best bid or best offer of a trading center. Accordingly, the NBBO 
today reflects protected quotations. As discussed below, the 
Commission is proposing to amend the definition of ``protected bid 
or protected offer'' to require that protected bids and protected 
offers be at least 100 shares. In addition, the Commission is 
proposing a new round lot size definition, which would be less than 
100 shares for higher-priced NMS stocks. See infra Section 
III.C.1(d)(i). Accordingly, if adopted, there would be an increase 
in instances where the best bid or best offer and the NBBO would not 
be protected quotations. See infra Section III.C.1(d)(ii).
    \118\ See supra note 101.
---------------------------------------------------------------------------

    As discussed in detail below, the Commission is proposing to 
include certain depth of book data and auction information in the 
proposed definition of core data. Because of the dispersion of 
liquidity to prices away from the best bids and best offers \119\ and 
the increasing proportion of orders that are executed during 
auctions,\120\ the Commission preliminarily believes that market 
participants need depth of book data and auction information to fully 
participate in the markets and the information would facilitate best 
execution.\121\ The Commission preliminarily believes that the proposed 
depth of book data and auction information would enhance the usefulness 
of proposed core data.
---------------------------------------------------------------------------

    \119\ See infra notes 276-279 and accompanying text.
    \120\ See infra notes 330, 348 and accompanying text.
    \121\ See infra Sections III.C.2(d) and III.C.3(c).
---------------------------------------------------------------------------

    As discussed above, SIP data currently includes certain data that 
would not be included in the definition of core data under the 
Commission's proposed definition.\122\ Currently, Nasdaq UTP Plan Level 
1 subscribers can obtain OTCBB quotation and transaction feeds for 
unlisted stocks.\123\ Similarly, the CTA Plan permits the dissemination 
of ``concurrent use'' data relating to corporate bonds and 
indexes.\124\ This information would not be included in the proposed 
definitions of core data or consolidated market data. OTCBB stocks, 
corporate bonds, and

[[Page 16737]]

indices are not NMS securities as defined in Regulation NMS \125\ and, 
therefore, the Regulation NMS rules related to the collection, 
consolidation, and dissemination of information regarding NMS 
securities, and the NMS plan(s) required under Rule 603(b) for NMS 
stocks,\126\ do not apply. Accordingly, this information is not 
included in the proposed definition of core data.\127\
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    \122\ In addition, because this data does not fall under the 
proposed definitions of regulatory data or administrative data, it 
would not be part of proposed ``consolidated market data'' either.
    \123\ See Nasdaq UTP DataFeed Approval Request, available at 
https://www.utpplan.com/datafeed_approval (last accessed Sept. 8, 
2019); supra note 41.
    \124\ See CTA Plan, supra note 13, at Section XIII; supra note 
41.
    \125\ ``NMS security'' is defined as ``any security or class of 
securities for which transaction reports are collected, processed, 
and made available pursuant to an effective transaction reporting 
plan, or an effective national market system plan for reporting 
transactions in listed options.'' 17 CFR 242.600(b)(47). ``Effective 
transaction reporting plan'' is defined as ``any transaction 
reporting plan approved by the Commission pursuant to Sec.  
242.601.'' 17 CFR 242.600(b)(23). Rule 601 requires a transaction 
reporting plan to be filed and approved pursuant to Rule 608 and to 
specify ``[t]he listed equity and Nasdaq securities or classes of 
such securities for which transaction reports shall be required by 
the plan.'' 17 CFR 242.601(a)(2). Therefore, OTCBB securities are 
not NMS securities.
    \126\ ``NMS stock'' is defined as ``any NMS security other than 
an option.'' 17 CFR 242.600(b)(48). See also 17 CFR 242.600(b)(47) 
(defining NMS security).
    \127\ One commenter suggested that this ``extraneous'' data 
should be removed from the exclusive SIPs. See Nasdaq, Total 
Markets: A Blueprint for a Better Tomorrow, 18 (``Nasdaq Total 
Markets Report''), available at https://www.nasdaq.com/docs/Nasdaq_TotalMarkets_2019_2.pdf.
---------------------------------------------------------------------------

    However, the Commission's proposed definitions of core data and 
consolidated market data would not prohibit the independent provision 
of other types of market data by the SROs, and, as discussed below, 
under the decentralized consolidation model, competing consolidators 
would be permitted to collect data from the SROs and offer data 
products to subscribers that go beyond what is proposed to be defined 
as core data or consolidated market data. Therefore, the exclusion of 
OTCBB and concurrent use data from the proposed definitions of core 
data and consolidated market data does not preclude the provision of 
this data to market participants who wish to receive it.
    Finally, the proposed definition of core data requires that the 
BBO, NBBO, and the proposed depth of book data include odd-lots that 
when aggregated are equal to or greater than a round lot, and that such 
aggregation would occur across multiple prices and be disseminated at 
the least aggressive price of all such aggregated odd-lots. Several 
national securities exchanges today have rules that provide for a 
similar odd-lot aggregation procedure for purposes of providing 
quotation data to the exclusive SIPs.\128\ Although not currently 
required by Regulation NMS, odd-lot aggregation increases the amount of 
quotation data that is included in SIP data and provides transparency 
into trading interest would not otherwise have been represented in such 
data. The Commission preliminarily believes that this information is 
important and should uniformly be included in the proposed core data 
disseminated to investors and market participants.\129\ In addition, 
for similar reasons, the Commission proposes to include odd-lots that, 
when aggregated, form a round lot for purposes of the new proposed 
definition of depth of book data.\130\
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    \128\ See infra note 157 and accompanying text.
    \129\ As discussed below, SROs may make the data necessary to 
generate consolidated market data available to competing 
consolidators and self-aggregators through their existing 
proprietary data products. See infra Section IV.B.1. Accordingly, 
any odd-lot quotations that are aggregated in an SRO's existing 
proprietary data products would be required to be aggregated in a 
manner consistent with the method set forth in the proposed 
definition of core data. See also proposed Rule 603(b). However, 
self-aggregators would only be required to aggregate odd-lots as 
prescribed in Rule 600(b)(20) to the extent that generating a 
particular component of proposed core data is necessary for that 
self-aggregator to comply with applicable regulatory requirements. 
For example, to the extent that a self-aggregator's activities 
require the self-aggregator to generate the NBBO, the self-
aggregator shall do so as described in Rule 600(b)(20).
    \130\ Today, odd-lots are only aggregated into round lots for 
purposes of providing an exchange's best bids and offers to the 
exclusive SIPs. See infra note 157.
---------------------------------------------------------------------------

    The Commission preliminarily believes, however, that the proposed 
definition of core data should require a different procedure with 
respect to the aggregation of odd-lots for purposes of protected 
quotations.\131\ For the reasons discussed below, the scope of Rule 611 
would not be extended to protected quotations of less than 100 
shares.\132\ The Commission preliminarily believes that aggregating 
odd-lots across multiple price points for purposes of determining 
protected quotations would effectively extend trade-through protection 
to quotes of less than 100 shares at different prices.\133\ Therefore, 
the proposed definition of core data provides that, for purposes of the 
calculation and dissemination of proposed core data by competing 
consolidators, and the calculation of proposed core data by self-
aggregators, protected quotations would only include odd-lots at a 
single price that, when aggregated, are equal to or greater than 100 
shares. However, the Commission is seeking comment on whether and how 
odd-lots should be aggregated and the specific proposed core data 
elements to which such aggregation should apply.
---------------------------------------------------------------------------

    \131\ See supra note 115 for the definition of ``protected 
quotation.'' Odd-lot quotations are not protected quotations under 
Rule 611. However, as explained below, many exchanges, pursuant to 
their own rules, aggregate odd-lots across multiple price points 
into round lots for purposes of providing protected quotations to 
the exclusive SIPs. See infra notes 157-158 and accompanying text. 
Although not required by Rule 611 or contemplated upon adoption of 
Regulation NMS, this has become the prevailing practice. The odd-lot 
aggregation methodology set forth in the Commission's proposed 
definition of core data would modify this practice. See infra 
Section VI.C.1(c)(i).
    \132\ See infra Section III.C.1(d)(ii).
    \133\ See infra Section III.C.1(d)(ii) for a discussion of the 
proposed changes to protected bid and protected offer.
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    The Commission requests comment on the proposed amendment to Rule 
600(b)(20) to introduce a definition of core data. In particular, the 
Commission solicits comment on the following:
    4. Do commenters believe Rule 600 should be amended to include a 
definition of core data? Why or why not?
    5. Do commenters believe that the Commission's proposed definition 
of core data captures the key components of information with respect to 
quotations for and transactions in NMS stocks that are useful for 
participating in today's markets? Are there any other useful market 
data elements that should be included in the proposed definition? Does 
the proposed definition include any elements that are not useful for 
trading? Please explain.
    6. Do commenters believe that there is sufficient demand for OTCBB, 
concurrent use, or other data currently provided by the exclusive SIPs 
that would not fall within the proposed definition of core data such 
that an independent market for the provision of this data would 
develop? Why or why not? Would the SROs or other entities that 
currently disseminate this data through the exclusive SIPs provide it 
through other means (i.e., to competing consolidators or directly to 
interested market participants)? Please explain.
    7. The Commission is proposing to include protected quotations in 
the proposed definition of core data. Do commenters believe that there 
is a need for a ``national protected best bid or offer'' analogous to 
the NBBO that would represent a snapshot of the single best protected 
bid and single best protected offer from among all the protected bids 
and offers of each SRO? Would this be a useful metric for competing 
consolidators to calculate and disseminate for market participants for 
either routing or regulatory compliance (e.g., the order execution 
disclosures required under Rule 605) purposes? Would firms that intend 
to self-aggregate produce such a metric on their own? Please explain.

[[Page 16738]]

1. Round Lot Size
    Today, SIP data includes quotation information in round lots and 
transaction information in both round lots and odd-lots. Market 
participants interested in quotation data for individual odd-lot orders 
must purchase it from exchange proprietary feeds. As share prices for 
many widely-held stocks have risen, individual odd-lot orders now often 
represent economically significant trading opportunities at prices that 
are better than the prices of displayed and disseminated round 
lots.\134\ Accordingly, information about individual odd-lot orders has 
gained increased importance with investors and market participants, and 
some have suggested that odd-lot orders should be included in SIP 
data.\135\
---------------------------------------------------------------------------

    \134\ See infra note 166 and accompanying text, and infra text 
accompanying notes 166-170 for staff analysis of odd-lot activity 
for the top 500 securities by dollar volume.
    \135\ See infra notes 170-177.
---------------------------------------------------------------------------

    The Commission is proposing to include certain information about 
quotations that are currently defined as odd-lots \136\ in proposed 
core data by introducing a tiered definition of the term ``round lot.'' 
As proposed, the definition of round lot would assign different round 
lot sizes to individual NMS stocks depending upon their stock price. 
The Commission preliminarily believes this would improve the usefulness 
of proposed consolidated market data, promote fair competition,\137\ 
and, like the addition of odd-lot transaction data to SIP data, would 
provide important information to investors and other market 
participants that would enhance transparency and price discovery.\138\ 
Moreover, since odd-lot quotes often represent opportunities to trade 
at prices that are superior to the prices disseminated by the Equity 
Data Plans,\139\ the inclusion of more of these quotes in proposed core 
data would facilitate the best execution analyses of broker-dealers who 
do not subscribe to proprietary data feeds that include all odd-lot 
information.\140\ Further, it would facilitate the ability of investors 
to use proposed core data to verify that their broker-dealers are 
providing best execution by providing investors with additional 
information on the pricing of smaller-sized orders.
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    \136\ Rule 600(b)(51) defines odd-lot as ``an order for the 
purchase or sale of an NMS stock in an amount less than a round 
lot.''
    \137\ See 15 U.S.C. 78k-1(a)(1)(C)(ii) (``The Congress finds 
that . . . [i]t is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly 
markets to assure . . . fair competition among brokers and dealers, 
among exchange markets, and between exchange markets and markets 
other than exchange markets.'').
    \138\ See infra notes 159-160 and accompanying text.
    \139\ See infra notes 166-170 and accompanying text.
    \140\ Statements made by market participants suggest that a 
significant number of broker-dealers do not subscribe to all 
proprietary market data products. See Roundtable Day One Transcript 
at 178 (James Brooks, ICE Data Services) (``[R]oughly half of the 
global investment banks take the most comprehensive New York Stock 
Exchange order-by-order feed, the other half do not.''); Roundtable 
Day One Transcript at 181 (Michael Friedman, Trillium Management) 
(``[T]he big fish . . . are the major consumers of depth-of-book 
data. I think there was some evidence . . . that there were only 50 
to 100 firms, period who buy all of the depth-of-book feeds.'').
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(a) Regulatory Background
    Round lot, though not defined in the Exchange Act or Regulation 
NMS, typically refers to orders or quotes for 100 shares or multiples 
thereof. Exchange rules typically define a round lot as 100 shares, but 
they also allow the exchange discretion to define it otherwise.\141\ 
The technical specifications for the Equity Data Plans provide similar 
definitions. For example, the CTA Plan defines round lot as 
``[t]ypically 100 shares of stock or any number of shares that is a 
multiple of 100 (i.e., 100, 600, 1,600, etc.).'' \142\ The exclusive 
SIP feeds also disseminate quotation and transaction information for 
stocks that have a round lot size of 10 or 1.\143\
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    \141\ See, e.g., NYSE Rule 55 (``Securities traded on the 
Exchange shall be quoted in round lots (generally 100 shares), 
except that in the case of certain stocks designated by the Exchange 
the round lot shall be such lesser number of shares as may be 
determined by the Exchange, with respect to each stock so 
designated.''); Nasdaq Rule 5005(a)(39) (```Round Lot' or `Normal 
Unit of Trading' means 100 shares of a security unless, with respect 
to a particular security, Nasdaq determines that a normal unit of 
trading shall constitute other than 100 shares.''). According to 
NYSE Trade and Quote (``TAQ'') Data, as of August 2019, twelve 
stocks, all of which are listed on NYSE or NYSE American, had a 
round lot size other than 100. Ten stocks had a round lot of ten and 
two stocks had a round lot of one.
    \142\ Consolidated Tape System, Multicast Output Binary 
Specification, 85 (May 8, 2018), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf. The technical specifications 
for the Nasdaq UTP Plan note that ``[f]or most NASDAQ issues, the 
round lot size is 100 shares.'' UTP Data Feed Services 
Specification, 22, available at https://www.utpplan.com/DOC/UtpBinaryOutputSpec.pdf (last accessed Jan. 7, 2020).
    \143\ See supra note 141.
---------------------------------------------------------------------------

    Regulation NMS defines ``odd-lot'' as ``an order for the purchase 
or sale of an NMS stock in an amount less than a round lot.'' \144\ 
Exchange definitions of odd-lot are similar, as is the definition of 
odd-lot in the technical specifications for the CTA Plan.\145\
---------------------------------------------------------------------------

    \144\ 17 CFR 242.600(b)(51).
    \145\ See, e.g., Cboe BZX Rule 11.10 (``One hundred (100) shares 
shall constitute a `round lot,' any amount less than 100 shares 
shall constitute an `odd lot,' and any amount greater than 100 
shares that is not a multiple of a round lot shall constitute a 
`mixed lot.' ''); Consolidated Tape System, Multicast Output Binary 
Specification, 84 (May 8, 2018), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/CTS_BINARY_OUTPUT_SPECIFICATION.pdf (defining ``odd lot'' as ``[a]n 
order amount for a security that is less than the normal unit of 
trading for that particular asset. Odd lots are considered to be 
anything less than the standard units of trade of 1, 10 or 100 
shares.'').
---------------------------------------------------------------------------

    Despite the absence of a round lot definition, other key defined 
terms in Regulation NMS--such as ``bid or offer,'' ``best bid and best 
offer,'' and ``quotation''--refer, directly or indirectly, to round 
lot. The effect of these references to round lot is that odd-lot 
quotation information is not currently collected or disseminated under 
Regulation NMS.\146\ For example, Rule 601 refers to ``transaction 
reports,'' \147\ the definition of which refers to round lot.\148\ Rule 
602 refers to ``bids'' and ``offers,'' \149\ the definition of which 
also refer to round lot.\150\ Rule 603 refers to a ``national best bid 
and national best offer,'' \151\ which ultimately refers back to round 
lot.\152\ Rules 610 (access to quotations) \153\ and 611 (order 
protection rule) \154\ do not apply to odd-lot orders. Rule 604 
(display of customer limit orders) also refers to bids and offers \155\ 
and specifically excludes odd-lot orders.\156\
---------------------------------------------------------------------------

    \146\ The Commission's proposal to add a definition of round lot 
will result in the inclusion of additional quotation data for 
smaller-sized orders in proposed core data, and, as discussed below 
in Section III.C.1(d)(i), will also affect the firm quote 
requirements of Rule 602(b), the customer limit order display 
requirements of Rule 604, the order execution disclosures required 
under Rule 605, the requirements under Rule 610(c) regarding fees 
for accessing quotations, and the Short Sale Circuit Breaker 
requirements of Rule 201. As discussed below in Section 
III.C.1(d)(ii), the Commission is also proposing certain amendments 
to the definition of ``protected bid or protected offer'' so that 
the scope of the order protection requirements of Rule 611 and the 
locked and crossed market prevention requirements of Rule 610(c) are 
not extended to the proposed smaller round lot sizes.
    \147\ See Rule 601, 17 CFR 242.601.
    \148\ See Rule 600(b)(84), 17 CFR 242.600(b)(84).
    \149\ See Rule 602, 17 CFR 242.602.
    \150\ See Rule 600(b)(9), 17 CFR 242.600(b)(9).
    \151\ See Rule 603, 17 CFR 242.603.
    \152\ See Rule 600(b)(43), 17 CFR 242.600(b)(43); Rule 
600(b)(9), 17 CFR 242.600(b)(9).
    \153\ See Rule 610, 17 CFR 242.610.
    \154\ See Rule 611, 17 CFR 242.611.
    \155\ See Rule 604, 17 CFR 242.604.
    \156\ See Rule 604(b)(3), 17 CFR 242.604(b)(3).
---------------------------------------------------------------------------

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

[[Page 16739]]

aggregation process works in different terms and with different levels 
of specificity,\157\ but many exchanges aggregate odd-lots across 
multiple prices and provide them to the exclusive SIPs at the least 
aggressive price if the combined odd-lot interest is equal to or 
greater than a round lot.\158\
---------------------------------------------------------------------------

    \157\ See, e.g., NYSE Rule 7.36 (``The best-ranked non-
marketable displayed Limit Order(s) to buy and the best ranked non-
marketable displayed Limit Order(s) to sell in the Exchange Book and 
the aggregate displayed size of such orders associated with such 
prices will be collected and made available to quotation vendors for 
dissemination pursuant to the requirements of Rule 602 of Regulation 
NMS under the Exchange Act. If non-marketable odd-lot sized orders 
at multiple price levels can be aggregated to equal at least a round 
lot, such odd-lot sized orders will be displayed as the best ranked 
displayed orders to sell (buy) at the least aggressive price at 
which such odd-lot sized orders can be aggregated to equal at least 
a round lot.''); Nasdaq Rule 4756 (``Pursuant to Rule 602 of 
Regulation NMS under the Exchange Act, Nasdaq will transmit for 
display to the appropriate network processor for each System 
Security: (i) The highest price to buy wherein the aggregate size of 
all displayed buy interest in the System greater than or equal to 
that price is one round lot or greater; (ii) the aggregate size of 
all displayed buy interest in the System greater than or equal to 
the price in (i), rounded down to the nearest round lot; (iii) the 
lowest price to sell wherein the aggregate size of all displayed 
sell interest in the System less than or equal to that price is one 
round lot or greater; and (iv) the aggregate size of all displayed 
sell interest in the System less than or equal to the price in 
(iii), rounded down to the nearest round lot.''); Cboe BZX Rule 
11.9(c)(2) (``Odd Lot Orders are only eligible to be Protected 
Quotations if aggregated to form a round lot.''); supra Section 
III.C for a discussion of odd-lot aggregation. As noted above, the 
proposed definition of core data sets forth a methodology for odd-
lot aggregation for the components of core data. Any odd-lot 
quotations that are aggregated in an SRO's existing proprietary data 
products would be required to be aggregated in a manner consistent 
with the method set forth in the proposed definition of core data. 
See supra note 129.
    \158\ See id. For example, if there are three sell orders on an 
exchange for a particular NMS stock--30 shares at $10.08, 20 shares 
at $10.09, and 50 shares at $10.10--the exchange will post 100 
shares at $10.10 as a protected round lot quote to the exclusive 
SIP. See infra Section VI.C.1(c)(i).
---------------------------------------------------------------------------

    In 2013, the participants to the Equity Data Plans filed proposed 
amendments to the Plans to add odd-lot transactions to SIP data.\159\ 
In support of the proposed amendments, the participants to the Equity 
Data Plans noted that ``odd-lot transactions account for a not 
insignificant percentage of trading volume, [and] the Participants have 
determined that including odd-lot transactions on the consolidated tape 
. . . would add post-trade transparency to the marketplace.'' \160\ In 
approving the amendments, the Commission agreed that ``odd-lot 
transactions comprise a noteworthy percentage of total trading 
volume,'' and stated that ``including odd-lot transactions on the 
consolidated tape will enhance post-trade transparency, as well as 
price discovery, and consequently would further the goals of the 
[Exchange] Act,'' and that ``information about odd-lot transactions 
would provide important information to investors and other market 
participants and therefore represents a positive development in the 
provision of market data.'' \161\
---------------------------------------------------------------------------

    \159\ Odd-lot transaction data that is required to be collected, 
consolidated, and disseminated pursuant to the Equity Data Plans 
would be included in the proposed definition of consolidated market 
data pursuant to proposed Rule 600(b)(20)(viii).
    \160\ Securities Exchange Act Release Nos. 70793 (Oct. 31, 
2013), 78 FR 66788 (Nov. 6, 2013) (order approving Amendment No. 30 
to the UTP Plan to require odd-lot transactions to be reported to 
consolidated tape); 70794 (Oct. 31, 2013), 78 FR 66789 (Nov. 6, 
2013) (order approving Eighteenth Substantive Amendment to the 
Second Restatement of the CTA Plan to require odd-lot transactions 
to be reported to consolidated tape).
    \161\ Id. at 66789-66790.
---------------------------------------------------------------------------

(b) Market Evolution
    In recent years, the share prices of some of the most widely-held 
stocks have increased substantially.\162\ As a result of higher share 
prices, odd-lot orders in many securities have a high dollar, or 
notional, value. Because SIP data does not currently include odd-lot 
quotation information except to the extent that cumulative odd-lot 
interest equals or exceeds a round lot, the best quote reflected in 
proprietary data products, especially for many high-priced stocks, may 
be an odd-lot order that is at a price that is better than the best bid 
or best offer that is disseminated by the exclusive SIPs. Indeed, as 
discussed below, an analysis of odd-lot transaction data and comments 
made in connection with the Roundtable indicate that odd-lot orders are 
frequently priced better than the quotation prices that are 
disseminated by the exclusive SIPs, yet these orders are not seen by 
investors or market participants that rely solely on SIP data.\163\
---------------------------------------------------------------------------

    \162\ For example, between 2004 and 2019, the average price of a 
stock in the Dow Jones Industrial Average nearly quadrupled.
    \163\ See Roundtable Day Two Transcript at 66 (Paul O'Donnell, 
Morgan Stanley) (``We all know that, for high-price stocks, there is 
a market inside the NBBO''); Roundtable Day One Transcript at 116 
(Michael Blaugrund, NYSE) (recommending the inclusion in core data 
of odd-lots priced better than the BBO); Healthy Markets Association 
Letter II; staff odd-lot analysis, infra (observing that 43% of odd-
lot transactions in September of 2019 occurred at prices better than 
the NBBO).
---------------------------------------------------------------------------

    The importance of increasing the transparency of odd-lot quotation 
information is supported by odd-lot quotation and transaction data. 
First, odd-lot transactions make up a significant proportion of 
transaction volume in NMS stocks, including exchange-traded products 
(``ETPs''). Based on data from the SEC's MIDAS analytics tool,\164\ the 
daily exchange odd-lot rate (i.e., the number of exchange odd-lot 
trades as a proportion of the number of all exchange trades) for all 
corporate stocks ranged from approximately 29% to 42% of trades and the 
daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of 
trades in 2018. More recently, in June 2019, the daily exchange odd-lot 
rate for all corporate stocks exceeded 50% several times (and exceeded 
65% several times for the top decile by price) and reached almost 30% 
for all ETPs in the same period.\165\ Exchange odd-lot volume as a 
proportion of total exchange-traded volume also rose in June 2019, 
reaching approximately 15% for all corporate stocks (and over 30% for 
the top decile by price) and approximately 4% for all ETPs.\166\
---------------------------------------------------------------------------

    \164\ Staff accessed consolidated data from the Equity Data 
Plans and exchange depth of book data, both of which staff receive 
through the SEC's MIDAS platform. See Market Data Analytics System 
(``MIDAS''), available at https://www.sec.gov/marketstructure/midas.html. This data is commercially available.
    \165\ Id. See also Alexander Osipovich, Tiny `Odd-Lot' Trades 
Reach Record Share of U.S. Stock Market, Wall Street Journal (Oct. 
23, 2019) (``The share of trades in odd-lot sizes hit a record 48.9% 
on Oct. 7 and has stayed above 40% ever since, according to the NYSE 
data, which cover all U.S. equity trades, not just those on the Big 
Board.'').
    \166\ See supra note 164.
---------------------------------------------------------------------------

    Staff examined odd-lot trade and message volume, duration on the 
inside,\167\ order-book distribution, and quoted spreads for the top 
500 securities by dollar volume during the week of September 10-14, 
2018, using the exclusive SIP trades, exclusive SIP quotes, off-
exchange data from FINRA's TRFs, and all of the exchanges' proprietary 
data feeds. Staff found that a significant portion of quotation and 
trading activity occurs in odd-lots, particularly for frequently 
traded, high-priced securities.\168\
---------------------------------------------------------------------------

    \167\ Duration on the inside is the percent of the day the 
aggregate size at the best price (bid, offer, or both) is less than 
100 shares based on the exchange proprietary data feeds.
    \168\ For example, staff observed that over 86% of the trades 
that occurred in the two largest securities by market capitalization 
that have share prices greater than $1,000 occurred in odd-lot share 
amounts.
---------------------------------------------------------------------------

    Staff compared the bid-ask spread when using exclusive SIP 
quotation information (which is in round lots) vs. quotation 
information in the proprietary feeds (which includes odd-lots). On 
average, the measure of bid-ask spread, an important metric in 
understanding market liquidity and quote competition, widens (i.e., 
degrades) significantly when calculated using only round lots relative 
to the odd-lot quotations displayed on proprietary feeds. In addition, 
as average stock share prices

[[Page 16740]]

rose, bid-ask spreads based only on round lots generally widened by a 
greater amount than did spreads based on round lots and odd-lots. 
During the period staff analyzed, for the 500 most frequently traded 
securities by dollar volume, the average bid-ask spread of the 50 
securities with the highest share prices decreased (improved or 
tightened) by $.05970 when calculated using the proprietary feeds 
relative to the exclusive SIP feed. Bid-ask spreads for the 50 
securities with the lowest share prices showed less improvement when 
using the proprietary feeds relative to the exclusive SIP feed, 
decreasing (or tightening) on average by $.00017.
    Staff also evaluated the frequency of trades in odd-lot sizes for 
the top 500 securities by dollar volume and found that frequently 
traded, high priced securities are likely to have a substantial portion 
of executions occur in odd-lot sizes. More than 25 percent of the on-
exchange share volume of the 50 securities with the highest share 
prices occurred in odd-lot sizes. In comparison, less than 2% of the 
on-exchange share volume of the 50 securities with the lowest share 
prices occurred in odd-lot sizes.
    In addition, as noted above,\169\ statements made by Roundtable 
panelists and commenters suggest that odd-lot orders can reflect prices 
that are better than the quotation prices that are disseminated by the 
exclusive SIPs. These observations are consistent with staff 
observations of odd-lot transaction pricing reflected in recent trading 
data. During the month of September 2019, a substantial proportion of 
odd-lot trades occurred at prices that are better than the prevailing 
NBBO. Specifically, approximately 51% of all trades executed on 
exchange and approximately 14% of all volume executed on exchange in 
corporate stocks (3,930 unique symbols) occurred in odd-lot sizes 
(i.e., less than 100 shares), and 43% of those odd-lot transactions 
(representing approximately 39% of all odd-lot volume) occurred at a 
price better than the NBBO.
---------------------------------------------------------------------------

    \169\ See supra note 163.
---------------------------------------------------------------------------

(c) Roundtable Discussion, Comments, and Alternative Proposals
    In connection with the Roundtable, one commenter presented data 
showing increased odd-lot trading and quoting rates over the last 
several years, as well as the existence of quotes on proprietary feeds 
that are at prices better than the NBBO disseminated by the exclusive 
SIPs.\170\ Several panelists at the Roundtable were supportive of 
adding odd-lot quotation information to SIP data.\171\ One panelist who 
supported adding odd-lot orders to SIP data noted that the application 
of order protection under Rule 611 to odd-lot quotes would need to be 
considered and added that he would likely be in favor of applying Rule 
611 to odd-lot quotes.\172\ Finally, one panelist emphasized the 
importance of odd-lot quotation data to market participants, stating 
that content that exists only in the proprietary feeds--such as odd-
lots--is needed to make effective decisions in trading applications and 
to fill client orders effectively.\173\
---------------------------------------------------------------------------

    \170\ Letter to Brent J. Fields, Secretary, Commission, from 
Tyler Gellasch, Executive Director, Healthy Markets Association, 5-
11 (Mar. 5, 2019) (``Healthy Markets Association Letter II''). See 
also Letter to Brent J. Fields, Secretary, Commission, from Rich 
Steiner, Head of Client Advocacy and Market Innovation, RBC Capital 
Markets, LLC (Oct. 25, 2019) (``RBC Letter'') (stating that internal 
research suggested exclusive SIPs should display odd-lot quotes).
    \171\ See Roundtable Day One Transcript at 98-99 (Stacey 
Cunningham, NYSE); Roundtable Day One Transcript at 116-17 (Michael 
Blaugrund, NYSE); Roundtable Day Two Transcript at 72 (Michael 
Blaugrund, NYSE) (recommending expanding consolidated market data to 
include odd-lot orders priced better than the BBO); Roundtable Day 
One Transcript at 157-59 (Oliver Albers, Nasdaq) (stating that over 
50% of the notional value of Nasdaq-listed names is in high priced 
stocks); Roundtable Day One Transcript at 226-27 (Chris Isaacson, 
Cboe); Roundtable Day Two Transcript at 73 (Prof. Robert Bartlett, 
UC Berkeley) (stating that including odd-lots in the trade data has 
been incredibly useful and including it in the quote data would be 
also helpful).
    \172\ See Roundtable Day One Transcript at 226-27 (Chris 
Isaacson, Cboe). In addition, another panelist suggested that 
revisiting Rule 611 for odd-lots has merit. See Roundtable Day One 
Transcript at 231-32 (Vlad Khandros, UBS). See also Robert Battalio, 
et al., Unrecognized Odd Lot Liquidity Supply: A Hidden Trading Cost 
for High Priced Stocks, The Journal of Trading (Winter 2017), 
available at https://jot.pm-research.com/content/iijtrade/12/1/35.full.pdf (``[T]he exclusion of odd lot orders from the protected 
NBBO quote produces cases in which trades fill at prices worse than 
available opposite-side trading interests.'').
    \173\ See Roundtable Day One Transcript at 127-28 (Mark 
Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------

    In addition, several comment letters submitted in connection with 
the Roundtable supported adding odd-lot quotation information to SIP 
data or otherwise highlighted negative consequences of its exclusion 
from SIP data.\174\ One commenter stated that the Commission should 
consider rulemaking to expand SIP data to include odd-lot information 
during which the Commission could gather data and determine whether 
odd-lots are valuable for price discovery for all securities.\175\ 
Commenters asserted that having to purchase ``relatively basic data 
such as odd-lots'' through exchange proprietary offerings goes against 
one of the main purposes of the national market system: Enabling 
investors' orders to be executed without the participation of a 
dealer.\176\ Another commenter provided data showing that proprietary 
feeds that include odd-lot quotes reflect superior pricing compared to 
the SIP data disseminated by the Equity Data Plans and indicated its 
support for adding odd-lot quotes to SIP data.\177\ Similarly, another 
commenter stated that as stock prices overall have risen and average 
trade sizes have fallen, odd-lots are becoming more important in the 
trading process, and the commenter presented data showing that stock 
price has a meaningful impact on odd-lot frequency and trade size and 
that high-priced stocks frequently trade in smaller quantities.\178\
---------------------------------------------------------------------------

    \174\ See Letter to Brent J. Fields, Secretary, Commission, from 
NYSE Group, 6, 13 (Oct. 24, 2018) (``NYSE Group Letter'') (stating 
that ``[o]dd-lot quoting, particularly in high-priced securities, 
has become more prevalent in today's markets and its exclusion from 
SIP feeds seems anachronistic''; recommending that core data be 
expanded to include ``the best bid and offer of any quantity''; and 
stating that ``Main Street would benefit if the prices disseminated 
by the SIPs included odd-lot quotes''); Letter to Vanessa 
Countryman, Acting Secretary, Commission, from Theodore R. Lazo, 
Managing Director and Associate General Counsel, SIFMA (Sept. 18, 
2019) (``SIFMA Letter II''); Letter to Brent J. Fields, Secretary, 
Commission, from Richard H. Baker, President and CEO, Global Head of 
Government Affairs Managed Funds Association and Jir[iacute] 
Kr[oacute]l, Deputy CEO, Global Head of Government Affairs, AIMA, 3-
4 (Dec. 20, 2018) (``MFA and AIMA Letter''); Healthy Markets 
Association Letter II.
    \175\ See SIFMA Letter II at 3.
    \176\ See MFA and AIMA Letter at 3-4.
    \177\ See Healthy Markets Association Letter II.
    \178\ See RBC Letter at 1-2 (highlighting that approximately 50% 
of all odd-lot trades in stocks priced between $50 and $250 are in 
20 shares or less).
---------------------------------------------------------------------------

    Some Roundtable panelists, however, pointed out complications that 
might arise from the addition of more odd-lot information to the SIP 
data. One panelist stated that an issue with adding odd-lot quotations 
to the Equity Data Plans is that they are not protected quotations 
under Rule 611, so, in the view of the panelist, there would be 
uncertainty as to whether a broker-dealer has to access odd-lot 
quotations to meet regulatory obligations. This panelist added that 
there will need to be clarity as to how odd-lots are reported to the 
exclusive SIPs and represented in the consolidated tapes (e.g., whether 
50 shares at $10 and 100 shares at $10 will be shown separately or as 
150 shares at $10).\179\ Another panelist stated that caution should be 
exercised in adding odd-lots to SIP data to avoid

[[Page 16741]]

overwhelming market participants with information. This panelist 
suggested that a ``price level metric,'' such as including odd-lot 
orders with a value in excess of a specified price, might make 
sense.\180\
---------------------------------------------------------------------------

    \179\ See Roundtable Day One Transcript at 159-60 (Adam 
Inzirillo, BAML) (stating that the different display options could 
result in a change from current practices).
    \180\ See Roundtable Day One Transcript at 160-61 (Matt 
Billings, TD Ameritrade).
---------------------------------------------------------------------------

    On October 2, 2019, the Equity Data Plans published an ``initial 
proposal'' for public comment regarding the addition of odd-lot quotes 
to the Equity Data Plans for dissemination by the respective exclusive 
SIPs.\181\ Under this proposal, the addition of odd-lot quotes would 
not change how the NBBO is calculated, nor would such quotes be 
``protected quotations'' \182\ under Regulation NMS. Rather, the odd-
lot quote data would be ``ancillary'' data available to exclusive SIP 
customers.\183\ Each exchange would send its top of book odd-lot quotes 
to the exclusive SIPs in the same form in which it currently sends its 
top of book round lot quotes.\184\ An ``odd-lot best bid and offer'' 
would be calculated in the same manner as the round lot NBBO, but would 
not be disseminated when it is worse than the NBBO.\185\
---------------------------------------------------------------------------

    \181\ See CTA Plan and UTP Plan, Odd Lots Initial Proposal 
(``SIP Odd Lot Initial Proposals''), available at https://www.utpplan.com/DOC/Odd_Lots_Proposal.pdf, https://ctaplan.com/publicdocs/CTA_Odd_Lots_Proposal.pdf; CTA Plan and UTP Plan 
Operating Committees, SIP Operating Committees Seek Comment on 
Proposal to Add Odd Lot Quotes to SIP Data Feeds (Oct. 2, 2019) 
(``SIP Odd Lots Proposal Press Release''), available at https://www.globenewswire.com/news-release/2019/10/02/1924016/0/en/SIP-Operating-Committees-Seek-Comment-on-Proposal-to-Add-Odd-Lot-Quotes-to-SIP-Data-Feeds.html; Letter from Robert Books, Chairman, UTP and 
CTA Operating Committees, to industry members and investors, 1 (Jan. 
6, 2020) (``CTA and UTP Annual Letter''), available at https://forefrontcomms.com/wp-content/uploads/2020/01/2020-Annual-Letter_FINAL_.pdf. The SIP Odd Lot Initial Proposals are the subject 
of continuing consideration by the operating committees. Comments 
are available at https://www.ctaplan.com/oddlots.
    \182\ See supra note 115.
    \183\ See SIP Odd Lot Initial Proposals, supra note 181, at 1.
    \184\ See id.
    \185\ See id.
---------------------------------------------------------------------------

    Additionally, on January 21, 2020, Cboe Global Markets, Inc. 
(``Cboe'') published a report detailing its recommendations for U.S. 
equity market structure.\186\ In the report, Cboe recommended that top 
of book odd-lot quotations be included in the exclusive SIP feeds.\187\ 
Furthermore, Cboe recommended redefining round lot with lower numbers 
for higher priced securities.\188\
---------------------------------------------------------------------------

    \186\ Cboe, Cboe's Vision: Equity Market Structure Reform (Jan. 
21, 2020) (``Cboe Report''), available at https://www.cboe.com/aboutcboe/government-relations/pdf/cboes-vision-equity-market-structure-reform-2020.pdf.
    \187\ See id. at 3.
    \188\ See id. at 2-3.
---------------------------------------------------------------------------

(d) Commission Discussion and Proposal
(i) Proposed Definition of Round Lot
    Data on odd-lot trading and quoting activity evaluated by 
staff,\189\ and the remarks and comments of market participants, 
suggest that SIP data omits a substantial amount of economically 
significant trading interest. Furthermore, bid-ask spreads calculated 
using round lot orders do not include some odd-lot quotations that may 
be at prices better than round lot orders, particularly for higher 
priced securities.\190\ The Commission is concerned that information 
about significant trading interest in odd-lot orders is only available 
to market participants who have purchased proprietary market data 
products from exchanges and remains unavailable to those that rely 
solely on SIP data. This creates a potentially significant information 
asymmetry between SIP data and proprietary data.\191\ Further, the 
Commission is concerned about the view expressed by some market 
participants that achieving best execution may be difficult for broker-
dealers that rely solely on SIP data.
---------------------------------------------------------------------------

    \189\ See supra Section III.C.1(b) (discussing staff odd-lot 
analysis).
    \190\ Id.
    \191\ Specifically, larger or better resourced broker-dealers 
may be more capable of paying the fees for multiple proprietary data 
feeds to obtain odd-lot quotations from several markets and 
consolidating these feeds to create a more complete picture of the 
market. See infra Sections VI.B.2(c), VI.B.3(a), and VI.B.3(b). In 
addition, the proposed definition of round lot would help ensure 
that market participants, including retail investors, would receive 
information on smaller-sized orders in higher-priced stocks in a 
context in which a trading or order routing decision can be 
implemented and would receive more informative order execution 
quality information. See infra Section III.C.1(d)(i) (discussing the 
effect of the proposed definition of round lot on Rules 603(c) and 
605).
---------------------------------------------------------------------------

    The Commission preliminarily believes that, to address these and 
other concerns, certain odd-lot quotation data should be required to be 
disseminated as part of proposed core data so that it is made more 
readily available to investors and market participants. The Commission 
is proposing that this be accomplished by defining the term ``round 
lot'' to include certain orders that currently are defined as ``odd-
lots.'' Given the prevalence of odd-lot quoting and trading, 
particularly in higher-priced stocks, the absence of odd-lot quotation 
data significantly reduces the comprehensiveness and usefulness of SIP 
data.
    The Commission preliminarily believes that the inclusion of odd-lot 
quotations in proposed core data should be reasonably calibrated. The 
Commission is preliminarily concerned that including all odd-lot 
quotations could, as some Roundtable commenters suggested,\192\ burden 
systems, increase complexity, and degrade the usefulness of information 
in a manner that may not be warranted by the relative benefits of the 
additional information to investors and market participants.\193\
---------------------------------------------------------------------------

    \192\ See supra note 180 and accompanying text.
    \193\ See infra note 195. Further, attempting to access orders 
of insignificant notional value--the share price multiplied by the 
number of shares in the order--could result in a situation where the 
benefit associated with accessing additional liquidity may be offset 
by the cost associated with signaling to other market participants 
the presence of a large incoming order. See Securities Exchange Act 
Release No. 78309 (July 13, 2016), 81 FR 49432, 49440 (July 27, 
2016) (``[S]ophisticated market participants closely monitor order 
and execution activity throughout the markets, looking for patterns 
that signal the existence of a large institutional order, so that 
they can use that information to their trading advantage . . . 
Indeed, institutional customers have expressed concern that 
excessive routing of their orders may increase the risk of 
information leakage without a commensurate benefit to execution 
quality.''). By limiting the quotation information that is added to 
the proposed core data to orders of $1,000 dollars notional value or 
more, as explained below, the proposed definition of round lot will 
increase transparency into smaller-sized orders while reducing the 
likelihood of information leakage.
---------------------------------------------------------------------------

    Accordingly, under proposed Rule 600(b)(81) of Regulation NMS, a 
``round lot'' would be defined as: (1) For any NMS stock for which the 
prior calendar month's average closing price on the primary listing 
exchange \194\ was $50.00 or less per share, an order for the purchase 
or sale of an NMS stock of 100 shares; (2) for any NMS stock for which 
the prior calendar month's average closing price on the primary listing 
exchange was $50.01 to $100.00 per share, an order for the purchase or 
sale of an NMS stock of 20 shares; (3) for any NMS stock for which the 
prior calendar month's average closing price on the primary listing 
exchange was $100.01 to $500.00 per share, an order for the purchase or 
sale of an NMS stock of 10 shares; (4) for any NMS stock for which the 
prior calendar month's average closing price on the primary listing 
exchange was $500.01 to $1,000.00 per share, an order for the purchase 
or sale of an NMS stock of 2 shares; and (5) for any NMS stock for 
which the prior calendar month's average closing price on the primary 
listing exchange was $1,000.01 or more per share, an order

[[Page 16742]]

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

    \194\ The IPO price would be used in lieu of the prior calendar 
month's average closing price on the primary listing exchange for 
newly issued stocks. See proposed Rule 600(b)(81).
---------------------------------------------------------------------------

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

                                                     Table 1
----------------------------------------------------------------------------------------------------------------
                                                                     Number of                      Percent of
                                                                     stocks in      Percent of       $ADV, by
                        Stock price group                           stock price    ADV, by price    price group
                                                                       group         group (%)          (%)
----------------------------------------------------------------------------------------------------------------
$0.00-$50.00....................................................           7,188           75.02           31.70
$50.01-$100.00..................................................           1,094           13.64           21.06
$100.01-$500.00.................................................             575           11.20           43.40
$500.01-$1,000.00...............................................              14            0.05            0.64
$1,000.01 +.....................................................              15            0.09            3.19
----------------------------------------------------------------------------------------------------------------

    The Commission's proposed definition of round lot attempts to 
balance the benefits of adding more quotation data regarding smaller-
sized orders to proposed core data against the concerns raised by some 
Roundtable panelists and commenters that adding all odd-lot quotes to 
proposed core data could increase its complexity and undermine its 
usefulness.\195\ The proposed definition, in effect, limits the 
quotation data that would be added to proposed core data to quotations 
that represent a notional value of at least $1,000, which the 
Commission preliminarily believes to be meaningful order size for 
today's market participants.\196\
---------------------------------------------------------------------------

    \195\ The proposed definition of round lot only includes a 
subset of all odd-lot quotation data, namely, orders with a notional 
value of at least $1,000. This would limit the number of data 
messages that would be provided to market participants when compared 
to providing all odd-lot quotation data. The Commission 
preliminarily believes that the proposed definition would address 
concerns regarding additional complexity and degradation of the 
usefulness of the data. See infra Section VI.C.1(b)(i).
    \196\ See infra Section VI.C.1.
---------------------------------------------------------------------------

    A round lot is a standard unit of trading that traditionally has 
reflected an order of meaningful size to market participants. Given the 
per share price increases of certain securities, and the large number 
of orders in sub-100 share sizes in today's market,\197\ the Commission 
preliminarily believes that the current round lot size of 100 shares no 
longer captures many orders of meaningful size. The number of shares in 
an order, on its own, has become a less accurate way of distinguishing 
orders of meaningful size from those of de minimis size. For example, a 
100-share order for an $11 stock and a 10 share order for a $110 stock 
both have a notional value of $1,100, but, under exchange rules and NMS 
plans, only the former may be a round lot currently. The Commission 
preliminarily believes that defining round lots based on a dollar value 
would better reflect orders of meaningful size.\198\
---------------------------------------------------------------------------

    \197\ See supra notes 163-169 and accompanying text.
    \198\ Commenters to the SIP Odd Lot Initial Proposals have 
suggested defining round lots based on share price. See Letter to 
SIP Operating Committees from Hubert De Jesus, Managing Director, 
Global Head of Market Structure and Electronic Trading, Blackrock, 
and Joanne Medero, Managing Director, Global Public Policy Group, 
Blackrock, regarding Odd Lots Proposal, 2 (Dec. 3, 2019), available 
at https://www.theice.com/publicdocs/BlackRock_Odd_Lot_Proposal_December_3_2019.pdf (``The sizing of 
round lots provides an intuitive mechanism for expanding odd lot 
coverage because its designation as the normal unit of trading is 
embedded in exchange rulebooks and market regulations. . . . 
BlackRock believes that a data-driven redefinition of round lots to 
scale lot size relative to security price would improve transparency 
and promote fairer and more efficient markets.''); Letter from 
Benjamin Connault, Economist, IEX Group, Inc., and Lucy Malcolm, 
Associate General Counsel, IEX Group, Inc., to Operating Committees, 
regarding Odd Lots Proposal and Round Lot Proposal, 2 (Nov. 18, 
2019), available at https://www.theice.com/publicdocs/IEX_Letter_re-CTA-UTP_Odd-Lots_Proposal_20191118.pdf (``IEX strongly supports 
reducing the round lot size for higher-priced securities.'').
---------------------------------------------------------------------------

    Furthermore, higher odd-lot trading rates are associated with 
higher-priced stocks,\199\ and, according to data provided in 
connection with the Roundtable, odd-lot transaction sizes go down as 
share price goes up.\200\ The proposed tiered, price-based round lot 
definition is intended to reflect these market dynamics. More 
specifically, a significant odd-lot transaction market--measured by 
odd-lot trade frequency--emerges at approximately a $50 share price, 
and 50% of the odd-lots traded in stocks priced between $50 and $250 
are 20 shares or less.\201\ This corresponds, approximately, with the 
proposed 20 share round lot category for stocks priced between $50.01 
and $100.00 per share. Moreover, according to data provided in 
connection with the Roundtable, 20, 10, 2, and 1 share odd-lot trade 
sizes are among the most common, with approximately 2.8%, 5.1%, 5.3%, 
and 11.7%, of odd-lot executions, respectively.\202\ The proposed 
definition of round lot is intended to broadly reflect these key data 
points in the context of a relatively simple, intuitive framework for 
establishing round lot sizes and associated price thresholds.
---------------------------------------------------------------------------

    \199\ See supra Section III.C.1(b) (stating that the daily 
exchange odd-lot rate for the top decile of corporate stocks by 
price exceeds the rate for all corporate stocks).
    \200\ See RBC Letter at 5.
    \201\ Id.
    \202\ Deutsche Bank, Global Equities, There's More to Odd Lots 
than High-Priced Stocks (June 25, 2019).
---------------------------------------------------------------------------

    Moreover, a significant portion of the odd-lot transactions that 
occur at a price better than the NBBO \203\ would be captured by the 
proposed definition of round lot. Specifically, of the odd-lot 
transactions executing at a price better than the NBBO during all of 
the trading days in September 2019, approximately 38% of such 
transactions and 61% of the odd-lot volume were in sizes that would be 
round lots under proposed Rule 600(b)(81). For example, for those 
stocks with an average prior calendar month's closing price on the 
primary listing exchange equal to or greater than $500.01 and less than 
$1,000, approximately 77% of all trades (99% of volume) in sizes less 
than 100 shares that occurred at a price better than the prevailing 
NBBO had a transaction size of 2 shares or more. Table 2 and Table 3, 
below, show the portion of odd-lot trades and volume, respectively, 
executed a price better than the prevailing NBBO that would be defined 
as round lots under the proposal:
---------------------------------------------------------------------------

    \203\ See supra Section III.C.1(b).

[[Page 16743]]



                                                     Table 2
----------------------------------------------------------------------------------------------------------------
                                                                                Portion of all trades less than
                                                                              100 shares, at a price better than
                                                                               the prevailing NBBO, occurring in
            Stock price group                Proposed round lot definition     a quantity that would be defined
                                                                               as a round lot under the proposal
                                                                                              (%)
----------------------------------------------------------------------------------------------------------------
$0.00-$50.00.............................  100 shares.......................                                   0
$50.01-$100.00...........................  20 shares........................                                  46
$100.01-$500.00..........................  10 shares........................                                  59
$500.01-$1000.00.........................  2 shares.........................                                  77
$1,000.01 or more........................  1 share..........................                                 100
----------------------------------------------------------------------------------------------------------------


                                                     Table 3
----------------------------------------------------------------------------------------------------------------
                                                                               Portion of all volume transacted
                                                                                  in a quantity less than 100
                                                                              shares, at a price better than the
            Stock price group                Proposed round lot definition      prevailing NBBO, occurring in a
                                                                               quantity that would be defined as
                                                                                a round lot under the proposal
                                                                                              (%)
----------------------------------------------------------------------------------------------------------------
$0.00-$50.00.............................  100 Shares.......................                                   0
$50.01-$100.00...........................  20 Shares........................                                  89
$100.01-$500.00..........................  10 Shares........................                                  95
$500.01-$1000.00.........................  2 Shares.........................                                  99
$1,000.01 or more........................  1 Share..........................                                 100
----------------------------------------------------------------------------------------------------------------

    The proposed definition of round lot requires the round lot size of 
an NMS stock to be based on the prior calendar month's average closing 
price on the primary listing exchange for that stock (or the IPO price 
if the prior calendar month's average closing price on the primary 
listing exchange is not available).\204\ The Commission preliminarily 
believes that the prior calendar month's average closing price on the 
primary listing exchange is a reasonable metric to assess an NMS 
stock's share price for purposes of determining the applicable round 
lot size. The daily closing price is a widely followed indicator of a 
stock's value that is often used to measure performance over time.\205\ 
Moreover, using a monthly average (rather than, e.g., each trading 
day's closing price or a weekly average), would help ensure that round 
lot sizes are based on current pricing information, while preventing 
short-term price fluctuations from impacting the round lot size, 
thereby avoiding unnecessary complexity and cost.
---------------------------------------------------------------------------

    \204\ Specifically, the prior calendar month's average closing 
price on the primary listing exchange would be the mean of the daily 
closing prices on the primary listing exchange for all trading days 
in the prior calendar month. For each NMS stock, the prior calendar 
month's average closing price on the primary listing exchange would 
only need to be computed at the beginning of each calendar month and 
would be in effect for the rest of the month (i.e., it would not be 
a ``rolling'' average requiring computation more frequently than 
once per calendar month).
    \205\ See Christopher Ting, Which Daily Price Is Less Noisy?, 
Financial Management 35, no. 3 (2006): 81-95 (describing daily 
closing price as a popular reference price, including for fund 
managers to compute net asset values).
---------------------------------------------------------------------------

    The proposed definition of round lot would impact other terms that 
are currently defined in Regulation NMS, as well as the proposed 
definition of core data (and its included terms), so that quotation 
information in the proposed round lot sizes would be included in the 
proposed definition of core data. Specifically, the definition of ``bid 
or offer'' \206\ is based on round lots, and the definition of ``bid or 
offer'' is reflected in the definition of ``best bid and best offer.'' 
\207\ Similarly, the definition of ``best bid and best offer'' is 
reflected in the definition of ``national best bid and national best 
offer.'' \208\ Therefore, the addition of the proposed definition of 
round lot would impact the calculation of the NBBO by requiring that it 
be calculated based upon the BBOs in the new round lot sizes. In 
addition, the proposed definition of depth of book data refers to 
``quotation size,'' which refers to ``bid or offer,'' so the quotation 
data at the price levels that are proposed to be included in depth of 
book data would include quotations in the new proposed round lot 
sizes.\209\
---------------------------------------------------------------------------

    \206\ See 17 CFR 242.600(b)(9).
    \207\ See 17 CFR 242.600(b)(8).
    \208\ See 17 CFR 242.600(b)(43).
    \209\ Similarly, since ``transaction report'' is defined as ``a 
report containing the price and volume associated with a transaction 
involving the purchase or sale of one or more round lots of a 
security,'' core data, as proposed, would include transaction 
reports based on the new proposed round lot sizes. The Equity Data 
Plans already collect and disseminate all odd-lot transaction 
reports and last sale data. See supra notes 160-161 and accompanying 
text. Accordingly, under proposed Rule 600(b)(19)(iv), which 
incorporates data elements required by the NMS plan(s) into the 
proposed consolidated market data, the SROs would continue to be 
required to provide all odd-lot transaction reports and last sale 
data as part of the proposed consolidated market data.
---------------------------------------------------------------------------

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

[[Page 16744]]

quotations in these sizes under Rule 602(a).
    In addition, Rule 602(b) provides that each ``responsible broker or 
dealer'' shall communicate to its SROs its best bids and offers and 
quotation sizes for a ``subject security.'' \210\ Thereafter, each 
responsible broker or dealer is obligated to execute an order to buy or 
sell a subject security, other than an odd-lot order, that is presented 
to that responsible broker or dealer at a price at least as favorable 
to such buyer or seller as the responsible broker's or dealer's 
``published bid or published offer.'' \211\ In other words, the 
responsible broker or dealer must be firm for its ``published bid or 
published offer.'' \212\ As a result of the proposed definition of 
round lot, responsible brokers or dealers will be required to 
communicate bids and offers in the proposed round lot sizes and be firm 
for such bids and offers. The Commission preliminarily believes that 
the proposed round lot definition should apply to the obligations of 
responsible brokers or dealers under Rule 602(b). As explained above, 
the Commission preliminarily believes that the proposed round lot sizes 
better reflect orders of meaningful size in today's markets. The 
Commission also preliminarily believes that the objectives of Rule 
602(b) of ensuring that broker-dealers disseminate their best quotes, 
and are firm for such quotes, would be furthered by applying the 
proposed definition of round lots such that those obligations would 
apply to quotes of meaningful size.
---------------------------------------------------------------------------

    \210\ ``Subject security'' means ``(i) With respect to a 
national securities exchange: (A) Any exchange-traded security other 
than a security for which the executed volume of such exchange, 
during the most recent calendar quarter, comprised one percent or 
less of the aggregate trading volume for such security as reported 
pursuant to an effective transaction reporting plan or effective 
national market system plan; and (B) Any other NMS security for 
which such exchange has in effect an election, pursuant to 
242.602(a)(5)(i), to collect, process, and make available to a 
vendor bids, offers, quotation sizes, and aggregate quotation sizes 
communicated on such exchange; and (ii) With respect to a member of 
a national securities association: (A) Any exchange-traded security 
for which such member acts in the capacity of an OTC market maker 
unless the executed volume of such member, during the most recent 
calendar quarter, comprised one percent or less of the aggregate 
trading volume for such security as reported pursuant to an 
effective transaction reporting plan or effective national market 
system plan; and (B) Any other NMS security for which such member 
acts in the capacity of an OTC market maker and has in effect an 
election, pursuant to 242.602(a)(5)(ii), to communicate to its 
association bids, offers, and quotation sizes for the purpose of 
making such bids, offers, and quotation sizes available to a 
vendor.'' 17 CFR 242.600(b)(77).
    \211\ See Rule 602(b)(2), 17 CFR 242.602(b)(2); Regulation NMS 
Adopting Release, supra note 10, at 37538. ``Published bid and 
published offer means the bid or offer of a responsible broker or 
dealer for an NMS security communicated by it to its national 
securities exchange or association pursuant to Sec.  242.602 and 
displayed by a vendor on a terminal or other display device at the 
time an order is presented for execution to such responsible broker 
or dealer.'' 17 CFR 242.600(b)(64).
    \212\ 17 CFR 242.602(b)(2). See also Rule 600(b)(64) which 
defines ``published bid and published offer.'' 17 CFR 
242.600(b)(64).
---------------------------------------------------------------------------

    Rule 603(c) governs the display of information with respect to 
quotations for and transactions in NMS stocks. Specifically, Rule 
603(c)(1) states that no securities information processor, broker, or 
dealer shall provide, in a context in which a trading or order routing 
decision can be implemented, a display of any information with respect 
to quotations for or transactions in an NMS stock without also 
providing, in an equivalent manner, a consolidated display--i.e., the 
NBBO and consolidated last sale information \213\--for such stock.\214\ 
As a result of the proposed definition of ``round lot,'' a securities 
information processor, broker, or dealer would be required to provide a 
consolidated display that reflects smaller-sized orders in higher-
priced stocks. As discussed above, the Commission preliminarily 
believes that the proposed round lot sizes represent orders of 
meaningful size to market participants. The Commission also 
preliminarily believes that the objective of Rule 603(c) of ensuring 
that market participants receive basic quotation and transaction 
information in a context in which a trading or order routing decision 
can be implemented would be furthered to the extent that such 
information is based on orders of meaningful size such as round lots as 
proposed to be defined in this proposal.
---------------------------------------------------------------------------

    \213\ Rule 600(b)(14) defines ``consolidated display'' as ``(i) 
The prices, sizes, and market identifications of the national best 
bid and national best offer for a security; and (ii) Consolidated 
last sale information for a security.'' 17 CFR 242.600(b)(14).
    \214\ Rule 603(c)(2) further states that this provision does not 
apply to a display of information on the trading floor or through 
the facilities of a national securities exchange or to a display in 
connection with the operation of a market linkage system implemented 
in accordance with an effective national market system plan. 17 CFR 
242.603(c)(2).
---------------------------------------------------------------------------

    Rule 604, which governs the display of customer limit orders for 
NMS stocks, would also be affected by the proposed definition of round 
lot. Rule 604(a)(1) requires each member of a national securities 
exchange that is registered with that exchange as a specialist, or is 
authorized by that exchange to perform functions substantially similar 
to those of a specialist, to publish immediately a bid or offer that 
reflects: (i) The price and the full size of each customer limit order 
held by the specialist that is at a price that would improve the bid or 
offer of such specialist in such security; and (ii) the full size of 
each customer limit order held by the specialist that is priced equal 
to the bid or offer of such specialist for such security, is priced 
equal to the national best bid or national best offer, and represents 
more than a de minimis change in relation to the size associated with 
the specialist's bid or offer. Rule 604(a)(2) imposes similar 
requirements on OTC market makers with respect to their customer limit 
orders. The requirements of Rule 604 do not apply to customer limit 
orders that, among other things, are odd-lots.\215\
---------------------------------------------------------------------------

    \215\ See 17 CFR 242.604(b)(3).
---------------------------------------------------------------------------

    Under the proposed definition of round lot, a specialist or OTC 
market maker would have to include customer limit orders in the new 
round lot sizes within its published bids and offers. Rule 604 
currently applies to round lots and the Commission preliminarily 
believes that Rule 604 should continue to use round lots, as proposed 
to be defined, as the measure for customer limit orders that must be 
reflected in a specialist or OTC market maker's published bid or offer. 
The Commission preliminarily believes that the objectives of Rule 604 
of ensuring that customers have the ability to effectively seek price 
improvement through the dissemination of their limit orders by 
specialists or OTC market makers would be furthered by applying the 
proposed definition of round lot such that those obligations would 
apply to customer limit orders of meaningful size. Therefore, the 
Commission preliminarily believes that the customer limit order display 
requirements of Rule 604 should apply to orders in the new proposed 
round lot sizes.
    Rule 605, which governs the disclosure of order execution quality 
information, would also be affected by the proposed definition of round 
lot because of the effect on the definition of NBBO. Rule 605 requires 
market centers to publish monthly reports containing execution 
statistics \216\ for certain NMS stock orders, including, but not 
limited to, the ``average realized spread,'' \217\

[[Page 16745]]

``average effective spread,'' \218\ data on shares ``executed with 
price improvement,'' \219\ and data on shares ``executed outside the 
quote.'' \220\ The calculations of average realized spread and average 
effective spread rely on the mid-point of the NBBO. Similarly, the 
benchmark for price improvement statistics, as reflected in the 
definitions of ``executed at the quote,'' \221\ ``executed with price 
improvement,'' \222\ and ``executed outside the quote,'' \223\ is the 
NBBO. As discussed above, since the NBBO will be based on the proposed 
round lot sizes, any Rule 605 execution quality statistics that rely on 
the NBBO as a benchmark would be affected by the proposed definition of 
round lot on the NBBO.\224\ The Commission preliminarily believes that 
order execution disclosures required under Rule 605 should be based on 
the NBBO that reflects the new proposed round lot sizes. The NBBO is 
currently based on round lots, and the proposed definition of round lot 
would allow additional orders of meaningful size to determine the NBBO. 
As a result, the execution quality and price improvement statistics 
required under Rule 605 would be based upon an updated NBBO that the 
Commission preliminarily believes is a more meaningful benchmark for 
these statistics. Therefore, the Commission preliminarily believes that 
the NBBO, as modified by the proposed definition of round lot, should 
continue to be used as a basis for the statistics required under Rule 
605.\225\
---------------------------------------------------------------------------

    \216\ Among other things, these reports must be ``categorized by 
order size,'' which means ``dividing orders into separate categories 
for sizes from 100 to 499 shares, from 500 to 1999 shares, from 2000 
to 4999 shares, and 5000 or greater shares.'' 17 CFR 242.600(b)(11).
    \217\ Rule 600(b)(7) defines ``average realized spread'' as 
``the share-weighted average of realized spreads for order 
executions calculated, for buy orders, as double the amount of 
difference between the execution price and the midpoint of the 
national best bid and national best offer five minutes after the 
time of order execution and, for sell orders, as double the amount 
of difference between the midpoint of the national best bid and 
national best offer five minutes after the time of order execution 
and the execution price; provided, however, that the midpoint of the 
final national best bid and national best offer disseminated for 
regular trading hours shall be used to calculate a realized spread 
if it is disseminated less than five minutes after the time of order 
execution.'' 17 CFR 242.600(b)(7).
    \218\ Rule 600(b)(6) defines ``average effective spread'' as 
``the share-weighted average of effective spreads for order 
executions calculated, for buy orders, as double the amount of 
difference between the execution price and the midpoint of the 
national best bid and national best offer at the time of order 
receipt and, for sell orders, as double the amount of difference 
between the midpoint of the national best bid and national best 
offer at the time of order receipt and the execution price.'' 17 CFR 
242.600(b)(6).
    \219\ Rule 600(b)(29) defines ``executed with price 
improvement'' as ``for buy orders, execution at a price lower than 
the national best offer at the time of order receipt and, for sell 
orders, execution at a price higher than the national best bid at 
the time of order receipt.'' 17 CFR 242.600(b)(29).
    \220\ Rule 600(b)(28) defines ``executed outside the quote'' as 
``for buy orders, execution at a price higher than the national best 
offer at the time of order receipt and, for sell orders, execution 
at a price lower than the national best bid at the time of order 
receipt.'' 17 CFR 242.600(b)(28).
    \221\ Rule 600(b)(27) defines ``executed at the quote'' as ``for 
buy orders, execution at a price equal to the national best offer at 
the time of order receipt and, for sell orders, execution at a price 
equal to the national best bid at the time of order receipt.'' 17 
CFR 242.600(b)(27).
    \222\ Supra note 219.
    \223\ Supra note 220.
    \224\ See supra Section III.C.1(d)(i) (discussing the impact of 
the proposed definition of round lot on other Regulation NMS defined 
terms, such as the NBBO). As discussed above, the Commission 
preliminarily believes that actual execution quality for retail 
investors will be improved as a result of the inclusion of odd-lot 
quotes in core data as a result of the better pricing that is often 
reflected in odd-lots.
    \225\ The NBBO used for purposes of Rule 605 would be calculated 
by competing consolidators and self-aggregators using the proposed 
round lot sizes. See supra Section III.C.1(d)(i). Under the 
proposal, each competing consolidator and self-aggregator would be 
required to calculate an NBBO consistent with the requirements set 
forth in the NBBO definition found in Rule 600(b)(50). See proposed 
Rule 614(d)(2). Accordingly, even though each competing consolidator 
and self-aggregator would be calculating its own NBBO, the 
calculation methodology for the NBBO would be consistent. Because 
the NBBO would be calculated in a consistent manner, Rule 605 
reports should still provide uniform comparisons of execution 
quality.
---------------------------------------------------------------------------

    Rule 606, which requires broker-dealers to provide disclosure of 
information regarding the handling of the broker-dealers' customers' 
orders,\226\ would also be affected by the proposed definition of round 
lot because of the effect on the definition of actionable indication of 
interest.\227\ Specifically, Rule 606(b)(3) requires every broker-
dealer, upon a request of a customer who places a not held order, to 
provide the customer with a standardized set of individualized 
disclosures concerning the broker-dealer's handling of the orders. The 
disclosures include, among other things, not held orders exposed by the 
broker-dealer through actionable indications of interest, and the 
venue(s) to which the actionable indications of interest were exposed, 
provided that the identity of such venue(s) may be anonymized if the 
venue is a customer of the broker-dealer. Rule 600(b)(1) defines an 
actionable indication of interest as any indication of interest that 
explicitly or implicitly conveys all of the following information with 
respect to any order available at the venue sending the indication of 
interest: (i) Symbol; (ii) side (buy or sell); (iii) a price that is 
equal to or better than the national best bid for buy orders and the 
national best offer for sell orders; and (iv) a size that is at least 
equal to one round lot.\228\ As a result of the proposed definition of 
round lot, there could be more actionable indications of interest in 
higher priced securities. The Commission preliminarily believes that 
applying the proposed round lot definition to actionable indications of 
interest would further the objectives of Rule 606 regarding the 
disclosure of order handling information--to make it easier for 
investors to evaluate how their brokers handle orders and make more 
informed decisions about brokers, and help investors to better 
understand how broker-dealers route and handle orders and assess the 
impact of broker-dealer routing decisions on order execution quality.
---------------------------------------------------------------------------

    \226\ Broker-dealers who engage in outsourced routing activity 
are exempt from the requirement to comply with Rule 606(b)(3) until 
April 1, 2020. See Securities Exchange Act Release No. 86874 (Sept. 
4, 2019), 84 FR 47625 (Sept. 10, 2019).
    \227\ See 17 CFR 242.600(b)(1). See also Securities Exchange Act 
Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) 
(``Rule 606 Adopting Release'').
    \228\ See id.
---------------------------------------------------------------------------

    In addition, Rule 610, which governs access to quotations, would be 
affected by the proposed definition of round lot. Specifically, Rule 
610(c) prohibits trading centers from imposing fees for the execution 
of an order against a protected quotation or any other quotation that 
is the best bid or offer of an SRO if the fees exceed certain limits 
($0.003 per share for quotes of $1.00 or more and 0.3% of the quotation 
price per share for quotes less than $1.00). As the Commission 
explained in adopting Regulation NMS, ``the purpose of the fee 
limitation is to ensure the fairness and accuracy of displayed 
quotations by establishing an outer limit on the cost of accessing such 
quotations,'' and Rule 610 ``thereby assures order routers that 
displayed prices are, within a limited range, true prices.'' \229\ As a 
result of the proposed definition of round lot, these fee limitations 
would apply to quotes in the smaller round lot sizes because they would 
apply to quotations that are the ``best bid or offer'' of an SRO. Rule 
610(c) currently applies to quotations in round lots and the Commission 
preliminarily believes that Rule 610(c) should apply to quotations in 
the new proposed round lot sizes. The Commission preliminarily believes 
that applying the fee limitations of Rule 610(c) to orders of 
meaningful size, as reflected in the proposed definition of round lot, 
would further that rule's objectives of ensuring the accuracy of 
displayed quotations by establishing an outer limit on the cost of 
accessing them.
---------------------------------------------------------------------------

    \229\ See Regulation NMS Adopting Release, supra note 10, at 
37502.
---------------------------------------------------------------------------

    Finally, Rule 201 of Regulation SHO requires, among other things, 
that trading centers have written policies and procedures reasonably 
designed to prevent the execution or display of a short sale order of a 
covered security at a price that is less than or equal to the current 
national best bid if the price of that covered security decreases by 
10% or more from the covered security's closing price as determined by 
the listing market for the covered security as of the end of regular 
trading hours on

[[Page 16746]]

the prior day.\230\ As a result of the proposed definition of round 
lot, the national best bid would include orders in the proposed round 
lot sizes. The Commission preliminarily believes that the objectives of 
Rule 201 of restricting destabilizing short sale orders in rapidly 
declining markets would be furthered by applying the proposed 
definition of round lot such that bids of meaningful size would be 
included within this restriction.\231\
---------------------------------------------------------------------------

    \230\ 17 CFR 242.201(b)(1)(i).
    \231\ Securities Exchange Act Release No. 61595, supra note 75. 
The Commission also preliminarily believes that instituting a 
different round lot size for purposes of Rule 201 would introduce 
unnecessary complexity into the markets. In particular, excessive 
order routing complexity may be introduced if order routers are 
allowed to execute a short sale order against certain bids (i.e., 
smaller round lots that are priced better than the 100-share 
national best bid) but not allowed to execute a short sale order 
against other bids (i.e., a 100-share bid).
---------------------------------------------------------------------------

    The Commission requests comment on the proposed definition of round 
lot in proposed Rule 600(b)(81) and the inclusion of additional 
quotation information for higher priced shares in proposed core data 
that would result from this proposed definition. In particular, the 
Commission solicits comment on the following:
    8. Should odd-lot quotation data that is not currently reflected in 
SIP data be incorporated into core data, as proposed, and, if so, what 
is the best way to do so?
    9. Should core data, as proposed, include quotation information for 
smaller sized orders in higher priced stocks? Why or why not? Does 
adding this quotation information enhance the usefulness of core data, 
as proposed? Please explain. What kinds of market participants would 
use this information? For what purposes? Would the inclusion of this 
information have any negative or unintended consequences, such as 
``information overload'' effects? Please explain.
    10. Do commenters believe the Commission's proposed definition of 
round lot is an effective way to incorporate this additional quotation 
information into core data, as proposed? Why or why not? What effect 
would the proposed definition have on systems capacity? Please explain 
and provide data. Would the proposed definition affect market 
complexity? Please explain. Do commenters believe that the proposed 
definition of round lot appropriately balances the benefits of 
providing additional quotation data to investors and other market 
participants against potential costs such as additional system burdens 
or increased data complexity? If not, please explain how this balance 
could be more appropriately achieved. Specifically, please provide 
details on the quantity of additional data or the increase in message 
traffic that would be represented by the Commission's proposal and any 
alternative proposals.
    11. Are there alternative approaches, such as requiring all or a 
subset of odd-lot quotations to be included in the proposed definition 
of core data, or directly requiring all quotes over a certain notional 
value to be included in the proposed definition of core data (rather 
than indirectly as in the proposed definition of ``round lot'')? Please 
describe any alternative approaches. What would be the advantages and 
disadvantages of any alternative approaches?
    12. Would the Commission's proposed definition of round lot capture 
a significant portion of the odd-lot quotation activity that is 
currently not included in SIP data? Is the definition appropriately 
tailored to capture the odd-lot quotation information that would be 
useful to market participants? If not, please identify and discuss 
alternative approaches that might be more appropriate. For example, do 
commenters believe round lot sizes and price intervals different from 
those in the proposed definition would capture more useful odd-lot 
quotation data? Please include data to support any suggested 
alternative sizes or price intervals. Please also discuss any issues 
related to increased order routing complexity or compliance with 
Commission rules that might result from the proposed definition of 
``round lot.''
    13. Do commenters believe that odd-lot quotes should be aggregated 
into the new round lot sizes at multiple price levels for the purposes 
of calculating and disseminating the NBBO in the proposed definition of 
core data? Why or why not? What are commenters' views on the specific 
odd-lot aggregation methodology set forth in the proposed definition of 
core data?
    14. Do commenters agree with the Commission's proposal to require 
odd-lot aggregation for purposes of protected quotations only at a 
single price level? Please explain. Should odd-lots be aggregated only 
at a single price level for purposes of determining the protected bid 
and offer for stocks valued at $50.00 or less based on the prior 
calendar month's average closing price on the primary listing exchange 
even though the round lot for this price tier remains 100 shares (i.e., 
both the best bid and offer and protected bid and offer must be 100-
shares in this price tier)? Should a multiple price level aggregation 
methodology for determining protected quotations apply to stocks valued 
at $50.00 or less? Would there be any costs or negative effects of 
having different odd-lot aggregation methodologies for stocks at 
different price levels?
    15. Is a price-based metric for determining round lot size an 
appropriate metric for determining the proposed round lot tiers? Are 
the proposed tiered round lot sizes appropriate? Why or why not? Should 
the tiers be set at different intervals? Should there be more or fewer 
tiers? For example, should the round lot size be one share for any NMS 
stock for which the prior calendar month's average closing price on the 
primary listing exchange was $500.01 or greater? Why or why not? Are 
the round lot sizes appropriate for the share prices? If not, what is 
the appropriate round lot size? Please provide empirical support for 
any suggested alternatives.
    16. Do commenters believe that a significant number of broker-
dealers do not currently subscribe to proprietary market data products, 
including proprietary market data products that include odd-lot 
quotations? If so, how many and what type of broker-dealers (e.g., 
executing broker-dealers, introducing broker-dealers, small broker-
dealers, large broker-dealers)? Are there specific types of proprietary 
market data products to which any such broker-dealers do not subscribe? 
If so, which types of proprietary market data products? Do any such 
broker-dealers subscribe to proprietary data products from some 
exchanges but not others?
    17. Do commenters have views on the odd-lot proposal released by 
the operating committees of the Equity Data Plans? \232\ What are the 
advantages and disadvantages of the proposal by the Equity Data Plans 
as compared to the Commission's proposed definition of round lot?
---------------------------------------------------------------------------

    \232\ See supra notes 181-185.
---------------------------------------------------------------------------

    18. Each of the proposed tiers represent a notional value of over 
$1,000. Is this an appropriate threshold? Should it be higher or lower? 
Please explain and submit data to support your analysis.
    19. Do commenters believe that the prior calendar month's average 
closing price on the primary listing exchange (or IPO price if the 
prior calendar month's average closing price is not available) is an 
effective way to assess the price of a stock for purposes of 
determining its round lot size? Why or why not? Do commenters believe 
it would be costly, difficult, or problematic for market participants 
to adjust procedures and systems to take into account new round lot 
sizes based

[[Page 16747]]

on the prior calendar monthly average closing price on the primary 
listing exchange, or to account for a particular stock's potentially 
different round lot size every month? Are there alternative time 
periods over which a stock's price for purposes of assigning a round 
lot size should be measured or alternative methods for measuring a 
stock's price that the Commission should consider? When should a stock 
whose price changes from one tier to another be assigned to a new round 
lot size and for how long should it remain in that round lot size? 
Would stocks priced near the thresholds that differentiate the round 
lot tiers be affected by frequent shifts between round lot sizes? 
Please explain.
    20. During the month following the IPO of a newly listed stock, 
should a minimum number of trading days be required to elapse before 
the stock's round lot size is determined? If so, should the average 
daily closing price on the primary listing exchange (or some other 
metric) over the course of that number of trading days be used to 
calculate the stock's price for purposes of determining its round lot 
size? If so, how would the stock's round lot size be determined in the 
interim?
    21. Do commenters have views on how monthly average closing price 
should be determined for stocks that are not traded every day? Should 
the closing price of the most recent trading day on which there was a 
trade be used each intervening day until the stock is traded again?
    22. Do commenters believe that the impacts of the proposed 
definition of round lot on the Commission rules described above are 
appropriate? Why or why not? Will any SRO rules be affected? Please 
explain. Specifically, please describe any effect of the proposed 
definition of round lot on market maker quoting obligations under SRO 
rules.
    23. Should the proposed definition of round lot apply to Rules 602 
and 604? Do commenters believe the applicability of the proposed 
smaller round lot sizes to these rules will help foster more displayed 
quotations of small orders? Do commenters believe this will result in a 
significant tightening of quoted spreads?
    24. Should the Commission amend Rule 605 in light of the proposed 
round lot definition? Specifically, since the disclosures required by 
Rule 605 must be ``categorized by order size,'' \233\ which currently 
begins at 100 shares, should the definition of ``categorized by order 
size'' be amended to require the relevant execution information to be 
provided for sub-100 share orders, such as orders in the proposed round 
lot sizes? Do commenters believe this would negatively or positively 
affect the execution quality statistics provided pursuant to Rule 605? 
More broadly, do commenters believe the proposed definition of round 
lot would improve the actual prices provided to retail investors (as 
distinct from the Rule 605 execution quality statistics)?
---------------------------------------------------------------------------

    \233\ See supra note 216.
---------------------------------------------------------------------------

    25. Should the proposed definition of round lot apply to Rule 
610(c)? Specifically, should the fee limits under Rule 610(c) apply to 
quotations in the proposed new round lot sizes? Would exchanges or 
other trading centers increase access fees for the smaller round lots 
if Rule 610(c) were limited to 100-share protected quotations? Why or 
why not? Do commenters believe that market forces would provide 
sufficient control over access fees for quotations in the smaller round 
lots? Why or why not? Should Rule 610(c) be limited to the Commission's 
definition of protected bid or protected offer, as amended? What would 
be the benefits and costs of each approach?
    26. Should the proposed definition of round lot apply to Rule 201 
of Regulation SHO? Would the scope of Rule 201 be expanded as a result 
of the proposed definition of round lot in a way that would 
unnecessarily restrict the ability of market participants to sell 
short? Will additional or excessive order routing complexity result 
from the application of Rule 201 to quotations in the proposed smaller 
round lot sizes? Should ``protected bid,'' as proposed to be amended, 
rather than the national best bid be used as the reference price for 
determining which short sales are required to be prevented under Rule 
201? What would be the benefits and costs of each approach?
    27. Do commenters believe that the proposed definition of round lot 
would have any effect on an exchange's official closing prices? Would 
the proposed definition of round lot have any effect on the pricing 
practices of mutual funds and other investment companies, including the 
calculation of net asset value or trading in portfolio securities? 
Please explain the potential costs and benefits of any such effects.
    28. Do commenters believe that the proposed definition of round lot 
would affect the proportion of on-exchange or off-exchange liquidity? 
Please explain.
    (ii) Proposed Amendments to the Definition of Protected Bid or 
Protected Offer
    Rule 611 requires trading centers to have policies and procedures 
that are reasonably designed to prevent trade-throughs on that trading 
center of protected bids or protected offers in NMS stocks, subject to 
specified exceptions.\234\ Rule 611 currently applies only to round 
lots.\235\ If the definition of protected bid or protected offer were 
left unmodified, the Commission's proposed definition of round lot 
would result in an expansion of Rule 611 by requiring the protection of 
quotations in the new smaller round lot sizes.
---------------------------------------------------------------------------

    \234\ Rule 611(a)(1). See also supra notes 115, 182. Rule 
600(b)(81) defines ``trade-through'' as ``the purchase or sale of an 
NMS stock during regular trading hours, either as principal or 
agent, at a price that is lower than a protected bid or higher than 
a protected offer.'' 17 CFR 242.600(b)(81).
    \235\ Specifically, Rule 611 applies to ``protected quotations'' 
which means ``protected bid[s] or []protected offer[s].'' 17 CFR 
242.600(b)(62). ``Protected bid or protected offer,'' as defined in 
Rule 600(b)(61), refers to ``a quotation,'' defined in Rule 
600(b)(66), which in turn refers to ``a bid or an offer,'' defined 
in Rule 600(b)(9), which, as noted above, applies to round lots.
---------------------------------------------------------------------------

    Whether Rule 611 should be modified or repealed has been the 
subject of much debate in recent years.\236\ Rule

[[Page 16748]]

611 was controversial when adopted,\237\ with many commenters either 
opposing the rule entirely or advocating for exceptions, such as for 
block trades or for those wishing to opt out of the Rule's 
protections.\238\ In the years since, Rule 611 has continued to be the 
subject of much debate, with some arguing that the rule has negatively 
impacted equity market structure, others taking the position that any 
benefits were achieved early on when the Rule induced widespread 
automated quotations and connectivity, and yet others expressing the 
view that the Rule continues to play an important role in supporting 
best execution and retail investor confidence.\239\ Recently, a 
Subcommittee of the Commission's Equity Market Structure Advisory 
Committee advocated that the EMSAC recommend that the Commission 
consider repealing Rule 611 on a pilot basis to test its impact.\240\
---------------------------------------------------------------------------

    \236\ For example, in its April 2017 memorandum discussing Rules 
610 and 611 under the Exchange Act, the Equity Market Structure 
Advisory Committee (``EMSAC'') Regulation NMS Subcommittee 
(``Subcommittee'') stated that the industry largely remained divided 
in its view on both the success and the continued need for the 
trade-through and the locked and crossed markets provisions of 
Regulation NMS. See Memorandum to EMSAC from the Subcommittee (Apr. 
3, 2017), available at https://www.sec.gov/spotlight/emsac/emaac-regulation-nms-subcommittee-discussion-framework-040317.pdf. In the 
memorandum, the Subcommittee recommended, among other things, that 
the Commission consider repealing Rule 611 on a pilot basis, with 
the goals of reducing excess complexity in the marketplace (as 
demonstrated by venue fragmentation, order types, and routing 
complexity); testing the hypothesis that Rule 611 has not created an 
incentive for posting visible liquidity; and opening the markets to 
competition and innovation over a longer time horizon, which the 
Subcommittee believed is currently constrained due to the 
proscriptive nature of Regulation NMS. The Subcommittee noted 
several arguments supporting the removal of Rule 611, including the 
apparent failure of Regulation NMS to increase the display of limit 
orders in the marketplace and the increase in dark liquidity, 
smaller trade sizes, and ``small'' venues; the de minimis benefit 
from decreased trade-through rates, coupled with a relatively high 
cost of trade-through compliance and the creation of new venues, 
complex order types, and a need to focus on speed and other market 
complexities as a requirement to manage queue priority; the fact 
that competition among market centers is largely based on price and 
speed; and the difficulty of setting the NBBO in active stocks 
without the use of sophisticated price-sliding order types and 
intermarket sweep orders. The Subcommittee also identified several 
arguments in support of retaining Rule 611, including concerns, 
especially among individual investors, of losing the best execution 
backstop of the trade-through rule; the concern that individual 
investors' non-marketable orders would lose trade-through 
protection; and a concern regarding the amount of effort that could 
be required to further monitor order routing behavior by agents in 
the absence of a trade-through rule. The Subcommittee also expressed 
the view that Rule 611 is too prescriptive as a best execution rule 
and that concerns about best execution could be addressed more 
effectively through enhanced guidance and procedures.
    \237\ See Regulation NMS Adopting Release, supra note 10, 
dissenting opinion.
    \238\ See Regulation NMS Adopting Release, supra note 10, at 
37505-37506, 37516, 37524-37526.
    \239\ See Memorandum to EMSAC from the Subcommittee, supra note 
236; Letter from Theodore R. Lazo, Managing Director and Associate 
General Counsel, SIFMA to Brent J. Fields, Secretary, SEC, 5-7 (Mar. 
29, 2017), available at https://www.sec.gov/comments/s7-21-16/s72116-1674693-149275.pdf (recommending that the SEC consider (1) 
eliminating Rule 611 and relying on the duty of best execution to 
maintain intermarket price protection, or (2) modifications to Rule 
611 to add volume thresholds for protected quote status and a block 
exception); Letter from William R. Harts, CEO, Modern Markets 
Initiative, to Brent J. Fields, Secretary, SEC (Dec. 9, 2016), 
available at https://www.sec.gov/comments/s7-21-16/s72116-9.pdf 
(recommending that the SEC review Rule 611 to assess whether it 
should be modified in light of the costs of compliance).
    \240\ See Memorandum to EMSAC from the Subcommittee, supra note 
236.
---------------------------------------------------------------------------

    In light of the concerns about the existing scope of Rule 611, the 
Commission preliminarily believes that Rule 611 should not be extended 
to smaller-sized quotations reflected in the proposed definition of 
round lot. Moreover, the Commission preliminarily believes that 
extending Rule 611 to the proposed new round lots is not necessary in 
light of market developments since the adoption of Regulation NMS in 
2005. While a substantial amount of trading in 2005 was conducted on 
relatively slow manual markets,\241\ and was concentrated for any given 
stock on its listing exchanges,\242\ nearly all trading now occurs on 
fast, electronic markets (where even small degrees of latency affect 
trading strategies) and is dispersed among a wide range of competing 
market centers.\243\ In a market environment characterized by fast, 
electronic trading across multiple venues, order routing and execution 
strategies have become highly automated and increasingly sophisticated 
at obtaining the best prices throughout the national market 
system.\244\ In addition, best execution obligations apply to odd-lot 
orders \245\ and would apply to bids and offers in the proposed round 
lot sizes. The Commission preliminarily believes that these market 
developments and improvements in trading and order routing technology, 
in combination with their pursuit of best execution, would provide 
sufficient incentives for market participants to engage with 
meaningfully sized orders \246\ even in the absence of an expanded 
order protection mandate under Rule 611.\247\ Further, the additional 
pre-trade transparency that would be provided to these orders by their 
inclusion in proposed core data should encourage market participants to 
access this liquidity, as many market participants that access similar 
data through proprietary feeds are already doing today.\248\ Moreover, 
as discussed above, the execution quality and price improvement 
statistics required under Rule 605 would be based upon an NBBO that 
reflects the new proposed round lot sizes, and would provide investors, 
including retail investors, with higher-quality information about their 
order executions.
---------------------------------------------------------------------------

    \241\ See Equity Market Structure Concept Release, supra note 
11, 75 FR at 3594 (``NYSE-listed stocks were traded primarily on the 
floor of the NYSE in a manual fashion until October 2006. At that 
time, NYSE began to offer fully automated access to its displayed 
quotations.''). In contrast to NYSE, stocks listed on Nasdaq traded 
in a highly automated fashion at many different trading centers 
following the introduction of SuperMontage in 2002. See Securities 
Exchange Act Release No. 46429, supra note 15; Steven Quirk, Senior 
Vice President, Trader Group, TD Ameritrade, Testimony before the 
U.S. Senate Committee on Homeland Security and Governmental Affairs, 
Permanent Subcommittee on Investigations, Hearing on ``Conflicts of 
Interest, Investor Loss of Confidence, and High Speed Trading in 
U.S. Stock Markets'' (June 17, 2014), available at https://www.hsgac.senate.gov/imo/media/doc/STMT%20-%20Quirk%20-%20TD%20Ameritrade%20(June%2017%202014).pdf%20 (citing statistics 
that average execution speed has improved by 90% since 2004--from 7 
seconds to 0.7 seconds in 2014). Today, trading speed is measured in 
microseconds and is moving towards nanoseconds. See, e.g., Vera 
Sprothen, Trading Tech Accelerates Toward Speed of Light, Wall 
Street Journal (Aug. 8, 2016), available at https://www.wsj.com/articles/trading-tech-accelerates-toward-speed-of-light-1470559173; 
Alexander Osipovich, NYSE Aims to Speed Up Trading With Core Tech 
Upgrade, Wall Street Journal (Aug. 5, 2019), available at https://www.wsj.com/articles/nyse-aims-to-speed-up-trading-with-core-tech-upgrade-11565002800.
    \242\ See Securities Exchange Act Release No. 59039 (Dec. 2, 
2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File No. SR-NYSEArca-2006-
21) (NYSE's reported market share of trading in NYSE-listed stocks 
declined from 79.1% in January 2005 to 30.6% in June 2008.); Equity 
Market Structure Concept Release, supra note 11.
    \243\ See Equity Market Structure Concept Release, supra note 
11, 75 FR at 3598 (``The registered exchanges all have adopted 
highly automated trading systems that can offer extremely high-
speed, or `low-latency,' order responses and executions.'').
    \244\ See Equity Market Structure Concept Release, supra note 
11, at 3594, 3598; Paul G. Mahoney and Gabriel Rauterberg, The 
Regulation of Trading Markets: A Survey and Evaluation, University 
of Virginia School of Law, Law and Economics Research Paper Series 
2017-07, at 6 (Apr. 2017) (``Brokers overwhelmingly place orders and 
trade through [NYSE's] electronic trading system . . . all markets 
have come to rely more and more on using software to match buy and 
sell orders automatically.'').
    \245\ See Securities Exchange Act Release No. 37619A (Sept. 6, 
1996) 61 FR 48290, 48305 and 48323 (Sept. 12, 1996) (``Order 
Execution Obligations Release'') (``The market maker still will have 
best execution obligations with respect to the remaining odd-lot 
portion of the customer limit order.'').
    \246\ See supra notes 196-198 and accompanying text (explaining 
that the proposed definition of round lot is intended to reflect 
orders of meaningful size for today's market participants).
    \247\ Moreover, the Commission is aware that many market 
participants today already utilize proprietary data feeds that 
include odd-lots and, therefore, already have visibility into odd-
lot quotations priced better than the NBBO. Accordingly, since these 
market participants already see and trade with quotations that are 
priced better than protected quotations and have best execution 
obligations, the greater transparency into smaller-sized orders that 
the Commission is proposing is not dissimilar from the trading 
environment that exists today for many market participants. See also 
supra note 90.
    \248\ See supra Section III.C.1(b) (stating that, during the 
month of September 2019, approximately 51% of all trades executed on 
exchange and approximately 14% of all volume executed on exchange in 
corporate stocks occurred in odd-lot sizes and 43% of those odd-lot 
transactions (representing approximately 39% of all odd-lot volume) 
occurred at a price better than the NBBO); supra Tables 2 and 3 
(showing the portion of all trades and volume less than 100 shares, 
at a price better than the prevailing NBBO, occurring in a quantity 
that would be defined as a round lot under the proposal).
---------------------------------------------------------------------------

    Thus, the Commission is proposing to amend the definition of 
``protected bid or protected offer'' in Rule 600(b)(61) by requiring 
automated quotations that are the best bid or offer of a national 
securities exchange or national securities association to be ``of at 
least 100 shares'' in order to qualify as a protected bid or protected 
offer. The proposed addition of this language will preserve the 
existing scope of Rule 611 for the vast majority of NMS stocks.\249\
---------------------------------------------------------------------------

    \249\ But see infra notes 250-252 and accompanying text 
(discussing stocks that currently have non-100 share round lot 
sizes). In addition, the proposed amendments to the definition of 
protected bid or protected offer would also provide clarity to 
market participants as to whether quotations in the new round lot 
sizes are protected quotations for purposes of Rule 611, which is 
responsive to comments made by some Roundtable panelists regarding 
uncertainty as to whether additional odd-lot quotation information 
would be protected under Rule 611. See supra note 179 and 
accompanying text.

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

[[Page 16749]]

    As noted above, exchange rules generally permit the exchange to 
assign a round lot size other than 100 shares.\250\ As of market close 
on August 8, 2019, 12 stocks had a round lot size other than 100 
shares,\251\ and because they are round lots, they are protected 
quotations to the extent that they satisfy the other requirements in 
the definition.\252\ Therefore, Rule 611 currently applies to orders of 
those stocks in their non-100 share round lot sizes. The proposed 
amendment to the definition of protected bid and protected offer would 
mean that the smaller round lot orders in these 12 stocks would no 
longer be protected quotations, and therefore they would no longer be 
subject to Rule 611. The Commission preliminarily believes that the 
rule should be consistently applied to protected quotations of 100 
shares or more (or quotations of fewer than 100 shares that can be 
aggregated at a single price into 100 shares or more). The Commission 
preliminarily believes that a single test for the applicability of the 
protected quotation definition, without special exceptions for certain 
stocks, would be simpler, would facilitate compliance with Rule 611, 
and would set consistent expectations among market participants. 
Further, the Commission preliminarily believes that competition among 
broker-dealers, improvements in trading and order routing 
technology,\253\ and the continued applicability of best execution 
requirements to sub-100 share orders of these stocks would provide 
sufficient incentives for the attainment of high-quality executions of 
such orders even in the absence of trade-through protection pursuant to 
Rule 611.\254\
---------------------------------------------------------------------------

    \250\ See supra note 141.
    \251\ Of the 12 stocks that had non-100 share round lot sizes, 
ten had a round lot of ten, and two had a round lot of one. Seven 
are common stocks, and five are preferred stocks. Prices of these 
stocks ranged from about $27 to over $300,000. See supra note 141 
and accompanying text. Currently, each of these stocks is thinly-
traded. For example, during the third quarter of 2019, each of these 
stocks had: An average daily share volume below 40,000, with most 
trading only hundreds of shares a day; an average trade count of 
less than 3,200, with some trading only dozens of times per day; and 
an average daily dollar volume of less than $130 million, with most 
trading on average less than $1 million per day.
    \252\ A ``protected bid or protected offer'' is defined as a 
``quotation in an NMS stock that (i) is displayed by an automated 
trading center; (ii) is disseminated pursuant to an effective NMS 
plan; and (iii) is an automated quotation that is the best bid or 
best offer of a national securities exchange . . . or national 
securities association.'' Rule 600(b)(61), 17 CFR 242.600(b)(61). 
``Protected quotation means a protected bid or protected offer.'' 
Rule 600(b)(62), 17 CFR 242.600(b)(62). As explained above, 
``protected quotations'' must be round lots, and exchange rules 
permit round lot sizes other than 100, so quotes in these stocks in 
their non-100 round lot sizes are ``protected quotes.'' See supra 
notes 141, 235. Similarly, other rules in Regulation NMS that apply 
to round lots as a result of references to ``bid or offer'' or other 
defined terms that directly or indirectly reference ``round lot,'' 
such as Rules 602, 603, 604, and 605, also apply to 1 or 10 share 
round lot quotes of these stocks.
    \253\ See supra notes 241-244 and accompanying text.
    \254\ See supra note 245.
---------------------------------------------------------------------------

    The Commission is also proposing to delete the references to ``The 
Nasdaq Stock Market, Inc.'' in the definition of protected bid or 
protected offer. Since the Nasdaq Stock Market is now a national 
securities exchange, that language is redundant.
    Finally, the locked and crossed markets restrictions of Rule 610 
are based on the term ``protected quotation.'' Specifically, Rule 
610(d) requires each national securities exchange and national 
securities association to establish, maintain, and enforce rules that, 
among other things, require its members to reasonably avoid displaying 
quotations that lock or cross any protected quotation in an NMS stock 
and that prohibit its members from engaging in a pattern or practice of 
displaying quotations that lock or cross any protected quotation in an 
NMS stock, absent an applicable exception. Under the proposed 
amendments to the definition of protected bid or protected offer, 
``protected quotation'' will refer to displayed, automated quotations 
that are the best bids or offers of at least 100 shares of a national 
securities exchange or association. As a result, quotations in the new, 
smaller proposed round lot sizes would not be subject to Rule 610(d) 
and could be locked or crossed.\255\
---------------------------------------------------------------------------

    \255\ For example, pursuant to the proposed definitions of round 
lot and protected bid or offer, a 20 share buy order for a stock 
that had an average monthly closing price of between $50.01 and 
$100.00 could be locked or crossed.
---------------------------------------------------------------------------

    As with Rule 611, the locked and crossed markets provisions of Rule 
610 continue to be the subject of much debate, with some arguing that 
they create additional market complexity without a clear benefit.\256\ 
Recently, a Subcommittee of the Commission's EMSAC advocated that the 
EMSAC recommend that the Commission consider repealing the locked and 
crossed markets provisions of Rule 610 on a pilot basis to test its 
impact, in conjunction with an access fee pilot.\257\ In light of the 
concerns about the existing scope of the locked and crossed markets 
provisions of Rule 610, the Commission preliminarily believes that such 
provisions should not be extended to smaller sized quotations reflected 
in the proposed definition of round lot. In addition, the Commission 
preliminarily believes that market forces, such as the economic 
incentives of market participants to obtain the best price and resolve 
locked or crossed markets, as well as improvements in trading and order 
routing technology,\258\ are sufficient to mitigate excessive locking 
or crossing of quotations in the new round lot sizes and to resolve 
such locked or crossed markets efficiently.
---------------------------------------------------------------------------

    \256\ See Memorandum to EMSAC from the Subcommittee, supra note 
236; Letter from Joanna Mallers, Secretary, FIA Principal Trading 
Group, to Brent J. Fields, Secretary, SEC, 2-3 (Mar. 13, 2017), 
available at https://www.sec.gov/comments/s7-21-16/s72116-1686170-149597.pdf (recommending the Commission review Rule 610(d) in light 
of increased complexity associated with restrictions on locking and 
crossing quotations); Letter from William R. Harts, CEO, Modern 
Markets Initiative, to Brent J. Fields, Secretary, SEC (Dec. 9, 
2016), available at https://www.sec.gov/comments/s7-21-16/s72116-9.pdf (recommending the Commission review the prohibition on locking 
or crossing quotations in light of the unnecessary complexity and 
investor confusion).
    \257\ See Memorandum to EMSAC from the Subcommittee, supra note 
236.
    \258\ See supra notes 241-244 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendments to the 
definition of protected bid or protected offer in proposed Rule 
600(b)(69). In particular, the Commission solicits comment on the 
following:
    29. Do commenters believe that the Commission's proposed amendments 
to the definition of protected bid or protected offer are an effective 
way to continue to require order protection for 100 share orders but 
not for smaller orders, or would an alternative be better? Please 
explain.
    30. Do commenters believe that the definition of NBBO should 
reflect the proposed round lot sizes or should it remain consistent 
with the 100-share protected quotation? Why or why not?
    31. Do commenters believe that Rule 611 should be extended to 
orders in the smaller round lot sizes set forth in the proposed 
definition of round lot? Why or why not? If Rule 611 were to be 
extended to the proposed smaller round lot sizes, would there be any 
negative or unintended consequences? Please explain in detail.
    32. Do commenters believe it would be costly for market 
participants to adjust procedures and systems to comply with Rule 611 
and prevent trade-throughs at the smaller round lot sizes? Please 
describe the necessary changes and any consequent costs in detail.
    33. Do commenters believe it would be costly for market 
participants to

[[Page 16750]]

adjust procedures and systems to comply with Rule 611 and prevent 
trade-throughs at 100 share order sizes when the new round lot size may 
be smaller? Please describe the necessary changes and any consequent 
costs in detail. Please also discuss how this differs meaningfully from 
today, if at all, for market participants that are currently using 
proprietary data feeds that include odd-lot information.
    34. Do commenters believe that the best execution obligation, 
combined with the greater transparency that the Commission is proposing 
for smaller-sized orders in higher-priced stocks, is sufficient, in the 
absence of the order protection rule, for market participants to engage 
with the liquidity represented by orders in the proposed round lot 
sizes to obtain the best execution for smaller-sized customer orders?
    35. Should the Commission maintain the applicability of Rule 611 to 
the small number of stocks \259\ that currently have a round lot other 
than 100? Why or why not?
---------------------------------------------------------------------------

    \259\ See supra note 141.
---------------------------------------------------------------------------

    36. Do commenters agree with the proposal not to extend Rule 610's 
locking and crossing requirements to orders with the proposed smaller-
round lot sizes? If not, why not? Do commenters have views or data on 
the frequency with which smaller-sized orders would be locked or 
crossed? Please explain. Would it be costly to apply locking and 
crossing prevention mechanisms to the new round lot sizes? Please 
explain.
(iii) Proposed Amendments to the Definition of National Best Bid and 
National Best Offer
    Today, the NBBO is calculated by the exclusive SIPs and 
disseminated over the consolidated tapes.\260\ The NBBO is defined in 
Rule 600(b)(43) as the best bid and best offer \261\ for an NMS 
security \262\ that is calculated and disseminated on a current and 
continuous basis by the exclusive SIPs. The definition further provides 
that if two or more market centers transmit identical bids or offers 
for an NMS security, the best bid or best offer shall be determined by 
ranking all identical bids or offers first by size (giving the highest 
ranking to the bid or offer associated with the largest size) and then 
by time (giving the highest ranking to the bid or offer received first 
in time). Accordingly, the NBBO reflects one market center that is the 
best bid and one market center that is the best offer across all market 
centers.
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    \260\ In addition, market participants that purchase exchange 
proprietary feeds may calculate their own NBBOs for their internal 
purposes.
    \261\ As discussed above, the best bid or best offer for an NMS 
stock of an exchange may contain multiple prices that are better 
than the best bid or best offer to the extent that an exchange 
aggregates better priced odd-lots and provides them to the exclusive 
SIPs at the least aggressive price that forms a round lot.
    \262\ The definition of NMS security is broader than NMS stock 
and includes ``any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.'' 17 CFR 242.600(47).
---------------------------------------------------------------------------

    As noted above, the proposed round lot definition would affect the 
calculation of the NBBO by requiring that the best bids and offers 
transmitted by the SROs to be in the new round lot sizes.\263\ 
Accordingly, the proposed definition of round lot, if adopted, would 
result in an NBBO that reflects the smaller round lot sizes.
---------------------------------------------------------------------------

    \263\ See supra Section III.C.1(d)(i).
---------------------------------------------------------------------------

    The proposed definition of round lot does not necessitate changes 
to the definition of NBBO. However, as discussed further below, the 
Commission is proposing a decentralized consolidation model where 
competing consolidators and self-aggregators would replace the 
exclusive SIPs. Therefore, the Commission is proposing amendments to 
the definition of NBBO to reflect that competing consolidators and 
self-aggregators, rather than the exclusive SIPs, would be calculating 
the NBBO in the proposed decentralized consolidation model. In 
addition, to accommodate this proposed decentralized consolidation 
model, the Commission is proposing to bifurcate the NBBO definition 
between NMS stocks and other NMS securities (i.e., listed options) to 
reflect that the proposed decentralized consolidation would apply only 
with regard to NMS stocks, and therefore the exclusive SIP for options 
would continue to be responsible for calculating and disseminating the 
NBBO in listed options.\264\ The proposed changes to the definition of 
NBBO would not impact the manner in which the NBBO is calculated for 
NMS stocks or listed options.
---------------------------------------------------------------------------

    \264\ The competing consolidator model described herein 
addresses the current market data infrastructure for NMS stocks and 
not the exclusive SIP for options. See infra note 417.
---------------------------------------------------------------------------

    Specifically, the NBBO for an NMS stock would be the best bid and 
best offer for such stock that is calculated and disseminated on a 
current and continuing basis by a competing consolidator or calculated 
by a self-aggregator.\265\ The Commission is proposing to remove 
references to a plan processor for NMS stocks because under the 
proposed decentralized consolidation model, there would not be plan 
processors. Further, competing consolidators and self-aggregators would 
have to calculate the NBBO in the same manner as it is calculated by 
the exclusive SIPs today, including the method currently set forth in 
the definition of NBBO for determining the best bid or offer in the 
event that two or more market centers transmit identical bid or offer 
prices.
---------------------------------------------------------------------------

    \265\ See infra notes 499-502 and accompanying text.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendments to the 
definition of national best bid and national best offer in proposed 
Rule 600(b)(50). In particular, the Commission solicits comment on the 
following:
    37. What are commenters' views on the proposed amendments to the 
definition of national best bid and national best offer? Do the 
proposed amendments make appropriate adjustments to the definition to 
accommodate the proposed introduction of a consolidated market data 
distribution model with competing consolidators and self-aggregators? 
Are any additional amendments needed, whether to the definition of NBBO 
or to other provisions? Please be specific.
2. Depth of Book Data
    Core data currently lacks quotation information in NMS stocks 
beyond the best round lot quotes of each SRO, commonly referred to as 
the ``top of book.'' However, as regulatory changes and market 
developments, such as decimalization, have increased the significance 
of information on quotes away from the best prices,\266\ some have 
suggested that core data be expanded to include certain depth of book 
data (i.e., quotations and aggregate size at prices outside the 
BBO).\267\
---------------------------------------------------------------------------

    \266\ See infra notes 276-277 and accompanying text.
    \267\ See, e.g., Roundtable Day One Transcript at 120 (Jeff 
Brown, Charles Schwab) (``So our recommendation for this panel and 
for this day is that the SEC move to impose . . . depth of book on 
the SIP.''). Suggestions for enhancing core data, however, have 
failed to garner the support by participants to the Equity Data 
Plans necessary for action. See infra Section III.C.2(c); supra note 
164 and accompanying text; supra Section II.A (discussing the 
distinction between the exclusive SIPs and proprietary DOB data 
feeds and market participants' views regarding their ability to use 
core data to be competitive in today's markets and provide best 
execution to their customers). See also, e.g., NYSE Sharing Data-
Driven Insights--Stock Quotes and Trade Data: One Size Doesn't Fit 
All (Aug. 22, 2019), available at https://www.nyse.com/equities-insights#20190822 (proposing to replace the exclusive SIP feeds with 
three tiered levels of service, including certain DOB data, based on 
the needs of specific types of investors).
---------------------------------------------------------------------------

    The Commission is proposing to define core data to include certain

[[Page 16751]]

``depth of book data.'' Specifically, depth of book data would be 
defined to include aggregated quotes at each price between the best bid 
(and best offer) and the protected bid (and protected offer) (if 
different), as well as the five price levels above the protected offer 
and below the protected bid.\268\ The Commission preliminarily believes 
this approach would approximate the level of liquidity information 
available to market participants at the best bid or offer prior to 
decimalization and enable market participants to use proposed core data 
to trade in a more informed and effective manner.\269\
---------------------------------------------------------------------------

    \268\ See supra Section III.C.1(d).
    \269\ Id. See also infra notes 310-313 and accompanying text 
(describing how depth of book data can be used to optimize order 
placement and to provide directional signals regarding near-term 
market movements.).
---------------------------------------------------------------------------

(a) Regulatory Background
    Regulation NMS and the Equity Data Plans neither require nor 
prohibit the collection, consolidation, or dissemination of depth of 
book data. Rule 602 requires that national securities exchanges and 
associations make available their best bids and best offers, which are 
defined in Rule 600(b)(8) as the highest priced bid and lowest priced 
offer. Similarly, Rule 603(b) requires the dissemination of an NBBO, 
and the definition of NBBO in Rule 600(b)(43) refers to best bids and 
best offers. Market participants that want depth of book data for 
trading must rely upon the proprietary feeds offered by the exchanges, 
which include varying degrees of depth of book data.\270\
---------------------------------------------------------------------------

    \270\ For example, CBOE One Premium offers five levels of 
aggregated depth while NYSE XDP Integrated, Nasdaq Total View, and 
CBOE Depth offer complete depth of book.
---------------------------------------------------------------------------

    In adopting Regulation NMS, the Commission considered the scope of 
quotations to which trade-through protection should apply under Rule 
611. The Commission decided to apply Rule 611 to protected quotations 
\271\ but not to depth of book quotations.\272\ Similarly, the 
Commission determined not to require that depth of book quotations be 
included in core data, reasoning that investors who needed depth of 
book data would be able to obtain that data from markets or third-party 
vendors.\273\ However, the Commission acknowledged that depth of book 
data is important to investors and updated former Exchange Act Rule 
11Ac1-2 (redesignated as Rule 603) to address the independent 
dissemination of depth of book and other market data by the 
exchanges.\274\ After the adoption of Regulation NMS in 2005, exchanges 
began to sell their proprietary data products separately from the core 
data required by Rule 603(b) of Regulation NMS.\275\
---------------------------------------------------------------------------

    \271\ See supra note 115.
    \272\ Specifically, the Commission considered a ``Voluntary 
Depth Alternative'' under which, in addition to protecting the best 
bids and offers of each SRO (the Market BBO Alternative), depth of 
book quotations that markets voluntarily disseminate in the 
consolidated quotations stream would be protected as well. See 
Regulation NMS Adopting Release, supra note 10, at 37529. The 
Commission decided to adopt the Market BBO Alternative, explaining 
that it would represent a major step toward achieving the objectives 
of intermarket price protection but with fewer of the costs and 
drawbacks associated with the Voluntary Depth Alternative. The 
Commission noted that the Market BBO Alternative will promote best 
execution for retail investors on an order-by-order basis, given 
that most retail investors justifiably expect that their orders will 
be executed at the NBBO and that the Market BBO Alternative would 
not require an expansion of the data disseminated through the 
exclusive SIP Plans. Id. at 37530.
    \273\ See Regulation NMS Adopting Release, supra note 10, at 
37567. In making that determination, the Commission stated that this 
would be ``a competition-driven outcome [that] would benefit 
investors and the markets in general.'' See id. at 37530.
    \274\ See Regulation NMS Adopting Release, supra note 10, at 
37565; 17 CFR 242.603(a)(2) (an exchange ``that distributes 
information with respect to quotations for or transactions in an NMS 
stock to a securities information processor, broker, dealer, or 
other persons shall do so on terms that are not unreasonably 
discriminatory''). While the pre-Regulation NMS rules did not 
prohibit the independent distribution of quotes by individual SROs, 
Rule 603(a) was intended to impose ``uniform standards'' to such 
distribution (i.e., the ``fair and reasonable'' and ``not 
unreasonably discriminatory'' standards). See Regulation NMS 
Adopting Release, supra note 10, at 37569. Prior to Regulation NMS, 
however, SROs and their members were prohibited from disseminating 
their trade reports independently. Id. at 37589.
    \275\ See supra note 19 and accompanying text.
---------------------------------------------------------------------------

(b) Market Evolution
    The decimalization of securities pricing in 2001, and the resulting 
shift away from the larger fractional quoting and trading 
increments,\276\ had significant implications for the amount of 
liquidity available at the top of book, the transparency of order book 
liquidity, and the need for market participants to obtain depth of book 
information. With the larger quoting and trading increments associated 
with fractional quoting, such as one-sixteenth of a dollar, trading 
interest was distributed across fewer price points and more liquidity 
(i.e., aggregate order interest) was concentrated at the top of book. 
For example, as the Commission noted in adopting Regulation NMS, 
``depth-of-book quotations have become increasingly important as 
decimal trading has spread displayed depth across a greater number of 
price points.'' \277\
---------------------------------------------------------------------------

    \276\ See Securities Exchange Act Release No. 42914 (June 8, 
2000), 65 FR 38010 (June 19, 2000) (directing the National 
Association of Securities Dealers and the national securities 
exchanges to act jointly in developing a plan to convert their 
quotations in equity securities and options from fractions to 
decimals).
    \277\ Regulation NMS Adopting Release, supra note 10, at 37592; 
see also Securities Exchange Act Release No. 50870 (Dec. 16, 2004), 
69 FR 77424 (Dec. 27, 2004) (``the initiation of trading in penny 
increments in 2001 transformed the equity markets. The number of 
quotation updates increased, and the quoted size at any particular 
price level dropped'').
---------------------------------------------------------------------------

    Since the implementation of decimalization, market participants 
have raised concerns about reduced price transparency and difficulty 
executing large transactions at the best prices due to lower 
concentrations of trading interest at the top of book.\278\ In the 
Report to Congress on Decimalization, required under Section 106 of the 
Jumpstart Our Business Startups Act, Commission staff noted academic 
literature that found that quoted depth, on average, declined after 
decimalization.\279\
---------------------------------------------------------------------------

    \278\ See, e.g., Regulation NMS Adopting Release, supra note 10, 
at 37529 (noting a comment from the Consumer Federation of America 
concerning ``complaints that decimal pricing has reduced price 
transparency because of the relatively thin volume of trading 
interest displayed in the best bid and offer''); Letter from Craig 
S. Tyle, General Counsel, Investment Company Institute, to Jonathan 
G. Katz, Secretary, Commission (Nov. 20, 2001), available at https://www.sec.gov/rules/concept/s71401/tyle1.htm#P41_3920 (``As we have 
previously noted, the reduction in quoted market depth as the 
minimum quoting increment has narrowed to a penny has adversely 
affected institutional investors' ability to execute large orders . 
. . Preliminary data has shown that, post-decimalization, it has 
become more difficult for large institutional orders to be filled 
entirely at the inside.'').
    \279\ Report to Congress on Decimalization, 10-11 (July 2012), 
available at https://www.sec.gov/news/studies/2012/decimalization-072012.pdf. Cumulative depth at competitive prices did not change, 
however. Id. See also Phil MacKintosh, What is Liquidity? (Dec. 12, 
2019), available at https://www.nasdaq.com/articles/what-is-liquidity-2019-12-12 (stating that while smaller quantity of the 
NBBO and smaller average trade sizes may suggest falling liquidity, 
depth of book liquidity suggests that overall liquidity is stronger 
than ever before); Citadel Securities Market Lens--Has Market 
Structure Evolution Made Equities Less Liquid (Sep. 2019), available 
at https://s3.amazonaws.com/citadel-wordpress-prd102/wp-content/uploads/sites/2/2019/09/27211934/Market-Lens-Has-Market-Structure-Evolution-Made-Equities-Less-Liquid.pdf (analyzing full depth of 
displayed liquidity from the exchanges' proprietary data feeds and 
finding that liquidity remained stable over the past eight years).
---------------------------------------------------------------------------

(c) Comments and Roundtable Discussion
    These developments have led market participants to call for depth 
of book data to be distributed through the Equity Data Plans. In 
connection with the Roundtable, several panelists and commenters 
recommended adding depth of book data to SIP data or otherwise 
emphasized their views about

[[Page 16752]]

the importance of depth of book data.\280\ One panelist stated that the 
exclusive SIPs could be upgraded and made ``relevant again'' by adding 
depth of book data, which would benefit retail investors by giving them 
information on which direction a stock may be moving and what type of 
order they may need to use.\281\ Another panelist stated that both his 
firm and the brokers it employs cannot rely solely on SIP data, as they 
believe they need depth of book data to have a full view of the market 
and to trade competitively, particularly with respect to large 
orders.\282\ One commenter stated that the Commission should require 
depth of book data to be included in SIP data and recommended adding at 
least five levels of depth.\283\
---------------------------------------------------------------------------

    \280\ See Roundtable Day Two Transcript at 245 (Tyler Gellasch, 
Healthy Markets) (stating that the exclusive SIPs should include 
depth of book data (as well as auction imbalance data and odd-lot 
quote data)); Roundtable Day One Transcript at 228-29 (Joseph Wald, 
Clearpool Group) (explaining that the lack of depth of book and 
auction data on the exclusive SIP feeds needs to be addressed); 
Letter to Brent J. Fields, Secretary, Commission, from Joe Wald, 
Chief Executive Officer, The Clearpool Group (Oct. 23, 2018) 
(``Clearpool Group Letter'') (``We believe that certain information 
currently provided through proprietary data feeds, for example, 
imbalance data and order depth-of-book information, should be 
considered core data and provided to all market participants through 
the SIP.''); MFA and AIMA Letter at 6 (stating that its members 
``purchase proprietary market data (e.g., depth-of-book and 
imbalance data) from exchanges for a variety of reasons, including 
strategy implementation, risk-analysis, best-execution, less latency 
than other sources and to fulfill fiduciary obligations.'').
    \281\ See Roundtable Day One Transcript at 119-120 (Jeff Brown, 
Charles Schwab).
    \282\ See Roundtable Day One Transcript at 136, 165-66 (Simon 
Emrich, Norges Bank Investment Management).
    \283\ See SIFMA Letter II at 2 (stating that retail firms 
generally use one level of depth for order routing and institutional 
firms generally use up to five levels of depth (sometimes as much as 
ten) and that the Commission should balance the need for more 
comprehensive information with the additional cost and potential 
increase in latency from including additional quotes, as well as 
adjust the exclusive SIP subscriber fee model to account for firms 
that do not need depth of book data).
---------------------------------------------------------------------------

    Some panelists and commenters went further, suggesting that depth 
of book data (or data provided on the exchange proprietary feeds more 
generally) is needed to fulfill best execution obligations.\284\ One 
panelist stated that paying for full depth of book data from each 
exchange is essential to effective order routing and to fulfilling best 
execution obligations, noting that if his firm did not get depth of 
book--top of book and many levels away--it could not provide best 
execution to its clients.\285\ Another commenter noted that broker-
dealers do not have the option to forgo buying proprietary data because 
SIP data has less content and is slower, and that, even if the 
Commission provided a safe harbor that best execution requirements may 
be satisfied by relying on SIP data, buying proprietary data would 
still be necessary from a business perspective.\286\
---------------------------------------------------------------------------

    \284\ See Roundtable Day One Transcript at 192-193 (Jamil 
Nazarali, Citadel Securities) (stating that proprietary feeds are 
required for best execution); Roundtable Day One Transcript at 48 
(Prof. Hal Scott, Committee on Capital Markets Regulation) (making a 
similar statement); Roundtable Day Two Transcript at 58-59 (Prof. 
Robert Bartlett, UC Berkeley) (making a similar statement); MFA and 
AIMA Letter at 3-4 (stating that broker-dealers that do not have 
depth of book information will be challenged to provide best 
execution).
    \285\ See Roundtable Day One Transcript at 27, 57-58, 73 (Doug 
Cifu, Virtu Financial); Letter to Brent J. Fields, Secretary, 
Commission, from Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial Inc., 4 (Oct. 23, 2018) (``Virtu Letter I'') (``Simply 
put, Virtu could not fulfill its obligations to its myriad of retail 
customers and institutional clients without full depth of book 
market data feeds and robust exchange connectivity features that the 
SIP feeds alone do not offer.'').
    \286\ See Letter to Brent J. Fields, Secretary, Commission, from 
Mehmet Kinak, Global Head of Systematic Trading and Market 
Structure, and Jonathan D. Siegel, Vice President--Senior Legal 
Counsel, T. Rowe Price, 2 (Jan. 10, 2019) (``T. Rowe Price 
Letter'').
---------------------------------------------------------------------------

    However, some panelists were reluctant to embrace the idea of 
adding depth of book data to SIP data and pointed out possible negative 
impacts from doing so. One panelist representing a retail brokerage 
firm stated that depth may be important for active traders and that his 
firm has platforms that incorporate it but added that depth is less 
important for retail investors who trade infrequently and that some of 
his firm's platforms do not incorporate it.\287\ This panelist also 
stated that there could be technological challenges and latency 
implications (i.e., added latency associated with the need to process 
additional message traffic) to adding depth of book data to SIP 
data.\288\ Furthermore, several panelists noted that adding depth of 
book data to the SIP data, particularly on an order-by-order basis, 
could be confusing, but some suggested that the data could be 
aggregated at certain price levels or otherwise simplified.\289\
---------------------------------------------------------------------------

    \287\ See Roundtable Day One Transcript at 162-163 (Matt 
Billings, TD Ameritrade).
    \288\ Id.; see also Roundtable Day Two Transcript at 74 (Michael 
Blaugrund, NYSE).
    \289\ See Roundtable Day One Transcript at 227 (Chris Isaacson, 
Cboe) (stating that he would not go as far as to add depth of book 
data to the consolidated market data, stating that doing so could 
potentially cause confusion, and emphasizing the difference between 
the plan processors and non-SIPs); Roundtable Day One Transcript at 
230 (Ronan Ryan, IEX) (stating that adding depth data could be 
confusing, but suggesting that perhaps there could be simpler 
alternatives, such as an aggregated size at each price level rather 
than order-by-order); Roundtable Day One Transcript at 232 (Michael 
Friedman, Trillium Management) (suggesting that perhaps some 
abbreviated version of depth rather than full depth of book could be 
added to the consolidated market data); Roundtable Day Two 
Transcript at 70 (Adam Nunes, Hudson River Trading) (cautioning 
against trying to force every market's depth of book into a single 
feed).
---------------------------------------------------------------------------

    In addition, some commenters stated that depth of book data is 
unnecessary for best execution and not useful for retail investors and 
other market participants.\290\ In an article submitted to the comment 
file for the Roundtable, one commenter expressed the view that depth of 
book data is not helpful for many types of market participants, citing 
a 2014 statistic that only 3.3% of all trades take place outside the 
NBBO, where depth of book information would be particularly useful. The 
commenter also noted that the Commission has stated that depth of book 
data is not necessary for a broker to comply with its best execution 
obligations.\291\
---------------------------------------------------------------------------

    \290\ See Letter to Brent J. Fields, Secretary, Commission, from 
Thomas Wittman, Executive Vice President, Head of Global Trading and 
Market Services and CEO, Nasdaq Stock Exchange, 11 (Oct. 25, 2018) 
(``Wittman Letter'') (``Main Street investors do not need the 
exchanges' proprietary depth-of-book data offerings, and the fact 
that some firms choose to purchase them has no adverse consequence 
to the Main Street investor. Nearly 97% of trades occur at or within 
the NBBO, reflecting that most customers do not require any sort of 
depth-of-book data.''); NYSE Group Letter at 13 (``NYSE Group 
believes that the Commission's prior conclusion that retail 
investors do not need depth-of-book data has not changed.'').
    \291\ See Letter to Brent J. Fields, Secretary, Commission, from 
Charles M. Jones, Robert W. Lear Professor of Finance and Economics, 
Columbia Business School, 15-16 (Oct. 21, 2018) (``Jones Letter'') 
(citing Securities Exchange Act Release No. 59039, supra note 242).
---------------------------------------------------------------------------

(d) Commission Discussion and Proposal
    Decimalization led to a dispersion of quoted volume away from the 
top of book.\292\ Consequently, the top of book (or NBBO) currently 
shown in SIP data has become less informative, and some market 
participants have come to view depth of book data as essential both to 
their efforts to trade competitively and to provide best execution to 
customer orders.\293\ The Commission preliminarily believes that: (1) 
The lack of depth of book information in SIP data creates a significant 
information asymmetry between SIP data and proprietary data; and (2) 
the availability of the additional information could help enhance the 
best execution analyses of market participants who currently rely 
solely on SIP data.
---------------------------------------------------------------------------

    \292\ See supra Section III.C.2(b).
    \293\ See supra notes 278, 280-286 and accompanying text.
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily believes that core data, 
as proposed, should include certain depth of book data, including 
aggregated orders at each price between the best

[[Page 16753]]

bid and best offer and the protected bid and protected offer (if 
different), as well as several price levels above and below the 
protected bid and protected offer. The Commission believes that the 
number of additional price levels should strike an appropriate balance 
by significantly enhancing the utility of proposed core data for a wide 
range of market participants, without risking the excessive message 
traffic \294\ or complexity that might result from the inclusion of 
full depth of book information in proposed core data. The Commission 
preliminarily believes that this balance is appropriately struck at 
five price levels (below and above the protected bid and protected 
offer) as this would approximate the level of liquidity available to 
market participants at the best bid or offer prior to 
decimalization.\295\ The Commission is seeking comment on whether and 
to what extent depth of book data should be included in the proposed 
definition of core data.
---------------------------------------------------------------------------

    \294\ As discussed below, aggregated quotation sizes at the 
price levels between the best quotes and protected quotes and the 
five levels above and below the protected quotes, particularly for 
the most liquid stocks, represent only a subset of all depth of book 
price levels at which there are quotations and could hence be 
represented in fewer messages.
    \295\ Prior to decimalization, when stocks were quoted in 
sixteenths of a dollar ($0.0625), there were five one cent 
increments between each permissible quoting increment. For example, 
market participants could bid $20.0625 or bid $20.125 but not 
$20.07, $20.08, $20.09, $20.10, $20.11. Decimalization permitted 
quoting at these intermediate, one-cent price levels, spreading 
quotation volume to these price levels. As a result of the 
Commission's proposal to define depth of book data to include 
aggregated quotation sizes at the five levels above and below the 
protected quotations, the proposed core data would provide 
transparency into the quotation interest that is comparable to the 
information that was available at the top of the book prior to 
decimalization.
---------------------------------------------------------------------------

    Specifically, under proposed Rule 600(b)(25), ``depth of book 
data'' would be defined as all quotation sizes at each national 
securities exchange, aggregated at each price at which there is a bid 
or offer \296\ that is lower than the best bid down to the protected 
bid and higher than the best offer up to the protected offer; and all 
quotation sizes at each national securities exchange, aggregated at 
each of the next five prices at which there is a bid that is lower than 
the protected bid and offer that is higher than the protected offer.
---------------------------------------------------------------------------

    \296\ See supra Section III.C.1(d)(i) for a discussion of the 
proposed definition of round lot and its effect on the terms bid and 
offer. As discussed above, bids and offers would reflect the 
proposed round lot sizes. See also Section III.C; supra note 128 and 
accompanying text for a discussion of proposed odd-lot aggregation.
---------------------------------------------------------------------------

    Although the Commission determined not to add depth of book data to 
core data in adopting Regulation NMS,\297\ the Commission recognizes 
that the market data needs of market participants continuously evolve. 
Demand for more content-rich exchange proprietary feeds has increased 
substantially in the years since the adoption of Regulation NMS, 
indicating a growing need by market participants for additional data, 
including depth of book data,\298\ in the increasingly fast, 
electronic, and dispersed markets that have developed since 2005.\299\ 
The Commission preliminarily believes that enriching the content of the 
data that is made available to investors and market participants by 
including depth of book data, as defined, in the proposed core data 
would promote fairer markets by reducing the information asymmetry 
between market participants who subscribe to the exchanges' proprietary 
depth products and those who rely on SIP data. In addition, the 
Commission preliminarily believes that many market participants would 
find depth of book data useful for trading in a more informed and 
effective manner in today's markets.
---------------------------------------------------------------------------

    \297\ See supra note 48.
    \298\ See supra note 275, 277-278 and accompanying text.
    \299\ See supra notes 241-244 and accompanying text; infra notes 
310-313 and accompanying text (discussing how depth of book data is 
used in order placement and other trading decisions).
---------------------------------------------------------------------------

    As proposed, core data would include the best bids and offers and 
the protected quotes of each exchange, which market participants need 
to comply with legal and regulatory requirements, such as the duty of 
best execution and Rule 611. The Commission preliminarily believes that 
information on any trading interest between the best bids or offers and 
the protected quotes, if they are different, would be of keen interest 
to market participants. Therefore, the Commission is proposing to 
include aggregated quotation sizes at each price where there is a bid 
or offer in that range in the definition of depth of book data.
    However, the Commission preliminarily believes that not all 
individual quotations away from the best prices should be added to 
proposed core data. While there may be some market participants that 
need total visibility into exchange order books, the Commission does 
not believe, at this time, that complete depth of book data should be 
required to be made available as proposed core data. The addition of 
complete, order-by-order depth of book data to proposed core data would 
represent an enormous volume of information, which could increase 
latencies in the provision of proposed core data and introduce 
complexity that might impair the usability of such data for many 
subscribers. The Commission's proposed definition of depth of book data 
is intended to incorporate into core data additional quotation 
information that would be useful to a broad array of market 
participants for trading \300\ and to thereby further the goals of the 
national market system.\301\ The Commission is not supplanting the 
proprietary depth offerings of the exchanges that contain additional 
content and that may be more appropriate for certain market 
participants or more specialized use cases.
---------------------------------------------------------------------------

    \300\ Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(B) (stating that the Commission shall prescribe rules to 
``assure . . . the fairness and usefulness of the form and content 
of'' information with respect to quotations for or transactions in 
securities).
    \301\ See, e.g., 15 U.S.C. 78k-1(a)(1)(C) (``The Congress finds 
that . . . [i]t is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly 
markets to assure--(i) economically efficient execution of 
securities transactions; (ii) fair competition among brokers and 
dealers, among exchange markets, and between exchange markets and 
markets other than exchange markets; (iii) the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities; (iv) the 
practicability of brokers executing investors' orders in the best 
market; and (v) an opportunity . . . for investors' orders to be 
executed without the participation of a dealer.'').
---------------------------------------------------------------------------

    The Commission recognizes that market participants have diverse 
market data needs. The discussions at the Roundtable and the comments 
received, however, suggest that many market participants need more than 
the best bids, best offers, and the NBBO disseminated by the exclusive 
SIPs in order to trade competitively and to optimize the placement of 
customer orders.\302\ As noted above, the Commission's proposed 
definition of depth of book data seeks to approximate the quotes that 
market participants were able to access on the exclusive SIPs prior to 
decimalization, which the Commission preliminarily believes would 
significantly enhance the usefulness of proposed core data. The 
Commission preliminarily believes that its proposed definition of depth 
of book data strikes a balance between enhancing the usefulness of core 
data for the many market participants that cannot rely entirely on SIP 
data, and limiting the amount of data disseminated to limit complexity 
and the processing demand on systems for market participants that do 
not need full depth of book visibility.\303\ The

[[Page 16754]]

proposed definition of depth of book seeks to balance the needs of 
different market participants, while reducing the information 
asymmetries that exist today in the provision of SIP data and 
proprietary data.
---------------------------------------------------------------------------

    \302\ See supra text accompanying notes 280-286.
    \303\ As discussed above, the inclusion of a limited number of 
price levels in the proposed definition of depth of book data means 
that fewer data messages would be required than would be the case if 
full depth of book was proposed. See supra note 294. Accordingly, 
the proposal would place lower processing demands on systems than if 
full depth of book data were included in the definition of depth of 
book data. Similarly, commenters have recommended the addition of 
five levels of depth to core data, emphasizing the importance of 
``balanc[ing] the need for more comprehensive information with the 
additional cost and potential increase in latency from including 
additional quotes.'' See supra note 283; SIFMA Letter II at 2. The 
Commission is soliciting comment on the extent of depth of book data 
that best strikes this balance, specifically by seeking quantitative 
data from market participants regarding any complexity or processing 
implications associated with the proposed definition of depth of 
book data.
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    Staff believes that there is a substantial amount of quotation 
volume several levels below the best bid and above the best offer. For 
example, staff reviewed depth of book quotations for corporate stocks 
using data from July 19, 2019. This analysis revealed that for this 
day, indeed, there was substantial quotation volume several levels 
below the best bid (the ask side was not examined). During active parts 
of the trading day, there is quotation interest at every $0.01 
increment at least ten levels out for the most liquid stocks; for the 
least liquid stocks, there is a large gap between the best bid and the 
next highest bid, and large gaps are generally also present between the 
next several bid levels. This is consistent with the Commission's 
proposal to define the depth of book price levels as the first five 
levels ``at which there is a bid or offer,'' rather than alternatives 
such as a fixed $0.05 band around the best quotes, since the former 
would capture much of the depth of book quotation information for less 
liquid stocks.\304\ In addition, the staff review found a significant 
percentage of the total notional value of all depth of book quotations 
for both liquid and illiquid stocks falls within the first five price 
levels. The Commission preliminarily believes that requiring aggregated 
quotation information at the first five price levels above and below 
the protected quote range is a reasonable way to delineate the trading 
interest that would be useful to a variety of market participants to 
support more effective quoting and trading. On the other hand, while 
quotations at price levels further away from the best bid and offer may 
be relevant for market participants handling very large orders or 
orders in highly illiquid securities for which liquidity at the top of 
the book and the next five price levels is not sufficient to fully 
execute the order, the Commission preliminarily believes that liquidity 
at price levels further away is less likely to provide relevant or 
immediately actionable information to many market participants.\305\
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    \304\ Moreover, because a ``bid or offer'' is defined in terms 
of ``round lot,'' the proposed definition of round lot in effect 
would establish a minimum size requirement for depth price levels so 
that, for example, a small number of one share orders at an away 
price for a stock whose prior calendar month's average closing price 
on the primary listing exchange was under $50 would not count as one 
of the price levels. The Commission acknowledges that the inclusion 
of price levels ``at which there is a bid or offer'' in the proposed 
definition of depth of book data could include quotations beyond 
what would have been available at the top of the book prior to 
decimalization for less liquid stocks, but believes that this 
approach would approximate the level of liquidity available at the 
top of the book prior to decimalization for more liquid stocks.
    \305\ See SIFMA Letter II at 2 (stating that SIFMA members that 
are retail firms generally use one level of depth for order routing, 
while SIFMA members that are institutional firms generally use up to 
five levels of depth, and sometimes as much as ten.).
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    While some market participants have stated that depth of book data 
is necessary to fulfill their best execution obligations, other 
commenters disagreed and pointed out that the Commission previously 
stated that depth of book data is not necessary for best 
execution.\306\ Several factors are considered in determining whether a 
broker-dealer has ``use[d] reasonable diligence to ascertain the best 
market'' \307\ for a customer order and fulfilled its best execution 
obligations.\308\ The Commission is not stating that a broker-dealer 
must always use all proposed depth of book data, under all 
circumstances, to provide best execution to its customers. However, the 
Commission preliminarily believes that the expanded set of proposed 
core data, including the proposed depth of book data, provides 
additional information that in many circumstances would be useful to a 
broker-dealer's best execution analysis.\309\
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    \306\ See supra notes 284-291 and accompanying text.
    \307\ FINRA Rule 5310.
    \308\ See Kurz v. Fidelity Management & Research Co., 556 F.3d 
639, 640 (7th Cir. 2009) (describing the ``duty of best execution'' 
as ``getting the optimal combination of price, speed, and liquidity 
for a securities trade''); Geman v. SEC, 334 F.3d 1183, 1186 (10th 
Cir. 2003) (noting that ``the duty of best execution requires that a 
broker-dealer seek to obtain for its customer orders the most 
favorable terms reasonably available under the circumstances'' 
(quoting Newton v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 135 
F.3d 266, 270 (3d Cir. 1998))).
    \309\ See Order Execution Obligations Release, supra note 245.
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    Where liquidity is distributed over multiple price points and less 
liquidity is available at the top of book,\310\ depth of book data is 
of increased importance to market participants for a number of reasons. 
Depth of book data can assist SORs and electronic trading systems with 
the optimal placement of orders across markets. For example, the 
Commission preliminarily believes that the proposed depth of book data 
would better inform traders on how to optimally place liquidity taking 
orders (i.e., marketable orders that execute against the liquidity of 
resting limit orders) that are larger than the displayed best bid or 
best offer.\311\ In addition, the Commission preliminarily believes 
that proposed depth of book data would assist market participants in 
determining how best to use liquidity providing orders (i.e., non-
marketable orders that will be posted on an exchange's order book 
without immediately executing) at prices away from the best bid or 
offer by providing insight into the length of order book queues.\312\ 
Finally, the Commission preliminarily believes that the proposed depth 
of book data would provide market participants with directional signals 
to help inform them about near-term market movements based upon 
aggregate market imbalance information.\313\
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    \310\ See supra notes 276-277.
    \311\ For example, if a liquidity taking order is larger than 
the displayed liquidity at the top of book and seeks to access 
liquidity at additional price level(s), then information about 
liquidity at other price levels is valuable in determining where to 
send an oversized order when trading in a market ecosystem with 
multiple exchanges. See, e.g., Shmuel Baruch, Who Benefits from an 
Open Limit-Order Book?, Journal of Business, Vol. 78, No. 4, 1267-
1306 (July 2005), available at https://www.jstor.org/stable/10.1086/430860 (presenting some theoretical results showing that liquidity 
takers benefit more from an open limit order book).
    \312\ For example, if a market participant using a particular 
trading strategy wishes to post orders passively at multiple price 
levels, depth of book information is valuable in determining the 
order book queue length (and therefore the ability to achieve 
beneficial queue priority) at different market centers. Further, 
depth of book data can assist market participants' trading 
strategies achieve better queue placement across market centers. See 
Roundtable Day One Transcript at 169 (Adam Inzirillo, BAML) (``So 
depth of book is important to understand where you are potentially 
in the queue when you aggregate yourself across the overall market 
center.''); Exegy, Checklist for Ensuring Best Execution with 
Historical Trade Performance Analysis (Dec. 6, 2018), available at 
https://www.exegy.com/2018/12/checklist-best-execution-trade-performance-analysis/ (``Liquidity can be valuable for executing 
large volume orders because the orders can be executed with minimal 
impact to market price. However, very high liquidity can also cause 
price volatility at a given exchange or time interval that produces 
slippage. Queue position and message volume are two valuable 
indicators of this liquidity. A long depth of book or high message 
volume may signal to traders to re-route an order to a different 
exchange. However, without a planned strategy for routing an order, 
slipping may arise.'').
    \313\ See, e.g., [Aacute]lvaro Cartea, et al., Enhancing Trading 
Strategies with Order Book Signals (Oct. 1, 2015), available at 
https://www.smallake.kr/wp-content/uploads/2015/11/SSRN-id2668277.pdf 
(``[O]ur measure of [volume] imbalance [in the limit order book] 
acts as a strong predictor of the rate of incoming [market orders] 
as well as the direction and magnitude of price movements following 
a [market order].''); Charles Cao, et al., The Information Content 
of an Open Limit-Order Book, Journal of Futures Markets Vol. 29, No. 
1, 16-41 (2009), available at https://www.pbcsf.tsinghua.edu.cn/research/caoquanwei/paper/10.The%20Information%20Content%20of%20an%20Open%20Limit%20Order%20Book.pdf (``[T]he authors find that the order book beyond the first 
step is modestly informative and that price discovery measures 
suggest that the contribution of the order book beyond the best bid 
and offer is approximately 22%''); Ke Xu, Martin D. Gould, and Sam 
D. Howison, Multi-Level Order-Flow Imbalance in a Limit Order Book, 
Mathematical Institute, University of Oxford (Oct. 29, 2019) (``[W]e 
find that including net order flow deeper into the limit order book 
improves the goodness-of-fit of the multi-level order-flow imbalance 
regressions for all of the stocks in our sample, with an improvement 
of about 65-75% for large-tick stocks and about 15-30% for small-
tick stocks. We argue that in many practical applications, 
improvements of this magnitude are economically meaningful.'').

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[[Page 16755]]

    Several Roundtable panelists and commenters raised potential 
concerns regarding the addition of depth of book data.\314\ The 
Commission preliminarily believes its proposed definition of depth of 
book data, and its proposal to introduce a definition of core data and 
a decentralized consolidation model for the dissemination of proposed 
consolidated market data more broadly, are responsive to these 
concerns. With respect to the view that depth of book data could be 
confusing or not of interest to all investors, the Commission is not 
mandating the consumption of five levels of depth data by all market 
data subscribers. While, as discussed below, competing consolidators 
must calculate and generate consolidated market data, as proposed, 
including depth of book data, and offer it to subscribers, competing 
consolidators would not be prohibited from developing and providing top 
of book only or customized depth of book products to customers who 
desire such products.\315\ The effective national market system plan(s) 
could offer a variety of proposed consolidated market data products 
geared toward particular categories of end-users, and certain 
exchanges, recently, have suggested possible approaches for doing 
so.\316\ With respect to the view that including depth of book data 
could present technical challenges and have latency ramifications, the 
Commission preliminarily believes the proposal to add five levels of 
aggregated depth from each exchange, rather than all order-by-order 
depth, is responsive to these concerns.\317\ Restricting depth of book 
data to the aggregate depth at each price level would limit the number 
of messages included within proposed core data, making the 
technological changes required more manageable and mitigating latency 
concerns. Indeed, the Commission's proposed approach aligns with some 
of these commenters' suggestions that simpler and more abbreviated 
versions of depth of book data might be more workable.\318\
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    \314\ See supra notes 287-289 and accompanying text.
    \315\ See supra Section III.A (explaining that different market 
participants and different trading applications have different needs 
for NMS information, that the proposal to expand and modernize the 
content of NMS information is intended to address the needs of a 
broad cross-section of market participants, and that the Commission 
is not specifying minimum data elements needed to achieve best 
execution).
    \316\ See, e.g., NYSE Equities Insights, Stock Quotes and Trade 
Data: One Size Doesn't Fit All (Aug. 22, 2019), available at https://www.nyse.com/equities-insights (proposing enhancing the exclusive 
SIPs by offering depth of book, odd-lot quotes, and primary auction 
imbalance information in three new tiers of service, each of which 
would have different levels of data content); infra Section IV.B.4.
    \317\ Today, there are a number of private data vendors that 
have developed software and infrastructure solutions for 
consolidating several of the most voluminous depth of book data 
feeds across equity markets and are providing consolidated depth of 
book products, which suggest that technical challenges and latency 
concerns can be addressed.
    \318\ See supra note 289 and accompanying text.
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    In addition, some commenters cited statistics on the high 
proportion (97%) of trades that execute at or within the NBBO in 
support of their views that depth of book data is not necessary for 
retail investors or other market participants.\319\ The Commission 
preliminarily believes that, even if these figures are accurate for the 
current market, they do not, on their own, persuade the Commission that 
it should not propose to add depth of book data to core data. The 
commenters, for example, do not specify whether or not the broker-
dealers handling the orders at issue had access to proprietary DOB 
products for their automated trading systems; if they did, depth of 
book data may have been contributing to the observed high at-or-within-
the-NBBO execution rates. For example, as discussed above, depth of 
book data can indicate the direction a stock price may be moving, which 
some market participants factor into the prices at which they place 
limit orders.\320\ Furthermore, in response to the comments that retail 
investors do not need depth of book data, the Commission preliminarily 
believes that there are different types of retail investors that have 
different market data needs and preferences. Some retail investors may 
not need depth of book information but other, more sophisticated retail 
investors may find depth of book data useful, as one Roundtable 
panelist from a retail firm stated.\321\ Further, while competing 
consolidators would have to offer proposed consolidated market data to 
end-users, they also would be permitted to develop products for their 
customers that could be customized to their customers' needs.\322\ 
Therefore, a competing consolidator could develop a consolidated market 
data product that does not contain proposed depth of book data if there 
is demand.\323\ The Commission's proposal aims to provide broker-
dealers and other market participants with improved access to 
meaningful depth of book information, so it can be used to improve 
order placement or other trading decisions and thereby potentially 
improve execution quality for investors.
---------------------------------------------------------------------------

    \319\ See supra notes 290-291 and accompanying text.
    \320\ Similarly, depth of book data can provide insight into the 
length of order book queues on different exchanges and therefore the 
prices at which limit orders can attain queue priority, helping 
market participants pursue trading strategies involving the 
placement of liquidity-providing orders that will not execute until 
the NBBO changes. See supra note 312 and accompanying text.
    \321\ See supra note 281 and accompanying text. In addition, 
another Roundtable panelist whose firm handles the orders of retail 
customers indicated that his firm needs depth of book data to 
fulfill its obligations to its retail customers. See supra note 285.
    \322\ See infra Section IV.B.1.
    \323\ Competing consolidators would be required to calculate and 
generate consolidated market data, including depth of book data as 
set forth in the Commission's proposed definition, and to offer such 
data to subscribers. See proposed Rule 614(d)(1)-(3). As explained 
above, the Commission believes that the proposed depth of book data 
would support the needs of some market participants. See supra notes 
301-305. However, some market participants may not need the depth of 
book data specified in the proposed definition. As proposed, market 
participants would be able to choose the components of consolidated 
market data that meet their needs, consistent with regulatory 
requirements, and purchase such data from competing consolidators.
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    Finally, the proposed definition of core data specifies that odd-
lot quotations at the relevant price levels between the national best 
bid or offer and the protected quotation, and at the five price levels 
above and below the protected quotation that can be aggregated into at 
least a round lot, would be included in depth of book data. As 
discussed above, the Commission preliminarily believes that its 
proposed definition of round lot reflects trading interest of 
meaningful size to market participants. The Commission further 
preliminarily believes that trading interest that is of less than 
meaningful size (i.e., an odd-lot size), that together with other odd-

[[Page 16756]]

lots aggregates into a round lot, similarly represents trading interest 
of meaningful size and should be displayed at the most conservative 
price at which such trading interest could be accessed.\324\
---------------------------------------------------------------------------

    \324\ See supra notes 129-130, 157 and accompanying text. To the 
extent that an SRO provides proprietary data products for the 
purposes of making consolidated market data available to competing 
consolidators and self-aggregators, any odd-lot quotations that are 
aggregated in an SRO's existing proprietary data products would be 
required to be aggregated in a manner consistent with the method set 
forth in the proposed definition of core data. See proposed Rule 
600(b)(20).
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    The Commission requests comment on the proposed inclusion of depth 
of book data in the proposed definition of core data and the definition 
of depth of book data in proposed Rule 600(b)(25). In particular the 
Commission solicits comment on the following:
    38. Should depth of book data be included in the proposed 
definition of core data? Why or why not? Do commenters believe the 
proposed definition of depth of book data would have any negative or 
unintended consequences? Why or why not?
    39. Do commenters believe that the Commission's proposed definition 
of depth of book data captures the appropriate level of depth data that 
should be included in the proposed definition of core data? Why or why 
not? Should the Commission include more or fewer levels of depth or 
otherwise revise the definition to capture the key depth information 
that would be useful to market participants? For example, should the 
Commission require depth only within a $0.05 band of the protected bid 
and offer rather than the first five price levels at which there is 
interest?
    40. Does the proposed definition of depth of book data adequately 
balance the need for more information against potential increases in 
complexity and processing demand that might result from the addition of 
such depth of book data? If not, where is this balance most 
appropriately struck in terms of the extent of depth of book data that 
should be included in the proposed definition of core data? 
Particularly, what processing demands would be associated with 
including varying levels of depth of book data? Please consider the 
proposed five levels of depth of book as well as any other possible 
depth of book alternatives. Please provide quantitative data and 
analyses to support your comments.
    41. Do commenters believe that the ``at which there is a bid or 
offer'' language in the Commission's proposed definition of depth of 
book data establishes an appropriate minimum size threshold (i.e., the 
existence of at least a round lot of aggregated interest) for inclusion 
as one of the five price levels? Why or why not? Are there alternative 
ways to set such a threshold, such as price levels where the volume of 
interest equals a certain percentage of the volume at the best price?
    42. Do commenters believe that odd-lot quotes at the depth price 
levels that aggregate into at least a round lot should be included in 
the proposed definition of core data? Why or why not?
    43. The proposed definition of depth of book data refers to depth 
of book quotations on each national securities exchange, as FINRA's 
Alternative Display Facility (``ADF'') currently does not have 
quotations submitted to it. Should the proposed definition be 
formulated to include the depth of book quotations of national 
securities associations as well to account for the possibility of OTC 
quotes being reported to the ADF in the future? Why or why not?
3. Auction Information
    Even as the proportion of trades executing in auctions has risen, 
little auction information is currently included in today's SIP 
data.\325\ The Commission is proposing to include auction information, 
including auction order imbalance and other auction data generated by 
the exchanges during an auction, in the proposed definition of core 
data.\326\ The Commission preliminarily believes that including auction 
information, as described below, in the proposed definition of core 
data would promote the goals of the national market system \327\ by 
conveying important information about orders participating in auctions 
and helping market participants to participate in auctions in a more 
informed and effective manner.
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    \325\ See infra notes 333-334 and accompanying text.
    \326\ See proposed Rule 600(b)(5). The definition of auction 
information in proposed Rule 600(b)(5) is ``all information 
specified by national securities exchange rules or effective 
national market system plans that is generated by a national 
securities exchange leading up to and during an auction, including 
opening, reopening, and closing auctions, and disseminated during 
the time periods and at the time intervals provided in such rules 
and plans.'' Accordingly, the proposed definition would include 
auction information that may be developed in the future and added to 
an SRO's rules that are approved by the Commission pursuant to Rule 
19b-4, 17 CFR 240-19b-4.
    \327\ See, e.g., 15 U.S.C. 78k-1(a)(1)(C) (``The Congress finds 
that . . . [i]t is in the public interest and appropriate for the 
protection of investors and the maintenance of fair and orderly 
markets to assure . . . the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities . . . [and] the practicability of brokers 
executing investors' orders in the best market.'').
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(a) Background
    Auctions are held pursuant to exchange rules at specified periods 
during the trading day (i.e., at the open, at the close, or during the 
day to reopen a stock that has been halted) when continuous trading is 
not occurring. During an auction, buy and sell orders generally 
interact at the single price, within limits, that maximizes the trading 
volume that can be executed. For example, a closing auction generally 
is held at the end of regular trading hours on the primary listing 
exchange pursuant to a process set forth in the primary listing 
exchange's rules to determine a security's official closing price. 
Typically, market-on-close orders, limit-on-close orders, and orders 
resting on the primary listing exchange's order book at the time a 
closing auction begins may participate in a closing auction. However, 
the rules of a primary listing exchange may also allow other specified 
order types, such as closing offset orders and D-orders on NYSE or 
imbalance-only close orders on Nasdaq, to participate in a closing 
auction.\328\ The opening auctions, which generally are held at the 
start of regular trading hours, also use specialized order types as 
specified in the rules of the primary listing market.\329\
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    \328\ See, e.g., NYSE Rule 7.31(d)(4) (A Discretionary Order, or 
``D Order,'' is a ``Limit Order that may trade at an undisplayed 
discretionary price''); NYSE Rule 13(c)(1) (A Closing Offset, or 
``CO,'' Order is ``[a] day Limit Order to buy or sell as part of the 
closing transaction where the eligibility to participate in the 
closing transaction is contingent upon: (i) An imbalance in the 
security on the opposite side of the market from the CO Order; (ii) 
after taking into account all other types of interest eligible for 
executing at the closing price, there is still an imbalance in the 
security on the opposite side of the market from the CO Order; and 
(iii) the limit price of the CO Order being at or within the price 
of the closing transaction.''); NYSE Rule 123C; Nasdaq Rule 
4702(b)(13)(A) (``An `Imbalance Only Order' or `IO Order' is an 
Order entered with a price that may be executed only in the Nasdaq 
Closing Cross and only against [market-on-close] Orders or [limit-
on-close] Orders.'').
    \329\ See, e.g., NYSE Open and Closing Auctions, available at 
https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Opening_and_Closing_Auctions_Fact_Sheet.pdf (last accessed Nov. 
25, 2019); Nasdaq Opening and Closing Crosses, available at https://www.nasdaqtrader.com/Trader.aspx?id=OpenClose (last accessed Nov. 
25, 2019).
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    Auctions conducted by the exchanges, especially opening and closing 
auctions, have become increasingly important liquidity events in recent 
years and represent a significant proportion of overall trading 
volume.\330\ One factor

[[Page 16757]]

that may be driving the higher concentration of trading in closing 
auctions is the growth of passive, index-tracking investment strategies 
through mutual funds, ETFs, and similar products.\331\ Since passive 
strategies and ETFs often track the performance of a benchmark index, 
and the closing price used in the benchmark index calculation is often 
set during the closing auction, participation in closing auctions has 
become increasingly important.\332\
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    \330\ See, e.g., Rosenblatt Securities, Closing Time: How End-
of-Day Auctions are Taking Over U.S. Equity Trading (Jan. 17, 2019) 
(stating that the percentage of consolidated volume in the executed 
at the close increased from 4.6% in 2013 to 8.4% in 2018); Financial 
Times, The 30 Minutes that Have an Outsized Role in US Stock Trading 
(Apr. 24, 2018), available at https://www.ft.com/content/9e1f05b4-43e7-11e8-803a-295c97e6fd0b (``The first and last half-hour of the 
U.S. trading day now accounts for 39.6 per cent of all volumes, up 
from 31.5 per cent a decade ago, according to Credit Suisse data. A 
decade ago about 16 per cent of all trading happened in the final 30 
minutes, but that rose to more than 20 per cent in 2012, and almost 
25 per cent this year. The closing auction alone--when most ETFs do 
their rebalancing--now accounts for 8.2 per cent of volumes in 2018, 
up from 3 per cent in 2007''); Greenwich Associates, Stock Trading 
Volumes Gravitate to Open and Closing Auctions (Feb. 2, 2017), 
https://www.greenwich.com/press-release/stock-trading-volumes-gravitate-open-and-closing-auctions (stating that ``[o]n average 
across both NYSE and Nasdaq listed securities, closing auctions now 
represent 5.5% of average daily volume, up from just 3.6% in 2011. 
Over the same period, average open auction volume increased from 
1.1% to 1.25%'').
    \331\ See, e.g., Securities Exchange Act Release No. 75165 (June 
12, 2015); 80 FR 34729, 34729-30 (June 17, 2015) (``[F]rom 2006 to 
2013, the total number of ETPs [exchange-traded products] listed and 
traded as of year-end rose by an average of 160 per year, with a net 
increase of more than 200 in both 2007 and 2011. . . The total 
market capitalization of ETPs has also grown substantially, nearly 
doubling since the end of 2009. Much of this growth has been in 
index-based ETPs. As of December 31, 2014, there were 1,664 U.S.-
listed ETPs, and they had an aggregate market capitalization of just 
over $2 trillion. Trading in these ETPs makes up a significant 
portion of secondary-market equities trading. For example, during 
2014, trading in U.S.-listed ETPs made up about 16.7% of U.S. equity 
trading by share volume and 25.7% of U.S. equity trading by dollar 
volume.'').
    \332\ See Greenwich Associates, Webinar: Trading the Auctions 
(Apr. 5, 2017), available at https://business.nasdaq.com/media/Trading-the-Auctions-Webinar-April-2017-17_tcm5044-46070.pdf (``As 
passive strategies and ETFs aim to track the performance of a 
benchmark index, they rely heavily on the closing auction, as it 
determines the closing price used in the benchmark index price 
calculation. Growth in passive investing and ETFs will thereby make 
the auction process ever more important.''); see also, e.g., Nasdaq 
Rule 4754 (``The Nasdaq Closing Cross price will be the Nasdaq 
Official Closing Price for stocks that participate in the Nasdaq 
Closing Cross.'').
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    To participate efficiently in auctions conducted by the exchanges, 
market participants seek information about orders that are 
participating in the auctions. This includes information about auction 
order imbalances, which reflect the extent to which auction buy orders 
exceed auction sell orders (or vice-versa) and are generally provided 
at periodic intervals leading up to the auction. In addition, primary 
listing exchanges provide information about the indicative price for 
the auction based on auction orders received at that time.
    Today, only limited auction-related information is included in SIP 
data.\333\ Some NYSE auction data is disseminated through the CTA/CQ 
SIP,\334\ but this reflects only a small subset of the auction-related 
information that the primary listing exchanges generate. No auction 
information generated by the other primary listing exchanges, including 
Nasdaq, NYSE Arca, and Cboe BZX, is distributed through the exclusive 
SIPs.
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    \333\ The LULD Plan requires the primary listing exchanges to 
provide the exclusive SIPs with certain auction information for 
dissemination related to reopening auctions after LULD trading 
pauses: Auction reference price, auction collars, and number of 
extensions to the reopening auction. See LULD Plan, supra note 38, 
at VII.B.1. The reopening auction data in proprietary products 
contains this data plus additional data. For example, NYSE's 
Integrated feed includes, among other data elements, a paired 
quantity (number of shares paired at the reference price), total 
imbalance quantity (number of shares not matched at the reference 
price), and the side of any imbalance (buy or sell). See NYSE XDP 
Integrated Feed Client Specification (Jan. 29, 2018). Nasdaq's Total 
View feed includes similar information for auctions that occur after 
halts or pauses. See Nasdaq TotalView-ITCH 5.0 Specifications.
    \334\ For example, in 1998, the Commission approved a NYSE 
proposal to allow the exchange to disseminate via the CTA/CQ SIP 
market-on-close (``MOC'') and limit-on-close (``LOC'') imbalance 
information in the final minutes of each trading day. See Securities 
Exchange Act Release No. 40094 (June 15, 1998), 63 FR 33975 (June 
22, 1998). The proposal provided for mandatory dissemination of all 
MOC and LOC imbalances of 50,000 shares or more at 3:40 p.m. 
Dissemination of imbalances of less than 50,000 shares could be made 
at the discretion of a floor official. The Commission stated its 
belief that the dissemination of such additional information through 
the plan processor would ``increase the amount of accurate market 
information available to the public'' and may ``increase public 
awareness of MOC/LOC order imbalances,'' potentially resulting in 
less market volatility. See id. at 33977-78; NYSE Rule 123C 
(providing that information regarding any disparity between MOC and 
marketable LOC interest to buy and MOC and marketable LOC interest 
to sell, measured at 3:50 p.m., of 50,000 shares or more shall be 
published on the consolidated tape; publication of imbalances in 
amounts less than 50,000 shares may also be published with the prior 
approval of a Floor Official or other qualified ICE employee). In 
addition, pre-opening indications, including the security and the 
price range within which the opening price is anticipated to occur, 
are published via the plan processors under certain conditions. See 
NYSE Rule 15.
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    By contrast, the primary listing exchanges provide a wide range of 
auction-related information through their proprietary data 
products.\335\ For example, NYSE provides opening auction information, 
such as opening order imbalance information and indicative pricing 
information, only through its proprietary market data products.\336\ In 
addition, with respect to closing auctions, NYSE disseminates order 
imbalance information approximately every five seconds between 3:50 
p.m. and 4:00 p.m., which consists of real-time imbalances between 
marketable closing orders to buy and marketable closing orders to sell, 
along with the indicative price at which the auction would occur at 
that time. This information is available only through NYSE's 
proprietary market data products.\337\ Similarly, Nasdaq,\338\

[[Page 16758]]

NYSE Arca,\339\ and Cboe BZX \340\ provide auction information that is 
available only through each exchange's proprietary market data 
products.
---------------------------------------------------------------------------

    \335\ The auction-related information disseminated through 
exchange proprietary feeds includes: The ``reference'' or 
``indicative match'' prices at which the largest potential auction 
would occur, imbalance side (buy or sell), number of shares of buy 
and sell orders at the indicative match price and reference price, 
paired quantity (number of shares matched at the indicative match 
price and reference price), execution quantity (number of shares 
executed at the indicative match price and reference price), 
imbalance quantity (number of shares not matched at the indicative 
match price and reference price), market order imbalance quantity 
(number of shares of market orders not matched at the indicative 
match price and reference price), far price (hypothetical auction-
clearing price for cross orders only), near price (hypothetical 
auction-clearing price for cross orders and continuous orders), 
price variation indicator (absolute value of the percent of 
deviation of the near price to the nearest current reference price), 
continuous book clearing price, closing only clearing price, upper 
collar, lower collar, freeze status, and number of times halt period 
extended. See, e.g., Nasdaq Rule 4754; Nasdaq TotalView-ITCH 5.0 
Specifications; NYSE Rule 15; NYSE XDP Integrated Feed Client 
Specification.
    \336\ See NYSE Rule 15.
    \337\ See NYSE Rule 123C (describing the dissemination of 
information regarding imbalances that accumulate prior to the 
closing transaction, including information on disparities between 
MOC and marketable LOC interest to buy and MOC and marketable LOC 
interest to sell, a data field indicating the price at which 
closing-only interest (e.g., MOC, LOC, and other auction-only 
orders) may be executed in full, and, beginning at 3:55 p.m., 
certain floor-broker quotes containing pegging instructions eligible 
to participate in the closing transaction).
    \338\ During the five minutes prior to the Nasdaq closing 
auction (also referred to as the closing cross) at 4:00 p.m., Nasdaq 
disseminates an ``Order Imbalance Indicator'' every second. The 
Nasdaq closing cross is an auction process in which Nasdaq's closing 
book and continuous book are brought together to create a single 
closing price. See Nasdaq Opening and Closing Crosses FAQs, 
available at https://www.nasdaqtrader.com/content/ProductsServices/Trading/Crosses/openclose_faqs.pdf (last accessed Jan. 7, 2020).) 
The Order Imbalance Indicator includes a reference price at which 
the maximum number of shares can be matched, the number of shares 
that can be matched at the reference price, the number of shares 
that cannot be matched at the reference price (i.e., the imbalance), 
the buy/sell direction of any imbalance, and a variety of indicative 
prices such as the ``far price,'' a hypothetical auction-clearing 
price for cross orders, and ``near price,'' a hypothetical auction-
clearing price for cross orders as well as continuous orders. See 
Nasdaq Rule 4754; Nasdaq TotalView-ITCH 5.0 Specifications.
    \339\ NYSE Arca disseminates ``Auction Imbalance Information'' 
via proprietary data feeds, specifically the NYSE Arca Order 
Imbalance feed and NYSE Arca Integrated feed. See NYSE Arca Rule 
7.35-E(a)(4)(C); NYSE Arca Trading Information: Auctions Overview, 
available at https://www.nyse.com/markets/nyse-arca/trading-info 
(last accessed Jan. 7, 2020). Auction Imbalance Information includes 
``if applicable, the Total Imbalance, Market Imbalance, Indicative 
Match Price, Matched Volume, Auction Reference Price, Auction 
Collar, Book Clearing Price, Far Clearing Price, Imbalance Freeze 
Indicator, and Auction Indicator.'' NYSE Arca Rule 7.35-E(a)(4).
    \340\ Cboe BZX disseminates, via the Bats Auction Feed, Closing 
Match Process Information (the total size of all buy and sell orders 
matched at the close) for Non-BZX-Listed Securities and 
``information regarding the current status of price and size 
information related to auctions conducted by the Exchange.'' See 
Cboe BZX Rules 11.22(i), 11.28(c).
---------------------------------------------------------------------------

    As noted above, proprietary feeds also include additional 
information in connection with reopening auctions after trading halts 
that goes beyond the LULD information that primary listing exchanges 
are required to report to the exclusive SIP.\341\
---------------------------------------------------------------------------

    \341\ See supra note 333.
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(b) Comments and Roundtable Discussion
    In connection with the Roundtable, several panelists and commenters 
supported the addition of auction information to SIP data.\342\ For 
example, one commenter stated that the Commission should require the 
inclusion of auction order imbalance information in SIP data and 
expressed the view that doing so should not materially increase the 
operating costs of the exclusive SIP.\343\
---------------------------------------------------------------------------

    \342\ See Roundtable Day One Transcript at 98 (Stacey 
Cunningham, NYSE); Roundtable Day One Transcript at 98 (Chris 
Concannon, CBOE); Roundtable Day One Transcript at 116 (Michael 
Blaugrund, NYSE); Roundtable Day Two Transcript at 124 (John Ramsay, 
IEX); Roundtable Day Two Transcript at 245-46 (Tyler Gellasch, 
Healthy Markets); NYSE Group Letter at 6, 13 (stating ``information 
about auction imbalances is now automated and yet is available only 
via proprietary data feeds'' and ``NYSE Group believes that Main 
Street could also benefit if auction imbalance information were 
included in the core data disseminated by the SIPs'' and 
recommending the expansion of the definition of core data to include 
auction imbalance information).
    \343\ See SIFMA Letter II at 2 (``At minimum, auction imbalance 
information shall include matched quantity, imbalance size, near 
price, far price, paired shares and imbalance shares.'').
---------------------------------------------------------------------------

    Similarly, other panelists and commenters emphasized the importance 
of auction information, including for achieving best execution.\344\ 
One panelist indicated that auctions are becoming more important and 
that institutional investors use auction imbalance data to trade.\345\ 
Another panelist stated that auction imbalance information is important 
for retail investors, particularly high-net worth individuals, because 
the amount of the imbalance may be significant to a trading 
decision.\346\
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    \344\ See Roundtable Day One Transcript at 228-29 (Joseph Wald, 
Clearpool Group) (stating that the lack of auction information (and 
depth of book data) on the exclusive SIPs needs to be addressed); 
Clearpool Letter (``We believe that certain information currently 
provided through proprietary data feeds, for example, imbalance data 
and order depth of book information, should be considered core data 
and provided to all market participants through the SIP.''); MFA and 
AIMA Letter at 6 (stating that that its members purchase proprietary 
market data (e.g., depth of book and imbalance data) from exchanges 
for a variety of reasons, including strategy implementation, risk-
analysis, best execution, less latency than other sources, and to 
fulfill fiduciary obligations).
    \345\ See Roundtable Day Two Transcript at 68 (Paul O'Donnell, 
Morgan Stanley).
    \346\ See Roundtable Day One Transcript at 159-60 (Adam 
Inzirillo, BAML).
---------------------------------------------------------------------------

    However, one panelist (Nasdaq) opposed adding auction information 
to the exclusive SIP. The panelist indicated that Nasdaq views its 
crossing process as its intellectual property, retail investors do not 
use the imbalance information, and auction data is already widely 
available to retail investors and retail online brokers.\347\
---------------------------------------------------------------------------

    \347\ See Roundtable Day One Transcript at 157-59 (Oliver 
Albers, Nasdaq).
---------------------------------------------------------------------------

(c) Commission Discussion and Proposal
    Auctions have become an increasingly significant part of the 
trading day, accounting for approximately 7% of daily equity trading 
volume.\348\ Auctions, especially the opening and the closing auctions, 
are important for the implementation of passive investment strategies, 
as detailed above, and generate prices that are used for a variety of 
market purposes, including setting benchmark prices for index 
rebalances and for mutual fund pricing. Reopening auctions also play a 
crucial role in connection with security-specific or market-wide 
events, helping to assure the resumption of orderly trading following a 
limit up-limit down or other regulatory halt.\349\ Auction information, 
including auction order imbalance and other auction data, is important 
for effective participation in these significant market events.
---------------------------------------------------------------------------

    \348\ This figure is based on data available on Cboe's website 
from November of 2019. See Cboe: U.S. Equities Market Volume 
Summary, available at https://markets.cboe.com/us/equities/market_share/ (last accessed Nov. 26, 2019); Rosenblatt Securities, 
supra note 330 (stating that closing auction volume amounted to 8.4% 
of consolidated volume); Greenwich Associates, Stock Trading Volumes 
Gravitate to Open and Closing Auctions (Feb. 2, 2017), available at 
https://www.greenwich.com/press-release/stock-trading-volumes-gravitate-open-and-closing-auctions (stating that average opening 
auction volume in 2017 was 1.25% of average daily volume).
    \349\ For example, on Aug. 24, 2015, LULD halts were triggered 
in 471 securities. More than half (55%) of the impacted securities 
triggered more than one halt, and over one quarter (26%) of the 
impacted securities were halted 4 or more times. See Staff of the 
Office of Analytics and Research, Division of Trading and Markets, 
Equity Market Volatility on Aug. 24, 2015, at 68 (Dec. 2015).
---------------------------------------------------------------------------

    However, the content of SIP data has not been updated to reflect 
the growing importance of auctions, and today most auction-related 
information is available only through exchange proprietary data 
products.\350\ This exacerbates the information asymmetries between SIP 
data and proprietary data \351\ and has raised concerns among market 
participants as to whether SIP data is sufficient to provide best 
execution to customer orders during auctions.\352\ Moreover, lack of 
full reopening auction information in SIP data may inhibit widespread 
participation in reopening auctions following limit-up-limit-down halts 
or other volatility events and may impede efficient price discovery 
during these critical periods.\353\
---------------------------------------------------------------------------

    \350\ See supra notes 333-341.
    \351\ See infra note 358 and accompanying text (explaining that 
auction data that would support more informed participation in 
auctions is not available publicly or to retail investors).
    \352\ See supra note 344.
    \353\ See supra note 333 (comparing the LULD information 
available through the exclusive SIP feeds with the more extensive 
reopening auction information available through proprietary market 
data products).
---------------------------------------------------------------------------

    As discussed above, market participants rely upon auction 
information for effective participation in opening, closing, and 
reopening auctions.\354\ Accordingly, the Commission preliminarily 
believes that full auction-related information should be included in 
the proposed definition of core data. Specifically, under proposed Rule 
600(b)(5) of Regulation NMS, ``auction information'' would be defined 
as all information specified by national securities exchange rules or

[[Page 16759]]

effective national market system plans that is generated by a national 
securities exchange leading up to and during an auction, including 
opening, reopening, and closing auctions, and disseminated during the 
time periods and at the time intervals provided in such rules and 
plans.
---------------------------------------------------------------------------

    \354\ Market participants use auction information in making a 
variety of trading decisions. See Markets Media, Auction Imbalance 
Data Affects Traders (Feb. 7, 2017), available at https://www.marketsmedia.com/auction-imbalance-data-affects-traders (stating 
that ``70% of traders said real-time imbalance data can influence 
how their firm trades in the auction or continuous market'' and 
explaining that large orders can be executed in auctions with less 
price impact). For example, market participants use auction 
imbalance information to predict closing volume, which is ``an 
important factor in the optimal scheduling of algorithmic trading.'' 
See Global Trading, Closing Volume Discovery (Sept. 23, 2019), 
available at https://www.fixglobal.com/home/closing-volume-discovery/. Since actual daily closing volume can vary widely, it is 
difficult for market participants to manage order placement logic 
for orders that are being submitted to auctions. Id. Auction 
imbalance messages published by the primary listing exchanges 
through proprietary market data products help market participants 
more accurately predict closing volume. Id.
---------------------------------------------------------------------------

    The elements of proposed auction information would be established 
by individual exchange rules or effective national market system plans 
(e.g., the LULD Plan). The individual exchanges have established their 
own auction information elements that are relevant to their individual 
auction processes, and effective national market system plans have also 
established information requirements related to certain auctions (e.g., 
reopenings after LULD trading pauses).\355\ The Commission 
preliminarily believes that each individual exchange and relevant plan 
should be able to design and develop its individual auctions and the 
data elements that would be useful to market participants that 
participate in such auctions. Further, by tying the proposed definition 
to the rules of the exchanges and effective national market system 
plans, the proposed definition could evolve over time as such exchanges 
or plans develop new data elements in the future. Any additional data 
element set forth in an exchange's rules or plan(s) would be subject to 
Commission consideration pursuant to Section 19(b) of the Exchange Act 
and Rule 19b-4 or Rule 608, respectively.
---------------------------------------------------------------------------

    \355\ See, e.g., LULD Plan, supra note 38, Section VII(B)(1).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed definition 
of auction information would promote more informed and effective 
trading in auctions. For example, information regarding the size and 
side of order imbalances can indicate the direction a stock's price 
might move and inform decisions on where to price an auction order and 
what order type to use. Including auction information in core data, as 
proposed, would facilitate a broader distribution of this information 
to a greater number and variety of market participants. The Commission 
preliminarily believes that this would help to promote more informed 
trading for a greater number of market participants, which could also 
facilitate price formation, and improve execution quality for more 
traders and investors. While some market participants may not need the 
proposed auction information, based on the growth of auctions and the 
importance a variety of market participants have ascribed to 
information about orders participating in auctions, the Commission 
preliminarily believes that many market participants, including some 
retail investors, would use this information to participate in auctions 
in a more informed and effective manner.\356\
---------------------------------------------------------------------------

    \356\ See supra notes 342-346 and accompanying text. Moreover, 
as noted above, see supra note 323, competing consolidators will be 
required to calculate and generate consolidated market data, 
including the auction information set forth in the Commission's 
proposed definition, and to offer this information to subscribers. 
See proposed Rule 614(d)(1)-(3). However, market participants may 
require more or less auction information than specified in the 
proposed definition, and can choose auction information products 
offered by competing consolidators that are more tailored to their 
specific needs.
---------------------------------------------------------------------------

    Some Roundtable panelists objected to the inclusion of auction 
information in core data. For example, as previously noted, Nasdaq 
asserted that its crossing process is its intellectual property and 
that auction data is already widely available to retail investors on 
Nasdaq's website and through other data vendors.\357\ Although some 
auction-related information may be available on Nasdaq's website, the 
Commission preliminarily believes that meaningful auction information, 
such as the real-time imbalance data that would support decisions 
regarding order type selection and order pricing during auctions, is 
available only through Nasdaq's proprietary market data products.\358\ 
In addition, the Commission's proposal would not require the disclosure 
of any specific details about the operation of Nasdaq's crossing 
process that would appropriate or compromise Nasdaq's intellectual 
property. The proposed definition of auction information would require 
the dissemination of information about orders participating in 
auctions; \359\ the proposed definition would not require the 
dissemination of information about the technology or processes used to 
hold an auction. Further, the proposed definition of auction 
information is based on information currently disseminated by Nasdaq.
---------------------------------------------------------------------------

    \357\ See supra note 347 and accompanying text.
    \358\ See Nasdaq Opening and Closing Crosses, https://www.nasdaqtrader.com/Trader.aspx?id=OpenClose (last accessed Jan. 7, 
2020) (providing share volume in the Nasdaq crossing network but 
noting that imbalance data is available by subscription only); supra 
note 338.
    \359\ See Section 11A(c)(1)(C) of the Exchange Act, stating that 
the Commission shall assure the usefulness of the form and content 
of information with respect to quotations for and transactions in 
securities. 15 U.S.C. 78k-1(c)(1)(C). The Senate Report stated that 
the Commission would have the authority under Section 11A to 
promulgate rules as to what information and how such information is 
displayed on any tape or within any quotation system. See Senate 
Report, supra note 5, at 10.
---------------------------------------------------------------------------

    The Commission requests comment on the inclusion of auction 
information in the proposed definition of core data as well as the 
proposed definition of auction information in proposed Rule 600(b)(5). 
In particular, the Commission solicits comment on the following:
    44. Do commenters believe that auction information should be 
included in the proposed definition of core data? Why or why not? What 
kinds of market participants will use this information? For what 
purposes? What are the advantages or disadvantages of including auction 
information in proposed core data as opposed to proprietary data?
    45. Do commenters believe that the lack of auction information in 
current SIP data creates significant information asymmetries between 
users of current SIP data and users of proprietary data products? Do 
commenters believe that current SIP data is sufficient to meet the 
needs of some market participants even though it does not include 
auction information? Please explain.
    46. Does the lack of auction information in current SIP data create 
impediments to achieving best execution when participating in auctions? 
Do market participants believe that it is possible to participate in 
auctions without the auction information? Please explain.
    47. What are commenters' views on the Commission's proposed 
definition of auction information? Does it capture the full range of 
auction-related information that market participants need for informed 
trading in auctions? Does it include any information that is not 
necessary or useful for informed trading in auctions? Should the 
Commission delineate specific data elements in the definition of 
auction information as opposed to defining auction information in terms 
of the auction information that is currently generated pursuant to 
exchange rules or effective national market system plans?
    48. Should the proposed definition of auction information include 
information on orders participating in non-auction matching processes, 
such as Cboe's market close order, that are related to auctions 
occurring on other exchanges? Why or why not?

D. Proposed Definition of ``Regulatory Data''

    As discussed above,\360\ the existing Equity Data Plans disseminate 
data elements related to a number of regulatory requirements, such as 
Regulation SHO, LULD, and MWCB requirements, and other information 
provided by the primary listing exchanges, such as official opening and

[[Page 16760]]

closing prices. To ensure that this information is included in the 
proposed definition of consolidated market data, the Commission is 
proposing to amend Rule 600 to add a definition of ``regulatory data.'' 
Specifically, under proposed Rule 600(b)(77) of Regulation NMS, 
regulatory data would be defined as: (1) Information required to be 
collected or calculated by the primary listing exchange for an NMS 
stock and provided to competing consolidators and self-aggregators 
pursuant to the effective national market system plan or plans required 
under Rule 603(b), including, at a minimum: (A) Information regarding 
Short Sale Circuit Breakers pursuant to Rule 201 of Regulation SHO; (B) 
information regarding Price Bands required pursuant to the LULD Plan; 
(C) information relating to regulatory halts or trading pauses (news 
dissemination/pending, LULD, and MWCBs) and reopenings or resumptions; 
(D) the official opening and closing prices of the primary listing 
exchange; and (E) an indicator of the applicable round lot size; and 
(2) information required to be collected or calculated by the national 
securities exchange or national securities association on which an NMS 
stock is traded and provided to competing consolidators and self-
aggregators pursuant to the effective national market system plan(s) 
required under Rule 603(b), including, at a minimum: (A) Whenever such 
national securities exchange or national securities association 
receives a bid (offer) below (above) an NMS stock's lower (upper) LULD 
price band, an appropriate regulatory data flag identifying the bid 
(offer) as non-executable; and (B) other regulatory messages including 
sub-penny execution and trade-though exempt indicators. For purposes of 
paragraph (1)(C), the primary listing exchange that has the largest 
proportion of companies included in the S&P 500 Index shall monitor the 
S&P 500 Index throughout the trading day, determine whether a Level 1, 
Level 2, or Level 3 decline, as defined in self-regulatory organization 
rules related to Market-Wide Circuit Breakers, has occurred, and 
immediately inform the other primary listing exchanges of all such 
declines (so that the primary listing exchange can initiate trading 
halts, if necessary).\361\
---------------------------------------------------------------------------

    \360\ See supra Section II.C.
    \361\ Because, under the proposed decentralized consolidation 
model, primary listing exchanges would perform some of the functions 
that the exclusive SIPs perform today (such as monitoring the S&P 
500 Index), each SRO would have to collect all elements of 
consolidated market data. SROs would not be required to obtain 
regulatory data or other consolidated market data from competing 
consolidators; SROs could choose to obtain such data directly from 
other SROs.
---------------------------------------------------------------------------

    The primary listing exchange is an SCI entity under Regulation 
Systems Compliance and Integrity (``Regulation SCI'').\362\ An SCI 
entity includes any national securities exchange other than an exchange 
that is notice registered with the Commission pursuant to 15 U.S.C. 
78f(g) or a limited purpose national securities association registered 
with the Commission pursuant to 15 U.S.C. 78o-3(k).\363\ Under 
Regulation SCI, any SCI system of, or operated by or on behalf of, the 
primary listing exchange that directly supports functionality relating 
to trading halts, would be a ``critical SCI system.'' An ``SCI system'' 
means all computer, network, electronic, technical, automated, or 
similar systems of, or operated by or on behalf of, an SCI entity that, 
with respect to securities, directly support trading, clearance and 
settlement, order routing, market data, market regulation, or market 
surveillance.\364\ A ``critical SCI system'' means any SCI systems of, 
or operated by or on behalf of, an SCI entity that: (1) Directly 
support the functionality relating to (i) Clearance and settlement 
systems of clearing agencies; (ii) Openings, reopenings, and closings 
on the primary listing market; (iii) Trading Halts; (iv) Initial public 
offerings; (v) The provision of consolidated market data; or (vi) 
Exclusively-listed securities; or (2) Provides functionality to the 
securities markets for which the availability of alternatives is 
significantly limited or nonexistent and without which there would be a 
material impact on fair and orderly markets.\365\ Accordingly, with 
respect to any SCI systems used to determine whether LULD or MWCB 
trading halts have been triggered, and to notify other SROs of such 
halts, Regulation SCI requires the primary listing exchange to have 
reasonably designed business continuity and disaster recovery plans 
that include maintaining backup and recovery capabilities sufficiently 
resilient and geographically diverse and that are reasonably designed 
to achieve two-hour resumption of such systems following a wide-scale 
disruption.\366\
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    \362\ 17 CFR 242.1000 et seq.
    \363\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000.
    \364\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000.
    \365\ Id.
    \366\ See Rule 1001(a)(2)(v), 17 CFR 242.1001(a)(2)(v). As the 
Commission stated when it adopted Regulation SCI, ``[i]n the event a 
trading halt is necessary, it is essential that the systems 
responsible for communicating the trading halt--typically maintained 
by the primary listing market--are robust and reliable so that the 
trading halt is effective across the U.S. securities markets. Thus, 
systems which communicate information regarding trading halts 
provide an essential service in the U.S. markets and, should a 
systems issue occur affecting the ability of an SCI entity to 
provide such notifications, the fair and orderly functioning of the 
securities markets may be significantly impacted.'' See Regulation 
SCI Adopting Release, supra note 28, at 72278.
---------------------------------------------------------------------------

    Market participants use this regulatory data to meet their 
regulatory obligations and to be informed of trading halts, price 
bands, or other market conditions that may affect their trading 
activity. Accordingly, the Commission preliminarily believes that this 
information should be included in the proposed definition of 
consolidated market data.
1. Regulation SHO
    In pertinent part, Rule 201(b) requires a trading center, including 
a listing market, to establish, maintain, and enforce certain written 
policies and procedures that are reasonably designed to prevent the 
execution or display of a short sale order of a covered security if the 
Short Sale Circuit Breaker has been triggered and further requires that 
such trading center, including a listing market, regularly surveil to 
ascertain the effectiveness of those policies and procedures and take 
prompt action to remedy any deficiencies.
    Under the proposed definition of regulatory data, the primary 
listing exchange for an NMS stock (i.e., a covered security under Rule 
201 of Regulation SHO) \367\ would make the determination \368\ 
regarding whether a Short Sale Circuit Breaker has been triggered.\369\ 
The Commission proposes to amend the process required under Rule 201 in 
two ways. First, if the Short Sale Circuit Breaker has been triggered, 
the listing market would be required to immediately notify competing 
consolidators and self-aggregators (rather than a single plan processor 
as is currently the case). Competing consolidators would then be 
required to consolidate and disseminate this information to their 
subscribers. Second, under the proposed decentralized consolidation 
model with competing consolidators and self-aggregators, the listing 
market would have the option of obtaining proposed consolidated market 
data from one or

[[Page 16761]]

more competing consolidators (rather than from a single plan processor 
as is currently the case) or, if aggregating consolidated market data 
itself, to make determinations as to whether a Short Sale Circuit 
Breaker has been triggered.
---------------------------------------------------------------------------

    \367\ A ``covered security'' is defined in Rule 201(a)(1) of 
Regulation SHO as any NMS stock as defined in Rule 600(b)(48). 17 
CFR 242.201(a)(1).
    \368\ 17 CFR 242.201(b)(3).
    \369\ Id. This is consistent with the current requirements under 
Rule 201(b)(3). Rule 201(b)(3) refers to the ``listing market'' as 
defined in Rule 201(a)(3). As discussed below, the Commission 
proposes to amend the definition of ``listing market'' to refer to 
the proposed definition of ``primary listing exchange'' in proposed 
Rule 600(b)(67).
---------------------------------------------------------------------------

    Due to the changes proposed herein (i.e., a listing market would 
now have the ability to choose from one or more competing consolidators 
for proposed consolidated market data, or to aggregate proposed 
consolidated market data on its own), the Commission preliminarily 
believes that a trading center, including a listing market, should 
consider updating its written policies and procedures required under 
Rule 201(b) to address the source of core data that it uses in making 
its determination regarding whether the Short Sale Circuit Breaker has 
been triggered and any changes to that source of core data, including 
the underlying reason for such change. The Commission preliminarily 
believes that these types of updates to such written policies and 
procedures would assist a listing market in ensuring consistency in 
making its determination regarding whether the Short Sale Circuit 
Breaker has been triggered and avoiding any appearance of ``gaming'' or 
``cherry-picking'' of core data in making that determination.
    Moreover, the Commission is proposing certain conforming amendments 
in Rule 201 to harmonize that rule with the Commission's proposal. 
Currently, Rule 201(a) defines ``listing market'' by reference to the 
listing market as defined in the effective transaction reporting plan 
for the covered security.\370\ Since primary listing exchanges will be 
required to collect and calculate regulatory data, the Commission is 
proposing to introduce a definition of ``primary listing exchange'' in 
Rule 600(b)(67) to provide greater clarity with respect to the 
responsibilities regarding regulatory data. Specifically, under 
proposed Rule 600(b)(67), primary listing exchange would be defined as, 
for each NMS stock, the national securities exchange identified as the 
primary listing exchange in the effective national market system plan 
or plans required under Rule 603(b).
---------------------------------------------------------------------------

    \370\ 17 CFR 242.201(a)(3).
---------------------------------------------------------------------------

    The Commission preliminarily believes that it is appropriate for 
the effective national market system plan(s) to determine which 
exchange is the primary listing exchange for each NMS stock and that 
the proposed definition would ensure that primary listing exchanges are 
clearly identified. The Commission also preliminarily believes that the 
definition of listing market in Rule 201(a)(3) should be amended so 
that it cross-references this proposed definition of primary listing 
exchange, so as to facilitate the consistent identification of primary 
listing exchanges across Regulation SHO and Regulation NMS and to avoid 
potentially duplicative or confusing definitions in the Commission's 
rules.
    Similarly, Rule 201(b)(1)(ii) requires Short Sale Circuit Breakers 
to be applied ``the remainder of the day and the following day when a 
national best bid for the covered security is calculated and 
disseminated on a current and continuing basis by a plan processor 
pursuant to an effective national market system plan.'' \371\ The 
Commission is proposing to update this provision by removing the 
reference to the plan processor to reflect the proposed decentralized 
consolidation model. In addition, Rule 201(b)(3) requires listing 
markets to immediately notify ``the single plan processor responsible 
for consolidation of information for the covered security pursuant to 
Rule 603(b)'' \372\ when a Short Sale Circuit Breaker has been 
triggered. Again, as a result of the proposed decentralized 
consolidation model, this reference to a single plan processor is 
proposed to be removed and replaced by a requirement for the listing 
market to immediately make such information available as provided in 
Rule 603(b) (i.e., to competing consolidators and self-aggregators).
---------------------------------------------------------------------------

    \371\ 17 CFR 242.201(b)(1)(ii).
    \372\ 17 CFR 242.201(b)(3).
---------------------------------------------------------------------------

2. Limit Up-Limit Down Plan
    Currently, the exclusive SIPs calculate and disseminate certain 
LULD data pursuant to the terms of the LULD Plan.\373\ Specifically, 
the exclusive SIPs calculate the price bands and reference prices and 
disseminate limit state flags identifying quotes that are non-
executable, trading pause messages, and reopening information. To 
ensure that this important LULD information continues to be calculated 
and disseminated as part of proposed consolidated market data, the 
Commission is proposing several new provisions. First, the Commission 
is proposing that the primary listing exchanges be required to 
calculate and disseminate the price bands and reference prices for the 
LULD Plan as part of proposed regulatory data. As discussed below, the 
existing exclusive SIPs would be replaced by the proposed decentralized 
consolidation model with competing consolidators and self-aggregators, 
and, therefore, the obligation to calculate and disseminate LULD data 
would need to be shifted to another entity. Primary listing exchanges 
have a direct relationship with their listed companies and are 
responsible for imposing market-wide ``news pending'' and other 
regulatory halts. Further, under the LULD Plan, the primary listing 
exchanges currently have substantial obligations with regard to 
imposing and communicating LULD trading pauses, as well as with respect 
to the reopening of trading.\374\ The Commission therefore believes 
that the primary listing exchanges would be well-situated to perform 
these calculations as part of proposed regulatory data.
---------------------------------------------------------------------------

    \373\ See supra Section II.C.2.
    \374\ See supra Section II.C.2.
---------------------------------------------------------------------------

    The LULD Plan is an important mechanism in the national market 
system. The Commission preliminarily believes that having multiple 
entities (e.g., competing consolidators and self-aggregators) 
calculating reference prices and price bands could complicate and 
potentially undermine the purposes of the LULD Plan and create 
confusion during periods of market volatility. Accordingly, the 
Commission believes that the LULD reference prices and price bands 
should continue to be calculated and disseminated by a single entity--
the primary listing exchange. The Commission's proposal to continue to 
have a single entity calculate and disseminate LULD information as part 
of proposed consolidated market data and, as discussed below, to 
monitor the S&P 500 Index throughout the trading day and send 
notification messages to the primary listing exchanges regarding MWCBs, 
is not inconsistent with the proposed decentralized consolidation model 
under which multiple competing consolidators would calculate and 
disseminate consolidated market data, including the NBBO. With broker-
dealers aggregating various proprietary market data products today, the 
potential for ``multiple NBBOs'' already exists, whereas LULD 
information is currently calculated and disseminated by a single entity 
(i.e., the exclusive SIPs) and notifications to primary listing 
exchanges regarding MWCBs triggered by S&P 500 Index declines are also 
sent by a single entity (i.e., SIAC).
    In addition, under the proposed definition of regulatory data, all 
national securities exchanges or national securities associations that 
receive a quote for an NMS stock that is outside of the price bands 
under the LULD Plan would be required to attach the appropriate 
regulatory flag signifying that the quote is non-executable and to

[[Page 16762]]

provide the quote and appropriate flag as part of its regulatory data 
to competing consolidators and self-aggregators. The Commission 
preliminarily believes that each national securities exchange or 
national securities association is in the best position to perform the 
function of attaching a flag to its own quote. The Commission 
preliminarily believes that assigning the responsibility to identify 
quotes as non-executable to parties other than the SRO disseminating 
the quote could add latency and complexity to the process and increase 
the risk of error.
3. Market-Wide Circuit Breakers
    Today, SIAC (the CTA/CQ SIP) monitors the S&P 500 Index to 
determine whether a Level 1, Level 2, or Level 3 decline has occurred 
and is responsible for sending messages to the primary listing 
exchanges informing them of such declines.\375\ Under the proposed 
decentralized consolidation model, there would no longer be an 
exclusive SIP to perform this function. Accordingly, the proposed 
definition of regulatory data identifies a specific primary listing 
exchange to monitor the S&P 500 Index throughout the trading day, 
determine whether a Level 1, Level 2, or Level 3 decline, as defined in 
SRO rules related to MWCB, has occurred, and immediately inform the 
other primary listing exchanges of all such declines. Specifically, the 
primary listing exchange that has the largest proportion of companies 
included in the S&P 500 Index would be required to conduct this 
monitoring and notification function.\376\ As discussed above, the 
Commission preliminarily believes that these responsibilities should 
continue to be carried out by a single entity so that messages 
regarding the occurrence of Level 1, Level 2, or Level 3 declines are 
distributed to primary listing exchanges simultaneously from the same 
source, to avoid the complexity and confusion that might result if such 
messages were distributed from multiple parties during periods of 
market volatility. The Commission preliminarily believes that it is 
appropriate to allocate these functions to the primary listing exchange 
that has the largest proportion of companies included in the S&P 500 
Index because a significant proportion of the monitoring would be 
related to its own listings.
---------------------------------------------------------------------------

    \375\ By contrast, rather than the exclusive SIP notifying the 
primary listing exchange, under LULD, if trading for an NMS stock 
does not exit a limit state within 15 seconds of entry during 
regular trading hours, then the primary listing exchange is required 
to declare a trading pause in that NMS stock and notify the 
exclusive SIP.
    \376\ NYSE currently lists the largest proportion of companies 
in the S&P 500 Index. If this changes, NYSE and the other primary 
listing exchange would need to coordinate to ensure that these 
monitoring and notification responsibilities are transitioned 
effectively.
---------------------------------------------------------------------------

    In addition, under the proposed definition of regulatory data, each 
primary listing exchange would be responsible for providing certain 
information required under the MWCB rules to competing consolidators 
and self-aggregators. Specifically, each primary listing exchange would 
be required to provide MWCB trading halt and resumption messages to 
competing consolidators and self-aggregators, just as they do with the 
exclusive SIPs today.
4. Other Regulatory Data
    Official opening and closing prices are closely tracked data 
elements used by market participants for a variety of purposes. The 
primary listing exchanges currently determine the official opening and 
closing prices for their listed stocks \377\ and provide these data 
elements to the exclusive SIPs. In addition to Regulation SHO, LULD, 
and MWCB information, the proposed definition of regulatory data will 
also require primary listing exchanges to provide the official opening 
and closing prices for the NMS stocks they list to competing 
consolidators and self-aggregators. The Commission preliminarily 
believes that the primary listing exchanges, because they determine the 
official opening and closing prices for their listed stocks and have 
direct and immediate access to this information, are best situated to 
provide official opening and closing prices in their listed securities 
to competing consolidators and self-aggregators under the decentralized 
consolidation model so that this important information is included in 
the proposed consolidated market data made available to market 
participants.
---------------------------------------------------------------------------

    \377\ See, e.g., NYSE Rule 123C(1)(e)(i) (Closing Procedures); 
NYSE Rule 123D(a) (Openings); Nasdaq Rule 4754(b)(4) (Nasdaq Closing 
Cross); Nasdaq Rule 4752(d) (Opening Process).
---------------------------------------------------------------------------

    In addition, the proposed definition of regulatory data would 
require the primary listing exchange for each NMS stock to calculate 
and make available to competing consolidators and self-aggregators an 
indicator of the applicable round lot size. As discussed above, the 
proposed definition of round lot would allocate stocks into five round 
lot categories based on each stock's average closing price on the 
primary listing exchange over the prior calendar month. The Commission 
preliminarily believes that such an indicator would help market 
participants ascertain the applicable round lot size for each NMS stock 
on an ongoing basis.\378\ Due to the primary listing exchanges' direct 
and immediate access to the official opening and closing prices of 
their listed stocks, the primary listing exchanges would be well-
situated to calculate the monthly average closing price, the metric 
that will be used to allocate NMS stocks into round lot sizes under the 
proposed definition of round lot; assign a round lot size of 100, 20, 
10, 2, or 1, as applicable; and include an indicator of the applicable 
round lot size in the data they make available to competing 
consolidators and self-aggregators.
---------------------------------------------------------------------------

    \378\ Among other reasons, market participants would need to be 
aware of the applicable round lot size under the proposed amendments 
because several Commission rules would apply to round lot orders. 
See supra Section III.C.1(d)(i) (discussing the impact of the 
proposed definition of round lot on Rules 602, 603, 604, and 605 of 
Regulation NMS).
---------------------------------------------------------------------------

    The proposed definition of regulatory data would also require an 
exchange or association on which an NMS stock is traded to provide 
other data pertaining to regulatory requirements, including sub-penny 
execution indicators and trade-though exempt indicators. Additional 
regulatory messages such as these are included in the technical 
specifications of the Equity Data Plans. The Commission preliminarily 
believes that all of these regulatory messages provide important 
information to the market and facilitate compliance with regulatory 
requirements. Therefore, the Commission preliminarily believes that 
such regulatory messages should be included in the proposed definition 
of consolidated market data.
    Finally, as discussed above,\379\ as the markets continue to 
evolve, there may be a need to reflect new regulatory data elements in 
proposed consolidated market data. Accordingly, the Commission is 
proposing that the definition of regulatory data include a provision 
(as set forth in proposed consolidated market data) that would allow 
the definition of regulatory data to be amended to include additional 
regulatory data elements pursuant to amendments to effective national 
market system plan(s). As discussed above, amendments to effective 
national market system plans must be filed with, and approved by, the 
Commission pursuant to Rule 608(b).
---------------------------------------------------------------------------

    \379\ See supra Section III.B.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed definition of 
regulatory data in proposed Rule 600(b)(77). In particular, the 
Commission solicits comment on the following:

[[Page 16763]]

    49. Do commenters believe that the elements of proposed regulatory 
data enumerated in proposed Rule 600(b)(77) reflect the elements that 
are necessary for trading in compliance with Commission rules, Equity 
Data Plans, or SRO rules? Why or why not? Should any additional data 
elements be included? Is there any significant regulatory information 
that is currently included in SIP data, including pursuant to the 
technical specifications to the Equity Data Plans, which is not 
captured by the proposed definition of regulatory data? If so, should 
such elements be included in the proposed definition of regulatory 
data? Please describe.
    50. Should any of the proposed elements of regulatory data be 
excluded? Please explain.
    51. Do commenters believe that the primary listing exchange should 
be responsible for calculating regulatory data, as defined? Why or why 
not? Would any of those responsibilities be more effectively allocated 
to competing consolidators? Do commenters believe another party should 
perform these calculations? Would the proposed definition of regulatory 
data impose any additional costs on primary listing exchanges?
    52. In the context of the Short Sale Circuit Breaker, what benefits 
and/or challenges do commenters believe will result from the proposed 
change to a competing consolidator/self-aggregator model? Do primary 
listing exchanges anticipate utilizing a consistent source of core data 
in making their determination regarding whether a Short Sale Circuit 
Breaker has been triggered? Or multiple sources? Please describe.
    53. Will updating the primary listing exchange's existing Rule 201 
written policies and procedures, as discussed above, present any 
operational (or other) challenges? If yes, please describe.
    54. Would a round lot size indicator be useful to market 
participants and investors? Why or why not?
    55. Do commenters believe that the primary listing exchange that 
has the largest proportion of companies included in the S&P 500 Index 
should be required to perform the MWCB-related functions described in 
the proposed definition of regulatory data? Why or why not? Should the 
primary listing market be determined by weighting the companies 
included in the S&P 500 Index? Why or why not? Do commenters believe 
that at least one other market should calculate this information as a 
backup contingency? Are there alternative approaches to the assignment 
of the S&P 500 Index monitoring and notification function? Would it be 
more appropriate to assign this function to another party? If so, 
please explain how any such other party could appropriately perform 
this function.
    56. Do commenters believe that each national securities exchange 
and national securities association receiving a quote outside the price 
bands under the LULD Plan should be required to flag each quote as non-
executable? Why or why not? Are there alternative approaches to the 
assignment of the non-executable quote flagging function? Would it be 
more appropriate to assign this function to another party? If so, 
please explain how any such other party could appropriately perform 
this function.

E. Proposed Definition of ``Administrative Data''

    In addition to current core data and current regulatory data, SIP 
data today includes additional technical information. Much of this 
information is enumerated in the technical specifications of the Equity 
Data Plans and described as ``administrative'' or ``control'' messages. 
Examples of administrative messages include market center and issue 
symbol identifiers.\380\ Examples of control messages include messages 
regarding the beginning and end of trading sessions.\381\ The 
Commission preliminarily believes that administrative messages can 
facilitate the efficient and accurate use of consolidated market data 
by market participants and should be included in the proposed 
definition of consolidated market data. Further, the Commission 
preliminarily believes that this information is useful to market 
participants and should continue to be widely available. The proposed 
definition is intended to capture administrative information that is 
currently provided in SIP data.\382\ In order to capture this type of 
information, under proposed Rule 600(b)(2), ``administrative data'' 
would be defined as administrative, control, and other technical 
messages made available by national securities exchanges and national 
securities associations pursuant to the effective national market 
system plan or plans required under Section 242.603(b) or the technical 
specifications thereto as of [date of Commission approval of this 
proposal].
---------------------------------------------------------------------------

    \380\ See, e.g., UTP Data Feed Services Specification, supra 
note 142, at 20.
    \381\ Id. at 33.
    \382\ As discussed above, administrative data elements could be 
added to consolidated market data pursuant to amendments to the 
effective national market system plan or plans required under 
Section 242.603(b). See supra Section III.B.
---------------------------------------------------------------------------

    The Commission preliminarily believes that administrative data, as 
proposed to be defined and as currently exists, provides additional 
context for market participants to understand, and efficiently and 
accurately use, the proposed core and regulatory data to support their 
trading activities. For example, issue symbol and market center 
identifiers provide basic information necessary to understand to which 
stock the price and size information represented in core data relates 
and the specific exchange on which this interest is available, which 
informs decisions about where orders in such stocks should be directed. 
As such, this information should continue to be included in the 
proposed definition of consolidated market data. Moreover, the 
Commission preliminarily believes that SROs would be well-situated to 
provide administrative data messages, which relate to SRO-specific 
details such as the market-center identifiers or the beginning and 
ending of trading sessions, because SROs have direct and immediate 
access to this information and could efficiently integrate it into the 
data feeds that they will utilize to make available the data necessary 
for competing consolidators and self-aggregators to generate core and 
regulatory data.
    The Commission requests comment on the proposed amendment to Rule 
600(b)(2) to introduce a definition of administrative data. In 
particular, the Commission solicits comment on the following:
    57. Do commenters believe that the Commission should propose a 
definition of administrative data? Why or why not? Should the 
Commission take an alternative approach? Why or why not?
    58. Do commenters believe that the proposed definition of 
administrative data captures the market data that would be necessary or 
useful to market participants? Please explain. Does the proposed 
definition of administrative data include any market data that should 
not be included? Please explain.
    59. Do commenters believe that each national securities exchange 
and national securities association should make available 
administrative data? Should any of the elements be provided by the 
primary listing exchange? Are there specific administrative data 
elements that should be consistent across all SROs? Are there any 
administrative data elements that competing consolidators or some other 
party, as opposed to national securities exchanges and national 
securities

[[Page 16764]]

associations, should be required to generate or provide for inclusion 
in proposed consolidated market data? Please explain.
    60. Do commenters believe that there are administrative data 
elements that should not require an NMS Plan amendment for inclusion in 
consolidated market data? For example, are there administrative data 
elements that are provided solely in the course of providing or 
utilizing other consolidated market data elements, such as core or 
regulatory data? Please explain. What procedural mechanism would be 
appropriate for including any such data elements in consolidated market 
data? How could any such data elements be distinguished from those 
which would require an NMS Plan amendment to be added to consolidated 
market data?

F. Proposed Definition of ``Exchange-Specific Program Data''

    In addition to current core data, regulatory data, and 
administrative data, current SIP data includes information related to 
individual exchange retail liquidity programs, which offer 
opportunities for retail orders to receive price improvement.\383\ The 
Commission preliminarily believes that existing retail liquidity 
programs and, in certain cases, other exchange-specific program 
information should continue to be included in proposed consolidated 
market data and is therefore proposing to define ``exchange-specific 
program data'' to include this information. Under proposed Rule 
600(b)(32), exchange-specific program data, which would be included in 
the proposed definition of consolidated market data, would be defined 
as (i) information related to retail liquidity programs specified by 
the rules of national securities exchanges and disseminated pursuant to 
the effective national market system plan or plans required under 
Section 242.603(b) as of [date of Commission approval of this proposal] 
and (ii) other exchange-specific information with respect to quotations 
for or transactions in NMS stocks as specified by the effective 
national market system plan or plans required under Section 242.603(b).
---------------------------------------------------------------------------

    \383\ See, e.g., CQS Binary Input Specifications (July 17, 
2019), at 37 (describing a ``retail interest indicator'' as follows: 
``[w]hen Retail Price Improvement (RPI) interest is priced better 
than the Protected Best Bid or Offer (PBBO) by a minimum of $0.001, 
an indication of interest on the Bid, Offer, or both the Bid and 
Offer will identify that interest will be eligible to interact with 
incoming Retail Order interest.''); supra note 47; NYSE Rule 107C; 
Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR 
40673 (July 10, 2012) (NYSE Retail Liquidity Program Approval 
Order); CBOE BYX Rule 11.24; Securities Exchange Act Release No. 
68303 (Nov. 27, 2012), 77 FR 71652 (Dec. 3, 2012) (CBOE BYX Retail 
Pilot Program Approval Order); Nasdaq BX Rule 4780; Securities 
Exchange Act Release No. 73702 (Nov. 28, 2014), 79 FR 72049 (Dec. 4, 
2014) (NASDAQ BX Retail Pilot Program Approval Order). For example, 
NYSE's retail liquidity program defines a class of market 
participants known as Retail Liquidity Providers who may provide 
potential price improvement, in the form of a non-displayed order 
that is priced better than NYSE's best protected bid or offer called 
a Retail Price Improvement Order. See NYSE Rule 107C; NYSE Retail 
Liquidity Program Approval Order. Other NYSE members are allowed, 
but not required, to submit Retail Price Improvement Orders. Id. 
When there is a Retail Price Improvement Order in a particular 
security, NYSE disseminates an indicator, which is included in the 
SIP data, known as the Retail Liquidity Identifier, indicating that 
such interest exists. In response, a class of market participants 
known as Retail Member Organizations can submit a special type of 
order, called a Retail Order, to the exchange. A Retail Order would 
interact, to the extent possible, with available contra-side Retail 
Price Improvement Orders. Id.
---------------------------------------------------------------------------

    Proposed Rule 600(b)(32)(i) pertains to information related to 
existing exchange retail liquidity programs that is currently 
disseminated pursuant to the Equity Data Plans. The dissemination of 
retail liquidity identifiers in the current SIP data encourages market 
participants to submit orders to, or otherwise participate in, such 
programs that the Commission has approved as consistent with the 
Exchange Act, including the dissemination of the related retail 
liquidity program information as SIP data.\384\ The proposed definition 
of exchange-specific program information would help ensure that the 
retail liquidity program information that is currently included in SIP 
data would be included in consolidated market data.
---------------------------------------------------------------------------

    \384\ See NYSE Retail Liquidity Program Approval Order, supra 
note 383 (stating that ``the Retail Liquidity Identifier will be 
disseminated through the consolidated public market data stream, and 
thus be widely viewable by market participants, and that members of 
the Exchanges that would not otherwise participate as Retail 
Liquidity Providers would be able to participate in the Program by 
submitting Retail Price Improvement Orders'').
---------------------------------------------------------------------------

    In addition, to the extent that an exchange, at its own discretion, 
determines to develop a new exchange-specific program in the future, 
proposed Rule 600(b)(32)(ii) would permit data elements related to any 
such program to be included in consolidated market data pursuant to the 
national market system plan or plans required under Section 242.603(b) 
or amendments thereto that are approved by the Commission. The 
Commission preliminarily believes that, to the extent that (i) 
exchanges develop new programs in the future,\385\ and (ii) the broad 
dissemination of information about such programs as part of 
consolidated market data would facilitate participation in such 
programs, an amendment to the effective national market system plan(s) 
could be filed with the Commission under Rule 608 of Regulation NMS to 
include such information in consolidated market data. Accordingly, the 
Commission preliminarily believes that this information is useful and 
should be included in the definition of consolidated market data as 
proposed.
---------------------------------------------------------------------------

    \385\ See supra note 92 and accompanying text. Currently, the 
only exchange-specific program data disseminated pursuant to the 
Equity Data Plans relates to retail liquidity programs.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendment to Rule 
600(b)(32) to introduce a definition of exchange-specific program data. 
In particular, the Commission solicits comment on the following:
    61. Do commenters believe that the proposed exchange-specific 
program data should be included in proposed consolidated market data? 
Why or why not?
    62. Do commenters believe that information related to retail 
liquidity programs currently established pursuant to exchange rules 
should be included in the proposed definition of exchange-specific 
program data? Why or why not? Do commenters believe that the inclusion 
of data elements related to these programs in current SIP data is 
useful for trading or investment decisions? Please explain.
    63. Do commenters believe that the proposed definition of exchange-
specific program data should permit data elements related to new 
exchange-specific programs that may be established to be included in 
consolidated market data pursuant to amendments to the effective 
national market system plan or plans required under Section 242.603(b)? 
Why or why not?

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

    The Commission is proposing to replace the existing centralized, 
exclusive consolidation model for SIP data \386\ with a decentralized, 
competitive consolidation model. The Commission preliminarily believes 
this model would foster competition in the consolidation and 
dissemination of proposed consolidated market data, better serve the 
needs of market participants and investors, and help mitigate the 
influence of certain conflicts of interest inherent in the existing 
exclusive SIP model.\387\ The Commission also preliminarily believes

[[Page 16765]]

that the proposed approach would modernize the infrastructure of the 
national market system by eliminating the existing, outdated 
centralized architecture for data consolidation and fostering the use 
of more competitive technologies for the collection, consolidation, and 
dissemination of proposed consolidated market data. Together, these 
would reduce latency differentials that currently exist between SIP 
data and proprietary data. Furthermore, the Commission preliminarily 
believes that this model will address concerns about the significant 
costs that accompany the exclusive \388\ structure that currently 
exists for the aggregation and dissemination of SIP data.
---------------------------------------------------------------------------

    \386\ See supra Sections I and II.A.
    \387\ These conflicts of interest are discussed in Section 
VI.A.2 infra.
    \388\ See Bloomberg Decision, supra note 37, at 3, 4. See also 
infra note 439.
---------------------------------------------------------------------------

A. Existing Centralized Consolidation Model

    Today, SIP data is collected, consolidated, and disseminated to 
investors and market participants through a centralized consolidation 
model with an exclusive SIP for each NMS stock centrally collecting 
market data transmitted from the dispersed SRO data centers and then 
redistributing consolidated SIP data to end-users. Each exchange and 
FINRA is required to transmit its own data for each NMS stock to the 
appropriate exclusive SIP.\389\ As provided under Rule 603(b), the 
exclusive SIPs do not compete with each other in the collection, 
consolidation, or dissemination of SIP data.\390\
---------------------------------------------------------------------------

    \389\ See supra note 42 and accompanying text.
    \390\ See supra note 21. The Senate Report stated that an 
exclusive processor of market information is, ``in effect, a public 
utility, and thus it must function in a manner which is absolutely 
neutral with respect to all market centers, all market makers, and 
all private firms.'' See Senate Report, supra note 5, at 7.
---------------------------------------------------------------------------

    For many years, this centralized consolidation model served 
investors well by providing an accurate, reliable, and fair stream of 
SIP data that was considered prompt relative to the prevailing 
technological standards of the time. Technological advances as well as 
the order routing and trading strategies that developed in response to 
the adoption of Regulation NMS have greatly increased the speed and 
automation of both markets and common trading strategies. These 
changes, along with the provisions adopted in Regulation NMS that allow 
for the sale of proprietary data products,\391\ have created incentives 
for exchanges to develop enhanced proprietary data products that they 
sell to the same market participants that are subscribers to the SIP 
data, and to offer connectivity products and services (e.g., co-
location, fiber connectivity, and wireless connectivity) that provide 
low-latency access to the proprietary data products. Further, as the 
markets evolved and depth of book data became more important for some 
market participants, the exchanges continued to improve their 
proprietary data feeds without similarly improving the exclusive SIPs 
to reflect this market evolution. The content and latency differentials 
between SIP data and the proprietary market data products disseminated 
directly by the exchanges have become increasingly material.\392\
---------------------------------------------------------------------------

    \391\ See Regulation NMS Adopting Release, supra note 10, at 
37567.
    \392\ See infra Section VI.B.2(b).
---------------------------------------------------------------------------

    There are widespread and significant concerns about the current 
method of disseminating SIP data and its associated latencies.\393\ The 
centralized consolidation model of the Equity Data Plans and the 
exclusive SIPs suffers from three specific sources of latency 
disadvantage: (a) Geographic latency, (b) aggregation or consolidation 
latency, and (c) transmission or communication latency.
---------------------------------------------------------------------------

    \393\ See, e.g., Letter to Brent J. Fields, Secretary, 
Commission, from Tyler Gellasch, Executive Director, Healthy Markets 
Association, 6 (Oct. 23, 2018) (``Healthy Markets Association Letter 
I'') (``SIP data feeds are still persistently slower and offer less 
information than is available through the private data feeds and 
connectivity offerings sold by the exchanges.'').
---------------------------------------------------------------------------

    Geographic latency, as used herein, refers to the time it takes for 
data to travel from one physical location to another, which must also 
take into account that data does not always travel between two 
locations in a straight line. Greater distances usually equate to 
greater geographic latency, though geographic latency is also affected 
by the mode of data transmission, as discussed below. The Commission 
understands that geographic latency is typically the most significant 
component of the additional latency that SIP data feeds experience 
compared to proprietary data feeds.\394\ Because each exclusive SIP 
must collect data from geographically-dispersed SRO data centers, 
consolidate the data, and then disseminate it from its location to end-
users, which are often in other locations, this hub-and-spoke form of 
centralized consolidation creates additional latency.\395\ For example, 
information about quotes and trades on Nasdaq for NYSE-listed 
securities incurs latency as it travels from Nasdaq's data center in 
Carteret approximately 34.5 miles to the CTA/CQ SIP in Mahwah, and then 
back to Carteret.\396\
---------------------------------------------------------------------------

    \394\ See, e.g., Letter to Brent J. Fields, Secretary, 
Commission, from Michael Blaugrund, Head of Transactions, New York 
Stock Exchange, 1 (Oct. 24, 2018) (``Blaugrund Letter'') (stating 
that, as ``processing time approaches zero, it is clear that the 
time required for trade and quote data to travel from Participant 
datacenter -> SIP datacenter -> Recipient datacenter, or `geographic 
latency,' is a larger portion of the total latency.'').
    \395\ One commenter has stated ``[w]hile it is true that the 
latencies of the SIPs are slightly greater than those of direct 
exchange feeds, it is important to remember that the SIPs are a 
consolidation of all market data feeds, not a single feed. 
Therefore, the SIPs must first aggregate data from multiple 
exchanges located in geographically disparate data centers before 
processing and transmitting it to the market, which means their 
feeds will always be, by definition, slightly slower than the data a 
user can receive directly from an exchange.'' See Statement from the 
SIP Operating Committees Adding to SEC Commissioner Jackson's Recent 
Comments (Sept. 24, 2018), available at https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/Media_Statement_from_SIP_Operating_Committees_Chair_Emily_Kasparov.pdf; Nasdaq, Total Markets Report, supra note 127, at 20.
    \396\ See Roundtable Day One Transcript at 127 (Mark Skalabrin, 
Redline Trading Solutions) (stating that customers cannot be 
competitive using SIP data due to geographic latency, explaining 
``[i]f you're sitting at Secaucus and you get a direct feed tick 
from BATS, it shows up in a few microseconds from when they publish 
it. That same tick for the SIP for Nasdaq-listed symbols goes to 
Carteret, for NYSE-listed symbols they go to Mahwah and they come 
back again. The real numbers are, for one, about 350 microseconds 
and the other about close to a millisecond in latency for those to 
show up for someone using the SIP to get the BATS tick. So this is 
just an architectural--an obsolete architecture, really, for an 
automated trading system in today's world . . . you can't be 
competitive with those kind of latencies compared to just getting it 
directly from the exchange.'').
---------------------------------------------------------------------------

    Aggregation or consolidation latency, as used herein, refers to the 
amount of time an exclusive SIP takes to aggregate the multiple sources 
of SRO market data into SIP data and includes calculation of the NBBO. 
This latency reflects the time interval between when an exclusive SIP 
receives data from an SRO and when it disseminates SIP data to the end-
user. For years, market participants have claimed that the exclusive 
SIP aggregation speeds have remained measurably slower and 
uncompetitive with private market offerings.\397\ For

[[Page 16766]]

example, in the second quarter of 2010, the average aggregation latency 
\398\ for the Tapes A and B quotes and trades feeds exceeded 6,000 
microseconds, and the Tape C feeds exceeded 5,500 microseconds.\399\ In 
recent years, the Equity Data Plans operating committees have made some 
improvements to aspects of the exclusive SIPs and related 
infrastructure, including to address aggregation latency.\400\ For 
example, as of the second quarter of 2019, Tapes A and B reduced 
average quote feed aggregation latency to 69 microseconds and trade 
feed aggregation latency to 139 microseconds.\401\ As another example, 
Tape C reduced its average quote feed aggregation latency to an average 
of 16.9 microseconds for quotes and 17.5 microseconds for trades in the 
second quarter of 2019.\402\ As shown by these latency statistics, 
however, aggregation latency for the CTA/CQ SIP data continues to be 
meaningfully greater than that of Nasdaq UTP SIP data, despite these 
improvements.\403\
---------------------------------------------------------------------------

    \397\ See Joel Hasbrouck, Price Discovery in High Resolution, 
New York University (Aug. 9, 2019 draft) (``The first analysis 
examines the extent to which the conventional source of market data 
(the consolidated tape) accurately reflects the prices observed by 
agents who subscribe (at additional cost) to direct exchange feeds. 
At a one-second resolution, the information share of the direct 
feeds is indistinguishable from that of the consolidated tape. At 
resolutions of 100 and 10 microseconds, however, the direct feeds 
are totally dominant, and the consolidated share approaches 
zero.''); Elaine Wah and Michael P. Wellman, Latency Arbitrage, 
Market Fragmentation, and Efficiency: A Two-Market Model, University 
of Michigan (2013) (``Given order information from exchanges, the 
SIP takes some finite time, say [X] milliseconds, to compute and 
disseminate the NBBO. A computationally advantaged trader who can 
process the order stream in less than [X] milliseconds can simply 
out-compute the SIP to derive NBBO*, a projection of the future NBBO 
that will be seen by the public. By anticipating future NBBO, an HFT 
algorithm can capitalize on cross-market disparities before they are 
reflected in the public price quote, in effect jumping ahead of 
incoming orders to pocket a small but sure profit.''); Herbert Lash, 
Potential Profit from U.S. ``Latency Arbitrage'' Trading May Be $3 
Billion--Study, Reuters (Feb. 25, 2016).
    \398\ Average latency is only one latency metric. Another metric 
for the use of evaluating the performance of the exclusive SIP is 
latency at the 99th percentile, which means that 99% of exclusive 
SIP latency observations for a given period were below that value. 
The 99th percentile is often reflective of periods of peak message 
traffic. These outlier periods tend to be among the more important 
trading periods during the day, and exclusive SIP latencies have 
tended to lag in performance during these periods. For example, in 
the second quarter of 2019, the latency measurement at the 99th 
percentile for Tapes A and B trades was 648 milliseconds, which is 
over 4 times slower than the average latency. See CTA, Key Operating 
Metrics of Tape A&B U.S. Equities Securities Information Processor 
(CTA SIP), available at https://www.ctaplan.com/publicdocs/CTAPLAN_Processor_Metrics_2Q2019.pdf (last accessed Jan. 22, 2020).
    \399\ Id.; see also UTP Q4 2016--Dec. Tape C Quote and Trade 
Metrics, available at https://www.utpplan.com/DOC/UTP_website_Statistics_-_Q4_2016_-_December.pdf (last accessed Jan. 
22, 2020).
    \400\ One commenter stated, ``In the last three years, the SIP 
Operating Committees have invested in the technology that powers 
them, increasing resiliency and redundancy while reducing latency . 
. .'' See Statement from the SIP Operating Committees Adding to SEC 
Commissioner Jackson's Recent Comments, supra note 395. Following 
the Nasdaq UTP SIP Outage--and a meeting between the equities and 
options exchanges, FINRA, DTCC, the Options Clearing Corporation, 
and the then-Chair of the Commission--the Equity Data Plans' 
operating committees discussed with Commission staff the operating 
committees' plans for the exclusive SIPs ``designed to improve 
operational resiliency, strengthen interoperability standards and 
disaster recovery capabilities, enhance governance, accountability, 
and establish a clear testing framework for the industry.'' See 
Self-Regulatory Organizations Response to SEC for Strengthening 
Critical Market Infrastructure (Nov. 12, 2013), available at https://ir.theice.com/press/press-releases/all-categories/2013/11-12-2013; 
NYSE Group Letter, at 3 (``[E]xchanges have invested significantly 
in the operation of the [SIPs], resulting in improved resilience and 
reduced latency, all while managing increased volumes.''); infra 
Section VI.B.
    \401\ See CTA, Key Operating Metrics of Tape A&B U.S. Equities 
Securities Information Processor (CTA SIP), available at https://www.ctaplan.com/publicdocs/CTAPLAN_Processor_Metrics_2Q2019.pdf 
(last accessed Jan. 22, 2020).
    \402\ See UTP Q3 2019--July Tape C Quote and Trade Metrics, 
available at https://www.utpplan.com/DOC/UTP_website_Statistics_Q3-2019-July.pdf (last accessed Jan. 22, 2020). Nasdaq has stated that 
the Nasdaq UTP SIP is ``faster at processing quote and trade 
messages than any Nasdaq-owned exchange trading system'' with an 
average SIP processing time of 16 microseconds, compared to 25 
microseconds ``from entry of an order on the Nasdaq stock market 
until the associated quotation or execution or execution message is 
transmitted on the exchange's proprietary TotalView data feed.'' See 
Wittman Letter at 9. These latencies are perceived to be at or near 
competitive market standards. See also Roundtable Day One Transcript 
at 106 (statement of Oliver Albers, Nasdaq) (``There have been vast 
improvements in SIP data in recent years, even as SIP revenue to 
exchanges has fallen. The Nasdaq UTP SIP has an average latency of 
just 16 millionths of a second . . . The Nasdaq UTP SIP can also 
handle 10 billion messages per day, 20 times more than a decade ago, 
and significant cybersecurity and fraud prevention investments by 
Nasdaq and other operators have increased the overall market 
efficiency and resiliency.'').
    \403\ See Nasdaq Total Markets Report, supra note 127, at 19, 
n.19 (stating that the CTA/CQ SIP ``currently operates with over 100 
microseconds of latency, which is not up to the standard that 
investors have come to expect in the modern markets.'').
---------------------------------------------------------------------------

    Transmission latency, as used herein, refers to the time interval 
between when data is sent (e.g., from an exchange) and when it is 
received (e.g., at an exclusive SIP and/or at the data center of the 
subscriber), and the transmission latency between two fixed points is 
determined by the transmission communications technology through which 
the data is conveyed. Transmission latency will also vary depending on 
the geographic distance between where the data is sent and where it is 
received. There are several options currently used for transmitting 
market data, such as fiber optics, which typically are used by the 
exclusive SIPs for receipt and dissemination of SIP data, and wireless 
microwave connections, which the exchanges offer as an alternative for 
their proprietary data feeds but not for SIP data. Fiber optics use 
light to transmit data through glass fiber cables. Wireless microwave 
connections (including extremely high frequency millimeter waves) 
transmit data through the air via towers in line of sight of one 
another and are commonly used to transmit market data today. Fiber 
optics are generally more reliable than wireless networks since the 
data signal is less affected by weather; \404\ however, fiber tends to 
suffer greater latency because of its dependence on geography: The 
cables often cannot be laid in the most direct manner, adding distance 
for the signal to travel. Light also travels slower through fiber than 
microwaves travel through the air. Laser transmission, a more recent 
addition to high speed market data transmission, is another wireless 
mode of transmission that is known to be faster than microwaves but 
less susceptible to weather conditions.\405\
---------------------------------------------------------------------------

    \404\ See Andriy Shkilko and Konstantin Sokolov, Every Cloud Has 
a Silver Lining: Fast Trading, Microwave Connectivity and Trading 
Costs (Apr. 2019), available at https://ssrn.com/abstract=2848562.
    \405\ See Reuters, Lasers, Microwave Deployed in High-Speed 
Trading Arms Race (May 1, 2013), available at https://www.reuters.com/article/us-highfrequency-microwave/lasers-microwavedeployed-in-high-speed-trading-arms-race-idUSBRE9400L920130501; ExtremeTech, New Laser Network between NYSE 
and Nasdaq Will Allow High-Frequency Traders to Make Even More Money 
(Feb. 14, 2014), available at https://www.extremetech.com/extreme/176551-new-laser-network-between-nyse-andnasdaq-will-allow-high-frequency-traders-to-make-even-more-money; ``The World's First Laser 
Network for Transporting Equities Market Data between Nasdaq and 
BATS/DirectEdge is Now Live and Operational'' (July 22, 2015), 
available at https://anovanetworks.com/the-worlds-first-laser-network-for-transporting-equities-market-data-between-nasdaq-batsdirectedge-is-now-live-operational/; ICE Global Network: New 
Jersey Metro, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last accessed Jan. 
22, 2020).

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[[Page 16767]]

    The modes of transmission for SIP data are typically slower than 
the modes of transmission used for proprietary data. For example, 
proprietary data products offered by the exchanges often rely on low-
latency wireless connections,\406\ whereas the Equity Data Plans rely 
on fiber optics for connectivity.\407\ Additionally, the NYSE, as the 
operator of the CTA/CQ SIP, has required that access to the CTA/CQ SIP 
be through the use of the NYSE's IP local area network. Recently, the 
NYSE submitted a proposed rule change to amend its prices related to 
co-location services to provide access to NMS feeds. The NYSE stated in 
that proposed rule change that the operating committee of the CTA and 
CQ Plans instituted this access requirement because of the IP network's 
security, resiliency, and redundancy.\408\ The NYSE stated that the IP 
network is not a low-latency network, so ``the requirement to use the 
IP network to access the NMS feeds introduces a layer of latency.'' 
\409\ The NYSE stated that it is in the process of building a low-
latency network alternative to connect to the CTA/CQ SIP that would 
result in a one-way latency reduction of over 140 microseconds.\410\
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    \406\ Some of these services are solely offered by exchanges 
within the facility of an exchange (e.g., co-location connectivity 
at NYSE's data center in Mahwah and Nasdaq's co-location at its data 
center in Carteret) and some are offered by both exchanges and other 
third party providers (e.g., fiber and wireless connectivity between 
data centers). See, e.g., Nasdaq Trade Management Services--Wireless 
Connectivity Suite, available at https://n.nasdaq.com/WirelessConnectivitySuite (last accessed on Jan. 22, 2020) 
(describing low-latency wireless network technology to deliver 
market data); ICE Global Network--Wireless, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless (last 
accessed on Jan. 22, 2020) (describing low-latency wireless 
connectivity options between trading hubs).
    \407\ See Roundtable Day One Transcript at 99 (Stacey 
Cunningham, NYSE) (``[i]n the short term, we could use wireless 
technology to deliver SIP and overcome some of the geographic 
latencies.''); at 156-157 (Oliver Albers, Nasdaq) (stating that 
Nasdaq could consider permitting microwave transmission from the 
exchanges to the Nasdaq UTP SIP); ICE Global Network & Colocation: 
Technical Specifications (Oct. 2019), available at https://www.nyse.com/publicdocs/data/IGN_Colo_US_Technical_Specifications.pdf.
    \408\ See NYSE Low-Latency SIP Filing, supra note 47. NYSE 
currently assesses the following colocation fees for access to the 
IP network: (1) For a 1 gb circuit, $2,500 per connection initial 
charge plus $2,500 monthly per connection; (2) for 10 gb circuit, 
$10,000 per connection initial charge plus $11,000 monthly per 
connection; and (3) for a 40 gb circuit, $10,000 per connection 
initial charge plus $18,000 monthly per connection. See NYSE Price 
List 2020, available at https://www.nyse.com/publicdocs/nyse/markets/nyse/NYSE_Price_List.pdf (last accessed Jan. 22, 2020).
    \409\ See NYSE Low-Latency SIP Filing, supra note 47, at 47594. 
The filing defines ``NMS feeds'' to include the data streams of the 
Consolidated Tape System, the Consolidated Quote System, and the 
Options Price Reporting Authority (``OPRA'').
    \410\ Id. The Commission understands this to mean that, 
currently, each of the CTA/CQ Plan participants must transmit its 
data through connectivity options that have a round-trip latency of 
at least 280 microseconds [140 microsecond one-way latency) * 2 = 
280 microsecond round-trip latency]. The Commission believes that 
this is in addition to the transmission latency that is in the 
published CTA average aggregation latency metrics of between 69 
microseconds for the quote feed and 139 microseconds for the trade 
feed. See CTA, Key Operating Metrics of Tape A&B U.S. Equities 
Securities Information Processor (CTA SIP), supra note 398 
(regarding the second quarter of 2019). The round-trip latency of 
280 microseconds would increase the 2Q19 realized CTA aggregation 
latency to 349 microseconds (from 69 microseconds) for the quotes 
feed and 419 microseconds (from 139 microseconds) for the trade 
feed. At the same time, the Commission understands that NYSE, which 
owns the CTA/CQ SIP, offers non-SIP proprietary data transmission to 
end-users via faster microwave networks. See, e.g., ICE Global 
Network: Chicago--New Jersey, available at https://www.theice.com/market-data/connectivity-and-feeds/wireless/chicago-to-new-jersey 
(last accessed Jan. 22, 2020) (describing ICE's microwave route 
between the Chicago metro trading hub to Nasdaq's data center in 
Carteret, NJ); ICE Global Network: New Jersey Metro, available at 
https://www.theice.com/market-data/connectivity-and-feeds/wireless/new-jersey-metro (last accessed Jan. 22, 2020) (describing ICE's 
laser and millimeter wave route between ICE's Mahwah data center and 
the Carteret and Secaucus data centers. The Commission has 
instituted proceedings to allow for additional analysis and input 
concerning proposed fees in connection with the NYSE Low-Latency SIP 
Filing. See Securities Exchange Act Release No. 87699 (Dec. 9, 
2019), 84 FR 68239 (Dec. 13, 2019). In addition, the CTA and OPRA 
recently made changes that permit access to the NMS feeds with an 
expected reduction in latency. ``The NMS Network uses low-latency 
network switches and optimized topology to minimize latency, which 
[CTA and OPRA] expects will result in one-way latency, across all 
network hops, of approximately 5us, including fiber latency. This is 
a substantial improvement over the current inbound one-way latency 
of approximately 144us over [Secure Financial Transaction 
Infrastructure].'' See NMS Network Customer FAQs, at 3 (2019), 
available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/NMS_Network_FAQ.pdf (last accessed Jan. 
22, 2020); CTA and UTP Annual Letter, supra note 181, at 1 (``In its 
continuing effort to reduce latency and improve resiliency, the CTA 
will be making two improvements to the CTA/CQ feeds this year. 
First, subscribers will be able to connect to a new, dedicated, low 
latency NMS network to access CTA/CQ feeds. Subject to SEC approval, 
this should be available in the first quarter of 2020. Second, the 
CTA will complete its migration to NYSE's new Pillar technology, 
which will provide substantial latency reductions for the CTA/CQ 
feeds. CTA anticipates that it will launch the new technology in the 
summer of 2020.'').
---------------------------------------------------------------------------

    Over the past several years, market participants have increasingly 
raised concerns about these various forms of latency and how they 
affect their ability to participate competitively in today's markets 
and provide best execution to their customers. Market participants have 
argued that as significant investments have been made in the 
proprietary data environment, the Equity Data Plans, which are operated 
by the SROs, have not made--or have been slow to make--the investments 
necessary to address most of these concerns.\411\ As a result, the 
latency differentials, in their various forms, between SIP data and 
proprietary data are significant enough that market participants 
believe they affect their ability to trade competitively and to provide 
best execution to customer orders.\412\
---------------------------------------------------------------------------

    \411\ See Letter from Theodore R. Lazo, Managing Director and 
Associate General Counsel, SIFMA, to Mary Jo White, Chair, 
Commission, 8-9 (Oct. 24, 2014), available at https://www.sec.gov/comments/s7-02-10/s70210-422.pdf; Letter from John Ramsay, Chief 
Market Policy Officer, Investors Exchange LLC, to Vanessa 
Countryman, Secretary, Commission (Sept. 24, 2019) (``Ramsay Letter 
II'') (attachment to letter), available at https://www.sec.gov/comments/4-729/4729-6190352-192448.pdf; Proposed Governance Order, 
supra note 8.
    \412\ See, e.g., Roundtable Day One Transcript at 64 (Brad 
Katsuyama, IEX) (``[a]nyone who cares or is, you know, making 
machine-level decisions cannot use the SIP just from a speed 
standpoint . . . [b]ut if full information and speed become 
important, which it is for the majority of large players maintaining 
their own electronic trading platform, then I would not say the SIP 
serves much of a purpose to them.''); at 66 (Mehmet Kinak, T. Rowe 
Price (``[t]his is a best execution obligation. We are obligated to 
try and produce best execution on every single order that we have. 
If our brokers are not aligned in that manner to use the most 
direct, the fastest, the most robust feeds they can get their hands 
on, then we will trade with someone else.''); T. Rowe Price Letter 
at 2 (explaining that broker-dealers must purchase proprietary data 
because SIP data is slow and not as expansive as proprietary data 
and that even if the Commission provided a safe harbor permitting 
broker-dealers to fulfill their best execution requirements by 
relying on SIP data, broker-dealers believe that they have an 
obligation to obtain the ``more robust, faster'' proprietary data 
feeds).
---------------------------------------------------------------------------

    Proprietary data products often rely on low latency wireless 
connections, and the data is transmitted directly from each exchange to 
the data center of the subscriber without first having to travel to a 
centralized consolidation location as is the case with the exclusive 
SIPs. In addition, new entities have entered the market data space by 
providing specialized market data products for subscribers using 
proprietary data feeds. In essence, the provision of proprietary data 
to market participants via a decentralized consolidation model has 
developed in a competitive environment that has enhanced content and 
reduced latency for market participants; however, improvements to 
latency occurred more slowly and to a lesser extent with the exclusive 
SIPs.\413\ The concurrent existence of both the exclusive, centralized 
consolidation model for SIP data and the decentralized consolidation 
model for enhanced proprietary data has resulted in a two-tiered market 
data environment, where those participants that can reasonably afford 
and choose to

[[Page 16768]]

pay for the proprietary feeds receive other content rich data faster 
than those who do not, such as smaller market participants that face 
higher barriers to entry from data and other exchange fees.\414\ The 
Commission is concerned about this disparity and its effect on 
investors. Accordingly, the Commission is proposing to address the 
latency differentials and reduce the asymmetries that exist within this 
two-tiered environment.
---------------------------------------------------------------------------

    \413\ See supra note 411 and accompanying text.
    \414\ See infra note 418.
---------------------------------------------------------------------------

B. Proposed Decentralized Consolidation Model

    To enhance the speed and quality of the collection, consolidation, 
and dissemination of the proposed consolidated market data, the 
Commission is proposing a decentralized consolidation model with 
competing consolidators \415\ and self-aggregators \416\ to replace the 
existing centralized consolidation model which relies on the exclusive 
SIPs.\417\
---------------------------------------------------------------------------

    \415\ See infra Section IV.B.2.
    \416\ See infra Section IV.B.3.
    \417\ The Commission is taking an incremental approach to 
addressing market data infrastructure issues and is at this time 
addressing only the market data infrastructure issues of NMS stocks. 
The market data needs of options market participants and equities 
market participants are different, as are the market structures for 
options and equities more broadly. The Commission's proposal to 
expand the content of consolidated market data and introduce a 
decentralized consolidation model for its distribution to market 
participants has been designed for NMS stocks. The Commission may in 
the future consider the market data infrastructure of listed 
options. See also Proposed Governance Order, supra note 8.
---------------------------------------------------------------------------

    The Commission preliminarily believes that a decentralized 
consolidation model with competing consolidators and self-aggregators 
would benefit market participants because it would significantly reduce 
the geographic, aggregation, and transmission latency differentials 
that exist between SIP data and proprietary data that have increasingly 
reduced the utility of SIP data and disadvantaged, in particular, 
smaller market participants.\418\ Specifically, as discussed above, the 
Commission preliminarily believes that the decentralized consolidation 
model would reduce geographic latency by facilitating the ability of 
proposed consolidated market data to be delivered to subscribers more 
directly, without going to a separate location to be consolidated by 
the exclusive SIPs.\419\ In addition, the proposed decentralized 
consolidation model likely would reduce geographic latency by allowing 
consolidation to occur at the data center where a data end-user is 
located instead of occurring only at the CTA/CQ SIP and the Nasdaq UTP 
SIP data centers. This arrangement would permit competing consolidators 
to receive data from each exchange directly at the point of 
consolidation and latency-sensitive data end-users to receive proposed 
consolidated market data at the same location if they so desired.\420\ 
This would eliminate the geographic latency necessarily encountered 
when a latency-sensitive data end-user receives consolidated data from 
an exclusive SIP that is in a separate data center and that exclusive 
SIP is consolidating data from exchanges that are located in other data 
centers.
---------------------------------------------------------------------------

    \418\ See infra Section VI.C.2(c). Roundtable panelists stated 
that broker-dealers do not have the option to forgo buying the 
proprietary data in meeting their clients' needs because the SIPs 
are slower and not as expansive. See Roundtable Day One Transcript 
at 65-66 (Mehmet Kinak, T. Rowe Price); T. Rowe Price Letter at 2; 
Roundtable Day Two Transcript at 245 (Tyler Gellasch, Healthy 
Markets) (asking how a small firm can be competitive when it has to 
spend $50,000 per month to connect to one exchange group's 
proprietary data feeds), at 280-281 (describing market data as a 
mandatory ``tax'' on doing business that imposes a 
disproportionately large burden on small brokers). But see Robert P. 
Bartlett, III and Justin McCrary, How Rigged Are Stock Markets? 
Evidence from Microsecond Timestamps (2017) (``Bartlett and 
McCrary''), available at https://www.law.berkeley.edu/wp-content/uploads/2019/10/bartlett_mccrary_latency2017.pdf (``[O]ur analysis 
suggests SIP reporting latencies generate remarkably little scope 
for exploiting the informational asymmetries available to 
subscribers to exchanges' direct data fees.''). Bartlett and 
McCrary, however, cautioned that their ``results should not be over-
interpreted'' and noted that their results ``do not rule out other 
types of latency arbitrage that might be prevalent in the current 
environment.'' Roundtable respondents supported the view that a 
competing consolidator model would reduce the speed differential 
between current SIP data and proprietary data. See, e.g., Roundtable 
Day One Transcript at 49-50 (Prof. Hal Scott, Harvard University); 
SIFMA Letter II.
    \419\ As noted above, the current Equity Data Plan architecture 
requires SRO data to be sent from an SRO's data center to the 
exclusive SIP (typically in a separate data center in a different 
geographic location) for consolidation, prior to then being 
transmitted from the plan processor's data center to market data 
users (again, typically in a separate data center in a different 
geographic location) once the data is consolidated. See supra notes 
395-396 and accompanying text.
    \420\ If a competing consolidator chooses not to consolidate 
data at the data center of its users, the Commission believes the 
users would still benefit from reduced aggregation and transmission 
latencies resulting from the proposed decentralized consolidation 
model. See infra notes 421-422 and accompanying text.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
introduction of competitive forces will lead to improvements in the use 
of more competitive, low latency aggregation and transmission 
technologies for consolidated market data. Specifically, competition 
should incentivize competing consolidators to minimize the amount of 
time it takes to aggregate SRO data into proposed consolidated market 
data.\421\ In addition, competition could incentivize competing 
consolidators to reduce transmission latency by offering superior 
connectivity options that are faster than fiber optics, such as 
microwave, laser, or other wireless means of connectivity.\422\ 
Competing consolidators and self-aggregators would not be restricted to 
the transmission methods mandated by the Equity Data Plans \423\ and 
would compete based on the efficiency of their aggregation of raw SRO 
data to generate proposed consolidated market data. By introducing 
competitive forces into the collection, consolidation, and 
dissemination of proposed consolidated market data, the Commission 
preliminarily believes such data could be delivered to market 
participants with improved efficiencies and latencies comparable to 
proprietary market data products.
---------------------------------------------------------------------------

    \421\ The Commission is proposing to require each competing 
consolidator to publish on its website its latency statistics on a 
monthly basis. See infra Section IV.B.2(e)(ii).
    \422\ See infra Section VI.C.2(c).
    \423\ As noted above, the NYSE and Nasdaq offer faster wireless 
connectivity to their data centers and other data centers. See supra 
Section IV.A.
---------------------------------------------------------------------------

    To implement this model, the Commission proposes to: (1) Amend Rule 
600 to introduce definitions of competing consolidator and self-
aggregator; (2) amend Rule 603(b) to require the SROs to provide their 
NMS information to competing consolidators and self-aggregators in the 
same manner the SROs make available this information to any person and 
to remove the requirement that there be only one plan processor for 
each NMS stock; and (3) adopt new Rule 614 to require the registration 
of competing consolidators and establish the obligations with which 
they must comply and a new Form CC for competing consolidator 
registration. In addition, the Commission is proposing to amend 
Regulation SCI to expand the definition of ``SCI entities'' to include 
competing consolidators because they would be sources of proposed 
consolidated market data, and therefore would ``play a significant role 
in the U.S. securities markets and/or have the potential to impact 
investors, the overall market, or the trading of individual 
securities.'' \424\ As discussed below, the Commission preliminarily 
believes that if a competing consolidator's consolidated market data 
feed became unavailable or otherwise unreliable, it could have a 
significant impact on the trading of securities, and could interfere

[[Page 16769]]

with the maintenance of fair and orderly markets.\425\ Accordingly, 
this change would subject competing consolidators to the requirements 
of Regulation SCI. Under this new proposed decentralized consolidation 
model, the SROs would be required to provide their NMS information to 
competing consolidators and self-aggregators and the existing exclusive 
SIP model would cease.
---------------------------------------------------------------------------

    \424\ See Regulation SCI Adopting Release, supra note 28, at 
72258.
    \425\ See infra Section IV.B.2(f).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the implementation of a 
decentralized consolidation model with competing consolidators and 
self-aggregators will fundamentally improve the way consolidated market 
data, as proposed, is provided in the U.S. Among other things, this 
model should materially reduce information asymmetries for those market 
participants who rely exclusively on the exclusive SIP feed and 
facilitate the ability to achieve best execution for those broker-
dealers who rely exclusively on the SIP feed. Finally, the Commission 
believes that the introduction of competition into the collection, 
consolidation, and dissemination of the proposed consolidated market 
data should help ensure that such data continues to be provided in an 
accurate, reliable, prompt, and fair manner \426\ as the market evolves 
in the future.
---------------------------------------------------------------------------

    \426\ See 15 U.S.C. 78k-1(c)(1)(B).
---------------------------------------------------------------------------

1. Access to Data
    The Commission is proposing to amend Rule 603(b) of Regulation NMS 
to reflect the decentralized consolidation model by requiring each SRO 
to provide its NMS information, including all data necessary to 
generate proposed consolidated market data, to all competing 
consolidators and self-aggregators \427\ in the same manner and using 
the same methods, including all methods of access \428\ and data 
formats, as such SRO makes available any information to any other 
person.\429\
---------------------------------------------------------------------------

    \427\ The proposal does not include a requirement that the SROs 
provide a standardized format for the data because the Commission 
preliminarily believes that imposing a standardized format would 
increase costs and burdens on the SROs and that competing 
consolidators and self-aggregators would be able to handle data 
received in multiple formats, as determined by each SRO, as is the 
case today for proprietary data. The Commission is proposing to 
require each SRO to offer the same access or transmission options 
and the same formats offered for proprietary data to proposed 
consolidated market data. See proposed amendment to Rule 603(b).
    \428\ For example, the same access options available to 
proprietary feeds, including, but not limited to transmission medium 
(i.e., fiber optics or wireless), multicast communication, 
colocation options, physical port, logical port, bandwidth, and 
FPGA, would be required to be made available for proposed 
consolidated market data feeds. Further, any enhancements to 
proprietary feed methods of access should similarly be made to 
consolidated market feeds.
    \429\ Four commenters supported this approach. One commenter 
stated that for a new consolidator model to be competitive, the 
consolidators would have to have the right to buy data from 
exchanges on non-discriminatory terms. See Ramsay Letter II 
(attachment to letter). Another commenter stated that the economic 
terms of co-located competing consolidators at an exchange data 
center should be equivalent to those offered to the exchange's 
trading members. This commenter also suggested that any exchange 
that operates a competing consolidator in its data center should 
have policies and procedures to ensure that competing consolidators 
in the same data center have equal access to the exchange's feeds at 
equal latencies. This commenter also supported the provision of 
direct market data feeds by exchanges to competing consolidators. 
See Letter to Brent J. Fields, Secretary, Commission, from Melissa 
MacGregor, Managing Director and Associate General Counsel, and 
Theodore R. Lazo, Managing Director and Associate General Counsel, 
SIFMA, dated Oct. 24, 2018 (``SIFMA Letter'') (attachment to 
letter). The third commenter stated that all market data 
distributors should receive the same market data at the same time 
and at the same cost, which may require exchange proprietary data 
feeds to be delayed to match the data receipt time of affiliated or 
third-party SIPs. The commenter said that exchanges, affiliates, and 
third parties then would be able to compete to provide market data 
to recipients. See Letter to Jay Clayton, Chairman, Commission, from 
Tyler Gellasch, Executive Director, Healthy Markets Association, 3 
(Jan. 3, 2020) (``Healthy Markets Association Letter III''). The 
fourth commenter suggested that the Commission update its 
interpretations for Rule 603(a) to emphasize ``the synchronized 
availability of data between SIP and exchanges' proprietary products 
to satisfy the fair and reasonable, as well as non-discriminatory 
principles.'' See Letter to Vanessa Countryman, Secretary, 
Commission, from Kelvin To, Founder and President, Data Boiler 
Technologies, LLC, 8 (Dec. 6, 2019) (``Data Boiler Letter''). The 
Commission believes that its proposed amendment to Rule 603(b), as 
discussed below, would achieve this result by requiring the same 
manner and methods, including all methods of access and the same 
format for competing consolidators, self-aggregators and subscribers 
of proprietary data.
---------------------------------------------------------------------------

    Under the Commission's proposed approach, competing consolidators 
and self-aggregators would have to collect, and the SROs would provide, 
all of each SRO's market data that is necessary to generate 
consolidated market data as proposed,\430\ and the competing 
consolidators and self-aggregators would aggregate the SROs' market 
data to generate the proposed consolidated market data. For exchange 
data, an exchange could leverage its existing offerings and 
infrastructure and make available to competing consolidators and self-
aggregators its current proprietary data products that contain data 
elements that are specified in the proposed definition of consolidated 
market data,\431\ or an exchange could develop a new market data 
product that contains only the data elements that are specified in the 
proposed definition of consolidated market data. Competing 
consolidators and self-aggregators could choose to purchase products 
that include only the proposed consolidated market data elements or 
products that contain elements of both proposed consolidated market 
data and other proprietary data. However, all SROs must offer market 
data, and access to such data, to those competing consolidators or 
self-aggregators that elect to purchase only data that would be 
necessary to create consolidated market data, as required under the 
proposed rule amendments.
---------------------------------------------------------------------------

    \430\ One commenter advocated that each exchange provide a 
single data feed to market participants. The commenter said that a 
single data feed ``would better serve market participants from the 
standpoint of equality and fairness.'' See T. Rowe Price Letter at 
3. The proposed rule does not require the SROs to provide a single 
feed. The Commission preliminarily believes that the SROs should be 
able to utilize their current data feeds to make available the data 
necessary to generate proposed consolidated market data. This would 
reduce the costs and burdens of implementing the proposed amendments 
to Rule 603(b).
    \431\ For example, an exchange could make available a current 
proprietary DOB product that contains elements of proposed core data 
to competing consolidators and self-aggregators for purposes of Rule 
603(b).
---------------------------------------------------------------------------

    The proposed decentralized consolidation model and the proposed 
consolidated market data definition do not preclude the exchanges from 
continuing to sell proprietary data. If an exchange provided its 
proprietary data products to a competing consolidator or self-
aggregator and a competing consolidator or self-aggregator developed a 
product, or otherwise used data, that exceeded the scope of proposed 
consolidated market data (e.g., full depth of book data), the competing 
consolidator or self-aggregator would be charged separately for the 
proprietary data use pursuant to the individual exchange fee 
schedules.\432\ Self-aggregators and competing consolidators that limit 
their use of exchange data to proposed consolidated market data 
elements would be charged only for proposed consolidated market data 
pursuant to the effective national market system plan(s) fee 
schedules.\433\ As noted above, under the proposed decentralized 
consolidation model, SROs must make available market data to competing 
consolidators or self-aggregators that elect only to purchase

[[Page 16770]]

data necessary for the proposed consolidated market data.\434\
---------------------------------------------------------------------------

    \432\ Fees for market data that is outside of the proposed 
definition of consolidated market data (i.e., proprietary data 
products, and access to such proprietary data products) would be 
subject to the rule filing process pursuant to Section 19(b) and 
Rule 19b-4. As discussed above, competing consolidators would be 
able to develop products for their subscribers based on subscriber 
demand. See supra notes 322-323 and accompanying text.
    \433\ Fees for proposed consolidated market data would be 
subject to the NMS plan process pursuant to Rule 608 of Regulation 
NMS. See infra Section IV.B.4 for a discussion of the effective 
national market system plan(s).
    \434\ Vendors would still be able to operate in the 
decentralized consolidation model. Vendors would be able to receive 
proprietary market data directly from the SROs as they do today or 
they would be able to receive consolidated market data from a 
competing consolidator in a manner that is similar to how they 
receive SIP data today without being required to register as a 
competing consolidator. However, if a vendor wished to receive 
directly from the SROs information with respect to quotations for 
and transactions in NMS stocks at the prices established by the 
effective national market system plan(s) and generate consolidated 
market data for dissemination, such vendor would be required to 
register as a competing consolidator. Thus, only competing 
consolidators and self-aggregators would be able to directly receive 
the NMS information that is necessary to generate consolidated 
market data from the SROs at the prices established by the effective 
national market system plan(s). Id.
---------------------------------------------------------------------------

    Currently, the exclusive SIPs are subject to Exchange Act Section 
11A(c)(1)(C) (as implemented by Rule 603(a)(1)), which requires that 
exclusive processors (which include the exclusive SIPs and SROs when 
they distribute their own data) must assure that all securities 
information processors may obtain on fair and reasonable terms 
information with respect to quotations for and transactions in 
securities, which includes consolidated market data.\435\ Section 
11A(c)(1)(D), in turn (as implemented by Rule 603(a)(2)), requires that 
the SROs provide such data to broker-dealers and others on terms that 
are not unreasonably discriminatory. As we have noted, competing 
consolidators will be securities information processors and thus 
Exchange Act Section 11(A)(c)(1)(C) will continue to apply. Similarly, 
self-aggregators are broker-dealers and thus Exchange Act Section 
11A(c)(1)(D) will continue to apply.
---------------------------------------------------------------------------

    \435\ 15 U.S.C. 78k-1(c). See also Rule 603(a)(1)-(2) of 
Regulation NMS, 17 CFR 242.603(a)(1)-(2).
---------------------------------------------------------------------------

    The Commission seeks to ensure that consolidated market data is 
widely available for reasonable fees.\436\ In discharging its 
statutorily mandated review function, the Commission must assess the 
proposed fees and determine whether they are fair and reasonable, and 
not unreasonably discriminatory.\437\ The Commission must have 
``sufficient information before it to satisfy its statutorily mandated 
review function''--that the fees meet the statutory standard.\438\ The 
Commission has previously stated that fees for consolidated SIP data 
can be shown to be fair and reasonable if they are reasonably related 
to costs.\439\
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    \436\ Bloomberg Decision, supra note 37, at 4, n.12 (citing 
Regulation NMS Adopting Release, supra note 10, at 37560) (``In the 
Proposing Release, the Commission emphasized that one of its primary 
goals with respect to market data is to assure reasonable fees that 
promote the wide public availability of consolidated market 
data.'').
    \437\ See 15 U.S.C. 78k-1(c); see also Rules 603(a)(1)-(2), 608 
of Regulation NMS, 17 CFR 242.603(a)(1)-(2), 608; Bloomberg 
Decision, supra note 37, at 11-12.
    \438\ Bloomberg Decision, supra note 37 at 15; cf. Rule of 
Practice 700, 17 CFR 201.700 (providing that the burden of 
demonstrating that a proposed rule change satisfies statutory 
standards is on the self-regulatory organization that proposed the 
rule change).
    \439\ In the Market Information Concept Release, the Commission 
stated ``the fees charged by a monopolistic provider (such as the 
exclusive processors of market information) need to be tied to some 
type of cost-based standard in order to preclude excessive profits 
if fees are too high or underfunding or subsidization if fees are 
too low. The Commission therefore believes that the total amount of 
market information revenues should remain reasonably related to the 
cost of market information.'' See Market Information Concept 
Release, supra note 11, at 70627. The Commission later explained 
that because core data must be purchased, their fees are less 
sensitive to competitive forces. See Securities Exchange Act Release 
No. 59039 (Dec. 2, 2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File 
No. SR-NYSEArca-2006-21). A reasonable relation to costs has since 
been the principal method discussed by the Commission for assessing 
the fairness and reasonableness of such fees for core data, with the 
recognition that ``[t]his does not preclude the Commission from 
considering in the future the appropriateness of another guideline 
to assess the fairness and reasonableness of core data fees in a 
manner consistent with the Exchange Act.'' See Bloomberg Decision 
supra note 37, at 15 & nn.63. Although this proposal introduces 
competition into the dissemination of consolidated market data, the 
mandatory nature of the provision of consolidated market data by the 
SROs has not changed. The ``principal method we have discussed for 
assessing the fairness and reasonableness of core data fees has 
stated that core data fees should bear at least some relationship to 
costs; past Commission statements have contemplated various 
approaches for how that relationship might be assessed. This is 
because distributors of core data have an effective monopoly over 
such data, and accordingly competitive market forces are not 
operating to impose sufficient constraints to promote core data 
fees' fairness and reasonableness.'' See Bloomberg Decision, supra 
note 37, at 15 (footnotes and citations omitted).
---------------------------------------------------------------------------

    The exchanges would be able to offer different access options 
(e.g., with different latencies, throughput capacities, and data-feed 
protocols) to market data customers, but any access options available 
to proprietary data customers must also be available to competing 
consolidators and self-aggregators for the purpose of collecting and 
consolidating proposed consolidated market data.\440\ Proposed Rule 
603(b) would require exchanges to provide all forms of access used for 
proprietary data to all competing consolidators and self-aggregators 
for the collection of the data necessary to generate proposed 
consolidated market data. The Commission is proposing to require that 
an exchange offer the same form of access, such as fiber optics, 
wireless, or other forms, in the same manner and using the same 
methods, including all methods of access and the same format, as the 
exchange offers for its proprietary data. For instance, if an exchange 
has more than one form of transmission for its proprietary data, then 
the exchange must offer the competing consolidators and self-
aggregators those types of transmission for proposed consolidated 
market data. The proposed rule would not require an exchange to offer 
new forms of access, but if an exchange did offer any new forms of 
access for proprietary data, it would have to offer them for proposed 
consolidated market data as well. Different forms of access affect the 
delivery of data. For example, as discussed above, fiber connections 
have latencies that wireless connections do not. If an exchange 
provided its proprietary market data via wireless connections and 
proposed consolidated market data only via fiber connections, the 
latencies that exist today would continue. Accordingly, the Commission 
preliminarily believes that the SROs should be required to provide 
proposed consolidated market data in the same manner and using the same 
methods, including all methods of access and the same format as they 
provide for proprietary data.
---------------------------------------------------------------------------

    \440\ See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a). 
Access fees would be set forth in each individual SRO's fee 
schedules.
---------------------------------------------------------------------------

    The Commission understands that different market participants have 
different access needs. The Commission is not mandating a specific 
connectivity option or limiting options for market participants but 
believes that all connectivity options, including co-location, must be 
available to all market participants whether they are purchasing 
proposed consolidated market data or proprietary data. In addition, the 
access requirement under Rule 603(b) would require that the exchanges 
provide their NMS information, including all data necessary to generate 
consolidated market data, at one data dissemination location co-located 
near each exchange's matching engine. This requirement would allow 
competing consolidators and self-aggregators to receive data at that 
location at the same speeds, and with the same access options, as the 
exchange offers its market data. Different colocation options within a 
data center could raise concerns about whether that exchange is 
providing the same manner of access to its data as proposed to be 
required under Rule 603(b). Further, the exchanges would not be 
permitted to provide their NMS information necessary to generate 
consolidated market data in a faster manner to any affiliate exchange, 
a subsidiary or other affiliate that operates

[[Page 16771]]

as a competing consolidator or a subsidiary or affiliate that competes 
in the provision of proprietary data.
    Furthermore, proposed Rule 603(b) would require that all access 
options be provided in a latency-neutralized manner such that all 
participants within the exchange's data center--such as proprietary 
data subscribers, competing consolidators, and self-aggregators--would 
receive the data at the same time, regardless of their location or 
status within the data center.\441\ For example, exchanges could adopt 
equal cable length protocols (i.e., where cable lengths from network 
equipment to customer cabinets are harmonized for equal access) to 
ensure that all of the exchange's data center connections provide 
market data simultaneously. The proposed decentralized consolidation 
approach would require the SROs to use the same latency-neutralization 
processes for competing consolidators and self-aggregators as they 
offer to subscribers of proprietary data.
---------------------------------------------------------------------------

    \441\ See also Rule 603(a) of Regulation NMS, 17 CFR 242.603(a); 
supra note 440 and accompanying text.
---------------------------------------------------------------------------

    The Commission is also proposing to remove the requirement in Rule 
603(b) that ``all consolidated information for an individual NMS stock 
[be disseminated] through a single plan processor.'' \442\ While this 
requirement is necessary for the centralized consolidation model, it 
would be inconsistent with the proposed decentralized consolidation 
model, which would allow multiple competing consolidators to 
disseminate proposed consolidated market data in individual NMS stocks 
and would permit self-aggregators to collect and generate proposed 
consolidated market data for individual NMS stocks for their own 
internal uses.
---------------------------------------------------------------------------

    \442\ 17 CFR 242.603(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed amendments 
to Rule 603(b) would be consistent with the goals of Section 11A of the 
Exchange Act by helping to ensure the prompt, accurate, reliable, and 
fair collection, processing, distribution, and publication of NMS 
information, as well as the fairness and usefulness of such data.\443\
---------------------------------------------------------------------------

    \443\ See Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 
78k-1(c)(1)(B). Section 11A(c)(1)(B) of the Exchange Act authorizes 
the Commission to prescribe rules, as necessary or appropriate in 
the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Exchange Act, that assure the 
prompt, accurate, reliable, and fair collection, processing, 
distribution, and publication of quotation and transaction 
information, as well as the fairness and usefulness of the form and 
content of such data. Id.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendments to Rule 
603(b) of Regulation NMS. In particular the Commission solicits comment 
on the following:
    64. Should the SROs be required to provide all of their market data 
with respect to NMS stocks to competing consolidators and self-
aggregators? Should the SROs charge fees based on the use of the data, 
e.g., fees for proposed consolidated market data set by the effective 
national market system plan(s) and fees for proprietary data set by 
individual SROs? Should the SROs only be required to provide the market 
data that is necessary to generate and calculate proposed consolidated 
market data? Or, should the determination as to how best to provide the 
market data that is necessary to generate and calculate proposed 
consolidated market data be left to the discretion of SROs? What are 
the benefits and costs of each of these potential approaches?
    65. Should the SROs be required to offer both proposed consolidated 
market data and proprietary data to competing consolidators from the 
same platform and using the same technology infrastructure at an 
exchange data center for both products?
    66. Should the SROs be required to offer both proposed consolidated 
market data and proprietary data to competing consolidators from the 
same platform and using the same SRO infrastructure where the pricing 
model for the different products is based on data use as opposed to 
being based upon distinct data feeds?
    67. Should the SROs be permitted to process their market data 
before providing it to competing consolidators and self-aggregators? 
For example, should the SROs be permitted to aggregate odd-lots before 
providing data to competing consolidators and self-aggregators? If so, 
why and to what extent? Should such processing only be allowed to the 
extent that it does not result in any latency differential between 
processed and unprocessed data? Alternatively, should such processing 
be required to facilitate ease of use for certain customers?
    68. Should exchanges be required to permit co-location of competing 
consolidators and self-aggregators within their data centers? If so, 
should the fees charged for such colocation be subject to the effective 
national market system plan(s) for NMS stocks?
    69. Should all data disseminated by the SROs to competing 
consolidators and self-aggregators be in the same format (e.g., 
aggregated vs. message-by-message depth of book)? Please explain the 
expected benefits and costs of allowing for multiple formats for data 
dissemination.
    70. Should the SROs make historical data freely available to market 
participants at a specified location and in a specified format? Why or 
why not?
    71. Is there anything different about having competing 
consolidators or changing the content of consolidated market data that 
should affect the analysis of the fairness and reasonableness of fees 
for data distributed pursuant to an NMS plan, or how the NMS plan 
participants demonstrate the fairness and reasonableness of those fees? 
If so, please explain why.
    72. Do commenters believe that the Commission should also require 
the SROs to provide a connectivity option solely for access to the NMS 
information necessary to generate proposed consolidated market data?
2. Competing Consolidators
    As noted above, currently Rule 603(b) requires all consolidated 
information for an individual NMS stock to be disseminated through a 
single plan processor.\444\ While the Commission has issued a proposed 
order that would direct the SROs to develop a single ``New Consolidated 
Data Plan'' with a new governance structure,\445\ the Commission now 
proposes to update and modernize the manner in which NMS information is 
collected, consolidated, and disseminated. The Commission is proposing 
to amend Regulation NMS to introduce competitive forces as one of 
several means to update and modernize the provision of proposed 
consolidated market data. Competing consolidators would replace the 
existing exclusive SIPs and would collect NMS information from each of 
the SROs.\446\ Thereafter, competing consolidators would calculate, 
consolidate, and disseminate the data as consolidated market data, as 
proposed to be defined.\447\ The Commission

[[Page 16772]]

preliminarily believes that the proposed amendments to Regulation NMS 
to introduce competing consolidators should help to ensure the 
``prompt, accurate, reliable, and fair collection, processing, 
distribution, and publication of information with respect to quotations 
for and transactions in such securities and the fairness and usefulness 
of the form and content of such information.'' \448\ Further, the 
Commission preliminarily believes that these new market data providers 
could help to effectively address the latency concerns related to the 
exclusive SIPs, as well as the cost concerns that have been raised 
regarding the need to buy both SIP data from the Equity Data Plans as 
well as proprietary data from the exchanges, and add resilience to the 
collection, consolidation and distribution of consolidated market data 
by having redundant systems perform these functions rather than an 
exclusive SIP.
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    \444\ Rule 603(b) of Regulation NMS, 17 CFR 242.603(b). See also 
supra Section II.B.
    \445\ See Proposed Governance Order, supra note 8.
    \446\ The existing exclusive SIPs would be required to continue 
their operations until such time as the Commission considers and 
approves an NMS plan amendment that would effectuate a cessation of 
their operations. See infra Section IV.B.6. Should the existing 
exclusive SIPs choose to become competing consolidators, proposed 
Rule 614(a) mandates a registration process for securities 
information processors that wish to become competing consolidators. 
See infra Section IV.B.2(e). If the existing exclusive SIPs choose 
to cease operations, the SROs would be required to amend the 
effective national market system plan(s) for NMS stocks to reflect 
this change.
    \447\ As discussed in Section IV.B.2(f), infra, because 
competing consolidators would be the sources of proposed 
consolidated market data, the Commission is proposing to define them 
as ``SCI entities,'' and thus subject to the requirements of 
Regulation SCI. The Commission proposes to amend Rule 1000 of 
Regulation SCI to effect this change. See proposed amendment to Rule 
1000 of Regulation SCI. See also 17 CFR 242.1000.
    \448\ 15 U.S.C 78k-1(c)(1)(B).
---------------------------------------------------------------------------

(a) Previous Consideration of Competing Consolidators Under Regulation 
NMS
    The Commission previously considered introducing competitive forces 
to the dissemination of SIP data when it proposed and adopted 
Regulation NMS. Specifically, the Commission discussed a competing 
consolidator model \449\ that, as described, would have retained the 
consolidated display requirement of the predecessor to Rule 603(c) of 
Regulation NMS but would have eliminated the Equity Data Plans and the 
two exclusive SIPs.\450\ Under the competing consolidator model that 
was being considered, each SRO would be allowed to establish its own 
fees, enter into and administer its own market data contracts, and 
provide its own data distribution facility.\451\ Competing 
consolidators would purchase data from the individual SROs, consolidate 
it, and distribute it to investors and other data users.\452\
---------------------------------------------------------------------------

    \449\ The competing consolidator model was recommended by the 
Advisory Committee on Market Information (``Advisory Committee on 
Market Information''), which had been formed to consider market data 
issues. See Report of the Advisory Committee on Market Information: 
A Blueprint for Responsible Change (Sept. 14, 2001), available at 
https://www.sec.gov/divisions/marketreg/marketinfo/finalreport.htm.
    \450\ See Securities Exchange Act Release No. 49325 (Feb. 26, 
2004), 69 FR 11126 (Mar. 9, 2004) (``Regulation NMS Proposing 
Release''), at 11177-11178; Regulation NMS Adopting Release, supra 
note 10, at 37558-37559.
    \451\ See Regulation NMS Proposing Release, supra note 450, at 
11177; Regulation NMS Adopting Release, supra note 10, at 37559.
    \452\ Id.
---------------------------------------------------------------------------

    At that time, however, the Commission noted several drawbacks to 
that competing consolidator model,\453\ including: (1) A lack of 
uniform data distribution to the public, (2) the potential for an 
increase in processing costs due to multiple consolidators performing 
tasks previously performed by a single processor, and (3) the risk that 
the fees for core data, as then contemplated, could increase because 
payment of every SRO's fees would be mandatory, thereby affording 
little room for competitive forces to influence the level of fees.\454\
---------------------------------------------------------------------------

    \453\ See Regulation NMS Proposing Release, supra note 450, at 
11178.
    \454\ Id. The Commission stated that it would have to review 
every SRO's market data fees and get involved in multiple market 
data fee disputes.
---------------------------------------------------------------------------

    When addressing its concerns about a potential loss of data 
uniformity, the Commission explained that a report issued by the 
Advisory Committee on Market Information, which prompted consideration 
of a competing consolidator model in the Regulation NMS Proposing and 
Adopting Releases,\455\ noted four types of quality problems that could 
arise from the competing consolidator model relating to: (1) Sequencing 
of information, (2) validation tolerances, (3) capacity, and (4) data 
protocols and formats.\456\ With respect to information sequencing, the 
report stated that the competing consolidator model would impose a risk 
that market data messages would be processed in different sequences by 
different consolidators due to the use of differing hardware, software, 
or communications platforms to process market data. On validation 
tolerances, the report stated that standards would need to be 
established for competing consolidators to verify the consistency of 
information (such as the NBBO), since the plan processors currently 
check all market center messages to verify that they utilize correct 
message structures. The report stated that competing consolidators must 
have sufficient capacity (for example, specifying network capacity, 
input, output line, system, internal system threading, storage and 
memory capacity, and database size) to process the information from all 
reporting market centers, explaining that if capacity is lacking, 
messages will be delayed to data recipients. Finally, with respect to 
data protocols and formats, the report said that the use of different 
protocols, message formats, and technologies by different consolidators 
could make the market data system more cumbersome and prone to error. 
The report noted that exclusive SIPs currently receive market center 
information using standard input formats and disseminate consolidated 
data using standard output formats.\457\
---------------------------------------------------------------------------

    \455\ See supra notes 449-450.
    \456\ See supra note 449. See infra text accompanying notes 503-
509, 513-515 for a discussion of the risks. The Advisory Committee 
on Market Information report stated that these risks would be 
manageable and recommended allowing the private sector to establish 
technical standards for competing consolidators rather than the 
Commission. See supra note 449, at Section VII.C.2.b(iv).
    \457\ See supra note 449, at Section VII.C.2.b.
---------------------------------------------------------------------------

    Ultimately, the Commission concluded that investors and other data 
users would bear the most risk in switching to a competing consolidator 
model, while the SROs would benefit by being able to charge higher fees 
for lower quality information; \458\ therefore, the Commission decided 
not to propose the competing consolidator model for adoption.\459\
---------------------------------------------------------------------------

    \458\ The Commission stated that the four types of data quality 
problems identified by the Advisory Committee could be limited in 
severity, but remained concerned that the introduction of competing 
consolidators would compromise data quality. See Regulation NMS 
Proposing Release, supra note 450, at 11178.
    \459\ See Regulation NMS Proposing Release, supra note 450, at 
11178. In the Regulation NMS Adopting Release, the Commission 
questioned the extent to which market data fees, which would be 
charged per SRO, would be subject to competition. See Regulation NMS 
Adopting Release, supra note 10, at 37559.
---------------------------------------------------------------------------

    In the Regulation NMS Adopting Release, the Commission focused its 
discussion on the extent to which the competing consolidator model 
would subject the level of market data fees to competitive forces.\460\ 
The Commission stated that market participants would need to purchase 
data from the SROs and expressed concern that ``the overall level of 
fees would not be reduced unless one or more of the SROs or Nasdaq was 
willing to accept a significantly lower amount of revenue than they are 
currently allocated by the Plans.'' \461\ The Commission believed that 
it was ``unlikely that any SRO or Nasdaq would voluntarily propose to 
lower just its own fees.'' Rather, the Commission stated that some 
SROs, ``particularly those with dominant market shares whose 
information is most vital to investors,'' might propose higher fees to 
increase their revenues.\462\
---------------------------------------------------------------------------

    \460\ Id. While the Commission did not propose a competing 
consolidator model, it received comments on the model described in 
the Regulation NMS Proposing Release.
    \461\ Id.
    \462\ Id.

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[[Page 16773]]

(b) Comments and Roundtable Discussion
    The current market data infrastructure, with the Equity Data Plans 
providing SIP data and the exchanges providing proprietary data 
products, has led some market participants to suggest that a competing 
consolidator model be considered again as a means to address the 
latency and cost differentials that exist between the two data 
categories.\463\
---------------------------------------------------------------------------

    \463\ The Treasury Capital Markets Report (``Treasury Report''), 
which was published one year prior to the Roundtable and referenced 
by Roundtable respondents, recommended that the Commission amend 
Regulation NMS to permit competing consolidators as alternatives to 
the exclusive SIPs as a means to provide faster consolidation and 
distribution of a wider breadth of market data, at a lower cost than 
provided by the exclusive SIPs. The Treasury Report suggested that 
competing consolidators be allowed to purchase proprietary data 
feeds from exchanges on a non-discriminatory basis. See U.S. 
Department of the Treasury, A Financial System that Creates Economic 
Opportunities--Capital Markets, 64 (Oct. 2, 2017). Other 
alternatives to the current centralized consolidation model are 
discussed below. See infra Section IV.C.
---------------------------------------------------------------------------

    Several panelists and commenters at the Roundtable discussed a 
competing consolidator model. One panelist presented a competing 
consolidator model and noted that it would introduce competition in the 
provision of market data by allowing competing consolidators to compete 
against each other for subscribers.\464\ This panelist also stated that 
market forces would drive consolidators' ``micro-decisions'' regarding 
the technology that they would use to provide data.\465\ The panelist 
also suggested that competing consolidators should be ``authorized'' 
and be Regulation SCI-compliant.\466\ The panelist expressed confidence 
that a competitive market would produce a more reliable solution than 
the current centralized consolidation model.\467\
---------------------------------------------------------------------------

    \464\ See Roundtable Day Two Transcript at 25 (Paul O'Donnell, 
Morgan Stanley).
    \465\ Id. at 26.
    \466\ Id. at 25.
    \467\ Id.
---------------------------------------------------------------------------

    One panelist explained that the exclusive SIPs represent a single 
point of failure for the equity markets and that competing 
consolidators could improve the speed and quality of SIP data while 
also reducing their costs.\468\ Another panelist said that his clients 
have expressed interest in competitive SIPs.\469\ One panelist 
suggested a competing consolidator model wherein entities would 
consolidate messages from individual exchange members. The panelist 
acknowledged that this approach would likely result in latency issues, 
but suggested that such a consolidated feed could possibly be leveraged 
from work being done on reporting to the consolidated audit trail.\470\
---------------------------------------------------------------------------

    \468\ See Roundtable Day One Transcript at 49-50 (Prof. Hal 
Scott, Harvard University). This panelist also suggested that the 
SIPs should include proprietary data and also permit competing 
consolidators to do the same.
    \469\ See Roundtable Day Two Transcript at 43 (Jarred Yuster, 
PICO).
    \470\ See Roundtable Day One Transcript at 182-184 (Michael 
Friedman, Trillium Trading).
---------------------------------------------------------------------------

    Several comment letters submitted in connection with the Roundtable 
expressed support for a competing consolidator model.\471\ One 
commenter stressed the importance to investors of competition by 
stating that competition would result in the reduction of the latency 
differential between the exclusive SIPs and proprietary data feeds, 
resilience through the use of multiple consolidators, and lower market 
data costs.\472\ Another commenter stated that competing consolidators 
would compete on ``speed, reliability, and price to the benefit of 
traders and investors alike'' \473\ and that competing consolidators 
would provide ``the benefit of expanded access to high-quality, low-
cost market data.'' \474\ Another commenter noted the Treasury Report, 
which was published in 2017,\475\ recommended that the Commission 
recognize that markets for SIP data and proprietary data feeds are not 
fully competitive and consider amending Regulation NMS to enable 
competing consolidators as an alternative to the exclusive SIPs.\476\ 
This commenter recommended that if competing consolidators are 
permitted, regulators should examine why a broker-dealer chooses a 
particular consolidator over others and should monitor how much 
exchanges decide to charge consolidators for market data.\477\
---------------------------------------------------------------------------

    \471\ See T. Rowe Price Letter, Letter to Brent J. Fields, 
Secretary, Commission, from Marcy Pike, SVP, Enterprise 
Infrastructure, and Krista Ryan, VP, Associate General Counsel, 
Fidelity Investments (Oct. 26, 2018) (``Fidelity Letter''); SIFMA 
Letter; SIFMA Letter II; Ramsay Letter II.
    \472\ See SIFMA Letter II at 3. In addition to the use of 
competing consolidators, this commenter suggested that the 
Commission require the exclusive SIPs to compete with each other. 
See also T. Rowe Price Letter at 3. This commenter believed that 
competition among organizations eligible to serve as exclusive SIPs, 
either through a periodic bidding process or the ability of multiple 
firms to simultaneously serve as exclusive SIPs and compete to 
provide the best overall combination of fees, services, and 
reliability would be beneficial.
    \473\ See Ramsay Letter II; Fidelity Letter at 10 (noting that 
competition may reduce the cost of consolidated market data).
    \474\ See Ramsay Letter II.
    \475\ See supra note 463.
    \476\ See Fidelity Letter at 10.
    \477\ Id.
---------------------------------------------------------------------------

    Several commenters suggested details on the types of entities that 
could be competing consolidators and the functions they could 
perform.\478\ For example, one commenter suggested that a competing 
consolidator could be any commercial entity meeting minimum standards, 
which may include exchanges or other financial technology vendors,\479\ 
and another suggested that they could be private companies that, unlike 
the existing exclusive SIPs, could operate in any location and would 
obtain and sell data comparable to proprietary data feeds.\480\ One 
commenter suggested a list of functionality that competing 
consolidators could provide, such as direct exchange feed data from all 
tapes, quote and trade feeds, regulatory messages, and the market 
status of all contributing markets.\481\
---------------------------------------------------------------------------

    \478\ See SIFMA Letter; Ramsay Letter II.
    \479\ See SIFMA Letter.
    \480\ See Ramsay Letter II.
    \481\ See SIFMA Letter (attachment to the letter). This 
commenter also stated that depth of book should be considered but 
stated that it should possibly be sold separately.
---------------------------------------------------------------------------

    Several panelists, in particular representatives of exchanges 
operating the current exclusive SIPs, expressed concern with a 
competing consolidator model. One panelist suggested that the interest 
in competing consolidators arises from a perception that competing 
consolidators will make market data less costly.\482\ The panelist said 
that the cost to produce market data is not a competing consolidator's 
cost and that this realization may make such a model less attractive to 
potential users of competing consolidators.\483\ Another panelist said 
that a competing consolidator model could result in multiple NBBOs 
prevailing at the same nanosecond, which would provide a broker with a 
choice regarding the price at which it filled a customer's order.\484\ 
The panelist believed that this discretion in choosing an NBBO could 
result in uncertainty regarding whether the broker had executed a 
customer's order at a price that was in the customer's interest or the 
broker's own interest.\485\ One panelist stated that there is value in 
understanding what the NBBO is when there are competing SIPs and asked 
whether this model would introduce benchmark reference price 
arbitrage.\486\ The panelist suggested that

[[Page 16774]]

a conflict could arise if a broker-dealer executes customer orders and 
also manages the price against which such trades are benchmarked, i.e., 
by calculating the NBBO.\487\
---------------------------------------------------------------------------

    \482\ See Roundtable Day Two Transcript at 46-47 (Michael 
Blaugrund, NYSE).
    \483\ Id.
    \484\ See Roundtable Day Two Transcript at 61 (Prof. Robert 
Bartlett, U.C. Berkeley).
    \485\ Id.
    \486\ See Roundtable Day One Transcript at 151-152 (Oliver 
Albers, Nasdaq); Bartlett and McCrary, supra note 418 (examining the 
incidence of exclusive SIP latency arbitrage strategies using 
timestamp data from the two SIPs and concluding that trading 
surrounding exclusive SIP priced trades showed little evidence that 
fast traders initiate liquidity taking orders to pick off stale 
quotes).
    \487\ See Roundtable Day One Transcript at 151-152 (Oliver 
Albers, Nasdaq).
---------------------------------------------------------------------------

    Several comment letters expressed skepticism about the benefits of 
a competing consolidator model. One commenter said that making radical 
market structure changes could undermine the NBBO and that adding 
multiple competing SIPs would create operational, legal, and regulatory 
complexities as well as unintended consequences, and may not solve 
concerns about geographic latency.\488\ Further, this commenter 
advocated that having a single source of best quote and trade data 
creates confidence in the U.S. markets because investors can be assured 
that orders will automatically route to the venue with the best quoted 
price on the exclusive SIP feed.\489\
---------------------------------------------------------------------------

    \488\ See Wittman Letter at 14; Letter to Brent J. Fields, 
Secretary, Commission, from Oliver Albers, SVP, Head of Global 
Partnerships, Nasdaq, 3 (Oct. 24, 2018) (``Albers Letter''); 
Blaugrund Letter at 2. The Wittman and Albers Letters were submitted 
on behalf of Nasdaq. The Blaugrund Letter was submitted on behalf of 
NYSE.
    \489\ See Albers Letter at 3.
---------------------------------------------------------------------------

    One commenter said that competition would result in multiple NBBOs 
that would confuse the market. Further, the commenter stated that 
competition would not ``curb rent-seeking behaviors, nor promote 
fairness.'' \490\ This commenter suggested that the Commission mandate 
a type of encryption instead of introducing competition, explaining 
that encrypting market data would allow proprietary and exclusive SIP 
feeds to be made available ``securely in synchronized time.'' \491\
---------------------------------------------------------------------------

    \490\ See Data Boiler Letter at 4. This commenter also suggested 
that the Commission amend interpretations of Rule 603(a) of 
Regulation NMS to emphasize ``synchronized availability of data 
between SIP and exchanges' proprietary products.'' Id. at 8.
    \491\ Id. at 2, 8.
---------------------------------------------------------------------------

    Another commenter urged the Commission to do a cost benefit 
analysis of efforts to decentralize the exclusive SIP architecture and 
recommended introducing additional instances of existing technology 
(i.e., a distributed SIP model) as the best approach to reducing 
geographic latency.\492\ This commenter added that a competing 
consolidator approach would create complexity that would undermine the 
purposes of Regulation NMS to keep costs low for investors.\493\
---------------------------------------------------------------------------

    \492\ See NYSE Group Letter at 6; Blaugrund Letter at 4. The 
Blaugrund Letter was submitted on behalf of NYSE.
    \493\ See Blaugrund Letter at 2.
---------------------------------------------------------------------------

    Finally, one commenter opined that competing SIPs would not solve 
the problem of the exchanges' control over market data access.\494\ 
This commenter asked why a technology firm would become a competing SIP 
when it cannot control the cost of the market data it must 
purchase.\495\
---------------------------------------------------------------------------

    \494\ See Healthy Markets Association Letter I at 38.
    \495\ Id.
---------------------------------------------------------------------------

(c) Commission Discussion
    The Commission is proposing a decentralized consolidation model 
with competing consolidators and self-aggregators who would collect 
data from the SROs, and calculate, consolidate, and disseminate 
proposed consolidated market data to investors and market 
participants.\496\ As discussed below, the Commission preliminarily 
believes that competing consolidators should be required to disclose 
publicly certain information about their organization, operations, and 
products, as well as regularly publish certain performance statistics 
on, for example, capacity, system availability, and latency to 
demonstrate their operational capability and to provide transparency 
into the performance of their systems.\497\ In addition, the Commission 
preliminarily believes that competing consolidators should have written 
policies and procedures to assure the prompt, accurate, and reliable 
delivery of consolidated market data.
---------------------------------------------------------------------------

    \496\ See infra Section IV.B.2(e)(ii) for a discussion of 
proposed Rule 614, which would require competing consolidators that 
are SIPs to register with the Commission and comply with specified 
responsibilities.
    \497\ One Roundtable respondent supported publication of 
operational capabilities and performance metrics by competing 
consolidators. See SIFMA Letter (attachment to letter).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the competing 
consolidator proposal would reduce latency, bolster the resilience of 
the market data infrastructure, and permit the market data 
infrastructure to more readily adapt to changes in technology to better 
fit the needs of market participants. The Commission also preliminarily 
believes that market forces could help to ensure that the proposed 
consolidated market data is reliable, accurate, and prompt. To attract 
and maintain its subscriber base, a competing consolidator would have 
to ensure that it provides consolidated market data, as proposed, with 
minimal latency, but also reliably and accurately, and in a cost-
effective manner. A competing consolidator that does not adequately 
perform would risk losing customers to another competing consolidator. 
Competition should also incentivize competing consolidators to evolve 
and adapt to the needs of the marketplace. If a new technology would 
result in better provision of data, a competing consolidator likely 
would adopt that technology to expand its client base. Finally, the 
introduction of multiple competing consolidators may bring additional 
resilience to the collection, consolidation, and distribution of 
consolidated market data, as there would be redundant systems 
performing these functions rather than one exclusive SIP creating a 
single point of failure.\498\
---------------------------------------------------------------------------

    \498\ The single point of failure problem was most recently 
evidenced on August 12, 2019, when the CTA/CQ SIP experienced 
multiple system issues and was unable to effectively fail over to 
its backup system. Among other impacts, final closing prices for 
many symbols were not able to be published by the CTA until after 
8:00 p.m. See CTA, CTA Processing Issue on August 12, 2019: CTA 
Participant Trade Files--Revised Notice, Alert (Aug. 28, 2019), 
available at https://www.ctaplan.com/alerts#110000144324. Several 
Roundtable respondents noted the additional reliability through the 
redundancy that multiple consolidators would provide. See Roundtable 
Day One Transcript at 49-50 (Prof. Hal Scott, Harvard University); 
Roundtable Day Two Transcript at 77 (Paul O'Donnell, Morgan 
Stanley); Ramsay Letter II.
---------------------------------------------------------------------------

    In proposing this competing consolidator model, the Commission 
considered the concerns it described when it previously evaluated a 
different competing consolidator model in connection with the adoption 
of Regulation NMS.\499\ The Commission preliminarily believes that the 
proposed competing consolidator model should not raise the same 
concerns due to the differences between the two models and the manner 
in which market participants handle market data today.
---------------------------------------------------------------------------

    \499\ See supra notes 453-454.
---------------------------------------------------------------------------

    First, to address the Commission's prior concern about a lack of 
data uniformity resulting from the use of multiple competing 
consolidators,\500\ the Commission is proposing requirements governing 
how consolidated market data is collected, calculated, generated, and 
made available.\501\ The Commission acknowledges that the introduction 
of multiple entities generating consolidated market data would result 
in multiple versions of consolidated market data. However, market 
participants currently consolidate proprietary data feeds, generate 
their own consolidated data, and calculate their own NBBO.\502\ The 
proposal

[[Page 16775]]

would require competing consolidators and self-aggregators to calculate 
consolidated market data, including the NBBO, in a consistent manner as 
set forth in the proposed definitions in Rule 600 of Regulation NMS, 
which the Commission preliminarily believes would help ensure 
continuity and consistency in how proposed consolidated market data, 
including the NBBO, is calculated.
---------------------------------------------------------------------------

    \500\ See supra note 453.
    \501\ See proposed Rules 614(d)(1)-(3).
    \502\ See Roundtable Day One Transcript at 128 (Mark Skalabrin, 
Redline Trading Solutions) (explaining that his firm builds an NBBO 
for its customers that use proprietary data feeds), at 141 
(``[E]ffectively today, people have to form the NBBO at their own 
location. Even a dark pool does that that's just trying to match at 
the best bid and offer. If they use the SIP NBBO, their customers 
would be subject to latency harm, because it's too old to use at 
their location after it's merged to really get effective 
performance.''). Although the Commission does not know the exact 
number of market participants that currently consolidate proprietary 
data feeds, generate their own consolidated data, and calculate 
their own NBBO, Nasdaq has stated that approximately 100 firms 
purchase all depth of book data from every exchange. See In the 
Matter of the Application of SIFMA, supra note 37, at 29 (citing an 
assertion from Nasdaq that 100 firms purchase all depth of book data 
from every exchange). The Commission acknowledges that not all of 
these market participants consolidate the proprietary data feeds and 
solicits comment on the number of market participants that do.
---------------------------------------------------------------------------

    Further, on the Advisory Committee on Market Information's 
validation tolerance concerns from 2001,\503\ the report had stated 
that standards should be created to ensure the consistency of 
information, such as the NBBO and market center message 
formatting.\504\ The report also stated that differences in the 
protocols and formats used by competing consolidators could make the 
market data system cumbersome or prone to error.\505\ As noted above, 
the proposal would require competing consolidators and self-aggregators 
to calculate consolidated market data, including the NBBO, in a 
consistent manner in accordance with the proposed definitions in Rule 
600 of Regulation NMS. Further, the Commission preliminarily believes 
that competing consolidators would likely establish their own standards 
for verifying information for consistency because they would be the 
entities responsible, pursuant to proposed Rule 614(d)(2), for 
calculating and generating consolidated market data based on this 
information.\506\ In addition, as the entities responsible for 
generating consolidated market data, competing consolidators would 
likely be incentivized by competition to disseminate data using a 
protocol or format that results in data that is readily usable by their 
subscribers. As market participants are currently able to ingest market 
data from different sources, such as the exclusive SIPs and proprietary 
data feeds, the Commission preliminarily believes that differences in 
the protocols or formats used by competing consolidators would not 
likely introduce a new challenge to the market. Rather than impose 
technical standards, the Commission preliminarily believes that 
competing consolidators would be in the best position to develop 
standards with respect to data consistency and generation, as 
appropriate, because they would be directly responsible for the quality 
of their product that is in compliance with Rule 614(d)(2), and would 
be incentivized through competition to create standards to ensure the 
integrity of their consolidated market data.
---------------------------------------------------------------------------

    \503\ See supra text accompanying notes 455-457.
    \504\ Id.
    \505\ Id.
    \506\ See proposed Rule 614(d)(2).
---------------------------------------------------------------------------

    With respect to the Advisory Committee on Market Information's 
previous concerns about capacity,\507\ the Commission is proposing to 
require each competing consolidator to publish on its website its 
capacity statistics on a monthly basis so that market participants can 
evaluate whether a competing consolidator has sufficient capacity to 
process information.\508\ The Commission is also proposing to require 
each competing consolidator to establish, maintain, and enforce written 
policies and procedures reasonably designed to ensure that its systems 
have levels of capacity to maintain operational capability and assure 
the prompt, accurate, and reliable delivery of consolidated market 
data.\509\
---------------------------------------------------------------------------

    \507\ See supra text accompanying notes 455-457.
    \508\ See infra Section IV.B.2(e)(ii).
    \509\ Id.
---------------------------------------------------------------------------

    The Commission was previously concerned about an increase in 
processing costs due to multiple consolidators \510\ performing the 
tasks performed by an exclusive SIP. As noted above, the Commission 
preliminarily believes that the introduction of competition should help 
to ensure that proposed consolidated market data is disseminated in a 
cost-effective manner.\511\
---------------------------------------------------------------------------

    \510\ The Commission preliminarily estimates that there could be 
up to twelve competing consolidators. This estimate includes the 
CTA/CQ SIP and the Nasdaq UTP SIP. See infra Section V.C.
    \511\ See also, e.g., Roundtable Day One Transcript at 49-50 
(Prof. Hal Scott, Harvard University) (``[C]ompetition among 
consolidators of SIP data . . . could improve the speed and quality 
of consolidated sources of market data while also reducing their 
costs.''); Treasury Report, supra note 463, at 64 (``The competing 
consolidators would aim to provide faster consolidation and 
distribution, improved breadth of data, and lower cost than the 
SIPs.'').
---------------------------------------------------------------------------

    Finally, the Commission was previously concerned about the risk 
that fees for core data would increase because payment to each SRO 
would be mandatory. The previous competing consolidator model would 
have eliminated the Equity Data Plans and contemplated that each 
individual exchange would have developed its own pricing scheme for its 
individual data. As discussed below, in contrast, under the proposed 
decentralized consolidation model, the SROs would continue to develop 
jointly the fees associated with the provision of the proposed 
consolidated market data through an effective national market system 
plan(s) for NMS stocks.\512\ These fees would be subject to Commission 
oversight under Rule 608.
---------------------------------------------------------------------------

    \512\ See infra Section IV.B.4; Proposed Governance Order, supra 
note 8; Effective on Filing Proposal, supra note 37 (a proposal to 
amend Regulation NMS to rescind a provision that allows a proposed 
amendment to an effective national market system plan(s) to become 
effective upon filing if the proposed amendment establishes or 
changes a fee or other charge).
---------------------------------------------------------------------------

    The use of competing consolidators may introduce sequencing risk, a 
concern raised by the Advisory Committee on Market Information \513\ as 
well as the Commission when it dismissed a competing consolidator model 
in proposing Regulation NMS.\514\ Having multiple competing 
consolidators using different technology could result in messages being 
processed in different sequences. The outcome would be the loss of a 
single reference for consolidated market data, which could negatively 
impact the reconstruction of the markets at a given point in time. 
However, the Commission believes that the proposal would mitigate the 
effects of sequencing risk by mandating that the effective national 
market system plan(s) require the application of timestamps to all 
consolidated market data by the SROs when they send market data to 
competing consolidators as well as requiring competing consolidators to 
apply timestamps to consolidated market data. Accordingly, no matter 
the differences in message processing across the competing 
consolidators, the sequencing of market data based on SRO timestamps 
should be able to be reconstructed.\515\
---------------------------------------------------------------------------

    \513\ See supra text accompanying notes 455-457.
    \514\ See Regulation NMS Proposing Release, supra note 450, at 
11178.
    \515\ The Commission further notes that the NBBOs currently 
calculated by the exclusive SIPs at different data centers may vary 
due to geographic and other forms of latency, and therefore, the 
proposed competing consolidator model does not introduce a new issue 
in this regard. However, under the proposed competing consolidator 
model, NBBOs created at other data centers where the exclusive SIPs 
currently do not have a point of presence (e.g., NY4 in Secaucus) 
could be more accurate for those market participants that are 
located in such data center.
---------------------------------------------------------------------------

    The Commission believes that there are a number of existing firms 
that

[[Page 16776]]

would be well-positioned to become competing consolidators. First, 
trading technology firms that today provide proprietary data 
aggregation services for their subscribers may decide to register as 
competing consolidators in order to potentially expand their subscriber 
base and to be eligible for the pricing for data content used to create 
proposed consolidated market data.\516\ In addition, the existing 
exclusive SIPs, CTA/CQ and Nasdaq UTP, could consider becoming 
competing consolidators, as they have extensive experience in this area 
and may choose to remain in the market data consolidation business. 
Similarly, SROs have experience collecting and processing market data 
and may wish to act as competing consolidators. The Commission 
preliminarily believes that the creation of a competing consolidator 
market would open up the potential for other entrants, as well. For 
example, various market participants that are currently self-
aggregating and have the technology to consolidate core data may decide 
to enter the competing consolidator business given the potential market 
opportunity. Finally, other entities have been interested in performing 
as plan processors. For example, there were competing bids to be the 
Nasdaq UTP SIP in 2014,\517\ and in 2013 and 2019 for OPRA. The bidding 
firms (or similar types of firms) may decide to enter the market as 
competing consolidators.
---------------------------------------------------------------------------

    \516\ The Commission does not know the number of aggregators in 
operation today, but assumes that certain market data vendors in the 
following list currently perform that function. See Nasdaq: Market 
Data Vendors, available at https://www.nasdaqtrader.com/Trader.aspx?id=MarketDataVendorsList&StartAlphabet=A&EndAlphabet=ZZZ 
(last accessed Dec. 17, 2019).
    \517\ Bidders included Nasdaq, Thesys Technologies LLC, 
CenturyLink, and a unit of exchange operator Miami International 
Holdings Inc. See Herbert Lash, Nasdaq Wins Bid to Manage Key Data 
Processor for Stock Trading, Reuters (Nov. 5, 2014), available at 
https://www.reuters.com/article/us-exchanges-stocktrading-nasdaq-omx-idUSKBN0IQ00220141106.
---------------------------------------------------------------------------

    The Commission preliminarily believes that sufficient incentives 
exist to attract a number of entities to register as competing 
consolidators and for a competitive market to develop. For one thing, 
the proposed definition of core data will incorporate additional 
elements such as quotation data in smaller size increments, depth of 
book data, and auction information, all of which market participants 
have recommended as necessary or useful. Therefore, there seems to be 
demand for the key product--i.e., consolidated market data as 
proposed--that competing consolidators will be producing and selling. 
Moreover, the proposed competing consolidator registration regime and 
responsibilities outlined below--while designed to collect relevant 
information about competing consolidators and to require competing 
consolidator performance data, data quality issues, and system issues 
to be made publicly available--are intended to be a relatively 
streamlined process that would impose appropriate burdens on entities 
likely to register as competing consolidators.
    Several Roundtable panelists and commenters raised potential issues 
about a competing consolidator model, in particular, about 
uncertainties regarding control over market data access, the costs of 
obtaining market data from the various SROs, and operational 
complexities associated with the model, such as the introduction of 
multiple NBBOs.\518\ However, the Commission preliminarily believes 
that some of these issues would be addressed by the proposal and the 
others would not be novel or insurmountable. On control over market 
data access, Rule 603 and the proposed amendments to Rule 603(b) would 
require that the SROs directly make available to competing 
consolidators and self-aggregators NMS information, including all data 
necessary to generate consolidated market data, on terms that are fair 
and reasonable and not unreasonably discriminatory. With respect to the 
costs of market data, the SRO fees associated with consolidated market 
data would be subject to Equity Data Plan requirements and the fees 
must be fair and reasonable.\519\ Finally, with respect to the concerns 
regarding the complexities associated with a competing consolidator 
model, many of the functions of competing consolidators are performed 
today by market participants, such as the consolidation of proprietary 
data feeds and calculation of NBBOs.\520\
---------------------------------------------------------------------------

    \518\ See Roundtable Day One Transcript at 151-152 (Oliver 
Albers, Nasdaq); Roundtable Day Two Transcript at 46-47 (Michael 
Blaugrund, NYSE), at 61 (Prof. Robert Bartlett, U.C. Berkeley); 
Wittman Letter at 14; Albers Letter at 3; Blaugrund Letter, at 2; 
Healthy Markets Association Letter I, at 38; Data Boiler Letter at 
4, 8.
    \519\ See supra note 439.
    \520\ For example, multiple NBBOs exist today because many 
broker-dealers independently calculate it for themselves.
---------------------------------------------------------------------------

    Finally, a Roundtable panelist suggested that multiple NBBOs could 
raise concerns about broker-dealers executing customer orders at prices 
that are in the broker's own interest, rather than the customers' 
interest, and questioned whether a competing consolidator model would 
introduce benchmark reference price arbitrage.\521\ A broker-dealer 
must provide best execution to its customers' orders.\522\ However, the 
existence of multiple NBBOs, which occurs today, does not impact a 
broker's best execution obligations. Further, the panelist questioned 
whether there would be conflicts for broker-dealers that execute 
customer trades as well as manage the price against which the trades 
are benchmarked (i.e., by calculating the NBBO). Broker-dealers today 
purchase market data from the SIP as well as proprietary data feeds and 
calculate NBBOs. Accordingly, the Commission is not persuaded by 
concerns about the introduction of multiple NBBOs because multiple 
NBBOs already exist.
---------------------------------------------------------------------------

    \521\ See Roundtable Day One Transcript at 151-152 (Oliver 
Albers, Nasdaq); Roundtable Day Two Transcript at 61 (Prof. Robert 
Bartlett, U.C. Berkeley); Data Boiler Letter at 4.
    \522\ See supra note 308.
---------------------------------------------------------------------------

(d) Proposed Definition of Competing Consolidator in Rule 600(b)
    The Commission is proposing to introduce a definition of competing 
consolidator in Rule 600(b). Specifically, under proposed Rule 
600(b)(16) of Regulation NMS, a competing consolidator would be defined 
as a securities information processor required to be registered 
pursuant to Rule 614 or a national securities exchange or national 
securities association that receives information with respect to 
quotations for and transactions in NMS stocks and generates 
consolidated market data for dissemination to any person.
    The Commission requests comment on the proposed amendment to Rule 
600(b) to introduce a definition of ``competing consolidator.'' In 
particular, the Commission solicits comment on the following:
    73. Is a decentralized consolidation model with competing 
consolidators and self-aggregators a viable and/or appropriate model 
for the collection, consolidation, and dissemination of consolidated 
market data? Are there any other viable and/or appropriate 
alternatives?
    74. Do commenters believe that the definition of competing 
consolidator accurately captures the requisite functions necessary for 
collecting, consolidating, and disseminating consolidated market data? 
Do commenters believe that there would be sufficient interest in 
entities that would become competing consolidators?
    75. Do commenters believe that competing consolidators would 
provide the necessary competition to lower the processing time and 
distribution speeds

[[Page 16777]]

for consolidated market data, as proposed to be defined, as well as 
reduce the overall costs of proposed consolidated market data?
    76. Do commenters believe that concerns identified by the 
Commission regarding the competing consolidator model considered in the 
Regulation NMS Proposing and Adopting Releases would be sufficiently 
addressed with the proposed decentralized consolidation model with 
competing consolidators and self-aggregators proposed in this release? 
If not, how should these concerns be addressed?
    77. Will the change to a proposed competing consolidator/self-
aggregator model present any specific operational and/or regulatory 
challenges to market participants? Are the challenges evenly 
distributed amongst market participants or would one set of market 
participants bear more of any burden? If so, please describe.
    78. The Commission solicits commenters' views regarding the various 
concerns raised by Roundtable respondents about the competing 
consolidator model. In particular, do commenters have any concerns 
about competing consolidators calculating independent NBBOs? Please 
explain. Do commenters have concerns about multiple versions of 
consolidated market data, as proposed? Please explain. If there are 
such concerns, please also explain how these concerns would vary from 
the multiple different forms of aggregation that exist today among 
broker-dealers either self-aggregating proprietary data feeds or 
utilizing vendors to do so on their behalf.
(e) Proposed Rule 614
    The Commission preliminarily believes that SIPs that wish to act as 
competing consolidators should be required to register with the 
Commission \523\ and be required to publicly disclose certain 
information about their organization, operations, and products. The 
proposed disclosure framework is similar to the disclosures currently 
required under Form SIP, with differences tailored to the proposed 
regulatory structure that would apply to competing consolidators. As 
described more fully below, a competing consolidator would be required 
to register with the Commission on proposed Form CC and to amend its 
Form CC (i) prior to the implementation of a material change to the 
competing consolidator's pricing, connectivity, or products offered (a 
``Material Amendment''); and (ii) no later than 30 calendar days after 
the end of each calendar year to correct information that has become 
inaccurate or incomplete for any reason and to provide an Annual Report 
as required under Form CC (each a ``Form CC Amendment'').\524\ A 
competing consolidator would be required to publish notice of its 
cessation of operations on Form CC at least 30 business days prior to 
the date it ceases to operate as a competing consolidator.\525\ The 
Commission would make public on its website each effective initial Form 
CC, order of ineffective initial Form CC, Form CC Amendment, and notice 
of cessation.\526\
---------------------------------------------------------------------------

    \523\ As explained further below, SROs are excluded from the 
definition of SIP under Section 3(a)(22)(A) of the Exchange Act. 15 
U.S.C. 78c(a)(22)(A). SROs that wish to act as competing 
consolidators would therefore not be required to register with the 
Commission on proposed Form CC, which, as explained below, is the 
form that SIPs would use to register as competing consolidators. See 
infra Section IV.B.2(e)(iii). However, SROs that wish to act as 
competing consolidators would be subject to the other requirements 
of proposed Rule 614, including the responsibilities of competing 
consolidators enumerated in proposed Rule 614(d), such as the 
monthly publication of performance metrics. See infra Section 
IV.B.2(e)(ii).
    \524\ See proposed Rules 614(a)(1)(i) and (a)(2)(i) and (ii).
    \525\ See proposed Rule 614(a)(3).
    \526\ See proposed Rule 614(b)(2). The Commission would publish 
an effective initial Form CC upon effectiveness and would publish a 
Form CC Amendment no later than 30 calendar days from the date of 
filing. See proposed Rule 614(b)(2)(iii).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that competing 
consolidators should be subject to certain obligations and should 
regularly publish certain performance statistics on a monthly basis on 
their respective websites pursuant to proposed Rules 614(d)(5) and 
(6).\527\ These disclosures are similar to disclosures currently made 
by the exclusive SIPs.
---------------------------------------------------------------------------

    \527\ See infra Section IV.B.2(e)(ii) for a discussion of the 
obligations and performance statistics. The information that the 
Commission is proposing that competing consolidators publish is 
based upon information that is currently collected or produced by 
the CTA/CQ SIP and the Nasdaq UTP SIP, either for public or internal 
distribution.
---------------------------------------------------------------------------

    These requirements, together with the operational transparency 
proposed in new Form CC for those SIPs that register as competing 
consolidators,\528\ should help to ensure that consolidated market 
data, as proposed to be defined, is provided in a prompt, accurate, and 
reliable manner and that all competing consolidators disclose the same 
information to allow for easier comparison and evaluation. 
Specifically, these requirements should allow market participants to 
effectively evaluate competing consolidators and foster competition 
among competing consolidators, which should result in high levels of 
performance in the provision of proposed consolidated market data. In 
addition, these requirements should facilitate Commission oversight of 
competing consolidators and help to ensure the resiliency of their 
systems.
---------------------------------------------------------------------------

    \528\ See infra Section IV.B.2(e)(iii) for a discussion of 
proposed Form CC.
---------------------------------------------------------------------------

(i) Section 11A(b) of the Exchange Act
    Section 11A(b)(1) of the Exchange Act \529\ provides that a SIP not 
acting as the ``exclusive processor'' \530\ of any information with 
respect to quotations for or transactions in securities is exempt from 
the requirement to register with the Commission as a SIP unless the 
Commission, by rule or order, determines that the registration of such 
SIP ``is necessary or appropriate in the public interest, for the 
protection of investors, or for the achievement of the purposes of 
[Section 11A].'' A SIP that proposes to act as a competing consolidator 
would not engage on an exclusive basis on behalf of any national 
securities exchange or registered securities association in collecting, 
processing, or preparing for distribution or publication any 
information with respect to quotations for or transactions in 
securities; therefore, such a proposed competing consolidator would not 
fall under the statutory definition of ``exclusive processor.'' 
However, under the proposed rules, competing consolidators would play a 
vital role in the national market system by collecting, consolidating, 
and disseminating proposed consolidated market data. Because the 
availability of prompt, accurate, and reliable consolidated market 
data, as proposed, is essential to investors and other market 
participants, the Commission preliminarily believes that it is 
necessary and appropriate in the public interest and for the protection 
of investors to require each SIP that wishes to act as a competing 
consolidator to register with the Commission as a SIP pursuant to 
proposed Rule 614. Section 11A(b)(1) provides the Commission with 
authority to require the registration of a SIP not acting as an 
exclusive processor by rule or order. The Commission is exercising this 
authority by proposing Rule 614 to establish the process by which SIPs 
that wish to act as competing consolidators would be required to 
register with the Commission.
---------------------------------------------------------------------------

    \529\ 15 U.S.C. 78k-1(b)(1).
    \530\ See supra note 20.
---------------------------------------------------------------------------

    The registration process for exclusive SIPs under Section 11A 
requires the Commission to publish notice of an exclusive SIP's 
application for registration and, within 90 days of publication of 
notice of the application,

[[Page 16778]]

by order grant the application or institute proceedings to determine 
whether the registration should be denied.\531\ At the conclusion of 
the proceedings, the Commission must, by order, grant or deny the 
registration.\532\ Section 11A(b)(1) of the Exchange Act also 
authorizes the Commission, by rule or by order, upon its own motion or 
by application, to conditionally or unconditionally exempt any SIP or 
class of SIPs from any provision of Section 11A or the rules or 
regulations thereunder if the Commission finds that such exemption is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 11A, including the maintenance of fair and 
orderly markets in securities and the removal of impediments to and 
perfection of the mechanisms of a national market system. The 
Commission preliminarily believes that it is consistent with the public 
interest, the protection of investors, and the purposes of Section 11A 
to use its authority under Section 11A(b)(1) to exempt SIPs that wish 
to act as competing consolidators from the registration process 
established in Section 11A(b)(3) of the Exchange Act and to allow such 
competing consolidators to register pursuant to a process that is more 
streamlined and limited than the process described in Section 
11A(b)(3). The process specified in Section 11A(b)(3) of the Exchange 
Act was developed for exclusive SIPs and reflects the heightened need 
to review and analyze exclusive processors. In contrast, SIPs that do 
not act as an exclusive SIP are exempt from registration unless the 
Commission ``finds that the registration of such securities information 
processor is necessary or appropriate in the public interest, for the 
protection of investors, or for the achievement of the purposes of 
[Section 11A].'' The Commission preliminarily believes that the 
proposed registration process would provide the Commission with the 
information necessary to oversee competing consolidators and help 
ensure that relevant information regarding such competing consolidators 
is available to the Commission and to the public, while providing a 
streamlined registration process designed to encourage entities to 
register as competing consolidators.
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    \531\ See Section 11A(b)(3), 15 U.S.C. 78k-1(b)(3).
    \532\ See Section 11A(b)(3)(B), 15 U.S.C. 78k-1(b)(3)(B).
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    The registration process proposed in new Rule 614 requires any 
person, other than an SRO,\533\ that chooses to become a competing 
consolidator to file with the Commission proposed Form CC.\534\ The 
Commission would review the initial Form CC and such filing would 
become effective, unless declared ineffective by the Commission by 
order.\535\ The Commission would make public on its website each 
effective initial Form CC and any order of ineffective initial Form CC, 
amendment to Form CC and notice of cessation, if applicable. The 
registration process proposed in new Rule 614 would not require the 
publication for notice and comment of an application for registration 
as a competing consolidator, nor would it require Commission approval 
of such an application. However, the Commission preliminarily believes 
that it is consistent with the public interest, the protection of 
investors, and the purposes of Section 11A to establish a relatively 
streamlined registration process based on disclosure for those SIPs 
that wish to act as competing consolidators. The Commission 
preliminarily believes that a relatively streamlined registration 
process would impose minimal burdens on entities likely to register as 
competing consolidators.
---------------------------------------------------------------------------

    \533\ See supra note 523.
    \534\ See infra Sections IV.B.2(e)(ii) and IV.B.2(e)(iii) for a 
discussion of the registration process for competing consolidators 
under proposed Rule 614.
    \535\ Proposed Rule 614(a)(1)(iii) provides that the Commission 
may, by order, declare an initial Form CC ineffective no later than 
90 calendar days from the date of filing with the Commission.
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that it is 
consistent with the public interest, the protection of investors, and 
the purposes of Section 11A to use its exemptive authority under 
Section 11A(b)(1) of the Exchange Act to exempt those SIPs that act as 
competing consolidators from Section 11A(b)(5) of the Exchange 
Act,\536\ which requires a registered SIP to notify the Commission if 
the SIP prohibits or limits any person with respect to access to its 
services. Section 11A(b)(5) allows any person aggrieved by a 
prohibition or limitation of such access to the SIP's services to 
petition the Commission to review the prohibition or limitation of 
access. Exclusive SIPs, by definition, engage on an exclusive basis in 
collecting, processing, or preparing data. In contrast, the proposed 
competing consolidators would not engage in collecting, processing, or 
preparing data on an exclusive basis. Therefore, the Commission 
preliminarily believes that the protections of Section 11A(b)(5) of the 
Exchange Act, including the ability of an aggrieved person to petition 
the Commission for review of a SIP's prohibition or limitation of 
access to the SIP's services, are not necessary for the SIPs that 
register as competing consolidators. The Commission preliminarily 
believes that competitive forces would reduce the likelihood that a 
subscriber would not be able to access consolidated market data as 
proposed because a subscriber should be able to obtain such data from 
another competing consolidator. Accordingly, the Commission 
preliminarily believes that it would be consistent with the protection 
of investors and the public interest to exempt competing consolidators 
from Section 11A(b)(5) of the Exchange Act.
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    \536\ Section 11A(b)(5) of the Exchange Act, 15 U.S.C. 78k-
1(b)(5), requires a SIP promptly to notify the Commission if the 
registered SIP prohibits or limits any person in respect of access 
to services offered, directly or indirectly, by the registered SIP. 
The notice must be in the form and contain the information required 
by the Commission. Any prohibition or limitation on access to 
services with respect to which a registered SIP is required to file 
notice is subject to review by the Commission on its own motion, or 
upon application by any person aggrieved by the prohibition or 
limitation.
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    The Commission requests comment on the proposal to establish a 
registration process for SIPs that wish to act as competing 
consolidators and to exempt such competing consolidators from Section 
11A(b)(5) of the Exchange Act. In particular, the Commission solicits 
comment on the following:
    79. Do commenters agree that the SIPs that wish to act as proposed 
competing consolidators should be required to register with the 
Commission? Do commenters agree that such competing consolidators 
should be subject to the proposed registration requirements in proposed 
Rule 614, rather than the registration requirements set forth in 
Section 11A(b) of the Exchange Act? Why or why not?
    80. Do commenters believe that the Commission should establish a 
registration process for competing consolidators different from the 
registration process in proposed Rule 614? If so, please describe. 
Should competing consolidator registration be subject to Commission 
approval and/or additional or different regulation? Why or why not? If 
so, please describe.
    81. Do commenters believe that competition and market forces would 
be sufficient to support the proposed registration regime for SIPs that 
wish to act as competing consolidators? Why or why not?
    82. Do commenters agree that the Commission should exempt SIPs that 
register as competing consolidators from Section 11A(b)(5) of the 
Exchange Act? Why or why not?
    83. Do commenters believe that competition and market forces are

[[Page 16779]]

sufficient to ensure that market participants would have access to 
consolidated market data as proposed? Why or why not?
(ii) Description of Proposed Rule 614
    Proposed Rule 614(a)(1)(i) would prohibit any person, other than an 
SRO,\537\ from (i) receiving directly from a national securities 
exchange or national securities association information with respect to 
quotations for and transactions in NMS stocks; and (ii) generating the 
proposed consolidated market data for dissemination to any person 
(i.e., acting as a competing consolidator by disseminating data to 
external parties) unless that person files with the Commission an 
initial Form CC and the initial Form CC has become effective pursuant 
to proposed Rule 614(a)(1)(v).\538\ The Commission preliminarily 
believes that a SIP that wishes to act as a competing consolidator 
should not be permitted to commence operations until the Commission has 
had the opportunity to review such competing consolidator's initial 
Form CC. The Commission's review of initial Form CC would help to 
ensure that a SIP that wishes to register as a competing consolidator 
makes disclosures that comply with the requirements of proposed Rule 
614 and that a consistent level of information, and consistent 
disclosures, are made available to market participants to evaluate such 
competing consolidators.
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    \537\ As noted above, SROs are excluded from the definition of 
SIP in Section 3(a)(22)(A) of the Exchange Act and therefore would 
not be required to register as a competing consolidator pursuant to 
proposed Rules 614(a)-(c) and proposed Form CC. However, SROs are 
regulated entities, and an SRO competing consolidator would be 
required to provide information equivalent to that required by 
proposed Form CC. For example, national securities exchanges must 
file information about their control persons, officers, and 
directors, and affiliates on Form 1 that is similar to the 
disclosures required under Exhibits A-D of proposed Form CC. See 
Form 1 Instructions, at Exhibits C, J, and K, available at https://www.sec.gov/files/form1.pdf (last accessed Jan. 8, 2020). In 
addition, SRO competing consolidators would be required to file with 
the Commission all proposed rule changes pursuant to Section 19(b) 
of the Exchange Act and Rule 19b-4 thereunder to begin operations as 
a competing consolidator, including rule changes related to the SRO 
competing consolidator's operations, disclosures regarding 
consolidated market data products, and all fees related to 
consolidated market data products. The other requirements of 
proposed Rule 614--specifically, the responsibilities of competing 
consolidators enumerated in proposed Rule 614(d), as described 
below, including the monthly performance metrics and other 
information required under proposed Rules 614(d)(5) and (d)(6)--
would apply to any competing consolidator, including any SRO that 
acts as a competing consolidator. An SRO, however, would have a 
choice of the manner in which--and the regulatory regime that would 
apply to--its competing consolidator business: An SRO could operate 
a competing consolidator as a facility of the SRO, which would be 
subject to the rule filing requirements of Section 19(b) of the 
Exchange Act and Rule 19b-4 thereunder, or the SRO could operate a 
competing consolidator in a separate affiliated entity, not as a 
facility, which, like other competing consolidators, would be 
subject to the proposed registration requirements under proposed 
Rule 614.
    \538\ In contrast, a self-aggregator would be defined as any 
broker-dealer that receives information with respect to quotations 
for and transactions in NMS stocks and generates consolidated market 
data solely for internal use, and therefore would not be a competing 
consolidator. See infra Section IV.B.3. If a self-aggregator 
disseminated consolidated market data to any person, it would be 
acting as a competing consolidator and would be required to register 
pursuant to proposed Rule 614 and comply with the requirements 
applicable to competing consolidators.
---------------------------------------------------------------------------

    Proposed Rule 614(a)(1)(ii) would require any reports required 
under new Rule 614 to be filed electronically on Form CC, include all 
of the information as prescribed in Form CC and the instructions to 
Form CC, and contain an electronic signature.\539\ The electronic 
signature requirement is consistent with the intention of the 
Commission to receive documents that can be readily accessed and 
processed electronically.
---------------------------------------------------------------------------

    \539\ This proposed requirement is consistent with electronic 
reporting standards set forth in other Commission rules under the 
Exchange Act, such as Rule 17a-25 (Electronic Submission of 
Securities Transaction Information by Exchange Members, Brokers, and 
Dealers). See 17 CFR 240.17a-25.
---------------------------------------------------------------------------

    The proposed rule contemplates the use of an online filing system 
through which competing consolidators would file a completed Form CC. 
The system, known as the electronic form filing system (``EFFS'') is 
currently used by SROs to submit Form 19b-4 filings and by SCI entities 
to submit Form SCI filings.\540\ Other methods of electronic filing of 
Form CC could include the use of secure file transfer through 
specialized electronic mailbox or through the Electronic, Data 
Gathering, Analysis and Retrieval (``EDGAR'') system, or directly 
through SEC.GOV via a simple HTML form. Based on the widespread use and 
availability of the internet, the Commission believes that filing Form 
CC in an electronic format would be less burdensome and a more 
efficient filing process for competing consolidators and the Commission 
because it is likely to be less expensive and cumbersome than mailing 
and filing paper forms with the Commission.
---------------------------------------------------------------------------

    \540\ See Securities Exchange Act Release No. 50486 (Oct. 4, 
2004), 69 FR 60287 (Oct. 8, 2004) (adopting the EFFS for use in 
filing Form 19b-4).
---------------------------------------------------------------------------

    In addition, proposed Rule 614(a)(1)(ii) would establish a uniform 
manner in which the Commission would receive, and competing 
consolidators would provide, reports made pursuant to proposed Rule 
614. The standardization would make it easier and more efficient for 
the Commission to promptly review and analyze the information that 
competing consolidators provide.
    Proposed Rule 614(a)(1)(iii) would provide that the Commission may, 
by order, declare an initial Form CC filed by a competing consolidator 
ineffective no later than 90 calendar days from filing with the 
Commission.\541\ The Commission preliminarily believes that 90 calendar 
days would provide the Commission with adequate time to carry out its 
oversight functions with respect to its review of an initial Form CC, 
including its responsibilities to protect investors and maintain fair, 
orderly, and efficient markets.
---------------------------------------------------------------------------

    \541\ See also proposed Rule 614(a)(1)(iv)(B).
---------------------------------------------------------------------------

    Proposed Rule 614(a)(1)(iv) would require a competing consolidator 
to withdraw an initial Form CC that has not become effective if any 
information disclosed in the initial Form CC is or becomes inaccurate 
or incomplete. The competing consolidator would be able to refile an 
initial Form CC pursuant to proposed Rule 614(a)(1). The Commission 
preliminarily believes that it would be appropriate to require an 
initial Form CC to be withdrawn if any information in the form is or 
becomes inaccurate or incomplete to assure that the Commission's review 
is based on accurate and complete information and to assure that the 
Commission has adequate time to review an accurate and complete initial 
Form CC.
    Proposed Rule 614(a)(1)(v)(A) would provide that an initial Form CC 
would become effective, unless declared ineffective, no later than the 
expiration of the review period provided in paragraph (a)(1)(iii) and 
upon publication of the initial Form CC pursuant to proposed Rule 
614(b)(2)(i).
    Proposed Rule 614(a)(1)(v)(B) would provide that the Commission 
would declare ineffective an initial Form CC if it finds, after notice 
and opportunity for hearing, that such action is necessary or 
appropriate in the public interest and is consistent with the 
protection of investors. The Commission also preliminarily believes 
that it would be necessary and appropriate in the public interest, and 
consistent with the protection of investors, to declare ineffective an 
initial Form CC if it finds, after notice and opportunity for hearing, 
that one or more disclosures reveal non-compliance with federal 
securities laws or the rules or regulations thereunder. The Commission 
also would make such a declaration if it finds, for example, that one 
or more disclosures on the initial Form CC were materially deficient 
with respect to their accuracy,

[[Page 16780]]

currency, or completeness. The Commission preliminarily believes that 
market participants would use the Form CC disclosure to understand and 
evaluate the operations of a competing consolidator and to help 
determine whether to subscribe to a competing consolidator. A 
disclosure on Form CC that is materially deficient with respect to its 
completeness or comprehensibility could mislead market participants or 
impede their ability to evaluate a competing consolidator. In addition, 
the Commission intends to use the information disclosed on an initial 
Form CC to exercise oversight over competing consolidators. Given these 
potential uses, the Commission believes that it is important that an 
initial Form CC contain disclosures that are accurate, current, and 
complete. During its review, the Commission and its staff may provide 
comments to the applicant and may request that the applicant supplement 
information in its initial Form CC or revise its disclosures on its 
initial Form CC.\542\
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    \542\ The responsibility for accurate, current, and complete 
disclosures on proposed Form CC would lie with the competing 
consolidator. The Commission's review of an initial Form CC would 
focus on an evaluation of the completeness and accuracy of the 
disclosures and compliance with federal securities laws. The 
Commission's evaluation regarding compliance with federal securities 
laws would involve a review of the Form CC disclosures for apparent 
non-compliance with federal securities laws, or other rules or 
regulations thereunder, and would focus on the disclosures made on 
the Form CC.
---------------------------------------------------------------------------

    If the Commission declares an initial Form CC ineffective, the 
applicant would be prohibited from operating as a competing 
consolidator. An initial Form CC declared ineffective would not prevent 
the competing consolidator from subsequently filing a new Form CC that 
attempted to address any disclosure deficiencies or other issues that 
caused the initial Form CC to be declared ineffective.
    The Commission requests comment on proposed Rule 614(a)(1), which 
establishes filing requirements for an initial Form CC and a Commission 
review period for determining whether a filed initial Form CC should be 
declared ineffective. In particular, the Commission solicits comment on 
the following:
    84. Do commenters believe that the proposed electronic filing 
requirement is appropriate? Are there methods other than EFFS that 
would be appropriate? If so, please describe. Is EFFS an efficient 
system for filing proposed Form CC? Would another system be more 
efficient? If so, please specify and describe the rationale for using a 
different system.
    85. Should the Commission adopt the proposal that an initial Form 
CC will become effective by operation of rule without the Commission 
issuing an order declaring effective the initial Form CC? Do commenters 
believe that publishing an initial Form CC on the Commission's website, 
without a Commission order declaring an initial Form CC effective, 
would provide sufficient notice that an initial Form CC has become 
effective? Why or why not? Please support your arguments.
    86. Should the Commission require the existing exclusive SIPs to 
file an initial Form CC before they may become competing consolidators 
if they decide to act as competing consolidators? Why or why not? 
Please support your arguments.
    87. Do commenters believe that the process to declare a Form CC 
ineffective is appropriate? Why or why not?
    88. Do commenters believe that an SRO seeking to operate a 
competing consolidator would establish the competing consolidator 
within the SRO or in a separate affiliated entity? What do commenters 
believe would be the advantages and disadvantages of each form of 
operation? Do commenters believe that an SRO competing consolidator 
would have any advantages over a competing consolidator registered 
pursuant to proposed Rules 614(a)-(c) and proposed Form CC?
    89. If an SRO decides to act as a competing consolidator, should it 
be required to file a specific notice of its intent to operate as a 
competing consolidator in addition to, or in lieu of, a Form 19b-4 with 
the Commission? Would a Form 19b-4 filing by itself provide sufficient 
notice that an SRO intends to act as a competing consolidator? Please 
explain.
    The Commission is proposing Rule 614(a)(2) to provide the 
requirements for amending an effective Form CC. Under proposed Rule 
614(b)(2)(iii), the Commission will make public any Form CC Amendment, 
as described below, no later than 30 calendar days from the date of its 
filing with the Commission. Proposed Form CC is similar to Form SIP and 
the information required to be filed on proposed Form CC is designed to 
enable market participants to make informed decisions when selecting a 
competing consolidator and to facilitate Commission oversight of 
competing consolidators. As described more fully below,\543\ proposed 
Form CC would require information concerning, among other things: The 
legal name and legal status of the competing consolidator; the owners, 
directors, officers, and governors of the competing consolidator, or 
persons performing similar functions; whether the competing 
consolidator is a broker-dealer or an affiliate of a broker-dealer and 
a description of the organizational structure of the competing 
consolidator; contact information for an employee of the competing 
consolidator prepared to respond to questions regarding Form CC; a 
description of each consolidated market data service or function, 
including connectivity and delivery options for subscribers, and a 
description of all procedures utilized for the collection, processing, 
distribution, publication and retention of information with respect to 
quotations for, and transactions in, securities; a description of all 
market data products with respect to consolidated data, or a subset 
thereof, that the competing consolidator provides to subscribers; a 
description of fees and charges for use of the competing consolidator 
with respect to consolidated market data, including the types, range, 
and structure of the competing consolidator's fees and differentiation 
among the types of subscribers; a description of any co-location and 
related services, the terms and conditions for co-location, 
connectivity, and related services, including connectivity and 
throughput options offered, and a description of any other means 
besides co-location and related services to increase the speed of 
communication, including a summary of the terms and conditions for its 
use; and a narrative description, or the functional specifications, of 
each consolidated market data service or function, including 
connectivity and delivery options for the subscribers.
---------------------------------------------------------------------------

    \543\ See infra Section IV.B.2(e)(iii).
---------------------------------------------------------------------------

    The Commission is proposing Rule 614(a)(2)(i) to require a 
competing consolidator to amend an effective Form CC in accordance with 
the instructions therein: (i) Prior to the date of implementation of a 
material change to the pricing, connectivity, or products offered; and 
(ii) no later than 30 calendar days after the end of each calendar year 
to correct information, whether material or immaterial, that has become 
inaccurate or incomplete for any reason (``Annual Report''). The 
Commission preliminarily believes that a change to a competing 
consolidator's pricing, connectivity, or products offered would be 
material if there is a substantial likelihood that a reasonable market 
participant would consider the change important when evaluating the 
competing consolidator as a provider of market data.\544\
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    \544\ See Securities Exchange Act Release No. 833633 (July 18, 
2018), 83 FR 38768 (Aug. 7, 2018) (Regulation of NMS Stock 
Alternative Trading Systems) (stating that a change to the 
operations of an NMS Stock ATS, or the disclosures regarding the 
activities of the broker-dealer operator of the NMS Stock ATS and 
its affiliates, would be material if there is a substantial 
likelihood that a reasonable market participant would consider the 
change important when evaluating the NMS Stock ATS as a potential 
trading venue).

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[[Page 16781]]

    The Commission preliminarily believes that the proposal to amend an 
effective Form CC prior to implementing a Material Amendment would 
provide market participants with information concerning changes to 
significant aspects of the competing consolidator's services, which 
would assist market participants in evaluating, or re-evaluating, the 
competing consolidator as a provider of market data. The Commission 
preliminarily believes that requiring a competing consolidator to amend 
an effective Form CC no later than 30 calendar days after the end of 
each calendar year to correct any other information that has become 
inaccurate or incomplete for any reason would help to ensure that 
market participants have accurate and current information regarding 
competing consolidators. The Commission preliminarily believes that 
providing a mechanism for competing consolidators to disclose changes 
to their operations or to update information that does not constitute a 
Material Amendment (e.g., a change in the organizational structure of 
the competing consolidator, its officers or directors, or its 
affiliated entities) no later than 30 calendar days after the end of 
each calendar year would tailor the reporting burden on competing 
consolidators to the degree of significance of the change in a manner 
that does not compromise the ability of market participants to obtain 
information about the competing consolidator's operations.
    The Commission believes that market participants would use 
information regarding a competing consolidator's organization, 
operational capability, market data products, fees, and co-location and 
related services to determine whether to subscribe, or continue 
subscribing, to a competing consolidator. In addition, this information 
would assist market participants in evaluating which products and 
services of the competing consolidator would be most useful to them. 
The information in proposed Form CC is also designed to ensure that the 
Commission has specified information regarding entities acting as 
competing consolidators, to facilitate the Commission's oversight of 
competing consolidators and help to ensure the resiliency of a 
competing consolidator's systems. Given these intended uses, the 
Commission believes that it is important for a competing consolidator 
to maintain an accurate, current, and complete Form CC.
    The Commission requests comment on proposed Rule 614(a)(2), which 
establishes filing requirements for Form CC Amendments. In particular, 
the Commission solicits comment on the following:
    90. In addition to material changes to a competing consolidator's 
pricing, connectivity, or products, what should be a Material 
Amendment?
    91. Do commenters believe that a competing consolidator should be 
required to file a Material Amendment within a specified time prior to 
implementing the change that constitutes a Material Amendment? Why or 
why not? Please support your arguments. Is 30 days an appropriate 
amount of time for a Material Amendment to be filed?
    92. Do commenters believe that a competing consolidator should be 
required to file an Annual Report? Why or why not? Proposed Rule 
614(a)(3) would require a competing consolidator to provide notice of 
its cessation of operations on Form CC at least 30 business days before 
the date the competing consolidator ceases to operate as a competing 
consolidator. The notice of cessation would cause the Form CC to become 
ineffective on the date designated by the competing consolidator. This 
requirement would provide notice to the public and the Commission that 
the competing consolidator intends to cease operations. The Commission 
preliminarily believes that this notice would provide market 
participants with time to find and select an alternative provider of 
market data.
    The Commission requests comment on proposed Rule 614(a)(3), which 
establishes filing requirements for a Form CC notice of cessation. In 
particular, the Commission solicits comment on the following:
    93. Should the Commission require a competing consolidator to give 
notice that it intends to cease operations 30 business days or more 
before ceasing operations as a competing consolidator? If not, why not? 
Is 30 business days an appropriate time for providing notice of an 
intention to cease operations? If not, what time period would be 
appropriate?
    In proposed Rule 614(b), the Commission is proposing to make public 
all Form CC reports filed by competing consolidators and other 
information. Under proposed Rule 614(b)(1), every Form CC filed 
pursuant to Rule 304 shall constitute a ``report'' within the meaning 
of Sections 11A, 17(a), 18(a), and 32(a), and any other applicable 
provisions of the Exchange Act. Because proposed Form CC is a report 
that is required to be filed under the Exchange Act, it would be 
unlawful for any person to willfully or knowingly make, or cause to be 
made, a false or misleading statement with respect to any material fact 
in Form CC. Under proposed Rule 614(b)(2), the Commission would make 
public via posting on the Commission's website each: (i) Effective 
initial Form CC; (ii) order of ineffective Form CC; (iii) filed Form CC 
Amendment; and (iv) notice of cessation. Under the proposed rule, the 
Commission would publish each Form CC Material Amendment and Annual 
Report on its website no later than 30 days after the competing 
consolidator filed the amendment.
    The Commission preliminarily believes that making each Form CC 
filing public via public posting on the Commission's website would 
provide market participants with important information about the 
operations of a competing consolidator and facilitate the Commission's 
oversight of competing consolidators. The Commission preliminarily 
believes that this information should be easily accessible to all 
market participants so that market participants may better evaluate a 
competing consolidator as a potential provider of market data. 
Additionally, the Commission preliminarily believes that the 
publication of Material Amendments and Annual Reports would provide 
market participants with information necessary to evaluate, or re-
evaluate, a competing consolidator as a provider of market data, 
facilitate the Commission's oversight of competing consolidators, and 
help to ensure the continued resiliency of a competing consolidator's 
systems.
    The Commission requests comment on proposed Rule 614(b), which 
would establish public disclosure requirements for Form CC filings. In 
particular, the Commission solicits comment on the following:
    94. Do commenters believe that the Commission should post on its 
website each effective initial Form CC, each notice of ineffectiveness 
of a Form CC, each Form CC Amendment, and each notice of cessation? Why 
or why not? Please support your arguments. Do commenters believe a 
competitive marketplace would provide competing consolidators with 
incentives to disclose sufficient information in the normal course of 
business? Why or why not?

[[Page 16782]]

    The Commission preliminarily believes that it would be helpful for 
a competing consolidator to make market participants aware that the 
competing consolidator's filings are publicly posted on the 
Commission's website. Therefore, proposed Rule 614(c) would require 
each competing consolidator to post on its website a direct URL 
hyperlink to the Commission's website that contains the documents 
enumerated in proposed Rule 614(b)(2), which includes the competing 
consolidator's Form CC filings. The Commission preliminarily believes 
that this requirement would make it easier for market participants to 
review a competing consolidator's Form CC filings by providing an 
additional means for market participants to locate Form CC filings that 
are posted on the Commission's website.
    The Commission requests comment on proposed Rule 614(c), which 
would require each competing consolidator to provide a direct URL 
hyperlink to the Commission's website that contains the documents 
identified in proposed Rule 614(b)(2). In particular, the Commission 
solicits comment on the following:
    95. Do commenters believe that proposed Rule 614(c) should require 
each competing consolidator to provide a direct URL hyperlink to the 
Commission's website that contains the documents identified in proposed 
Rule 614(b)(2). Why or why not? Please support your arguments.
    Under the proposed decentralized consolidation model, competing 
consolidators would be required to perform many of the obligations 
currently performed by the existing exclusive SIPs. Proposed Rule 
614(d) establishes the responsibilities applicable to competing 
consolidators, which also includes the disclosure of information that 
would facilitate the Commission's oversight of competing consolidators 
and assist market participants in choosing and evaluating competing 
consolidators. Proposed Rule 614(d)(1) would require each competing 
consolidator to collect from each national securities exchange and 
national securities association, either directly or indirectly, the 
information with respect to quotations for and transactions in NMS 
stocks as provided in Rule 603(b), which would include all data 
necessary to generate the proposed consolidated market data. Proposed 
Rule 614(d)(2) would require each competing consolidator to calculate 
and generate consolidated market data, as defined in proposed Rule 
600(b)(16), from the information collected in proposed Rule 614(d)(1). 
Proposed Rule 614(d)(3) would require competing consolidators to make 
the proposed consolidated market data available to subscribers on a 
consolidated basis and on terms that are not unreasonably 
discriminatory, with the timestamps required by proposed Rule 614(d)(4) 
and Rule 614(e)(1)(ii), as discussed below.
    As noted above, competing consolidators would be required under 
proposed Rule 614(d)(2) to calculate and generate proposed consolidated 
market data and make proposed consolidated market data available to 
subscribers. Accordingly, all competing consolidators would be required 
to develop a consolidated market data product that contains all of the 
data elements provided under the proposed definition of consolidated 
market data. In addition, competing consolidators could develop other 
market data products that contain only a subset of consolidated market 
data elements (e.g., a TOB product) and could develop market data 
products that contain elements that go beyond the elements required 
under the proposed definition of consolidated market data (e.g., a full 
DOB product). The Commission recognizes that market participants have 
varying needs with respect to market data, and the proposed rules would 
permit a competing consolidator to offer additional market data 
products to meet these needs so long as the competing consolidator 
complies with proposed Rules 614(d)(2) and (d)(3) by providing a 
consolidated market data product.\545\
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    \545\ See supra Section III.A.
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    The Commission preliminarily believes that the proposed provisions 
are both necessary and appropriate because they reflect the main 
obligations of competing consolidators, which are to collect, 
calculate, and disseminate consolidated market data, as proposed. In 
addition, the use of a competing consolidator at a specific data center 
would likely be more accurate and useful in assessing the trading 
activity of a trading participant in that same data center. As 
proposed, competing consolidators would be the only entities providing 
proposed consolidated market data to market participants. Accordingly, 
the terms by which they provide proposed consolidated market data to 
their subscribers must not be unreasonably discriminatory.\546\
---------------------------------------------------------------------------

    \546\ See 15 U.S.C. 78k-1(c)(1)(D).
---------------------------------------------------------------------------

    The Commission requests comment on proposed Rules 614(d)(1)-(3). In 
particular, the Commission solicits comment on the following:
    96. Do these provisions reflect the main obligations of competing 
consolidators? Should there be any other obligations?
    97. Competing consolidators would be required to generate proposed 
consolidated market data, which would include the calculation of an 
NBBO consistent with the process outlined in the definition of NBBO in 
Rule 600(b)(42). Do commenters believe that the definition of NBBO 
would ensure the calculation of consistent NBBOs by competing 
consolidators?
    98. Do commenters believe that competing consolidators should be 
required to develop a consolidated market data product that contains 
all of the data elements provided under the proposed definition of 
consolidated market data? Why or why not? Could there be some competing 
consolidators that only offer a subset of the proposed consolidated 
market data? Please explain.
    Proposed Rule 614(d)(4) would require each competing consolidator 
to timestamp the information collected in proposed Rule 614(d)(1): (i) 
Upon receipt from each national securities exchange and national 
securities association at the exchange's or association's data center; 
(ii) upon receipt of such information at its aggregation mechanism; and 
(iii) upon dissemination of consolidated market data to customers. The 
Commission understands that the existing SIPs similarly timestamp 
information in accordance with proposed Rule 614(d)(4)(i) and (iii). 
The Commission preliminarily believes that the proposed rule is 
appropriate because it would allow subscribers to ascertain a competing 
consolidator's realized latency (i.e., how quickly the competing 
consolidator can receive data from the exchanges, transmit that data 
between the exchange's data center and its aggregation center, and 
aggregate and disseminate proposed consolidated market data to 
subscribers). This information provides transparency that should help 
subscribers evaluate a potential competing consolidator or determine 
whether an existing competing consolidator continues to meet their 
needs.\547\
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    \547\ If a competing consolidator uses a vendor to transmit data 
between the SRO data center and the competing consolidator's data 
center, the competing consolidator retains responsibility for 
collecting all of the timestamps described in proposed Rule 
614(d)(4).
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    The Commission is also proposing several rules, described below, 
that would require public disclosure of metrics and other information 
concerning the performance and operations of a competing consolidator. 
The information that the Commission is

[[Page 16783]]

proposing that competing consolidators publish is based upon 
information that is currently produced by the CTA/CQ SIP and the Nasdaq 
UTP SIP, either for public or internal distribution.\548\ Because this 
information is useful to current users of the exclusive SIPs and 
participants of the Equity Data Plans, the Commission preliminarily 
believes that it should be made publicly available \549\ by competing 
consolidators. The Commission preliminarily believes that public 
disclosure and accessibility of this information would help market 
participants to evaluate the merits of a competing consolidator by 
providing transparency into the services and performance, and 
resiliency of each competing consolidator, and could also lower search 
costs for market participants and enhance competition. In addition, the 
Commission preliminarily believes that the public disclosure of this 
information--particularly the system availability and network delay 
statistics and data quality and system issues--would help to ensure 
that competing consolidators have a demonstrated ability to provide 
consolidated market data in a stable and resilient manner.
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    \548\ The exclusive SIPs currently publish to their respective 
websites monthly processor metrics that provide the following 
information: System availability, message rate and capacity 
statistics, and the following latency statistics from the point of 
receipt by the SIP to dissemination from the SIP: Average latency 
and 10th, 90th and 99th percentile latency. See CTA Metrics, 
available at https://www.ctaplan.com/metrics; UTP Metrics, available 
at https://www.utpplan.com/metrics. Additionally, the exclusive SIPs 
post on their websites any system alerts and the Nasdaq UTP Plan 
posts vendor alerts as well. See CTA Alerts, available at https://www.ctaplan.com/alerts; UTP-SIP System Alerts, available at https://www.utpplan.com/system_alerts; UTP Vendor Alerts, available at 
https://www.utpplan.com/vendor_alerts. Further, the exclusive SIPs 
publish on their websites charts detailing realized latency from the 
inception of a Participant matching engine event through the point 
of dissemination from the exclusive SIP. See CTA Latency Charts, 
available at https://www.ctaplan.com/latency-charts; UTP Realized 
Latency Charting, available at https://www.utpplan.com/latency_charts.
    \549\ Rule 600(b)(37) of Regulation NMS defines ``make publicly 
available'' as ``posting on an internet website that is free and 
readily accessible to the public, furnishing a written copy to 
customers on request without charge, and notifying customers at 
least annually in writing that a written copy will be furnished on 
request.'' See 17 CFR 242.600(b)(37).
---------------------------------------------------------------------------

    Proposed Rule 614(d)(5) would require each competing consolidator 
to publish prominently on its website, within 15 calendar days after 
the end of each month, certain performance metrics. All information 
posted pursuant to proposed Rule 614(d)(5) must be publicly posted in 
downloadable files and must remain free and accessible (without any 
encumbrances or restrictions) by the general public on the website for 
a period of not less than three years from the initial date of posting. 
The Commission preliminarily believes that the availability of this 
information on a website (without any encumbrances or restrictions) 
would assist market participants in comparing competing consolidators 
and evaluating their performance over time.\550\ In particular, 
proposed Rule 614(d)(5) would provide that the performance metrics 
include: (i) Capacity statistics (such as system tested capacity, 
system output capacity, total transaction capacity, and total 
transaction peak capacity); (ii) message rate and total statistics 
(such as peak output rates on the following bases: 1-millisecond, 10-
millisecond, 100-millisecond, 500-millisecond, 1-second, and 5-second); 
(iii) system availability statistics (for example, whether system up-
time has been 100% for the month and cumulative amount of outage time); 
(iv) network delay statistics (for example, today under a TCP-IP 
network, network delay statistics would include quote and trade zero 
window size events, quote and trade TCP retransmit events, and quote 
and trade message total); and (v) latency statistics (with distribution 
statistics up to the 99.99th percentile) for (1) when a national 
securities exchange or national securities association sends an inbound 
message to a competing consolidator network and when the competing 
consolidator network receives the inbound message; \551\ (2) when the 
competing consolidator network receives the inbound message and when 
the competing consolidator network sends the corresponding consolidated 
message to a subscriber; and (3) when a national securities exchange or 
national securities association sends an inbound message to a competing 
consolidator network and when the competing consolidator network sends 
the corresponding consolidated message to a subscriber.
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    \550\ A competing consolidator that ceases operations would not 
be required to maintain the information posted pursuant to proposed 
Rule 614(d)(5) after the competing consolidator files its notice of 
cessation and its Form CC becomes ineffective, as provided in 
proposed Rule 614(a)(3).
    \551\ The Commission believes that the SIPs do not currently 
produce this latency statistic.
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    Additionally, proposed Rule 614(d)(6) would require each competing 
consolidator to publish prominently on its website, within 15 calendar 
days after the end of each month, information on: (i) Data quality 
issues (such as delayed message publication, publication of duplicative 
messages, and message inaccuracies); (ii) system issues (such as 
processing, connectivity, and hardware problems); (iii) any clock 
synchronization protocol utilized; (iv) for the clocks used to generate 
the timestamps described in Rule 614(d)(4), clock drift averages and 
peaks and number of instances of clock drift greater than 100 
microseconds; \552\ and (v) vendor alerts (such as holiday reminders 
and testing dates). All information posted pursuant to proposed Rule 
614(d)(6) must be publicly posted and must remain free and accessible 
(without any encumbrances or restrictions) by the general public on the 
website for a period of not less than three years from the initial date 
of posting.
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    \552\ The Commission believes that the SIPs do not currently 
produce this information.
---------------------------------------------------------------------------

    The Commission requests comment on proposed Rules 614(d)(4)-(d)(6). 
In particular, the Commission solicits comment on the following:
    99. Do commenters believe that separate timestamps should be 
required as described in Rule 614(d)(4)? Are these the relevant 
instances for timestamps? Should any other timestamps be adopted? 
Should any of the proposed timestamps not be required?
    100. Do commenters believe that the information required to be 
published pursuant to proposed Rule 614(d)(5) and proposed Rule 
614(d)(6) is appropriate for competing consolidators? Should any 
further information be published? Is any information proposed to be 
published unnecessary?
    101. Do commenters believe that the frequency of publication of the 
information required to be published pursuant to proposed Rule 
614(d)(5) and proposed Rule 614(d)(6) is sufficient? Is it too onerous?
    102. Do commenters believe that requiring each competing 
consolidator to publish the data required by proposed Rule 614(d)(5) 
and proposed Rule 614(d)(6) on its respective website is appropriate? 
Would commenters prefer that the competing consolidators instead file 
the data with the Commission for publication on the Commission's 
website?
    103. Do commenters believes that any of the information required to 
be published on the competing consolidator's website should not be 
required to be made publicly available? Please explain. If so, should 
this information be required to be provided to subscribers? Should any 
information proposed to be made publicly available not be made publicly 
available due to competitive concerns? If so, please

[[Page 16784]]

identify the information and provide an explanation.
    104. Do commenters believe a requirement for the competing 
consolidators to publish historical performance data should be included 
in proposed Rule 614(d)(5) and proposed Rule 614(d)(6)? If yes, for 
what time periods should historical data be required to be published?
    The Commission is proposing several rules that would require 
competing consolidators to provide and maintain information for 
regulatory purposes. Proposed Rule 614(d)(7) would require each 
competing consolidator to keep and preserve at least one copy of all 
documents, including all correspondence, memoranda, papers, books, 
notices, accounts, and such other records as shall be made or received 
by it in the course of its business as such and in the conduct of its 
business.\553\ The proposed rule would require competing consolidators 
to keep these documents for a period of no less than five years, the 
first two years in an easily accessible place. Proposed Rule 614(d)(8) 
would require each competing consolidator to, upon request of any 
representative of the Commission, promptly furnish to the possession of 
such representative copies of any documents required to be kept and 
preserved by it.\554\ These requirements would facilitate the 
Commission's oversight of competing consolidators and the national 
market system.
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    \553\ See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 
78q(a)(1).
    \554\ In this context, ``promptly'' or ``prompt'' means making 
reasonable efforts to produce records that are requested by the 
staff during an examination without delay. The Commission believes 
that in many cases a competing consolidator could, and therefore 
will be required to, furnish records immediately or within a few 
hours of a request. The Commission expects that only in unusual 
circumstances would a competing consolidator be permitted to delay 
furnishing records for more than 24 hours. Accord Regulation 
Crowdfunding, Securities Act Release No. 9974, Securities Exchange 
Act Release No. 76324 (Oct. 30, 2015), 80 FR 71387, 71473 n. 1122 
(Nov. 15, 2015) (similarly interpreting the term ``promptly'' in the 
context of Regulation Crowdfunding Rule 404(e)); Security Based Swap 
Data Repository Registration, Duties, and Core Principles, 
Securities Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR 
14438, 14500, n. 846 (March 19, 2015) (similarly interpreting the 
term ``promptly'' in the context of Exchange Act Rule 13n-7(b)(3)); 
Registration of Municipal Advisors, Securities Exchange Act Release 
No. 70462 (Sept. 20, 2013), 78 FR 67468, 67578-67579 n. 1347 (Nov. 
12, 2013) (similarly interpreting the term ``prompt'' in the context 
of Exchange Act Rule 15Ba1-8(d)).
---------------------------------------------------------------------------

    The Commission requests comment on proposed Rules 614(d)(7) and 
(d)(8). In particular, the Commission solicits comment on the 
following:
    105. Do commenters believe that the documents required to be kept 
and preserved by proposed Rule 614(d)(7) are appropriate for competing 
consolidators? If not, please explain. Are there any other documents 
that should be kept and preserved by competing consolidators?
    106. Do commenters believe that the recordkeeping time periods 
required by proposed Rule 614(d)(7) are appropriate for competing 
consolidators? If not, what would be more appropriate recordkeeping 
time periods?
    107. Do commenters believe that proposed Rule 614(d)(8), which 
requires competing consolidators to provide copies of any documents 
required to be kept and preserved to any representative of the 
Commission upon request, is appropriate for competing consolidators? If 
not, please explain.
    The Commission is proposing to define ``business day'' for purposes 
of proposed Rule 614 to comport with provisions contained in Rule 19b-4 
and to specify the conditions under which filings required pursuant to 
Rule 614 are deemed to have been made on a particular business day. 
Specifically, the Commission proposes to define ``business day'' in the 
same manner in which it is defined in Rule 19b-4(b)(2).\555\ The 
Commission preliminarily believes that these provisions providing a 
date-of-filings standard would facilitate the ability of competing 
consolidators to comply with the requirements of Rule 614 and 
facilitate the ability of the Commission to effectively receive, 
review, and make public the filings required under proposed Rule 614.
---------------------------------------------------------------------------

    \555\ See Rule 19b-4(b)(2), 17 CFR 240.19b-4(b)(2).
---------------------------------------------------------------------------

    The Commission requests comment on proposed Rules 614(a)(4)(i) and 
(a)(4)(ii). In particular, the Commission solicits comment on the 
following:
    108. Do commenters believe that the definition of business day in 
proposed Rule 614(a)(4)(i) is appropriate? Why or why not? Would any 
alternative definition of business day be preferable? Please explain.
    109. Do commenters believe that the standards set forth in proposed 
Rule 614(a)(4)(ii) regarding when a filing or publication requirement 
is deemed to have occurred on a particular business day are 
appropriate? Why or why not? Would any alternative standards be 
preferable? Please explain.
(iii) Proposed New Form CC
    Proposed new Form CC includes a set of instructions for its 
completion and submission. These instructions are attached to this 
release, together with proposed Form CC. Proposed Form CC would require 
competing consolidators\556\ to provide information and/or reports in 
narrative form by attaching specified exhibits. The proposed form would 
require a competing consolidator to indicate the purpose for which it 
is filing the form (i.e., initial report, material amendment, annual 
amendment, or notice of cessation), and to provide information in four 
categories: (1) General information, along with contact information; 
(2) business organization; (3) operational capability; and (4) services 
and fees. The Commission preliminarily believes that it is necessary to 
obtain the information requested in proposed Form CC to enable the 
Commission to determine whether to declare a Form CC ineffective. 
Specifically, the Commission believes that the requested information 
would assist the Commission in understanding the competing 
consolidator's overall business structure, technological reliability, 
and services offered. In addition, Form CC would help to provide for 
consistent disclosures among competing consolidators.
---------------------------------------------------------------------------

    \556\ As explained above, only non-exclusive SIP competing 
consolidators, and not SRO competing consolidators, would be 
required to register on Form CC.
---------------------------------------------------------------------------

    General Information: Proposed Form CC would require a competing 
consolidator to provide its legal name and ``DBA'' (doing business as), 
if applicable, its address, website URL, legal status (e.g., 
corporation, partnership, and sole proprietorship), and, except in the 
case of a sole proprietorship, the date of formation and state or 
country in which it was formed. The Commission preliminarily believes 
that this basic information is necessary for the Commission to evaluate 
a competing consolidator. Proposed Form CC also would require the 
competing consolidator to indicate (1) whether it is registered as a 
broker-dealer or affiliated with a registered broker-dealer and (2) 
whether it is a successor to a previously registered competing 
consolidator and, if so, the date of succession and the name and 
address of the predecessor registrant. The Commission preliminarily 
believes that this would provide basic identifying information about 
the competing consolidator and assist the Commission in its review of 
Form CC.
    Business Organization: Proposed Form CC would require each 
competing consolidator to provide information regarding its business 
organization, including: (1) In Exhibit A, information regarding any 
person who owns 10 percent or more of the competing

[[Page 16785]]

consolidator's stock or who, either directly or indirectly, through 
agreement or otherwise, in any other manner, may control or direct the 
competing consolidator's management or policies, including the full 
name and title of any such person and a copy of the agreement, or if 
there is no written agreement, a description of the agreement or basis 
upon which such person may exercise such control or direction; (2) in 
Exhibit B, a list of the officers, directors, governors, or persons 
performing similar functions of the competing consolidator; (3) in 
Exhibit C, a narrative or graphic description of the competing 
consolidator's organizational structure; and (4) in Exhibit D, a list 
of all affiliates of the competing consolidator and the general nature 
of the affiliations. The Commission preliminarily believes that 
obtaining this information would assist the Commission in understanding 
the competing consolidator's overall business structure, governance 
arrangements, and operations, all of which would assist the Commission 
in its review of Form CC. If the competing consolidator is a broker-
dealer, or is affiliated with a broker-dealer, proposed Form CC would 
permit the competing consolidator to attach its, or its affiliate's, 
Schedule A of Form BD, relating to direct owners and executive 
officers, and Schedule B of Form BD, relating to indirect owners. 
Alternatively, in lieu of filing Exhibits A and B to proposed Form CC, 
or providing Schedules A and B of Form BD, proposed Form CC would 
permit a competing consolidator to provide a URL address where the 
information requested under Exhibits A and B to proposed Form CC are 
available. The Commission preliminarily believes that this information 
would help the Commission and market participants understand the 
persons and entities that directly and indirectly own the broker-
dealer, thereby enabling the Commission and market participants to 
better understand potential conflicts of interest that may arise for a 
competing consolidator that is a broker-dealer or is affiliated with a 
broker-dealer.
    Operational Capability: Proposed Form CC would require each 
competing consolidator to provide a description of each proposed 
consolidated market data service or function, including connectivity 
and delivery options for subscribers, and a description of all 
procedures utilized for the collection, processing, distribution, 
publication, and retention of information with respect to quotations 
for, and transactions in, securities. The Commission further believes, 
preliminarily, that this information could assist the Commission in 
overseeing competing consolidators and assist market participants in 
assessing whether to become a subscriber of a certain competing 
consolidator. Competing consolidators could serve an important role in 
the national market system by calculating and generating consolidated 
market data, as proposed, and, accordingly, it is important for the 
competing consolidator to provide the requested information relating to 
its operational capability.
    Services and Fees: Proposed Form CC would further require a 
competing consolidator to provide information regarding access to its 
competing consolidator services, including: (1) A description of all 
market data products with respect to proposed consolidated market data 
or any subset of proposed consolidated market data that are provided to 
subscribers; (2) a description of any fees or charges for use of the 
competing consolidator with respect to proposed consolidated market 
data or any subset of proposed consolidated market data, including the 
types of fees (e.g., subscription and connectivity), the structure of 
the fee (e.g., fixed and variable), variables that affect the fees 
(e.g., data center costs, aggregation costs, and transmission costs), 
pricing differentiation among the types of subscribers, and range of 
fees (high and low); (3) a description of any co-location, 
connectivity, and related services, and the terms and conditions for 
co-location and related services, including connectivity and throughput 
options offered; and (4) a description of any other means besides co-
location and related services to increase the speed of communication, 
including a summary of the terms and conditions for its use. The 
Commission preliminarily believes that this information would assist 
market participants in determining whether to become a subscriber of a 
competing consolidator by requiring the availability to all market 
participants of information regarding the services offered by the 
competing consolidator and the fees it charges for services and 
proposed consolidated market data. The availability of this information 
would also help to assure that all subscribers and potential 
subscribers have the same information about the services that the 
competing consolidator offers.
    Contact Information: In addition to the foregoing, proposed Form CC 
would require a competing consolidator to provide Commission staff with 
point of contact information for a person(s) prepared to respond to 
questions regarding Form CC, including the name, title, telephone 
number, and email address of such person. Proposed Form CC also would 
require an electronic signature to help ensure the authenticity of the 
Form CC submission. The Commission preliminarily believes these 
proposed requirements would expedite communications between Commission 
staff and a competing consolidator and help to ensure that only 
personnel authorized by the competing consolidator are submitting 
required filings and responding to questions from Commission staff 
regarding Form CC.
    The Commission requests comment on proposed Form CC. In particular, 
the Commission solicits comment on the following:
    110. Are the instructions in proposed Form CC sufficiently clear? 
If not, identify any instructions that should be clarified, and, if 
possible, offer alternatives.
    111. Should the Commission implement an electronic filing system 
for receipt of Form CC, and, if so, what particular features should be 
incorporated into the system? Are there any burdens associated with the 
electronic filing of proposed Form CC that the Commission should 
consider?
    112. Is the requested information relating to a competing 
consolidator's operational capability appropriate? If not, identify any 
items that are not appropriate, explain why, and, if possible, offer 
alternatives.
    113. Is the requested information relating to access to a competing 
consolidator's services appropriate? If not, identify any items that 
are not appropriate, explain why, and, if possible, offer alternatives.
    114. Do commenters believe that competing consolidators will bundle 
their products and/or services? If so, should this be disclosed on Form 
CC?
    115. Should the Commission require any additional information on 
Form CC? If so, what information and why?
    116. Are there any items on proposed Form CC that the Commission 
should not request? If so, which items and why?
(f) Amendments to Regulation SCI
    The Commission adopted Regulation SCI in November 2014 to 
strengthen the technology infrastructure of the U.S. securities 
markets.\557\ Regulation SCI is designed to reduce the occurrence of 
systems issues in the U.S. securities markets, improve resiliency when 
systems problems occur, and enhance

[[Page 16786]]

the Commission's oversight of securities market technology 
infrastructure. The key market participants that are currently subject 
to Regulation SCI are called ``SCI entities'' and include certain SROs 
(including stock and options exchanges, registered clearing agencies, 
FINRA and the Municipal Securities Regulatory Board) (``SCI SROs''); 
alternative trading systems that trade NMS and non-NMS stocks exceeding 
specified volume thresholds (``SCI ATSs''); the exclusive SIPs (``plan 
processors''); and certain exempt clearing agencies.\558\ Regulation 
SCI, among other things, requires these SCI entities to establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure that their key automated systems have levels of 
capacity, integrity, resiliency, availability, and security adequate to 
maintain their operational capability and promote the maintenance of 
fair and orderly markets, and that such systems operate in accordance 
with the Exchange Act and the rules and regulations thereunder and the 
entities' rules and governing documents, as applicable.\559\ Broadly 
speaking, Regulation SCI also requires SCI entities to take appropriate 
corrective action when systems issues occur; provide certain 
notifications and reports to the Commission regarding systems problems 
and systems changes; inform members and participants about systems 
issues; conduct business continuity and disaster recovery testing and 
penetration testing; conduct annual reviews of their automated systems; 
and make and keep certain books and records.\560\
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    \557\ See Regulation SCI Adopting Release, supra note 28, at 
72252-56 for a discussion of the background of Regulation SCI.
    \558\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000. Because 
self-aggregators would be broker-dealers, see infra Section IV.B.3, 
they would be subject to existing broker-dealer risk control and 
supervisory obligations. See, e.g., 17 CFR 240.15c3-5, FINRA Rule 
3110, FINRA Rule 4370, FINRA Rule 4380.
    \559\ See Rule 1001 of Regulation SCI, 17 CFR 242.1001, which is 
also discussed further below.
    \560\ See Rules 1002-1007 of Regulation SCI, 17 CFR 242.1001-
1007, which are also discussed further below.
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    Regulation SCI applies primarily to the systems of, or operated on 
behalf of, SCI entities that directly support any one of six key 
securities market functions--trading, clearance and settlement, order 
routing, market data, market regulation, and market surveillance (``SCI 
systems'').\561\ With respect to security, Regulation SCI also applies 
to systems that, if breached, would be reasonably likely to pose a 
security threat to SCI systems (``indirect SCI systems'').\562\ In 
addition, certain systems that raise concerns about single points of 
failure (defined as ``critical SCI systems'') are subject to certain 
heightened requirements.\563\
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    \561\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000.
    \562\ Id.
    \563\ Id. Subparagraph (1) of the definition of ``critical SCI 
systems'' in Rule 1000 of Regulation SCI specifically enumerates 
certain systems to be within its scope, including those that 
``directly support functionality relating to: (i) Clearance and 
settlement systems of clearing agencies; (ii) openings, reopenings, 
and closings on the primary listing market; (iii) trading halts;(iv) 
initial public offerings; (v) the provision of consolidated market 
data; or (vi) exclusively-listed securities . . .''.
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    When adopting Regulation SCI, the Commission included within the 
scope of Regulation SCI those entities ``that play a significant role 
in the U.S. securities markets and/or have the potential to impact 
investors, the overall market, or the trading of individual 
securities.'' \564\ The Commission identified by function the key 
market participants it believed were integral to ensuring the 
stability, integrity, and resiliency of securities market 
infrastructure.\565\ As discussed below, ``plan processors'' are 
currently among those entities that are subject to Regulation SCI. 
Under Regulation SCI, ``plan processors'' have the meaning set forth in 
Regulation NMS.\566\ Thus, currently, the exclusive SIPs, or plan 
processors of the Equity Data Plans and the OPRA Plan, are subject to 
Regulation SCI.\567\ The Commission included plan processors within the 
scope of Regulation SCI because the Commission believed that such 
entities, because they are exclusive processors and providers of key 
market data pursuant to a national market system plan, are central 
features of the national market system and serve an important role 
within the national market system in operating and maintaining computer 
and communications facilities for the receipt, processing, validating, 
and dissemination of quotation and/or last sale price information.\568\
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    \564\ See Regulation SCI Adopting Release, supra note 28, at 
72258.
    \565\ Id. at 72254.
    \566\ See Rule 600(b)(59) of Regulation NMS, 17 CFR 
242.600(b)(59).
    \567\ See also Regulation SCI Adopting Release, supra note 28, 
at 72270-71, n. 196 (discussing how the term ``plan processor'' 
applies to the CTA, CQ, Nasdaq UTP, and OPRA plans).
    \568\ See also id. at 72271. The Commission also stated how 
systems issues affecting SIPs highlighted their importance within 
the national market system. See id. at n. 199 (discussing the impact 
of two systems issues involving SIPs).
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    The Commission preliminarily believes that competing consolidators, 
because they would be sources of consolidated market data, even if not 
exclusive sources of such data, would similarly serve an important role 
in the national market system, and therefore should be subject to the 
requirements of Regulation SCI. When adopting Regulation SCI, the 
Commission explained that Regulation SCI would apply not only to 
exclusive providers of consolidated market data, but also to the market 
data systems of SCI SROs, stating, ``both consolidated and proprietary 
market data systems are widely used and relied upon by a broad array of 
market participants, including institutional investors, to make trading 
decisions, and [] if a consolidated or a proprietary market data feed 
became unavailable or otherwise unreliable, it could have a significant 
impact on the trading of the securities to which it pertains, and could 
interfere with the maintenance of fair and orderly markets.'' \569\ The 
Commission preliminarily believes that if a consolidated market data 
feed of a competing consolidator became unavailable or otherwise 
unreliable, it could have a significant impact on the trading of NMS 
stocks and/or the market participants subscribing to its data feeds, 
and could possibly interfere with the maintenance of fair and orderly 
markets. A systems issue could occur at a competing consolidator (e.g., 
a systems disruption that prevented the competing consolidator from 
disseminating consolidated market data to its subscribers, a systems 
intrusion that impacted the quality of the data being disseminated, or 
another cybersecurity incident, such that certain market participants 
or the securities markets broadly could be significantly impacted until 
such time that the issue was resolved at the competing consolidator, or 
the end user (or its market data vendor, if applicable) was able to 
implement any backup arrangements with an alternative competing 
consolidator. As detailed further below, the Commission is requesting 
comment on whether all of the obligations set forth in Regulation SCI 
should apply to competing consolidators, or whether only certain 
requirements should be imposed, such as those requiring written 
policies and procedures, notification of systems problems, business 
continuity and disaster recovery testing (including testing with 
participants/subscribers of a competing consolidator), and penetration 
testing.
---------------------------------------------------------------------------

    \569\ See Regulation SCI Adopting Release, supra note 28, at 
72275.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to revise the definition 
of ``critical SCI system,'' to take account of competing consolidators, 
which, as proposed, would not be exclusive providers of consolidated 
market data. Currently, subparagraph (1)(v) of the

[[Page 16787]]

definition of ``critical SCI systems'' includes those SCI systems of, 
or operated on behalf of, an SCI entity that directly support 
functionality relating to ``the provision of consolidated market 
data.'' The Commission is proposing to revise this subparagraph to 
apply to those systems that directly support functionality relating to 
``the provision of market data by a plan processor.'' The proposed 
revised language in subparagraph (1)(v) is intended to identify as 
critical SCI systems only those market data systems that perform an 
exclusive market data dissemination function pursuant to an NMS plan. 
Accordingly, the scope of ``critical SCI systems'' would still capture 
single points of failure within the national market system. Under the 
current consolidation model, because the exclusive SIPs represent such 
single points of failure, they are all subject to heightened 
requirements as ``critical SCI systems.'' However, because the 
competing consolidator model is designed to result in multiple viable 
sources of consolidated market data, and would not be initiated until a 
transition period was complete,\570\ the Commission preliminarily 
believes that including systems of such competing consolidators within 
the scope of ``critical SCI systems'' would not be necessary. With 
multiple competing consolidators operating in the national market 
system, the systems of competing consolidators would be subject to the 
standard (i.e., as SCI systems that are not critical SCI systems) 
requirements of Regulation SCI, whereas the proposed revised definition 
of ``critical SCI systems'' would address single point of failure 
concerns.
---------------------------------------------------------------------------

    \570\ See infra Section IV.B.6.
---------------------------------------------------------------------------

    Because the competing consolidator model would not apply with 
respect to trading in options, the definition of ``critical SCI 
systems'' must still account for the systems of OPRA's plan processor, 
whose systems would continue to be ``critical SCI systems.'' In 
addition, to avoid confusion with the term ``consolidated market 
data''--which is proposed to be defined to include (1) core data, (2) 
regulatory data, (3) administrative data, (4) exchange-specific program 
data, and (5) additional regulatory, administrative, or exchange-
specific program data elements defined as such pursuant to the 
effective national market system plan(s) required under Rule 603(b) 
\571\--the Commission is proposing to replace that phrase within the 
definition of ``critical SCI systems'' with ``market data.'' \572\
---------------------------------------------------------------------------

    \571\ See proposed Rule 600(b)(19) of Regulation NMS. See also 
supra Section III.B.
    \572\ See proposed amendment to Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------

    Thus, under this proposal, the definition of ``SCI entities'' would 
be expanded to include ``competing consolidators,'' which would be 
defined to have the same meaning as the definition of ``competing 
consolidators'' set forth in proposed Rule 600(b)(16) of Regulation 
NMS.\573\ Competing consolidators would be subject to the requirements 
of Regulation SCI, as described below.
---------------------------------------------------------------------------

    \573\ See proposed amendment to Rule 1000 of Regulation SCI. As 
discussed above, competing consolidators would not fall within the 
definition of ``plan processors'' under Regulation SCI. See supra 
notes 566-567 and accompanying text. In addition to revising Rule 
1000 of Regulation SCI to define ``competing consolidators'' and 
include them within the definition of ``SCI entity,'' corresponding 
changes would be made to Form SCI and the General Instructions to 
Form SCI to include references to ``competing consolidators.'' See 
infra note 595 and accompanying text (discussing Form SCI and Rule 
1006 of Regulation SCI).
---------------------------------------------------------------------------

    Rule 1001(a) of Regulation SCI requires SCI entities to have 
policies and procedures reasonably designed to ensure that their SCI 
systems and, for purposes of security standards, indirect SCI systems, 
have levels of capacity, integrity, resiliency, availability, and 
security adequate to maintain their operational capability and promote 
the maintenance of fair and orderly markets, and includes certain 
minimum requirements for those policies and procedures relating to 
capacity planning, stress tests, systems development and testing 
methodology, the identification of vulnerabilities, business continuity 
and disaster recovery plans (including geographic diversity and 
resumption goals), and monitoring.\574\ Of particular note for 
competing consolidators is Rule 1001(a)(2)(vi), which requires that an 
SCI entity's policies and procedures include standards ``that result in 
such systems being designed, developed, tested, maintained, operated, 
and surveilled in a manner that facilitates the successful collection, 
processing, and dissemination of market data.'' \575\ Rule 1001(a)(3) 
of Regulation SCI requires that SCI entities periodically review the 
effectiveness of these policies and procedures, and take prompt action 
to remedy any deficiencies.\576\ Rule 1001(a)(4) of Regulation SCI 
provides that, for purposes of the provisions of Rule 1001(a), an SCI 
entity's policies and procedures will be deemed to be reasonably 
designed if they are consistent with current SCI industry standards, 
which shall be comprised of information technology practices that are 
widely available to information technology professionals in the 
financial sector and issued by an authoritative body that is a U.S. 
governmental entity or agency, association of U.S. governmental 
entities or agencies, or widely recognized organization; \577\ however, 
Rule 1001(a)(4) of Regulation SCI also makes clear that compliance with 
such ``current SCI industry standards'' are not the exclusive means to 
comply with these requirements.
---------------------------------------------------------------------------

    \574\ Rule 1001(a) of Regulation SCI, 17 CFR 242.1001(a).
    \575\ Rule 1001(a)(2)(vi) of Regulation SCI, 17 CFR 
242.1001(a)(2)(vi).
    \576\ Rule 1001(a)(3) of Regulation SCI, 17 CFR 242.1001(a)(3).
    \577\ Rule 1001(a)(4) of Regulation SCI, 17 CFR 242.1001(a)(4). 
We note that concurrent with the Commission's adoption of Regulation 
SCI, Commission staff issued staff guidance on current SCI industry 
standards as referenced in Regulation SCI. The staff guidance listed 
examples of publications in nine domains describing processes, 
guidelines, frameworks, or standards an SCI entity could look to in 
developing reasonable policies and procedures to comply with Rule 
1001(a) of Regulation SCI. See ``Staff Guidance on Current SCI 
Industry Standards,'' November 19, 2014, available at: https://www.sec.gov/rules/final/2014/staff-guidance-current-sci-industry-standards.pdf. The domains included: Application controls; capacity 
planning; computer operations and production environment controls; 
contingency planning; information security and networking; audit; 
outsourcing; physical security; and systems development methodology.
---------------------------------------------------------------------------

    Rule 1001(b) of Regulation SCI requires that each SCI entity 
establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure that its SCI systems operate in a manner 
that complies with the Act and the rules and regulations thereunder and 
the entity's rules and governing documents, as applicable, and 
specifies certain minimum requirements for such policies and 
procedures.\578\ Rule 1001(b)(3) of Regulation SCI requires that SCI 
entities periodically review the effectiveness of these policies and 
procedures, and take prompt action to remedy any deficiencies.\579\ 
Rule 1001(b)(4) of Regulation SCI provides individuals with a safe 
harbor from liability under Rule 1001(b) if certain conditions are 
met.\580\
---------------------------------------------------------------------------

    \578\ Rule 1001(b)(1)-(2) of Regulation SCI, 17 CFR 
242.1001(b)(1)-(2).
    \579\ Rule 1001(b)(3) of Regulation SCI, 17 CFR 242.1001(b)(3).
    \580\ Rule 1001(b)(4) of Regulation SCI, 17 CFR 242.1001(b)(4).
---------------------------------------------------------------------------

    Rule 1001(c) of Regulation SCI requires SCI entities to establish, 
maintain, and enforce reasonably designed written policies and 
procedures that include the criteria for identifying responsible SCI 
personnel, the designation and documentation of responsible SCI 
personnel, and

[[Page 16788]]

escalation procedures to quickly inform responsible SCI personnel of 
potential SCI events.\581\ Rule 1000 of Regulation SCI defines 
``responsible SCI personnel'' to mean, ``for a particular SCI system or 
indirect SCI system impacted by an SCI event, such senior manager(s) of 
the SCI entity having responsibility for such system, and their 
designee(s).'' \582\ Rule 1000 also defines ``SCI event'' to mean an 
event at an SCI entity that constitutes a system disruption, a systems 
compliance issue, or a systems intrusion.\583\ Rule 1001(c)(2) of 
Regulation SCI requires that SCI entities periodically review the 
effectiveness of these policies and procedures, and take prompt action 
to remedy any deficiencies.\584\
---------------------------------------------------------------------------

    \581\ Rule 1001(c) of Regulation SCI, 17 CFR 242.1001(c).
    \582\ Rule 1000 of Regulation SCI, 17 CFR 242.1000.
    \583\ A ``systems disruption'' means an event in an SCI entity's 
SCI systems that disrupts, or significantly degrades, the normal 
operation of an SCI system. A ``systems compliance issue'' means 
``an event at an SCI entity that has caused any SCI system of such 
entity to operate in a manner that does not comply with the Act and 
the rules and regulations thereunder or the entity's rules or 
governing documents, as applicable.'' A ``systems intrusion'' means 
any unauthorized entry into the SCI systems or indirect SCI systems 
of an SCI entity.'' See Rule 1000 of Regulation SCI, 17 CFR 
242.1000.
    \584\ Rule 1001(c)(2) of Regulation SCI, 17 CFR 242.1001(c)(2).
---------------------------------------------------------------------------

    Under Rule 1002 of Regulation SCI, SCI entities have certain 
obligations related to SCI events. Specifically, when any responsible 
SCI personnel has a reasonable basis to conclude that an SCI event has 
occurred, an SCI entity must begin to take appropriate corrective 
action which must include, at a minimum, mitigating potential harm to 
investors and market integrity resulting from the SCI event and 
devoting adequate resources to remedy the SCI event as soon as 
reasonably practicable.\585\ Rule 1002(b) provides the framework for 
notifying the Commission of SCI events including, among other things, 
to: Immediately notify the Commission of the event; provide a written 
notification within 24 hours that includes a description of the SCI 
event and the system(s) affected, with other information required to 
the extent available at the time; provide regular updates regarding the 
SCI event until the event is resolved; and submit a final detailed 
written report regarding the SCI event.\586\ Rule 1002(c) of Regulation 
SCI also requires that SCI entities disseminate information to their 
members or participants regarding SCI events.\587\ These information 
dissemination requirements are scaled based on the nature and severity 
of an event. Specifically, for ``major SCI events,'' SCI entities are 
required to promptly disseminate certain information about the event to 
all of its members or participants. For SCI events that are not ``major 
SCI events,'' SCI entities must, promptly after any responsible SCI 
personnel has a reasonable basis to conclude that an SCI has occurred, 
disseminate certain information to those SCI entity members and 
participants reasonably estimated to have been affected by the event. 
In addition, dissemination of information to members or participants is 
permitted to be delayed for systems intrusions if such dissemination 
would likely compromise the security of the SCI entity's systems or an 
investigation of the intrusion.\588\
---------------------------------------------------------------------------

    \585\ See Rule 1002(a) of Regulation SCI, 17 CFR 242.1002(a).
    \586\ See Rule 1002(b) of Regulation SCI, 17 CFR 242.1002(b). 
For any SCI event that ``has had, or the SCI entity reasonably 
estimates would have, no or a de minimis impact on the SCI entity's 
operations or on market participants,'' Rule 1002(b)(5) provides an 
exception to the general Commission notification requirements under 
Rule 1002(b). Instead, an SCI entity must make, keep, and preserve 
records relating to all such SCI events, and submit a quarterly 
report to the Commission regarding any such events that are systems 
disruptions or systems intrusions.
    \587\ See Rule 1002(c) of Regulation SCI, 17 CFR 242.1002(c).
    \588\ See Rule 1002(c)(2) of Regulation SCI, 17 CFR 
242.1002(c)(2). In addition, the information dissemination 
requirements of Rule 1002(c) do not apply to SCI events to the 
extent they relate to market regulation or market surveillance 
systems, or to any SCI event that has had, or the SCI entity 
reasonably estimates would have, no or a de minimis impact on the 
SCI entity's operations or on market participants. See Rule 
1002(c)(4) of Regulation SCI, 17 CFR 242.1002(c)(4).
---------------------------------------------------------------------------

    Rule 1003(a) of Regulation SCI requires SCI entities to provide 
reports to the Commission relating to system changes, including a 
report each quarter describing completed, ongoing, and planned material 
changes to their SCI systems and the security of indirect SCI systems, 
during the prior, current, and subsequent calendar quarters, including 
the dates or expected dates of commencement and completion.\589\ Rule 
1003(b) of Regulation SCI also requires that an SCI entity conduct an 
``SCI review'' not less than once each calendar year.\590\ ``SCI 
review'' is defined in Rule 1000 of Regulation SCI to mean a review, 
following established procedures and standards, that is performed by 
objective personnel having appropriate experience to conduct reviews of 
SCI systems and indirect SCI systems, and which review contains: A risk 
assessment with respect to such systems of an SCI entity; and an 
assessment of internal control design and effectiveness of its SCI 
systems and indirect SCI systems to include logical and physical 
security controls, development processes, and information technology 
governance, consistent with industry standards.\591\ Rule 1003(b)(2)-
(3) SCI entities are also required to submit a report of the SCI review 
to their senior management, and must also submit the report and any 
response by senior management to the report, to their board of 
directors as well as the Commission.\592\
---------------------------------------------------------------------------

    \589\ See Rule 1003(a) of Regulation SCI, 17 CFR 242.1003(a).
    \590\ See Rule 1003(b) of Regulation SCI, 17 CFR 242.1003(b).
    \591\ See Rule 1000 of Regulation SCI, 17 CFR 242.1000. In 
addition, Rule 1003(b)(1) of Regulation SCI states that penetration 
test reviews of an SCI entity's network, firewalls, and production 
systems must be conducted at a frequency of not less than once every 
three years, and assessments of SCI systems directly supporting 
market regulation or market surveillance must be conducted at a 
frequency based upon the risk assessment conducted as part of the 
SCI review, but in no case less than once every three years. See 
Rule 1003(b)(1)(i)-(ii) of Regulation SCI, 17 CFR 242.1003(b)(1)(i)-
(ii).
    \592\ See Rule 1003(b)(2)-(3) of Regulation SCI, 17 CFR 
242.1003(b)(2)-(3).
---------------------------------------------------------------------------

    Rule 1004 of Regulation SCI sets forth the requirements for testing 
an SCI entity's business continuity and disaster recovery plans with 
its members or participants. This rule requires that, with respect to 
an SCI entity's business continuity and disaster recovery plan, 
including its backup systems, each SCI entity shall: (a) Establish 
standards for the designation of those members or participants that the 
SCI entity reasonably determines are, taken as a whole, the minimum 
necessary for the maintenance of fair and orderly markets in the event 
of the activation of such plans; \593\ (b) designate members or 
participants pursuant to the standards established and require 
participation by such designated members or participants in scheduled 
functional and performance testing of the operation of such plans, in 
the manner and frequency specified by the SCI entity, provided that 
such frequency shall not be less than once every 12 months; and (c) 
coordinate the testing of such plans on an industry- or sector-wide 
basis with other SCI entities.
---------------------------------------------------------------------------

    \593\ See Rule 1004 of Regulation SCI, 17 CFR 242.1004. For a 
competing consolidator, its designated members or participants 
generally would include the national securities exchanges that 
receive its consolidated market data, as well as its other 
significant subscribers for such data (including, but not limited, 
to major market data vendors that widely redistribute such data).
---------------------------------------------------------------------------

    Rule 1005(b) of Regulation SCI relates to the recordkeeping 
requirements of competing consolidators related to compliance with 
Regulation SCI.\594\

[[Page 16789]]

Rule 1006 of Regulation SCI provides for certain requirements relating 
to the electronic filing, on Form SCI, of any notification, review, 
description, analysis, or report to the Commission required to be 
submitted under Regulation SCI.\595\ Finally, Rule 1007 of Regulation 
SCI contains requirements relating to a written undertaking when 
records required to be filed or kept by an SCI entity under Regulation 
SCI are prepared or maintained by a service bureau or other 
recordkeeping service on behalf of the SCI entity.\596\
---------------------------------------------------------------------------

    \594\ See Rule 1005 of Regulation SCI, 17 CFR 242.1005. Rule 
1005(a) relates to recordkeeping provisions for SCI SROs, whereas 
Rule 1005(b) relates to the recordkeeping provision for SCI entities 
other than SCI SROs.
    \595\ See Rule 1006 of Regulation SCI, 17 CFR 242.1006.
    \596\ See Rule 1007 of Regulation SCI, 17 CFR 242.1007.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed inclusion of 
competing consolidators in Regulation SCI and the related revisions to 
Rule 1000 of Regulation SCI. In particular, the Commission solicits 
comment on the following:
    117. Do commenters believe that Regulation SCI should apply to 
competing consolidators? If so, do commenters believe that the proposed 
revisions to Rule 1000 of Regulation SCI are appropriate? Why or why 
not? Is there a potential for a systems issue at a competing 
consolidator to have an adverse impact on the maintenance of fair and 
orderly markets? If so, what do commenters believe would be the most 
effective way to mitigate that potential?
    118. Do commenters believe that competing consolidators could play 
a significant role in the U.S. securities markets such that they should 
be defined as SCI entities? Why or why not? What do commenters believe 
are the risks related to subscribers associated with systems issues at 
a competing consolidator? What impact would a systems issue have on the 
trading of securities and the maintenance of fair and orderly markets? 
Do commenters believe that all requirements set forth in Regulation SCI 
should apply to competing consolidators? Why or why not?
    119. Unlike other types of SCI entities, ATSs are only subject to 
Regulation SCI if they meet certain volume thresholds set forth in the 
definition of ``SCI ATS.'' Do commenters similarly believe there is a 
threshold size, or a threshold for significant market share, at which 
Regulation SCI should apply to a competing consolidator? For example, 
the definition of SCI ATSs contains a two-pronged volume threshold test 
measured over a ``four out of six-month'' period to determine whether 
an alternative trading system is subject to Regulation SCI. Would a 
similar test be appropriate for competing consolidators? If so, what do 
commenters believe would be an appropriate measurement that should be 
used for such a test? For example, in the definition of SCI ATS, the 
NMS stock volume threshold test for inclusion of an alternative trading 
system in Regulation SCI is one percent (1%) or more of overall volume 
in NMS stocks during at least four of the preceding six calendar 
months. Would it, for example, be appropriate for the Commission to 
apply Regulation SCI to competing consolidators that had one percent 
(1%) or more of total subscribers of consolidated market data during at 
least four of the preceding six calendar months? Or, would a different 
threshold (such as five, ten, or twenty percent) be more appropriate? 
Why or why not? Please describe. Do commenters believe that another 
measurement (other than total subscribers of consolidated market data) 
be more appropriate? If so, what do commenters believe that measurement 
should be? Please describe.
    120. Do commenters believe that only certain provisions of 
Regulation SCI should apply to competing consolidators? For example, 
should competing consolidators only be subject to certain aspects of 
Regulation SCI, such as the policies and procedures required by Rule 
1001 of Regulation SCI; the requirement to provide notification of SCI 
events and to take corrective action as required by Rule 1002 of 
Regulation SCI; the requirement to conduct SCI reviews as required by 
Rule 1003 of Regulation SCI; the requirement to perform disaster 
recovery testing as required by Rule 1004 of Regulation SCI; the 
requirements related to recordkeeping, as required by Rule 1005 of 
Regulation SCI; the requirements relating to electronic filing on Form 
SCI pursuant to Rule 1006 of Regulation SCI; and the requirements 
relating to service bureaus, as required by Rule 1007 of Regulation 
SCI? If so, which provisions should apply? Do commenters believe that 
different or unique requirements should apply to the systems of 
competing consolidators? What should they be and why?
    121. In what instances, if at all, should the systems of competing 
consolidators be defined as ``critical SCI systems''? Please describe.
    122. Which subscribers or types of subscribers should competing 
consolidators consider as ``designated members or participants'' that 
should be required to participate in the annual mandatory business 
continuity and disaster recovery testing? Please describe.
    123. Do commenters believe that requiring competing consolidators 
to be defined as SCI entities would deter parties from registering as 
competing consolidators? Why or why not?
    124. Do commenters believe that competing consolidators should not 
be defined as SCI entities but should be required to comply with 
provisions comparable to provisions of Regulation SCI? Why or why not?
    125. If commenters believe that competing consolidators should not 
be defined as SCI entities but should be required to comply with 
provisions comparable to provisions of Regulation SCI, what provisions 
should apply? Should competing consolidators be required to have 
business continuity and disaster plans, to designate subscribers that 
the competing consolidator determines are necessary for the maintenance 
of fair and orderly markets in the event of the activation of such 
plans, to mandate such subscribers' participation in scheduled 
functional and performance testing of the operation of such plans not 
less than once every 12 months, and to coordinate testing of such plans 
on an industry- or sector-wide basis with SCI entities, or otherwise be 
required to participate in coordinated testing scheduled by SCI 
entities? Why or why not?
    126. Do commenters believe that existing proprietary market data 
aggregation firms that wish to register as competing consolidators 
would establish separate legal entities for that purpose? Why or why 
not?
3. Self-Aggregators
    Currently, some broker-dealers effectively act as self-aggregators 
by purchasing proprietary data products from the exchanges, 
consolidating that information (either independently or with the use of 
vendor services and/or hardware), and calculating the NBBO for their 
own use. Broker-dealers may self-aggregate to eliminate various forms 
of latency \597\ or to access the additional content provided by 
proprietary data feeds in a consolidated form. This self-aggregated 
consolidated data may be used for SORs, algorithmic trading systems, 
alternative trading systems (``ATSs''), visual display, or other uses. 
While broker-dealers raised concerns about the costs associated with 
proprietary data products, some have developed these self-aggregation 
solutions as a means to address the

[[Page 16790]]

latency and content issues that are present with the exclusive SIPs 
themselves.\598\ The Commission preliminarily believes that broker-
dealers should be permitted to continue to self-aggregate consolidated 
market data as proposed to be defined under the proposed decentralized 
consolidation model. The Commission is concerned that eliminating the 
ability of broker-dealers to self-aggregate proposed consolidated 
market data for their own use would be unnecessarily disruptive to the 
current market data infrastructure landscape.
---------------------------------------------------------------------------

    \597\ See supra Section IV.A for a discussion of geographic, 
aggregation, and transmission latencies.
    \598\ See, e.g., Roundtable Day One Transcript at 198-199 
(Joseph Wald, Clearpool) (``Clearpool and other broker-dealers are 
compelled to purchase exchanges' proprietary data feeds, both to 
provide competitive execution services to our clients and to meet 
our best execution obligations due to the content of the information 
contained in the proprietary data feeds as well as the latency 
differences between them, which are major and important 
considerations for brokers.'').
---------------------------------------------------------------------------

    Accordingly, the Commission proposes to amend Rule 600(b) to add a 
definition of a self-aggregator. The Commission proposes to define a 
self-aggregator as ``a broker or dealer that receives information with 
respect to quotations for and transactions in NMS stocks, including all 
data necessary to generate consolidated market data, and generates 
consolidated market data solely for internal use. A self-aggregator may 
not make consolidated market data, or any subset of consolidated market 
data, available to any other person.'' In particular, a self-aggregator 
would collect the NMS information necessary to generate proposed 
consolidated market data that it needs to trade for its own account or 
to execute transactions for its customers. A self-aggregator would 
generate the proposed consolidated market data that it needs for its 
business, such as calculating current protected bids and offers from 
each trading center for purposes of Rule 611 and the current best bids 
and offers from each trading center for achieving and analyzing best 
execution.\599\ The proposed definition would prohibit self-aggregators 
from disseminating proposed consolidated market data to any person, 
including a customer or any affiliated entity, as such action would not 
be for the internal use of a self-aggregator and would be akin to the 
actions of a competing consolidator, and thus would require 
registration as a competing consolidator.
---------------------------------------------------------------------------

    \599\ A self-aggregator also would receive from the primary 
listing exchanges regulatory data (as defined as proposed 
consolidated market data), which would be necessary for meeting 
regulatory obligations, such as monitoring Short Sale Circuit 
Breakers and LULD price bands. See supra Section III.D.
---------------------------------------------------------------------------

    Like competing consolidators, a self-aggregator would collect all 
information with respect to quotations for and transactions in NMS 
stocks directly from each SRO, but importantly, self-aggregators would 
not be permitted to re-distribute or re-disseminate proposed 
consolidated market data to any person, including to any affiliates or 
subsidiaries. A self-aggregator that re-distributed or re-disseminated 
proposed consolidated market data, or any subset of proposed 
consolidated market data, would be performing the functions of a 
competing consolidator and, accordingly, would be required to register 
as a competing consolidator. Self-aggregators would establish 
connectivity to the SROs directly or through the use of a service 
provider and would either use their own proprietary technology or that 
of a third party vendor to perform aggregation and any other functions 
necessary for generating proposed consolidated market data. A vendor 
providing hardware, software, and/or other services for the purposes of 
self-aggregation would not be a competing consolidator unless it 
collected and aggregated proposed consolidated market data in a 
standardized format within its own facility (e.g., not that of a 
broker-dealer customer) and resold that configuration of proposed 
consolidated market data to a customer.
    As discussed above, pursuant to Rule 603(b), self-aggregators would 
receive access from the SROs, either directly or via the use of a 
vendor, to the data necessary to generate proposed consolidated market 
data in the same manner and using same methods as other persons, 
including competing consolidators.\600\ A self-aggregator that limits 
its use of exchange data to the creation of proposed consolidated 
market data would be charged only for proposed consolidated market data 
pursuant to the effective national market system plan(s) fee 
schedules.\601\ A self-aggregator that uses an exchange's proprietary 
data (e.g., full depth of book data) could be charged separately for 
the proprietary data use pursuant to the individual exchange's fee 
schedule.\602\
---------------------------------------------------------------------------

    \600\ See supra Section IV.B.1.
    \601\ See infra Section IV.B.4 for a discussion of the effective 
national market system plan(s). This would apply to proposed 
consolidated market data provided through an exchange's proprietary 
data product.
    \602\ SRO fees for market data other than the proposed 
consolidated market data would be subject to the rule filing process 
pursuant to Section 19(b) and Rule 19b-4.
---------------------------------------------------------------------------

(a) Roundtable Discussion and Comments
    Roundtable participants discussed self-aggregation. One panelist 
described a variation of the self-aggregation alternative that he 
referred to as the ``one feed-one speed'' model.\603\ The panelist 
suggested that consolidated market data should be made available in a 
similar manner and using the same framework as the exchanges use to 
make available their direct proprietary data feeds.\604\
---------------------------------------------------------------------------

    \603\ See Roundtable Day Two Transcript at 27-29 (Adam Nunes, 
Hudson River Trading).
    \604\ Id. This panelist also published a note that described the 
ability of firms and vendors to receive data directly from the 
exchanges. See Adam Nunes, MMI Member Guest Editorial: Speed up the 
SIP, Modern Markets Initiative (Dec. 22, 2015), available at https://www.modernmarketsinitiative.org/archive/2018/11/14/mmi-member-guest-editorial-speed-up-the-sip. In this note, the panelist 
described a model in which (1) firms would order the SIP data as 
they do today, by contacting their vendor or the SIP administrator; 
(2) the firm/vendor connecting to the SIP would get a connection to 
each exchange to listen to their data where the data is produced 
(rather than getting the data from a central location); and (3) the 
firm would receive and process the data similarly to how it handles 
direct market data feeds.
---------------------------------------------------------------------------

    The Commission received one comment letter that supported 
consideration of a self-aggregation model. The commenter believed that 
this approach would further the principles of transparency and fairness 
and ``level the playing field for industry participants.'' \605\
---------------------------------------------------------------------------

    \605\ See Letter to Brent J. Fields, Secretary, Commission, from 
Kirsten Wegner, Chief Executive Officer, Modern Markets Initiative, 
5-6 (Oct. 18, 2018) (``Modern Markets Initiative Letter''). One 
commenter advocated that each exchange should provide a single data 
feed to market participants (instead of a SIP data feed and 
proprietary data feeds). The commenter said that a single data feed 
``would better serve market participants from the standpoint of 
equality and fairness.'' However, the commenter also noted that 
investors would benefit from competition among organizations able to 
operate as SIPs, either through a bidding process for a centralized 
SIP or the ability of multiple SIPs to operate (i.e., a competing 
consolidator model). See T. Rowe Price Letter at 3.
---------------------------------------------------------------------------

    In contrast, the Commission received one comment letter that 
expressed criticism of a self-aggregation model. The commenter urged 
against government intervention requiring all market participants to 
use the same connectivity and the same data, explaining that different 
customers need different products and that the government should not 
limit choices ``in this radical manner.'' \606\ The commenter also 
stated that adding multiple consolidators or competing SIPs to the 
model would magnify risks.\607\
---------------------------------------------------------------------------

    \606\ See Wittman Letter at 15.
    \607\ Id. at 16.

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[[Page 16791]]

(b) Commission Discussion
    The Commission preliminarily believes that the proposed 
decentralized consolidation model should allow broker-dealers to 
continue to self-aggregate by collecting and calculating consolidated 
market data, as proposed, solely for their internal use, in a manner 
that would allow access to proposed consolidated market data on fair 
and reasonable terms and without the inefficiencies and added latencies 
associated with the existing exclusive SIP model.
    The proposed decentralized consolidation model is designed to 
increase, rather than limit, market participants' choices with respect 
to data products and connectivity. Accordingly, the Commission 
preliminarily believes that broker-dealers should be able to choose to 
self-aggregate consolidated market data for their own internal purposes 
in a similar manner as they may do today with proprietary data. Under 
the proposed rules, competing consolidators and self-aggregators would 
be able to select the transmission services that meet the needs of 
their client or their individual needs, respectively, rather than be 
restricted to transmission services mandated by the Equity Data Plans. 
In addition, the proposed rules would allow competing consolidators and 
self-aggregators to choose to receive exchange data products that 
include only proposed consolidated market data elements or products 
that contain both proposed and non-proposed consolidated market data 
elements (e.g., existing proprietary data products).
    As discussed more fully above, the proposed rules would permit the 
exchanges to offer different connectivity options (e.g., with different 
latencies, throughput capacities, and data-feed protocols) to market 
data customers but would require that any options provided to 
proprietary data customers be available to competing consolidators and 
self-aggregators in the same manner and using the same methods, 
including all methods of access and the same format, for the purpose of 
collecting and consolidating proposed consolidated market data.
    Self-aggregators may have a minor latency advantage over market 
participants that decide to utilize a competing consolidator for their 
consolidated market data, due to the fact that self-aggregators will be 
collecting and consolidating this data for themselves rather than 
relying on a competing consolidator to do so, and therefore would 
eliminate a potential latency cost that comes with an extra hop within 
a given data center. The Commission, however, preliminarily believes 
that the addition of competitive forces with the introduction of 
competing consolidators should minimize these inherent latencies.\608\
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    \608\ Some have argued that speed-based competition in modern 
markets--in particular, the speed advantages of high-frequency 
traders and practices such as ``latency arbitrage''-- impose costs 
on investors and other market participants. See, e.g., Matteo 
Aquilina, et al., Quantifying the High-Frequency Trading ``Arms 
Race'': A Simple New Methodology and Estimates, Financial Conduct 
Authority (Jan. 2020), available at https://www.fca.org.uk/publication/occasional-papers/occasional-paper-50.pdf?mod=article_inline. But see Bartlett and McCrary, supra note 
418. As discussed above, the Commission preliminarily believes that 
the proposed decentralized consolidation model would reduce latency 
in the distribution of proposed consolidated market data and speed-
based information asymmetries between market participants. See supra 
Section IV.B.
---------------------------------------------------------------------------

    The Commission has not proposed a separate registration requirement 
for self-aggregators, nor has it proposed to impose the obligations of 
competing consolidators on self-aggregators. Because self-aggregators 
will be broker-dealers who are subject to broker-dealer registration 
requirements, the Commission preliminarily believes that imposing an 
additional registration requirement and the competing consolidator 
obligations on self-aggregators would be unnecessary and could result 
in undue costs and burdens. Further, self-aggregators would be required 
to calculate and generate proposed consolidated market data, or a 
component of proposed consolidated market data, to the extent that such 
information is necessary for the self-aggregator to comply with 
applicable regulatory requirements. For example, to the extent that a 
self-aggregator's activities require that self-aggregator to generate 
the NBBO, the self-aggregator would be required to do so consistent 
with proposed Rule 600(b)(50). Any self-aggregator that disseminates to 
any person--including to an affiliate or subsidiary of the self-
aggregator--or makes public the proposed consolidated market data, or 
any subset of the proposed consolidated market data, would be required 
to register as a competing consolidator.\609\
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    \609\ A self-aggregator that provides a software product to 
other broker-dealers for purposes of allowing such other broker-
dealers to self-aggregate SRO data to generate proposed consolidated 
market data within such other broker-dealers' facilities would not 
be a competing consolidator because the self-aggregator itself would 
not be generating consolidated market data for dissemination to such 
broker-dealers. However, if an entity uses its own software product 
to aggregate SRO data to generate proposed consolidated market data 
within the self-aggregator's facilities and thereafter redistributes 
or disseminates proposed consolidated market data to other broker-
dealers or market participants, such entity would be a competing 
consolidator because it would be generating and disseminating 
consolidated market data to others.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed amendment to Rule 
600(b)(82) to introduce a definition of ``self-aggregator.'' In 
particular, the Commission solicits comment on the following:
    127. Is the definition of self-aggregator as ``a broker or dealer 
that receives information with respect to quotations for and 
transactions in NMS stocks, including all information necessary to 
generate consolidated market data, and generates consolidated market 
data solely for internal use'' too broad or narrow? Should other 
entities be included in the definition? Please identify such entities 
and explain.
    128. Are the distinctions between self-aggregators and competing 
consolidators sufficiently clear? Should any additional clarification 
be provided to fully distinguish between a vendor that provides self-
aggregation services to multiple broker-dealers and competing 
consolidators that provide aggregated data to multiple broker-dealers? 
If so, please describe what additional clarification should be 
provided.
    129. Should self-aggregators be subject to a registration 
requirement? Why or why not?
    130. Self-aggregators may have a minor latency advantage over 
competing consolidators. Please provide comment on this potential 
latency advantage. Would the latency advantage be material? Are there 
methods to neutralize any latency advantage between self-aggregators 
and competing consolidators? If so, should they be instituted?
    131. Should self-aggregators be permitted to disseminate proposed 
consolidated market data to their affiliates and subsidiaries without 
being required to register as a competing consolidator? Why or why not? 
Does the restriction on not providing consolidated market data or a 
subset thereof to customers or affiliates reflect a significant 
departure from current practices? Please explain.
    132. Should any market participants aside from broker-dealers be 
included in the proposed definition of self-aggregator? Please explain.
4. Amendment to the Effective National Market System Plan(s) for NMS 
Stocks
    An integral part of the national market system is the use of NMS 
plans. Section 11A(a)(3)(B) of the Exchange Act reflects their 
importance by providing the Commission the authority to require the 
SROs, by order, ``to act jointly . . . in planning, developing, 
operating, or

[[Page 16792]]

regulating a national market system (or a subsystem thereof).'' The 
Equity Data Plans, which are the effective national market system plans 
for NMS stocks,\610\ historically have played an important role in 
developing, operating, and governing the national market system.\611\ 
The proposed decentralized consolidation model would fundamentally 
change the national market system and the role of the Equity Data 
Plans.\612\ Under the decentralized consolidation model, the effective 
national market system plan(s) for NMS stocks, would continue to play 
an important but modified role in the national market system.\613\ 
Therefore, the Commission is proposing in Rule 614(e) that an amendment 
to the effective national market system plan(s) be filed with the 
Commission to conform the plan(s) to the decentralized consolidation 
model, to address the application of timestamps by the SROs, to require 
annual assessments of competing consolidators' performance, and to 
develop a list of the primary listing market for each NMS stock, as 
discussed below. Proposed Rule 614(e) would require the participants to 
the effective national market system plan(s) for NMS stocks to submit 
an amendment pursuant to Rule 608 to conform the plan(s) to the 
proposed decentralized consolidation model within 60 calendar days from 
the effective date of Rule 614.
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    \610\ See Proposed Governance Order, supra note 8.
    \611\ See supra Section II.A.
    \612\ Id.
    \613\ Pursuant to the proposed amendments to Rule 603(b), 
proposed consolidated market data would be collected, consolidated, 
and disseminated pursuant to an effective national market system 
plan.
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    As discussed above, today, the Equity Data Plans operate the 
exclusive SIPs for the collection, consolidation, and dissemination of 
SIP data.\614\ In the decentralized consolidation model, the effective 
national market system plan(s) for NMS stocks would no longer be 
responsible for collecting, consolidating, and disseminating 
consolidated market data and would no longer operate an exclusive 
SIP.\615\ Instead, the participants of the effective national market 
system plan(s) for NMS stocks would develop and file with the 
Commission the fees for SRO data content required to be made available 
by each SRO to competing consolidators and self-aggregators for the 
creation of proposed consolidated market data, including fees for SRO 
market data products that contain all of the components of proposed 
consolidated market data as well as the fees for market data products 
that contain only a subset of the components of proposed consolidated 
market data.\616\ The effective national market system plan(s) would 
also collect fees for the SRO data content used to create the proposed 
consolidated market data; \617\ and allocate the revenues among the SRO 
participants. The effective national market system plan(s) would also 
oversee plan accounts and plan audits for purposes of billing, among 
other things.\618\
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    \614\ See supra Section II.A.
    \615\ The Commission preliminarily believes that the operators 
of the existing exclusive SIPs may choose to become competing 
consolidators. See infra Section IV.B.6.
    \616\ For example, the operating committee of the effective 
national market system plan(s) could develop different pricing for a 
TOB product that includes only certain SRO data content used to 
create proposed consolidated market data. See supra note 316 and 
accompanying text. See also NYSE Sharing Data-Driven Insights--Stock 
Quotes and Trade Data: One Size Doesn't Fit All (Aug. 22, 2019), 
available at https://www.nyse.com/equities-insights#20190822 
(proposing to replace the exclusive SIP feeds with three tiered 
levels of service, including certain DOB data, based on the needs of 
specific types of investors). Nothing in this proposal would prevent 
the operating committee of the effective national market system 
plan(s) from structuring the sale of data in a similar manner.
    \617\ See supra Section IV.B.1.
    \618\ The effective national market system plan(s) for NMS 
stocks would review the performance of competing consolidators. See 
infra discussion on proposed Rule 614(e) (1)(iii).
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    Rule 614(e)(1) would direct the participants to file with the 
Commission an amendment to the effective national market system plan(s) 
for NMS stocks in order to conform the plan(s) to reflect the proposed 
consolidated market data and proposed decentralized consolidation 
model. The Commission preliminarily believes that to conform to the 
proposed decentralized consolidation model, the effective national 
market system plan(s) for NMS stocks would need to be amended to 
reflect the fees for the proposed consolidated market data. The 
proposed new fees would need to reflect the following: (i) That 
proposed consolidated market data includes the content described above, 
including depth of book data, auction information, and additional 
information on orders of sizes smaller than 100 shares; (ii) that the 
effective national market system plan(s) for NMS stocks is no longer 
operating an exclusive SIP and is no longer performing aggregation and 
other operational functions; and (iii) that the SROs are no longer 
responsible for the connectivity and transmission services required for 
providing data to the exclusive SIPs from the SROs' data centers since 
the exclusive SIPs will no longer be operated by the effective national 
market system plan(s) for NMS stocks.\619\ The proposed new fees for 
consolidated market data must be fair and reasonable and not unfairly 
discriminatory.\620\ The proposed fees must be submitted by the 
participants of the effective national market system plan(s) for NMS 
stocks pursuant to Rule 608 under the Exchange Act. In addition, to 
conform the effective national market system plan(s) for NMS stocks to 
the proposed decentralized consolidation model, the amendment to the 
plan(s) generally should include a harmonized approach to data billing 
protocols, including with respect to any unified multiple 
installations, single users (``MISU'') policy.\621\
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    \619\ As noted above, pursuant to proposed Rule 603(b), each SRO 
must provide its NMS information, including all data necessary to 
generate proposed consolidated market data, to all competing 
consolidators and self-aggregators in the same manner and using the 
same methods, including all methods of access and the same format, 
as such SRO makes available any information to any other person. The 
competing consolidators and self-aggregators will be responsible for 
establishing the connectivity and transmission services they use to 
connect to the SROs.
    \620\ See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a).
    \621\ MISU policies seek to ensure that a single device fee is 
applied to a data user that receives consolidated market data on 
multiple display devices. See, e.g., CTA, CTA Multiple Installations 
for Single Users (MISU) Policy (Apr. 2016), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Policy%20-%20MISU%20with%20FAQ.pdf. MISU policies would need to be 
conformed in the proposed decentralized consolidation model to 
reflect that consolidated market data users may seek to receive 
through more than one competing consolidator and/or access through 
multiple devices.
---------------------------------------------------------------------------

    Proposed Rule 614(e)(1)(ii) would require the participants to file 
a proposed amendment to the effective national market system plan(s) 
for NMS stocks to address the application of timestamps by the SRO 
participants on proposed consolidated market data, including the time 
the proposed consolidated market data was generated by the SRO 
participant and the time the SRO participant made the proposed 
consolidated market data available to competing consolidators and self-
aggregators. Timestamping should provide incentives for the SROs to 
generate and disseminate proposed consolidated market data as quickly 
as possible. Further, the Commission preliminarily believes that the 
application of timestamps will be an important part of market 
participants' ability to measure latency and to seek to ensure accurate 
sequencing of data in the new national market system, and therefore the 
application of timestamps should be consistent and reliable.\622\

[[Page 16793]]

The Commission understands that the SROs currently submit timestamped 
data under the SIP plans \623\ and the National Market System Plan 
Governing the Consolidated Audit Trail (``CAT NMS Plan'').\624\
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    \622\ SRO timestamps would also assist market participants in 
their ability to assess latencies in the provision of proposed 
consolidated market data. Under proposed Rule 614(d)(3), competing 
consolidators would have to make available consolidated market data 
that includes timestamps assigned by the SROs as well as competing 
consolidators. See supra Section IV.B.2(e)(ii) and the discussion of 
proposed Rule 614(d)(4).
    \623\ See, e.g., CTA Plan, supra note 13, at Section VI.(c); 
Nasdaq UTP Plan, supra note 13, at Section VIII.
    \624\ See CAT NMS Plan at Sections 6.3(d), 6.8. As required by 
Rule 613, the CAT NMS Plan was filed with the Commission by the 
national securities exchanges and national securities associations, 
who include BATS Exchange, Inc. (n/k/a Cboe BZX Exchange, Inc.), 
BATS-Y Exchange, Inc. (n/k/a Cboe BYX Exchange, Inc.), BOX Exchange 
LLC, C2 Options Exchange, Incorporated (n/k/a Cboe C2 Exchange, 
Inc.), Chicago Board Options Exchange, Incorporated (n/k/a Cboe 
Exchange, Inc.), Chicago Stock Exchange, Inc. (n/k/a NYSE Chicago, 
Inc.), EDGA Exchange, Inc. (n/k/a Cboe EDGA Exchange, Inc.), EDGX 
Exchange, Inc. (n/k/a Cboe EDGX Exchange, Inc.), Financial Industry 
Regulatory Authority, Inc. (``FINRA''), International Securities 
Exchange, LLC (n/k/a Nasdaq ISE, LLC), ISE Gemini, LLC (n/k/a Nasdaq 
GEMX, LLC), Miami International Securities Exchange LLC, NASDAQ OMX 
BX, Inc. (n/k/a Nasdaq BX, Inc.), NASDAQ OMX PHLX LLC (n/k/a Nasdaq 
PHLX LLC), The Nasdaq Stock Market LLC, National Stock Exchange, 
Inc. (n/k/a NYSE National, Inc.), New York Stock Exchange LLC, NYSE 
MKT LLC, and NYSE Arca, Inc. See 17 CFR 242.613; Securities Exchange 
Act Release No. 78318 (Nov. 15, 2016), 81 FR 84696, (Nov. 23, 2016) 
(``CAT NMS Plan Approval Order''). The CAT NMS Plan is Exhibit A to 
the CAT NMS Plan Approval Order. See CAT NMS Plan Approval Order, at 
84943-85034. In approving the CAT NMS Plan, the Commission added ISE 
Mercury, LLC (n/k/a Nasdaq MRX, LLC) and Investors' Exchange LLC as 
Participants to the CAT NMS Plan. See id. at 84728. On January 30, 
2017 and March 1, 2019, the Commission noticed for immediate 
effectiveness amendments to the CAT NMS Plan to add MIAX PEARL, LLC 
and MIAX Emerald, LLC, respectively, as Participants. See Securities 
Exchange Act Release Nos. 79898 (Jan. 30, 2017), 82 FR 9250 (Feb. 3, 
2017), and 85230 (Mar. 1, 2019), 84 FR 8356 (Mar. 7, 2019). On 
November 27, 2019, the Commission noticed for immediate 
effectiveness amendments to the CAT NMS Plan to add Long-Term Stock 
Exchange, Inc. as a Participant. See Securities Exchange Act Release 
No. 87595 (Nov. 22, 2019), 84 FR 65447 (Nov. 27, 2019). The CAT NMS 
Plan functions as the limited liability company agreement of the 
jointly owned limited liability company formed under Delaware state 
law through which the Participants conduct the activities of the CAT 
(the ``Company''). Each Participant is a member of the Company and 
jointly owns the Company on an equal basis. The Participants 
submitted to the Commission a proposed amendment to the CAT NMS Plan 
on August 29, 2019, which they designated as effective on filing. 
Under the amendment, the limited liability company agreement of a 
new limited liability company named Consolidated Audit Trail, LLC 
serves as the CAT NMS Plan, replacing in its entirety the CAT NMS 
Plan. See Securities Exchange Act Release No. 87149 (Sept. 27, 
2019), 84 FR 52905 (Oct. 3, 2019).
---------------------------------------------------------------------------

    Proposed Rule 614(e)(1)(iii) would require the participants to file 
a proposed amendment to the effective national market system plan(s) 
for NMS stocks to reflect that the participants would need to conduct 
an annual assessment of the overall performance of competing 
consolidators, including speed, reliability, and cost of data provision 
and provide the Commission with a report of such assessment on an 
annual basis. As noted above, the Equity Data Plans play an important 
role in governing the operation of the national market system. The 
Commission preliminarily believes that the effective national market 
system plan(s) for NMS stocks should continue in this important role by 
monitoring the overall performance of competing consolidators to seek 
to ensure that the decentralized consolidation model is operating 
soundly. To aid the Commission's monitoring, the Commission is 
requiring the effective national market system plan(s) for NMS stocks 
to provide assessments in key factors of competing consolidators, 
including: Speed of the competing consolidators in receiving, 
calculating, and disseminating proposed consolidated market data; the 
reliability of the transmission of proposed consolidated market data; 
and a detailed cost analysis of the provision of proposed consolidated 
market data. The effective national market system plan(s) would base 
their assessments on publicly available information about the competing 
consolidators, including the information that each competing 
consolidator would be required to make available under proposed Rule 
614.
    Finally, proposed Rule 614(e)(1)(iv) would require the participants 
to file an amendment to the effective national market system plan(s) 
for NMS stocks to include a list that identifies the primary listing 
exchange for each NMS stock. As discussed above, primary listing 
exchanges will be required to collect, calculate, and provide the data 
included in the proposed definition of ``regulatory data'' to competing 
consolidators and self-aggregators. Moreover, the Commission is 
proposing to define ``primary listing exchange'' in proposed Rule 
600(b)(67) as ``for each NMS stock, the national securities exchange 
identified as the primary listing exchange in the effective national 
market system plan or plans required under Sec.  242.603(b).'' The 
effective national market system plan(s) for NMS stocks must 
accordingly be amended to include this list so that the primary listing 
exchange for each NMS stock--and the responsibilities regarding the 
collection, calculation, and provision of regulatory data--are clear. 
The Commission preliminarily believes that information regarding the 
primary listing exchange for each NMS stock is readily accessible and 
that the operating committee of the effective national market system 
plan(s) for NMS stock, which will have representation from each primary 
listing exchange, is well-situated to include such a list in a plan 
amendment.
    The Commission requests comment on proposed Rule 614(e). In 
particular, the Commission solicits comment on the following:
    133. Do the proposed amendments to the effective national market 
system plan(s) for NMS stocks reflect an appropriate role for the NMS 
plan(s) under the proposed decentralized consolidation model?
    134. Should the rule include other provisions that should be 
included in an amendment to the effective national market system 
plan(s) for NMS stocks? Please describe.
    135. Should the rule require an amendment to the effective national 
market system plan(s) for NMS stocks to include plan provisions related 
to the development by competing consolidators of non-core market data 
products (i.e., a full depth of book product)? Why or why not?
    136. Should the rule require an amendment to the effective national 
market system plan(s) to require the operating committee of such 
plan(s) to develop latency statistics based on the SRO timestamps and 
make them publicly available?
    137. Do commenters believe that the proposed timestamps are 
sufficiently comprehensive? Should the Commission require other 
timestamps to be added by the SROs, or should any of the proposed 
requirements for the timestamps be pared down or removed? Please 
explain.
    138. Should the rule require an amendment to the effective national 
market system plan(s) for NMS stocks to specify a method for 
synchronizing clocks on the various systems and networks utilized in 
the provision of proposed consolidated market data? If yes, what is the 
appropriate method or protocol (e.g., Precision Time Protocol vs. 
Network Time Protocol)? Or should the requirement for clock 
synchronization be performance based (i.e., accurate to less than one 
microsecond)? If so, what is the appropriate standard for maximum 
allowable clock drift? Please explain. Should the SROs be required to 
publish clock drift statistics?
    139. Do commenters believe that there are other measures to assess 
the performance of competing consolidators that should be included in 
the annual report? Please explain.

[[Page 16794]]

    140. Do commenters believe that a portion of the assessment or the 
full assessment should be made public? Do commenters believe that a 
portion of the annual report or the full annual report to the 
Commission should be made public? Why or why not? Please explain.
    141. Do commenters believe that the operating committee for the 
effective national market system plan(s) for NMS stocks should conduct 
an assessment and provide the Commission with a report more frequently 
than annually, or at all? Please describe any alternative frequency and 
the rationale.
    142. Do commenters believe that a similar report should be 
generated for self-aggregators? If so, please explain. Should self-
aggregators be required to publish any performance statistics publicly 
or to the Commission?
    143. Do commenters believe that the effective national market 
system plan(s) for NMS stocks should be amended to include a list that 
identifies the primary listing exchange for each NMS stock? Please 
explain. Are there alternative ways to ensure that the primary listing 
exchange for each NMS stock is clearly identified? Please explain.
    144. Do commenters believe that the effective national market 
system plan(s) for NMS stocks should include fees for different types 
of proposed consolidated market data products, such as products that 
contain only a subset of proposed core data elements (e.g., a TOB 
product)? If so, what products should be included?
5. Effects on the National Market System Plan Governing the 
Consolidated Audit Trail
    The CAT NMS Plan requires the Central Repository \625\ to ``collect 
(from a SIP \626\ or pursuant to an NMS Plan \627\) and retain on a 
current and continuing basis . . . all data, including the following 
(collectively, `SIP Data').'' \628\ The Commission preliminarily 
believes that this provision of the CAT NMS Plan will be affected by 
the proposed decentralized consolidation model and the proposed 
definition of consolidated market data. Rule 603(b), as proposed to be 
amended, would require the national securities exchanges and 
associations to distribute consolidated market data ``pursuant to one 
or more effective national market system plans.'' Under Section 
6.5(a)(ii) of the CAT NMS Plan, the Central Repository must collect and 
retain ``all data'' from ``a SIP or pursuant to an NMS Plan,'' so the 
Central Repository would be required to collect and retain consolidated 
market data.
---------------------------------------------------------------------------

    \625\ The CAT NMS Plan defines ``Central Repository'' as ``the 
repository responsible for the receipt, consolidation, and retention 
of all information reported to the CAT pursuant to SEC Rule 613 and 
this Agreement.'' CAT NMS Plan, supra note 624, at Section 1.1.
    \626\ The CAT NMS Plan defines ``Securities Information 
Processor'' or ``SIP'' as having ``the same meaning provided in 
Section 3(a)(22)(A) of the Exchange Act.'' Id. at Section 1.1.
    \627\ The CAT NMS Plan defines ``NMS Plan'' as having ``the same 
meaning as `National Market System Plan' provided in SEC Rule 
613(a)(1) and SEC Rule 600(b)(43).'' Id. at Section 1.1.
    \628\ Id. at Section 6.5(a)(ii). Section 6.5(a)(ii) specifically 
enumerates the following ``SIP Data'' elements: ``(A) Information, 
including the size and quote condition, on quotes including the 
National Best Bid and National Best Offer for each NMS Security; (B) 
Last Sale Reports and transaction reports reported pursuant to an 
effective transaction reporting plan filed with the SEC pursuant to, 
and meeting the requirements of, SEC Rules 601 and 608; (C) trading 
halts, Limit Up/Limit Down price bands, and Limit Up/Limit Down 
indicators; and (D) summary data or reports described in the 
specifications for each of the SIPs and disseminated by the 
respective SIP.'' Id.
---------------------------------------------------------------------------

    Because proposed consolidated market data would include information 
beyond the data that is currently disseminated by the exclusive SIPs, 
such as smaller-sized orders in higher-priced stocks pursuant to the 
proposed definition of round lot, proposed depth of book data, and 
proposed auction information, the scope of the consolidated data 
collected and retained by the CAT Central Repository would be expanded. 
In addition, the Central Repository may have to obtain the data from a 
different source. The Commission preliminarily believes that having the 
Central Repository collect an expanded set of data from a different 
source and retain this data in the Central Repository are appropriate 
to further the objectives of CAT by enabling regulators to use the 
expanded set of data ``solely for surveillance and regulatory 
purposes.'' \629\
---------------------------------------------------------------------------

    \629\ See CAT NMS Plan, supra note 624, at Section 6.5(g); infra 
Section VI.C.4(c).
---------------------------------------------------------------------------

    The Commission requests comment on the effects of the proposed 
decentralized consolidation model and the proposed definition of 
consolidated market data on the CAT. In particular, the Commission 
solicits comment on the following:
    145. Do commenters believe that CAT should receive consolidated 
market data from one competing consolidator, all competing 
consolidators, or some specific subset of competing consolidators? 
Please explain.
    146. Do commenters believe the selection by the CAT of a competing 
consolidator could have a competitive impact on other competing 
consolidators? Please explain.
6. Transition Period
    A transition period would be necessary to implement the 
decentralized consolidation model. While SROs would be permitted to 
make the data necessary to generate consolidated market data, as 
proposed to be defined, available to competing consolidators and self-
aggregators using their existing data feeds, SROs may also choose to 
provide this data through new, separate feeds,\630\ which would require 
development time. Furthermore, the proposed requirements related to the 
provision by SROs of regulatory data to competing consolidators and 
self-aggregators would require SROs to make adjustments to their data 
collection and processing systems and procedures to integrate the 
proposed regulatory data elements into new or existing data feeds.\631\ 
In addition, firms intending to act as competing consolidators or self-
aggregators will need to register, develop or modify systems, establish 
pricing, and make other preparations needed to function as competing 
consolidators or self-aggregators. Finally, market participants would 
be expected to need some period of time for implementation and testing 
of any new data feeds. As these changes are being implemented, market 
participants will continue to need a consistent and reliable source of 
consolidated market data.
---------------------------------------------------------------------------

    \630\ See supra Section IV.B.1.
    \631\ See supra Section III.D.
---------------------------------------------------------------------------

    Accordingly, the Commission preliminarily believes that the 
existing exclusive SIPs should continue their operations until such 
time as the Commission considers and approves an NMS plan amendment 
that would effectuate a cessation of their operations as exclusive 
SIPs. In considering and approving such an NMS plan amendment, the 
Commission preliminarily believes that it would need to consider the 
operational readiness of competing consolidators and self-aggregators 
to determine whether market participants are fully able to receive 
proposed consolidated market data in a manner that is sufficiently 
prompt, accurate, and reliable.\632\ The Commission preliminarily 
believes that sufficient operational readiness would only be achieved 
once consolidated market data generated under the decentralized 
consolidation model is demonstrably capable of supporting the various 
needs of users of consolidated market data, including needs for visual 
display, trading activities, and compliance with

[[Page 16795]]

regulatory obligations, such as under Rules 603(c) and Rule 611 under 
Regulation NMS and best execution. In determining whether to approve an 
NMS plan amendment to effectuate the cessation of the operations of the 
existing exclusive SIPs and whether it meets the standards set forth in 
Rule 608(b)(2),\633\ the Commission would consider the state of the 
market and the general readiness of the competing consolidator 
infrastructure. Examples of some of the things that the Commission 
could consider include, among other things: The status of registration, 
testing, and operational capabilities of multiple competing 
consolidators, self-aggregators, and market participants; capabilities 
of competing consolidators to provide monthly performance metrics and 
other data required to be published pursuant to proposed Rule 
614(d)(5)-(6); \634\ and the consolidated market data products offered 
by competing consolidators. The Commission preliminarily believes that 
consideration of these and other factors should help to ensure that 
market participants have effective and continuous access to proposed 
consolidated market data and other market data products during the 
transition period and prior to the cessation of operations of the 
existing exclusive SIPs.
---------------------------------------------------------------------------

    \632\ Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k-
1(c)(1)(B).
    \633\ See 17 CFR 242.608(b)(2) (providing that the Commission 
shall approve an NMS plan amendment ``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.'').
    \634\ See supra Section IV.B.2(b).
---------------------------------------------------------------------------

    The Commission anticipates that the operators of the existing 
exclusive SIPs may choose to become competing consolidators and that 
they too may need to make additional investments and operational 
changes during this transition period to provide a competitive 
competing consolidator service.\635\ The Commission preliminarily 
believes that the existing exclusive SIPs should have the ability to 
pursue such development while continuing concurrent operations of 
existing SIPs. Given their experience operating the exclusive SIPs, the 
exclusive SIP operators would likely be able to enter the competing 
consolidator business from a competitively strong position relative to 
other potential competing consolidators.
---------------------------------------------------------------------------

    \635\ The exclusive SIPs may choose to utilize existing 
proprietary data feeds for the provision of consolidated market 
data. They may also choose to develop a business to support self-
aggregation by broker-dealers.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed transition period 
to implement the decentralized consolidation model. In particular, the 
Commission solicits comment on the following:
    147. What period of time should be expected for SROs to make any 
changes necessary to provide the data necessary to generate proposed 
consolidated market data to competing consolidators and self-
aggregators?
    148. What period of time should be expected for broker-dealers to 
make any changes necessary, including testing, to utilize the new data 
feeds in a manner that is not disruptive to their trading practices and 
their ability to meet their regulatory obligations?
    149. What other factors should be taken into consideration to allow 
for a smooth transition from a centralized, exclusive SIP model to a 
competitive, decentralized consolidation model?
    150. What should the Commission take into consideration in 
determining whether the availability of proposed consolidated market 
data from competing consolidators, or any other aspect of the 
development or implementation of the proposed decentralized 
consolidation model, is sufficient to allow for the cessation of the 
existing exclusive SIPs?
    151. Should the Commission require the operation of a certain 
number of competing consolidators before allowing the exclusive SIPs to 
cease operations? Why or why not? If so, how many competing 
consolidators should be operational before allowing exclusive SIPs to 
cease operations? Please explain.
    152. How long do commenters think such an implementation period 
should be? Please explain your answer.

C. Alternatives to the Centralized Consolidation Model

    Several alternative approaches to the centralized consolidation 
model were suggested by Roundtable respondents and separately by 
several exchanges. These suggestions include the distributed SIP model, 
a single SIP for all exchange-listed securities, and a low-latency 
dedicated connection to existing exclusive SIP feeds.
1. Distributed SIP Alternative
    A distributed SIP alternative has been suggested as one possible 
means to reduce geographic latency.\636\ Specifically, under a 
distributed SIP alternative, each exclusive SIP would place an 
additional processor in other major data centers, where the additional 
processor would separately aggregate and disseminate consolidated 
market data for its respective tape. The SROs would submit their 
quotations and trade information directly to each instance of the 
exclusive SIP in each data center, and each exclusive SIP instance 
would consolidate and disseminate its respective consolidated market 
data feeds to subscribers at those data centers, thereby eliminating 
geographic latency. Under the distributed SIP alternative, consolidated 
market data would not have to travel from an exchange at one location 
to an exclusive SIP at a second location for consolidation and 
dissemination prior to traveling yet again to a subscriber that may be 
at a third location.\637\
---------------------------------------------------------------------------

    \636\ See supra notes 492-493 and accompanying text; Cboe 
Report, supra note 186, at 3-4 (recommending the creation of 
distributed SIPs in different geographic locations).
    \637\ One commenter noted that the distributed SIP alternative 
could address the issue of geographic latency. See SIFMA Letter II 
at 3.
---------------------------------------------------------------------------

(a) Comments and Roundtable Discussion
    The distributed SIP model was suggested and discussed at the 
Roundtable by certain panelists and commenters. One panelist who 
presented on the distributed SIP model argued that it would be the 
least burdensome approach for the industry to reduce delays,\638\ 
explaining that firms could consume data under the current structure 
without having to make any changes if they did not have sub-millisecond 
latency concerns, while those firms for which geographic latency is 
critical could choose to consume data at the nearest SIP instance.\639\
---------------------------------------------------------------------------

    \638\ See Roundtable Day Two Transcript at 17 (Michael 
Blaugrund, NYSE).
    \639\ See Roundtable Day Two Transcript at 18 (Michael 
Blaugrund, NYSE). This panelist also believed that the distributed 
SIP model would not require changes to Rule 603(b) of Regulation 
NMS, which requires the dissemination of consolidated information 
for an individual NMS stock through a single plan processor. The 
panelist stated that the existing SIPs would remain under the 
distributed SIP model, only with additional processors. See 
Roundtable Day Two Transcript at 19-20 (Michael Blaugrund, NYSE).
---------------------------------------------------------------------------

    Two other panelists expressed interest in considering the 
distributed SIP model.\640\ One panelist said that the

[[Page 16796]]

distributed SIP model could address the latencies of the current 
centralized consolidation model.\641\ Another panelist suggested that a 
distributed SIP model with enhanced content, such as auction imbalance 
and depth of book information, would be useful \642\ and that even a 
fiber optics connection could be sufficient for a distributed SIP model 
since the consolidated market data would no longer have to travel 
throughout the various data centers for collection and 
distribution.\643\
---------------------------------------------------------------------------

    \640\ See, e.g., Roundtable Day One Transcript at 227-228 (Chris 
Issacson, Cboe) (``[W]e're open to discussion about distributed 
SIPs.''); at 98-99 (Stacey Cunningham, NYSE) (``. . . there is 
debate the NYSE brought to the SIP Committee a long time ago to talk 
about the nature of a distributed SIP and that is something we 
should explore.''); Roundtable Day Two Transcript at 17 (Michael 
Blaugrund, NYSE) (``. . . we think that a distributed SIP 
implementation of the existing processors would be the simplest, 
least costly approach for the industry to minimize delays when 
consolidated data and single market proprietary data are received in 
distant data centers.'').
    \641\ See Roundtable Day One Transcript at 231-232 (Vlad 
Khandros, UBS).
    \642\ See Roundtable Day One Transcript at 225 (Ronan Ryan, 
IEX).
    \643\ See Roundtable Day One Transcript at 229-230 (Ronan Ryan, 
IEX). This is a reference to the understanding that a distributed 
SIP model would solve for geographic latency.
---------------------------------------------------------------------------

    Three panelists were skeptical about the value of the distributed 
SIP model. One panelist described the distributed SIP model as better 
than the current SIP system, ``but just less worse than direct feeds,'' 
\644\ and said what is desired instead is an exclusive SIP that is as 
fast as the direct feeds.\645\ Another panelist said that, with the 
distributed SIP model, determining the appropriate instance of the SIP 
locations would be complicated.\646\
---------------------------------------------------------------------------

    \644\ See Roundtable Day Two Transcript at 27 (Adam Nunes, 
Hudson River Trading).
    \645\ Id.
    \646\ See Roundtable Day One Transcript at 151-152 (Oliver 
Albers, Nasdaq).
---------------------------------------------------------------------------

    One commenter submitted two comment letters that discussed the 
distributed SIP model. One letter urged the Commission to do a cost 
benefit analysis of efforts to decentralize the SIP architecture and 
recommended introducing additional instances of existing technology as 
the best approach to reducing geographic latency.\647\ The other letter 
noted questions about which SIP location would be responsible for 
regulatory messages, such as for LULD and MWCBs, and whether the costs 
for the industry to connect to this infrastructure would outweigh the 
benefits.\648\
---------------------------------------------------------------------------

    \647\ See Blaugrund Letter at 4. The Blaugrund Letter was 
submitted on behalf of NYSE.
    \648\ See NYSE Group Letter at 10.
---------------------------------------------------------------------------

    Another commenter stated that the distributed SIP alternative would 
introduce new and expensive operational complexities, legal and 
regulatory questions, and possible unintended consequences. This 
commenter also questioned whether the distributed SIP alternative would 
resolve concerns regarding geographic latency and noted that the NBBO 
could differ among the distributed SIPs, leading to operational and 
compliance questions.\649\
---------------------------------------------------------------------------

    \649\ See Albers Letter at 3; Wittman Letter at 14. The Albers 
and Wittman Letters were submitted on behalf of Nasdaq. The 
commenter also believed that significant advances in clock 
synchronization techniques would be necessary. See Wittman Letter at 
14. This commenter later expressed support for the distributed SIP 
model, stating that the approach could reduce data transmission time 
for some market participants between 400 and 750 microseconds. See 
Nasdaq Total Markets Report, supra note 127, at 19-20; Remarks by 
Tal Cohen, Nasdaq, Meeting of the Securities and Exchange Commission 
Investor Advisory Committee, at 50 (``[R]ecognizing the industry's 
desire for a distributed SIP, we support this in concept to ensure 
geographic latency concerns are addressed.'').
---------------------------------------------------------------------------

(b) Commission Discussion
    The Commission preliminarily believes that a distributed SIP model 
could address the geographic latencies that exist in the current 
centralized consolidation model but is concerned that the distributed 
SIP model has certain fundamental shortcomings that make it a less 
desirable option compared to the proposed competitive, decentralized 
consolidation model. In particular, the distributed SIP model does not 
allow for the introduction of competitive forces and continues to allow 
for one exclusive SIP to have exclusive rights for the dissemination of 
market data for the NMS stocks on a given consolidated tape. Because 
the distributed SIP model does not introduce competitive forces, it is 
less likely to adequately address the broader array of latencies and 
competitive product and service offerings.
    In addition, insofar as the distributed SIP model does not allow 
for the provision of all three consolidated tapes to be consolidated 
and disseminated from a single entity, it retains the inefficiencies 
that would not apply to a competing consolidator model, such as the 
need for end-users to obtain data from multiple SIPs.\650\
---------------------------------------------------------------------------

    \650\ Since 2017, a distributed SIP subcommittee created by the 
CTA and Nasdaq UTP Plan operating committees has considered and 
continues to consider implementation of a distributed SIP model to 
address geographic latencies. See CTA and UTP Annual Letter, supra 
note 181, at 1-2.
---------------------------------------------------------------------------

    As a result, the Commission preliminarily believes that, since the 
distributed SIP model could result in significant additional costs and 
complexity and would not be likely to competitively address all forms 
of content and latency differentials, the Commission preliminarily 
believes that the distributed SIP model is not the optimal solution for 
the provision of consolidated market data.
    The Commission requests comment on the distributed SIP alternative. 
In particular, the Commission solicits comment on the following:
    153. Is the distributed SIP alternative a viable or superior 
alternative to the proposed competing consolidator and self-aggregator 
model? If so, please describe the benefits of the distributed SIP model 
and why that model is the preferred alternative.
    2. Single SIP Alternative
    Another suggestion to modify the centralized consolidation model to 
address latency concerns was to combine the exclusive SIPs into a 
single exclusive SIP for all exchange-listed securities.\651\ Comments 
noted that such a change would permit the harmonization of exclusive 
SIP infrastructure \652\ and narrow the latency difference between the 
exclusive SIPs and proprietary data feeds.\653\ One commenter thought 
this alternative would be a low cost alternative.\654\
---------------------------------------------------------------------------

    \651\ See Nasdaq Total Markets Report, supra note 127, at 21; 
SIFMA Letter II at 3. This suggestion would apply the centralized 
consolidation structure.
    \652\ See Nasdaq Total Markets Report, supra note 127, at 21.
    \653\ See SIFMA Letter II at 3. The commenter did not elaborate 
on how this model could address latency issues. This commenter, 
however, noted that the use of competing consolidators would best 
resolve the latency issues because competition would provide the 
incentives for improvements.
    \654\ Id.
---------------------------------------------------------------------------

    In light of the fact that the Nasdaq UTP SIP has less latency that 
the CTA/CQ SIP, within the current exclusive and centralized exclusive 
SIP model, this solution has certain merits. It could allow for an 
upgrade to existing processor technology for the CTA/CQ SIP, which 
continues to lag the performance of the Nasdaq UTP SIP. It could also 
eliminate certain inefficiencies in having two separate exclusive SIPs 
for SIP data. Potentially having a single administrator and exclusive 
SIP could ease these burdens and introduce benefits such as a less 
complex infrastructure and greater standardization.
    However, this alternative has certain key shortcomings. For one 
thing, it does not attempt to introduce competitive forces, and, 
therefore, as with the distributed SIP alternative, would not 
necessarily be expected to fully address all forms of latency in a 
competitive data environment. Further, it does not attempt to address 
geographic latency, which, as noted, is believed to be the most 
significant source of latency undermining the viability of the current 
centralized exclusive SIP model.
    The Commission requests comment on these alternative approaches to 
the current centralized consolidation

[[Page 16797]]

model. In particular, the Commission solicits comment on the following:
    154. Is the single exclusive SIP alternative a viable alternative 
to addressing the concerns with the current centralized consolidation 
model? If so, please describe the operation of the single exclusive SIP 
alternative and how it would address the latency and cost concerns 
arising from the centralized consolidation model. Are there any other 
viable alternatives?
    155. Do commenters believe that the single centralized exclusive 
SIP model could be a viable solution despite the fact that it would not 
introduce competitive forces into the provision of consolidated data 
and would not address geographic latency? If so, please describe any 
factors that make this solution as good as or better than the proposed 
decentralized model.

V. Paperwork Reduction Act

    Certain provisions of the proposed rules and proposed rule 
amendments contain ``collection of information requirements'' within 
the meaning of the Paperwork Reduction Act of 1995 (``PRA'').\655\ The 
Commission is submitting these collections of information to the Office 
of Management and Budget (``OMB'') for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The title of the new collection of 
information is ``Market Data Infrastructure and Form CC.'' Further, the 
title of the existing collection of information for Regulation SCI is 
``Regulation SCI, Form SCI,'' OMB Control No. 3235-0703.\656\ An agency 
may not conduct or sponsor, and a person is not required to respond to, 
a collection of information unless the agency displays a currently 
valid control number.
---------------------------------------------------------------------------

    \655\ 44 U.S.C. 3501 et seq.
    \656\ As discussed below, the proposed modifications to 
Regulation SCI contain ``collection of information requirements'' 
within the meaning of the PRA. See infra Section V.G. Further, as 
discussed above, the proposed definition of round lot would affect 
Rule 606(b)(3) by requiring actionable indications of interest to be 
in the proposed round lot sizes and included in 606(b)(3) reports. 
The Commission preliminarily believes that the PRA estimates set 
forth in the Rule 606 Adopting Release would cover the collection of 
actionable indications of interest in the proposed round lot sizes 
because there should only be minor systems updates to reflect the 
new round lot sizes. See Rule 606 Adopting Release, supra note 227.
---------------------------------------------------------------------------

A. Summary of Collection of Information

    The proposed rules and rule amendments would include a collection 
of information within the meaning of the PRA for competing 
consolidators who would be required to comply with the provisions of 
Rule 614 and file a Form CC with the Commission. In addition, SROs 
would be required to collect information that they would then have to 
provide to competing consolidators and self-aggregators for the 
purposes to generating proposed consolidated market data. Finally, the 
SROs would be required to amend the effective national market system 
plan(s) required under Rule 603(b).
1. Registration Requirements and Form CC
    Proposed Rule 614(a)(1)(i) would require each competing 
consolidator to register with the Commission by filing Form CC 
electronically in accordance with the instructions contained on the 
form.\657\ To file a form CC, a competing consolidator would need to 
access the Commission's EFFS, a secure website operated by the 
Commission. Each competing consolidator would have to submit an 
application and register each individual who would access the EFFS 
system on behalf of the competing consolidator. Proposed Rule 
614(a)(1)(ii) would require any reports required under proposed Rule 
614 to be filed electronically on Form CC, include all of the 
information as prescribed in Form CC and contain an electronic 
signature. Proposed Rule 614(a)(1)(iv) would require a competing 
consolidator to withdraw an initial Form CC during its review by the 
Commission if information on the initial Form CC is or becomes 
inaccurate or incomplete. Under proposed Rule 614(a)(2)(i), a competing 
consolidator would be required to amend an effective Form CC in 
accordance with the instructions therein: (i) Prior to the 
implementation of a material change to pricing, connectivity or 
products offered; and (ii) no later than 30 calendar days after the end 
of each calendar year to correct information that has become inaccurate 
or incomplete for any reason. Proposed Rule 614(a)(3) would require a 
competing consolidator to provide notice of its cessation of operations 
on Form CC at least 30 business days before the date the competing 
consolidator ceases to operate as a competing consolidator.
---------------------------------------------------------------------------

    \657\ As explained above, SROs that wish to act as competing 
consolidators would not be required to register with the Commission 
on Form CC. See supra note 537.
---------------------------------------------------------------------------

2. Competing Consolidator Duties and Data Collection
    Proposed Rules 614(d)(1)-(4) would require each competing 
consolidator to: (1) Collect from each national securities exchange and 
national securities association, either directly or indirectly, the 
information with respect to quotations for and transactions in NMS 
stocks as provided in Rule 603(b); (2) calculate and generate 
consolidated market data as defined in proposed Rule 600(b)(19) from 
the information collected pursuant proposed Rule 614(d)(1); (3) make 
consolidated market data, as defined in proposed Rule 600(b)(19), and 
as timestamped as required by proposed Rule 614(d)(4) and including the 
SRO data generation timestamp required to be provided by the SROs by 
proposed Rule 614(e)(1)(ii), available to subscribers on a consolidated 
basis on terms that are not unreasonably discriminatory; and (4) 
timestamp the information collected pursuant to proposed Rule 
614(d)(1): (i) Upon receipt from each national securities exchange and 
national securities association; (ii) upon receipt of such information 
at its aggregation mechanism; and (iii) upon dissemination of 
consolidated market data, as defined in proposed Rule 600(b)(19), to 
customers. Proposed Rule 614(c) would require each competing 
consolidator to make public on its website a direct URL hyperlink to 
the Commission's website that contains each effective initial Form CC, 
as amended, order of ineffective initial Form CC, and Form CC amendment 
to an effective Form CC.
3. Recordkeeping
    Proposed Rule 614(d)(7) would require each competing consolidator 
to keep and preserve at least one copy of all documents, including all 
correspondence, memoranda, papers, books, notices, accounts and such 
other records as shall be made or received by it in the course of its 
business as such and in the conduct of its business. The proposed rule 
would require competing consolidators to keep these documents for a 
period of no less than five years, the first two years in an easily 
accessible place. Proposed Rule 614(d)(8) would require each competing 
consolidator, upon request of any representative of the Commission, to 
promptly furnish to such representative copies of any documents 
required to be kept and preserved by it.
4. Reports and Reviews
    Proposed Rule 614(d)(5) would require each competing consolidator, 
within 15 calendar days after the end of each month, to publish 
prominently on its website monthly performance metrics, as defined by 
the effective national market system plan(s) for NMS stocks, that shall 
include at least the following: (i) Capacity statistics; (ii)

[[Page 16798]]

message rate and total statistics; (iii) system availability; (iv) 
network delay statistics; (v) latency statistics for the following, 
with distribution statistics up to the 99.99th percentile: (A) When a 
national securities exchange or national securities association sends 
an inbound message to a competing consolidator network and when the 
competing consolidator network receives the inbound message; (B) when 
the competing consolidator network receives the inbound message and 
when the competing consolidator network sends the corresponding 
consolidated message to a subscriber; and (C) when a national 
securities exchange or national securities association sends an inbound 
message to a competing consolidator network and when the competing 
consolidator network sends the corresponding consolidated message to a 
subscriber. All information posted pursuant to proposed Rule 614(d)(5) 
must be publicly posted in downloadable files and must remain free and 
accessible (without any encumbrances or restrictions) by the general 
public on the website for a period of not less than three years from 
the initial date of posting.
    Proposed Rule 614(d)(6) would require a competing consolidator, 
within 15 calendar days after the end of each month, to publish 
prominently on its website the following information: (i) Data quality 
issues; (ii) system issues; (iii) any clock synchronization protocol 
utilized; (iv) for the clocks used to generate the timestamps described 
in proposed Rule 614(d)(4), the clock drift averages and peaks, and the 
number of instances of clock drift greater than 100 microseconds; and 
(v) vendor alerts. All information posted pursuant to proposed Rule 
614(d)(6) must be publicly posted and must remain free and accessible 
(without any encumbrances or restrictions) by the general public on the 
website for a period of not less than three years from the initial date 
of posting.
5. Amendment to the Effective National Market System Plan(s) for NMS 
Stocks
    As detailed above, proposed Rule 614(e)(1) would direct the 
participants to the effective national market system plan(s) for NMS 
stocks to submit an amendment to such plan(s) within 60 days of the 
effectiveness of the proposed rule that would address several 
articulated provisions. In particular, proposed Rule 614(e)(1)(i) would 
require that the amendment conform the plan(s) to reflect the provision 
of market data that is necessary to generate consolidated market data, 
as defined in proposed Rule 600(b)(19), by the SRO participants to 
competing consolidators and self-aggregators, and the role that the 
plan(s) would have in developing fees for consolidated market data and 
defining the monthly performance metrics that competing consolidators 
would be required to publish.\658\ Proposed Rule 614(e)(1)(ii) would 
require that the participants to the effective national market system 
plan(s) for NMS stocks file an amendment that contains provisions 
regarding the application of timestamps by the SRO participants on all 
consolidated market data, as defined in proposed Rule 600(b)(19), and 
that such time stamps be attached at the time the data was generated by 
the SRO and the time that the SRO made the proposed consolidated market 
data available to competing consolidators and self-aggregators. The 
participants to the effective national market system plan(s) for NMS 
stocks would be required to file an amendment that includes provisions 
relating to assessments of competing consolidator performance that 
would include the speed, reliability and cost of data provision and the 
provision of an annual report of such assessment to the Commission. 
Finally, participants to the effective national market system plan(s) 
for NMS stocks would be required to file an amendment to identify the 
primary listing market for each NMS stock.
---------------------------------------------------------------------------

    \658\ See proposed Rule 614(d)(6).
---------------------------------------------------------------------------

    Proposed Rule 614(e) would impose paperwork burdens on the 
participants to the effective national market system plan(s) for NMS 
stocks. First, requiring the submission of an amendment or amendments 
to the effective national market system plan(s) for NMS stocks would 
impose a paperwork burden on the participants of such plan(s) 
associated with preparing and filing the amendment or amendments. 
Second, defining the monthly performance metrics for competing 
consolidators would impose a paperwork burden on the participants of 
the plan(s). Third, developing the requirements for the application of 
timestamps by the SROs would impose a paperwork burden on the SRO 
participants of such plans. Fourth, requiring the provision of an 
annual report to the Commission assessing competing consolidator 
performance would impose a paperwork burden on the participants of the 
effective national market system plan(s) for NMS stocks. Finally, 
developing and maintaining a list of the primary listing market for 
each NMS stock would impose a paperwork burden on the participants of 
the effective national market system plan(s) for NMS stocks.
6. Collection and Dissemination of Information by National Securities 
Exchanges and National Securities Associations
    The proposed amendment to Rule 603(b) would require every national 
securities exchange on which an NMS stock is traded and national 
securities association to make available to all competing consolidators 
and self-aggregators all information with respect to quotations for and 
transactions in NMS stocks, including all data necessary to generate 
consolidated market data, in the same manner and using the same 
methods, including all methods of access and using the same format, as 
such exchange or association makes available any information with 
respect to quotations for and transactions in NMS stocks to any person. 
SROs would be required to collect the information necessary to generate 
proposed consolidated market data, which would be required to be made 
available under proposed Rule 603(b). As proposed, the primary listing 
exchange would have to collect and make available pursuant to Rule 
603(b) information required under Rule 201 of Regulation SHO. Moreover, 
the proposal would require the primary listing exchange with the 
largest proportion of stocks includes in the S&P 500 Index to monitor 
the index throughout the trading day. The collection of information may 
require system changes by the SROs.

B. Proposed Use of Information

1. Registration Requirements and Form CC
    As discussed above, proposed Form CC, Rules 614(a)(1) and 614(a)(2) 
would generally require competing consolidators to register on Form CC 
and make amendments to an effective Form CC prior to implementing a 
material change to the pricing, connectivity or products offered and 
annually to correct information that has become inaccurate or 
incomplete for any reason. The information collected in Form CC would 
be used to help assure that a competing consolidator's disclosures 
comply with the requirements of proposed Rule 614 and so that specified 
information would be made publicly available and could be used to 
evaluate competing consolidators. The information required under 
proposed Rule 614(a)(1) also would be used by the Commission to 
determine whether to declare ineffective an initial Form CC filed by a 
competing consolidator.
    Proposed Rule 614(a)(3) would require a competing consolidator to

[[Page 16799]]

provide notice of its cessation of operations on Form CC at least 30 
business days prior to the date the competing consolidator will cease 
to operate as a competing consolidator. This information would be used 
by the Commission to monitor and oversee competing consolidators and 
would provide notice to the public that the competing consolidator 
intends to cease operations.
2. Competing Consolidator Duties and Data Collection
    Under the proposed decentralized consolidation model, proposed 
Rules 614(d)(1)-(d)(3) would require the competing consolidators to 
collect from the SROs quotation and transaction information for NMS 
stocks, calculate and generate consolidated market data, as proposed, 
from this information, and make such consolidated market data available 
on terms that are not unreasonably discriminatory to subscribers. The 
information that would be collected under these provisions is a 
critical element of the U.S. national market system, and the 
availability of this information would promote fair and efficient 
markets and facilitate the ability of brokers and dealers to trade more 
effectively and to provide best execution to their customers.
    Proposed Rule 614(d)(4) would require competing consolidators to 
timestamp the information with respect to quotations and transactions 
in NMS stocks that they collect from the SROs pursuant to proposed Rule 
614(d)(1) upon receipt, upon receipt by the aggregation mechanism, and 
upon dissemination to subscribers. This information would be used by 
subscribers to determine a competing consolidator's realized latency 
and should assist subscribers in choosing a competing consolidator or 
in deciding whether the chosen competing consolidator continues to meet 
their latency needs.
    Proposed Rule 614(c) would require each competing consolidator to 
make public on its website a direct URL hyperlink to the Commission's 
website that contains each effective initial Form CC, order of 
ineffective initial Form CC, and amendments to effective Form CCs. 
These proposed requirements will help to assure that information 
regarding competing consolidators is readily available.
3. Recordkeeping
    Proposed Rule 614(d)(7) would require each competing consolidator 
to keep and preserve at least one copy of all documents made or 
received by it in the course of its business and in the conduct of its 
business. These documents must be kept for a period of no less than 
five years, the first two years in an easily accessible place. Proposed 
Rule 614(d)(8) would require each competing consolidator to promptly 
furnish these documents to any representative of the Commission upon 
request. This information would facilitate the Commission's oversight 
of competing consolidators.
4. Reports and Reviews
    Proposed Rules 614(d)(5) and (d)(6) would require the monthly 
publication, on a competing consolidator's website, of metrics and 
other information concerning the competing consolidator's performance 
and operations. This information would include, among other things, 
latency statistics, system availability, data quality problems, and 
clock drift information. The information must be publicly posted and 
must remain free and accessible (without any encumbrances or 
restrictions) by the general public on the website for a period of not 
less than three years from the initial date of posting. These proposed 
rules would provide transparency with respect to the services and 
performance of a competing consolidator, which would allow market 
participants to evaluate the merits of a competing consolidator.
5. Amendment to the Effective National Market System Plan(s) for NMS 
Stocks
    As discussed above, the effective national market system plan(s) 
for NMS stocks would need to be updated and would be required to 
include specified new provisions. Accordingly, the participants would 
be required to file an amendment or amendments to the plans to reflect 
the new role and functions of the plan(s). For example, the proposed 
amendment would need to reflect that the plan(s) is (are) no longer 
operating the exclusive SIPs. In addition, the amendment would reflect 
the new fees for consolidated market data as well as the approach to 
billing protocols, including an MISU policy. In addition, the 
participants to the plan(s) would need to file an amendment to define 
the monthly performance metrics of competing consolidators. The 
information that would be collected pursuant to the proposed plan(s) 
amendment would inform market participants of the proposed operation of 
the effective national market system plan(s) for NMS stocks and 
facilitate the Commission's ability to oversee the national market 
system for NMS stocks. The information that would be collected pursuant 
to the proposed plan(s) amendment would also inform competing 
consolidators of the monthly performance metrics that they would be 
required to develop. The amendment or amendments would be published for 
public comment.
(a) Proposed Application of Timestamps (Rule 614(e)(1)(iii))
    As noted above, timestamps are used extensively in reporting market 
data elements. Timestamps are used to properly sequence events and are 
necessary for the elements of consolidated market data, as proposed. 
Timestamps also help to measure latencies with the provision of 
proposed consolidated market data. The lack of timestamps would impair 
the usefulness of the data and would impair market participants' 
ability to measure the latencies involved with the provision of 
proposed consolidated market data. Accordingly, the Commission 
preliminarily believes that the timestamp information that would be 
collected pursuant to the effective national market system plan(s) 
would be used by competing consolidators and self-aggregators to 
properly sequence core data elements and measure latencies relating to 
the collection, calculation and generation of core data.\659\
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    \659\ In addition, the proposed timestamps would be used by 
competing consolidators to generate the monthly performance metrics 
pursuant to proposed Rule 614(d)(5).
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(b) Proposed Annual Report (Rule 614(a)(2)(ii))
    The proposed assessment of competing consolidators' performance and 
the proposed annual report would be used by the Commission to analyze 
and oversee the operation of the effective national market system 
plan(s) for the provision of proposed consolidated market data in NMS 
stocks. The annual report would contain useful information for 
measuring the promptness, accuracy and reliability of the competing 
consolidator model. As noted above, the provision of consolidated 
market data is a necessary part of the national market system and the 
annual report would be useful in assessing its operation.
(c) Proposed List of Primary Listing Markets (Rule 614(e)(1)(iv))
    The proposed list of the primary listing market for each NMS stock 
would be used by the Commission to oversee the development and 
provision of proposed regulatory data. In addition, the list would be 
used by primary listing exchanges to identify which primary listing 
exchange is responsible for making Short Sale Circuit Breaker

[[Page 16800]]

information available pursuant to Rule 201(b)(3) is clearly identified.
6. Collection and Dissemination of Information by National Securities 
Exchanges and National Securities Associations
    As discussed above, the proposed amendment to Rule 603(b) would 
require every national securities exchange on which an NMS stock is 
traded and national securities association to make available to all 
competing consolidators and self-aggregators all information with 
respect to quotations for and transactions in NMS stocks, including all 
data necessary to generate consolidated market data, as proposed, in 
the same manner and using the same methods, including all methods of 
access and using the same format, as such exchange or association makes 
available any information with respect to quotations for and 
transactions in NMS stocks to any person. In addition, as proposed, the 
primary listing exchange would have to collect and make available 
pursuant to Rule 603(b) information required under Rule 201 of 
Regulation SHO. Moreover, the primary listing exchange with the largest 
proportion of stocks included in the S&P 500 Index would need to 
monitor the index throughout the trading day. Therefore, to comply with 
this provision, the SROs would have to collect all elements of 
consolidated market data. The competing consolidators would 
consolidate, process, and sell to their customers these data regarding 
NMS stock quotations and transactions. The data will also be used by 
self-aggregators to trade and provide services to their customers.

C. Respondents

    The collection of information in the proposed changes to Rule 
603(b) would apply to the sixteen national securities exchanges (that 
are equity securities exchanges) and the one national securities 
association (Financial Industry Regulatory Authority, Inc.) that are 
registered with the Commission. The amendment to the effective national 
market system plan(s) for NMS stocks would apply to these sixteen 
national securities exchanges and the one national securities 
association (Financial Industry Regulatory Authority, Inc.) that are 
registered with the Commission and that are participants in the 
effective national market system plan(s) for NMS stocks.\660\ In 
addition, the proposed information collections regarding registration 
requirements and Form CC, competing consolidator duties and data 
collection, recordkeeping, reports and reviews, and policies and 
procedures as contemplated in proposed Rule 614 would apply to those 
entities that register under the process in proposed Rule 614 to become 
competing consolidators. The Commission preliminarily estimates that 
there would initially be 12 persons who decide to perform the functions 
of a competing consolidator that would have to comply with the proposed 
information collections.
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    \660\ Currently, these national securities exchanges are: Cboe 
BYX Exchange, Inc., Cboe BZX Exchange, Inc., Cboe EDGA Exchange, 
Inc., Cboe EDGX Exchange, Inc., Cboe Exchange, Inc., Investors 
Exchange LLC, Long-Term Stock Exchange, Inc., Nasdaq BX, Inc., 
Nasdaq ISE, LLC, Nasdaq PHLX LLC, Nasdaq Stock Market LLC, New York 
Stock Exchange LLC, NYSE American LLC, NYSE Arca, Inc., NYSE 
Chicago, Inc., and NYSE National, Inc. The primary listing exchanges 
responsible for making Short Sale Circuit Breaker information 
available pursuant to Rule 201(b)(3) would be identified in the 
effective national market system plan(s).
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D. Total Annual Reporting and Recordkeeping Burden

1. Registration Requirements and Form CC
(a) Initial Burden and Costs
    As discussed above, proposed Rule 614(a)(1) would require competing 
consolidators to register with the Commission by filing electronically 
new Form CC in accordance with the instructions to the Form CC. For 
purposes of the PRA, the Commission preliminarily estimates that it 
will take 200 hours to complete the initial Form CC with the 
information required, including all exhibits to Form CC. The Commission 
based this estimate on the number of hours necessary to complete Form 
SIP because Form CC was generally based on Form SIP and incorporated 
many of the provisions of Form SIP.\661\ In addition, the Commission 
estimates that each competing consolidator would initially designate 
two individuals to access EFFS, with each application to access EFFS 
taking 0.15 hours for a total of 0.3 hours per competing consolidator. 
Therefore, the Commission estimates that it would take 200.3 hours to 
complete the Form CC and gain access to EFFS.
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    \661\ The Commission estimated that completing Form SIP, which 
includes 20 exhibits, would take 400 hours. See Securities Exchange 
Act Release No. 63347 (Nov. 19, 2010), 75 FR 77306 (Dec. 10, 2010) 
(``The Commission calculated in 2008 that Form SIP takes 400 hours 
to complete.''). Proposed Form CC includes 9 exhibits, so the 
Commission preliminarily estimates that completing proposed Form CC 
would take 200 hours.
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    As noted above, the Commission preliminarily estimates that 12 
respondents would be subject to this burden, however, as noted above, 
SROs are not required to file Form CC.\662\ Therefore, there would be 8 
respondents (the Commission preliminarily estimates that 4 SROs would 
also act as competing consolidators). Accordingly, the Commission 
estimates that the one-time initial registration burden for all 
competing consolidators is approximately 1,602.4 burden hours.\663\ The 
Commission estimates that competing consolidators will, as a general 
matter, prepare Form CC internally and not use external service 
providers to complete the form. It is likely that Form CC would be 
prepared by an attorney, and, with approximately 1,602.4 burden hours 
for all competing consolidators, the total cost to register all 
competing consolidators would be $748,320.80.\664\ In addition, the 
Commission estimates that each respondent would designate two 
individuals to sign the Form CC. An individual signing the Form CC must 
obtain a digital ID, at the cost of approximately $25 each year. 
Therefore, each respondent would expend approximately $50 annually to 
obtain digital IDs for the individuals with access to EFFS for the 
purposes of signing the Form CC \665\ or approximately $400 for all 
respondents.\666\
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    \662\ See supra note 537.
    \663\ The hour figure is based on 200.3 hours x an estimated 8 
competing consolidators. The Commission preliminarily believes that 
additional competing consolidators may register from time to time 
and would be subject to a similar one-time initial registration 
burden.
    \664\ The Commission based this estimate on the $467 hourly rate 
as of May 2019 for an assistant general counsel x 200.3 hours x 8 
respondents. The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead. 
Burden estimates may vary to the extent that competing consolidators 
utilize external service providers or outside counsel. The 
Commission preliminarily believes that competing consolidators would 
use in-house counsel and not use external service providers or 
outside counsel to file the Form CC.
    \665\ $25 per digital ID x 2 individuals = $50 per respondent.
    \666\ $50 per respondent x 8 total respondents = $400.
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    As discussed below, the Commission believes that amendments to Form 
CC represent the ongoing annual burdens of Form CC and proposed Rule 
614(a)(2). The Commission preliminarily estimates that competing 
consolidators may file two amendments--one Material Amendment and one 
Annual Report--during its first year after the

[[Page 16801]]

effectiveness of its Form CC. As discussed below, the ongoing annual 
burden for complying with these amendment requirements will be 
approximately 6.0 burden hours for each competing consolidator per 
amendment \667\ (for a total of $2,802), and approximately 48 burden 
hours for all competing consolidators per amendment (for a total of 
$22,416).\668\ Therefore, the Commission preliminarily estimates that 
each respondent will have an average annual burden of 12.0 hours (for a 
total of $5,604) for a total estimated average annual burden of 96 
hours (for a total of $44,832).\669\ As with the initial Form CC, the 
Commission believes the competing consolidators will conduct this work 
internally.
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    \667\ When Form SDR was adopted in 2015, the Commission 
estimated the hour burden for amendments to be roughly 3% of the 
initial burden. Securities Exchange Act Release No. 74246, supra 
note 554, at 14522. In that release, the initial burden was 
calculated to be 400 hours per respondent and 12 hours per 
respondent for amendments. The Commission believes that a similar 
ratio will apply to filers of Form CC because filers of Form SDR, 
like filers of Form CC, are required to file amendments annually as 
well as when certain information on Form SDR becomes inaccurate. 
Form SDR: General Instructions for Preparing and Filing Form SDR, 
available at https://www.sec.gov/about/forms/formsdr.pdf (last 
accessed Jan. 8, 2020). Thus, the Commission estimates that the 
annual burden of filing one amendment on Form CC will be 3% of the 
200 hour initial burden, or 6 hours.
    \668\ See supra note 664.
    \669\ See id.
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(b) Ongoing Burden and Costs
    As discussed above, proposed Rule 614(a)(2) would require competing 
consolidators to amend Form CC prior to the implementation of material 
changes to pricing, connectivity, or products offered as well as 
annually to correct information that has become inaccurate or 
incomplete for any reason. On an ongoing basis, each competing 
consolidator may add one individual to access the EFFS system for 
amendments, adding 0.15 hours per competing consolidator.\670\ The 
Commission believes that these amendments represent the ongoing annual 
burdens of Form CC and proposed Rule 614(a)(2). The Commission 
preliminarily estimates that the ongoing annual burden for complying 
with these amendment requirements will be approximately 6.15 burden 
hours for each competing consolidator per amendment \671\ (for a total 
of $2,872.05), and approximately 49.2 burden hours for all competing 
consolidators per amendment (for a total of $22,976.40).\672\
---------------------------------------------------------------------------

    \670\ For example, a competing consolidator may have to add an 
individual to access EFFS to account for staffing changes.
    \671\ When Form SDR was adopted in 2015, the Commission 
estimated the hour burden for amendments to be roughly 3% of the 
initial burden. Securities Exchange Act Release No. 74246, supra 
note 554, at 14522. In that release, the initial burden was 
calculated to be 400 hours per respondent and 12 hours per 
respondent for amendments. The Commission believes that a similar 
ratio will apply to filers of Form CC because filers of Form SDR, 
like filers of Form CC, are required to file amendments annually as 
well as when certain information on Form SDR becomes inaccurate. 
Form SDR: General Instructions for Preparing and Filing Form SDR, 
available at https://www.sec.gov/about/forms/formsdr.pdf (last 
accessed Jan. 8, 2020). Thus, the Commission estimates that the 
annual burden of filing one amendment on Form CC will be 3% of the 
200 hour initial burden, or 6 hours.
    \672\ See supra note 664.
---------------------------------------------------------------------------

    The Commission preliminarily believes that one Material Amendment 
would be a reasonable estimate for the number of such amendments per 
year. Thus, the Commission preliminarily estimates that respondents 
will be required to file on average a total of two amendments per year, 
one Material Amendment plus one Annual Report. Therefore, the 
Commission preliminarily estimates that each respondent will have an 
average annual burden of 12.3 hours (for a total of $5,744.10) for a 
total estimated average annual burden of 98.4 hours (for a total of 
$45,952.80).\673\ As with the initial Form CC, the Commission believes 
the competing consolidators will conduct this work internally. Further, 
as noted above, an individual signing the Form CC must obtain a digital 
ID, at the cost of approximately $25 each year. Therefore, each 
respondent would expend approximately $25 annually to obtain digital 
IDs for the individuals with access to EFFS for the purposes of signing 
the Form CC or approximately $200 for all respondents. Thus, the 
Commission preliminary estimates that each respondent will have an 
average annual cost of $5,769.10 ($5,744.10 + $25) and a total 
estimated annual cost of $46,152.80 ($5,769.10 * 8).
---------------------------------------------------------------------------

    \673\ See id.
---------------------------------------------------------------------------

    As discussed above, proposed Rule 614(a)(3) would permit a 
competing consolidator to cease acting as a competing consolidator by 
filing an amendment to Form CC 30 business days before the proposed 
cessation of acting as a competing consolidator. The Commission 
preliminarily believes that a competing consolidator's notice of 
cessation of acting as a competing consolidator on Form CC will be 
substantially similar to its most recently filed Form CC. The Form CC 
being filed in this circumstance will therefore already be 
substantially complete and as a result, the burden will not be as great 
as the burden of filing an application for registration on Form CC. 
Rather, the Commission preliminarily believes that the burden of filing 
a notice of cessation of acting as a competing consolidator on Form CC 
will be akin to filing an amendment on Form CC. Thus, the Commission 
estimates that the one-time burden of filing Form CC to notice 
cessation of acting as a competing consolidator will be approximately 2 
burden hours (for a total of $934).\674\
---------------------------------------------------------------------------

    \674\ See id. The Commission preliminarily estimates that no 
competing consolidators would cease operation in the first three 
years of the rule's effectiveness.
---------------------------------------------------------------------------

2. Competing Consolidator Duties and Data Collection
    As discussed above, proposed Rules 614(d)(1)-(d)(3) would require 
the competing consolidators to collect from the SROs quotation and 
transaction information for NMS stocks, calculate and generate proposed 
consolidated market data from this information, and make proposed 
consolidated market data available to subscribers on a consolidated 
basis on terms that are not unreasonably discriminatory. Proposed Rule 
614(d)(4) would require competing consolidators to timestamp the 
information with respect to quotations and transactions in NMS stocks 
that they collect from the SROs pursuant to proposed Rule 614(d)(1) 
upon receipt, upon receipt by the aggregation mechanism, and upon 
dissemination to subscribers. The Commission preliminarily believes 
that five types of entities may register to become competing 
consolidators and would have to build systems, or modify existing 
systems, that comply with Rules 614(d)(1)-(d)(4): (1) Market data 
aggregation firms, (2) broker-dealers that currently aggregate market 
data for internal uses, (3) the existing exclusive SIPs (CTA/CQ and 
Nasdaq UTP SIPs), (4) entities that would be entering the market data 
aggregation business for the first time (``new entrants''), and (5) 
SROs. The Commission preliminarily estimates that, apart from the SRO 
category, two respondents from each category may register to become a 
competing consolidator; the Commission preliminarily believes that four 
SROs may register to become competing consolidators.\675\
---------------------------------------------------------------------------

    \675\ The Commission preliminarily believes that these SROs may 
be a national securities association and equities national 
securities exchanges that do not currently operate an exclusive SIP.
---------------------------------------------------------------------------

(a) Initial Burden Hours and Costs for Market Data Aggregation Firms
    There are a number of technology firms that provide proprietary 
market data aggregation services. The Commission preliminarily believes 
that

[[Page 16802]]

some of these firms may choose to become competing consolidators 
because they currently collect, consolidate and disseminate market data 
to their customers, much like competing consolidators would. The 
systems used by these firms already collect, consolidate and 
disseminate more extensive proprietary market data than the data that 
is provided by the exclusive SIPs. Therefore, the Commission 
preliminarily believes that firms providing proprietary market data 
aggregation services would not have to extensively modify their systems 
to comply with Rules 614(d)(1)-(d)(4). For example, the Commission 
preliminarily believes that each market data aggregation firm would 
incur burden hours to expand their bandwidth to receive information 
that is not currently disseminated in the exchange proprietary market 
data feeds, such as the proposed regulatory data and administrative 
data, and may incur external costs to purchase hardware to receive such 
added information.
    The Commission preliminarily believes that each market data 
aggregation firm that chooses to become a competing consolidator would 
incur initial burden hours to upgrade its systems to comply with Rules 
614(d)(1)-(d)(4) in order to collect, consolidate and disseminate the 
proposed consolidated market data. The Commission also preliminarily 
believes that each market data aggregation firm would incur initial 
external costs associated with such upgrades, including co-location 
fees at the exchange data centers and the cost of market data.
    The Commission preliminarily believes that each market data 
aggregation firm would incur 900 initial burden hours \676\ and 
$206,250 in external costs \677\ to modify its systems to comply with 
Rules 614(d)(1)-(d)(4). Additionally, the Commission estimates that an 
existing market data aggregator would incur initial external costs of 
$14,000 to purchase market data from the SROs,\678\ and an additional 
initial external cost of $194,000 to co-locate at four exchange data 
centers,\679\ for a total initial external cost of $414,250 per 
existing market data aggregator,\680\ and an aggregate estimate of 
1,800 initial burden hours \681\ and $828,500 in initial external 
costs.\682\ The Commission solicits comment on the accuracy of this 
information.
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    \676\ The Commission estimates the monetized initial burden for 
this requirement to be $293,750. Based on discussions with a market 
participant, the Commission reached the following estimates: [(Sr. 
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at 
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 
hours) + (Director of Compliance at $489/hour for 50 hours) + 
(Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 
burden hours) to upgrade existing systems to comply with Rules 
614(d)(1)-(d)(4). The Commission derived this estimate based on per 
hour figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead.
    \677\ This estimate is based on discussions with a market 
participant and the Commission's understanding of hardware costs.
    \678\ The Commission is using the monthly market data access and 
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq 
UTP SIP as the basis of this estimate ($14,000).
    \679\ This estimate is based on an estimated $48,500 in initial 
co-location fees as calculated from NYSE Price List 2020, multiplied 
by four exchange data centers. The Commission preliminarily believes 
that the market data aggregators would already be co-located at the 
four exchange data centers, which may lower this estimate. See NYSE 
Price List 2020, supra note 408.
    \680\ $414,250 = [($206,250 in initial external costs to modify 
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 for the 
first month of market data costs) + ($194,000 in initial co-location 
costs at four exchange data centers)].
    \681\ The Commission estimates the monetized initial burden for 
this requirement to be $587,500. Based on discussions with a market 
participant, the Commission reached the following estimates: [(Sr. 
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at 
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 
hours) + (Director of Compliance at $489/hour for 50 hours) + 
(Compliance Attorney at $366/hour for 100 hours)] x [(2 market data 
aggregation firms)] = 1,800 initial burden hours across the market 
data aggregation firms.
    \682\ The Commission preliminarily estimates that the market 
data aggregation firms would incur the following initial external 
costs: [($206,250 to modify systems to comply with Rules 614(d)(1)-
(d)(4)) + ($14,000 to purchase market data) + ($194,000 to co-locate 
within four exchange data centers)] x [(2 market data aggregation 
firms)] = $828,500.
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(b) Initial Burden Hours and Costs for Broker-Dealers That Aggregate 
Market Data
    The Commission preliminarily believes that some broker-dealers that 
currently aggregate market data for their own internal uses may choose 
to become competing consolidators. The systems used by such broker-
dealers already collect and consolidate the proprietary feeds from the 
exchanges, which contain more extensive data than the data provided by 
the exclusive SIPs. Therefore, Commission preliminarily believes that 
these firms may not have to extensively modify their systems to comply 
with Rules 614(d)(1)-(d)(4). For example, the Commission preliminarily 
believes that each broker-dealer would incur burden hours to expand 
their bandwidth to receive information that is not currently 
disseminated in the exchange proprietary market data feeds, such as 
data from the OTC market, the proposed regulatory data and 
administrative data and may incur external costs to purchase hardware 
to receive such added information. In addition, these broker-dealers 
would incur burden hours to disseminate proposed consolidated market 
data to subscribers. The Commission estimates that the initial burden 
hour and external costs estimates for these broker-dealers to modify 
their systems to comply with Rules 614(d)(1)-(d)(4) would be similar to 
market data aggregation firms because, for both types of respondents, 
the scope of the systems changes and costs associated with becoming 
competing consolidators would be comparable.
    The Commission preliminarily believes that each broker-dealer that 
aggregates market data for internal uses that chooses to become a 
competing consolidator would incur burden hours to upgrade its systems 
to comply with Rules 614(d)(1)-(d)(4) in order to collect, consolidate, 
and disseminate the proposed consolidated market data. The Commission 
also preliminarily believes that each broker-dealer would also incur 
initial external costs associated with such upgrades, including co-
location fees at the exchange data centers and the cost of market data.
    The Commission preliminarily believes that each broker-dealer would 
incur 900 initial burden hours \683\ and $206,250 in external costs 
\684\ to modify its systems to comply with Rules 614(d)(1)-(d)(4). 
Additionally, the Commission estimates that a broker-dealer would incur 
initial external costs of $14,000 to purchase market data from the 
SROs,\685\ and an additional initial external cost of $194,000 to co-
locate itself at four exchange data centers,\686\

[[Page 16803]]

for a total initial external cost of $414,250 per broker-dealer,\687\ 
and an aggregate estimate of 1,800 initial burden hours \688\ and 
$828,500 in initial external costs.\689\ The Commission solicits 
comment on the accuracy of this information.
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    \683\ The Commission estimates the monetized initial burden for 
this requirement to be $293,750. Based on discussions with a market 
participant, the Commission reached the following estimates: [(Sr. 
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at 
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 
hours) + (Director of Compliance at $489/hour for 50 hours) + 
(Compliance Attorney at $366/hour for 100 hours)] = 6 months (900 
burden hours) to upgrade existing systems to comply with Rules 
614(d)(1)-(d)(4). The Commission derived this estimate based on per 
hour figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for a 1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead.
    \684\ This estimate is based on discussions with a market 
participant and the Commission's understanding of hardware costs.
    \685\ The Commission is using the monthly market data access and 
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq 
UTP SIP as the basis of this estimate ($14,000).
    \686\ This estimate is based on an estimated $48,500 in initial 
co-location fees as calculated from NYSE Price List 2020, multiplied 
by four exchange data centers. See NYSE Price List 2020, supra note 
408.
    \687\ $414,250 = [($206,250 in initial external costs to modify 
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 for the 
first month of market data costs) + ($194,000 in initial co-location 
costs at four exchange data centers)].
    \688\ The Commission estimates the monetized initial burden for 
this requirement to be $587,500. Based on discussions with a market 
participant, the Commission reached the following estimates: [(Sr. 
Programmer at $332/hour for 350 hours) + (Sr. Systems Analyst at 
$285/hour for 300 hours) + (Compliance Manager at $310/hour for 100 
hours) + (Director of Compliance at $489/hour for 50 hours) + 
(Compliance Attorney at $366/hour for 100 hours)] x [(2 broker-
dealers)] = 1,800 initial burden hours across the broker-dealers.
    \689\ The Commission preliminarily estimates that broker-dealers 
would incur the following initial external costs: [($206,250 to 
modify systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to 
purchase market data) + ($194,000 to co-locate within four exchange 
data centers) x (2 broker-dealers)] = $828,500.
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(c) Initial Implementation Burden Hours and Costs for the Exclusive 
SIPs
    The Commission preliminarily believes that the CTA/CQ SIP and the 
Nasdaq UTP SIP could choose to become competing consolidators due to 
their years of experience in collecting, consolidating and 
disseminating market data. The systems used by the exclusive SIPs 
already collect, consolidate and disseminate SIP data. Therefore, the 
Commission preliminarily believes that the exclusive SIPs would not 
have to build entirely new systems to comply with Rules 614(d)(1)-
(d)(4). For example, each exclusive SIP would incur burden hours and 
external costs to expand their bandwidth and connections to consume and 
disseminate proposed consolidated market data as well as to transmit 
it, and to program feed handlers to receive and normalize the different 
formats of the data feeds developed by the exchanges.\690\ Further, 
each exclusive SIP would expend external costs on purchasing proposed 
consolidated market data and on colocation fees at the exchange data 
centers.
---------------------------------------------------------------------------

    \690\ Feed handlers receive market data and make it usable to 
customers.
---------------------------------------------------------------------------

    However, the exclusive SIPs may have to make a greater scope of 
changes to become competing consolidators than market data aggregation 
firms. For this reason, the Commission has estimated initial burden 
hour and external cost estimates that are higher than those estimated 
for market data aggregation firms.
    The Commission preliminarily believes that each exclusive SIP would 
incur burden hours to upgrade their systems to comply with Rules 
614(d)(1)-(d)(4) to collect, consolidate and disseminate the proposed 
consolidated market data. The Commission also preliminarily believes 
that each exclusive SIP would also incur external costs associated with 
such upgrades, including co-location fees at the exchange data centers 
and the cost of market data. The Commission preliminarily believes that 
each exclusive SIP would incur 1,800 initial burden hours \691\ and 
$412,500 in external costs \692\ to modify its systems to comply with 
Rules 614(d)(1)-(d)(4). Additionally, the Commission estimates that an 
exclusive SIP would incur initial external costs of $14,000 to purchase 
market data from the SROs,\693\ and an additional initial external cost 
of $194,000 to co-locate itself at four exchange data centers,\694\ for 
a total initial external cost of $620,500 per existing SIP,\695\ and an 
aggregate estimate of 3,600 initial burden hours \696\ and $1,241,000 
in initial external costs.\697\ The Commission solicits comment on the 
accuracy of this information.
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    \691\ Based on discussions with a market participant, the 
Commission reached the following estimates for a market data 
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + 
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance 
Manager at $310/hour for 100 hours) + (Director of Compliance at 
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 
hours)] = 6 months (900 burden hours) to upgrade existing systems to 
comply with Rules 614(d)(1)-(d)(4). The Commission derived this 
estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for a 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead. As noted above, the Commission has 
increased this initial burden hour estimate for the exclusive SIPs. 
Therefore, the Commission preliminarily estimates that each 
exclusive SIP will incur 1,800 initial burden hours to upgrade its 
existing systems to comply with Rules 614(d)(1)-(d)(4) (or $587,500, 
as monetized).
    \692\ As noted above, the Commission estimates the initial 
external cost estimates to comply with Rules 614(d)(1)-(d)(4) will 
be higher for exclusive SIPs than for market data aggregation firms. 
Therefore, the Commission preliminarily estimates that each existing 
SIP will incur $412,500 in initial external costs to modify its 
systems to comply with Rules 614(d)(1)-(d)(4).
    \693\ The Commission is using the monthly market data access and 
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq 
UTP SIP as the basis of this estimate ($14,000).
    \694\ This estimate is based on an estimated $48,500 in initial 
co-location fees as calculated from NYSE Price List 2020, multiplied 
by four exchange data centers. See NYSE Price List 2020, supra note 
408.
    \695\ The Commission preliminarily estimates that each existing 
SIP would incur the following initial external costs: [($412,500 to 
modify systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to 
purchase market data) + ($194,000 to co-locate within four exchange 
data centers)] = $620,500.
    \696\ Based on discussions with a market participant, the 
Commission reached the following estimates for a market data 
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + 
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance 
Manager at $310/hour for 100 hours) + (Director of Compliance at 
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 
hours)] = 900 initial burden hours across the market data 
aggregation firms. As noted above, the Commission has increased this 
initial burden hour estimate to apply to the exclusive SIPs. 
Therefore, the Commission preliminarily estimates that each 
exclusive SIP will incur 1,800 initial burden hours to upgrade its 
existing systems to comply with Rules 614(d)(1)-(d)(4) (or $587,500, 
as monetized). The aggregate initial burden hour estimate for two 
exclusive SIPs would be [(1,800 initial burden hours) x (2 existing 
SIPs)] = 3,600 initial burden hours.
    \697\ The Commission preliminarily estimates that the exclusive 
SIPs would incur the following initial external costs: [($412,500 to 
modify systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to 
purchase market data) + ($194,000 to co-locate within four exchange 
data centers)] x [(2 exclusive SIPs)] = $1,241,000.
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(d) Initial Implementation Burden Hours and Costs for New Entrants
    The Commission anticipates that firms without prior experience in 
the business of collecting, consolidating and disseminating market data 
may choose to become competing consolidators and would have to build 
systems to comply with Rules 614(d)(1)-(d)(4). Because these systems 
would be completely new, the Commission preliminarily believes that 
these new entrants will incur substantially higher initial burden hours 
and external costs to build a system that complies with Rules 
614(d)(1)-(d)(4) than the other entities described above. For this 
reason, the Commission has estimated initial burden hour and external 
cost estimates for new entrants that are higher than those estimated 
for the other potential entities that may choose to become competing 
consolidators. The Commission preliminarily believes that each new 
entrant would incur initial burden hours to comply with Rules 
614(d)(1)-(d)(4) to build a system that collects, consolidates, and 
disseminates the proposed consolidated market data. The Commission also 
preliminarily believes that each new entrant would incur associated 
external costs, including co-location fees at the exchange data centers 
and the cost of market data. The Commission preliminarily believes that 
each new entrant would incur 3,600 initial burden hours \698\ and 
$825,000 in external

[[Page 16804]]

costs \699\ to build systems to comply with Rules 614(d)(1)-(d)(4). 
Additionally, the Commission estimates that a new entrant would incur 
initial external costs of $14,000 to purchase market data from the 
SROs,\700\ and an additional initial external cost of $194,000 to co-
locate itself at four exchange data centers,\701\ for a total initial 
external cost of $1,033,000 per new entrant,\702\ and an aggregate 
estimate of 7,200 initial burden hours \703\ and $2,066,000 in initial 
external costs.\704\ The Commission solicits comment on the accuracy of 
this information.
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    \698\ Based on discussions with a market participant, the 
Commission reached the following estimates for a market data 
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + 
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance 
Manager at $310/hour for 100 hours) + (Director of Compliance at 
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 
hours)] = 6 months (900 burden hours) to upgrade existing systems to 
comply with Rules 614(d)(1)-(d)(4). The Commission derived this 
estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead. As noted above, the Commission has 
increased this initial burden hour estimate to apply to the new 
entrants. Therefore, the Commission preliminarily estimates that 
each new entrant will incur 3,600 initial burden hours to build 
systems to comply with Rules 614(d)(1)-(d)(4) (or $1,175,000, as 
monetized).
    \699\ As noted above, the Commission has increased its initial 
external cost estimates for market data aggregation firms to apply 
to new entrants. Therefore, the Commission preliminarily estimates 
that each new entrant will incur $825,000 in initial external costs 
to build systems to comply with Rules 614(d)(1)-(d)(4).
    \700\ The Commission is using the monthly market data access and 
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq 
UTP SIP as the basis of this estimate ($14,000).
    \701\ This estimate is based on an estimated $48,500 in initial 
co-location fees as calculated from NYSE Price List 2020, multiplied 
by four exchange data centers. See NYSE Price List 2020, supra note 
408.
    \702\ The Commission preliminarily estimates that each new 
entrant would incur the following initial external costs: [($825,000 
to build systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 
to purchase market data) + ($194,000 to co-locate within four 
exchange data centers)] = $1,033,000.
    \703\ Based on discussions with a market participant, the 
Commission reached the following estimates for a market data 
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + 
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance 
Manager at $310/hour for 100 hours) + (Director of Compliance at 
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 
hours)] = 900 initial burden hours. As noted above, the Commission 
has increased the per market data aggregation firm initial burden 
hour estimate to apply to the new entrants. Therefore, the 
Commission preliminarily estimates that each existing SIP will incur 
3,600 initial burden hours to upgrade its existing systems to comply 
with Rules 614(d)(1)-(d)(4) (or $1,175,000, as monetized). [(3,600 
burden hours) x (2 new entrants] = 7,200 hours (or $2,350,000 as 
monetized).
    \704\ The Commission preliminarily estimates that each new 
entrant would incur the following initial external costs: [($825,000 
to build systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 
to purchase market data) + ($194,000 to co-locate within four 
exchange data centers) x (2 new entrants)] = $1,033,000. 
[($1,033,000 in initial external costs) x (2 new entrants)] = 
$2,066,000.
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(e) Initial Implementation Burden Hours and Costs for SROs
    The Commission anticipates that SROs may choose to become competing 
consolidators and would have to build new systems to comply with Rules 
614(d)(1)-(d)(4). Although these SROs may be able to leverage existing 
systems in developing a system compliant with Rules 614(d)(1)-(d)(4), 
the Commission preliminarily believes that these SROs would likely have 
to build new systems and thus will incur initial burden hours to comply 
with Rules 614(d)(1)-(d)(4) that are similar to new entrants. The 
Commission preliminarily believes that each SRO would incur initial 
burden hours to comply with Rules 614(d)(1)-(d)(4) to build a system 
that collects, consolidates, and disseminates the proposed consolidated 
market data. The Commission also preliminarily believes that each SRO 
would incur associated external costs, including co-location fees at 
the exchange data centers and the cost of market data. The Commission 
preliminarily believes that each SRO would incur 3,600 initial burden 
hours \705\ and $825,000 in external costs \706\ to build systems to 
comply with Rules 614(d)(1)-(d)(4). Additionally, the Commission 
estimates that an SRO would incur initial external costs of $14,000 to 
purchase market data from the SROs,\707\ and an additional initial 
external cost of $194,000 to co-locate itself at four exchange data 
centers,\708\ for a total initial external cost of $1,033,000 per new 
entrant,\709\ and an aggregate estimate of 14,400 initial burden hours 
\710\ and $4,132,000 in initial external costs.\711\ The Commission 
solicits comment on the accuracy of this information.
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    \705\ Based on discussions with a market participant, the 
Commission reached the following estimates for a market data 
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + 
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance 
Manager at $310/hour for 100 hours) + (Director of Compliance at 
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 
hours)] = 6 months (900 burden hours) to upgrade existing systems to 
comply with Rules 614(d)(1)-(d)(4). The Commission derived this 
estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead. As it did for its new entrant 
estimates, the Commission has increased this initial burden hour 
estimate to apply to the SROs. Therefore, the Commission 
preliminarily estimates that each new entrant will incur 3,600 
initial burden hours to build systems to comply with Rules 
614(d)(1)-(d)(4) (or $1,175,000, as monetized).
    \706\ As it did for its new entrant estimates, the Commission 
has increased its initial external cost estimates for market data 
aggregation firms to apply to the SROs. Therefore, the Commission 
preliminarily estimates that each SRO will incur $825,000 in initial 
external costs to build systems to comply with Rules 614(d)(1)-
(d)(4).
    \707\ The Commission is using the monthly market data access and 
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq 
UTP SIP as the basis of this estimate ($14,000).
    \708\ This estimate is based on an estimated $48,500 in initial 
co-location fees as calculated from NYSE Price List 2020, multiplied 
by four exchange data centers. See NYSE Price List 2020, supra note 
408.
    \709\ The Commission preliminarily estimates that each SRO would 
incur the following initial external costs: [($825,000 to build 
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to 
purchase market data) + ($194,000 to co-locate within four exchange 
data centers)] = $1,033,000.
    \710\ Based on discussions with a market participant, the 
Commission reached the following estimates for a market data 
aggregation firm: [(Sr. Programmer at $332/hour for 350 hours) + 
(Sr. Systems Analyst at $285/hour for 300 hours) + (Compliance 
Manager at $310/hour for 100 hours) + (Director of Compliance at 
$489/hour for 50 hours) + (Compliance Attorney at $366/hour for 100 
hours)] = 900 initial burden hours. As it did for its new entrant 
estimates, the Commission has increased the per market data 
aggregation firm initial burden hour estimate to apply to the SROs. 
Therefore, the Commission preliminarily estimates that each SRO will 
incur 3,600 initial burden hours to upgrade its existing systems to 
comply with Rules 614(d)(1)-(d)(4) (or $1,175,000, as monetized). 
[(3,600 burden hours) x (4 new entrants] = 14,400 hours (or 
$4,700,000 as monetized).
    \711\ The Commission preliminarily estimates that each SRO would 
incur the following initial external costs: [($825,000 to build 
systems to comply with Rules 614(d)(1)-(d)(4)) + ($14,000 to 
purchase market data) + ($194,000 to co-locate within four exchange 
data centers)] = $1,033,000. [($1,033,000 in initial external costs) 
x (4 new entrants)] = $4,132,000.
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(f) Ongoing Burden Hours and Costs for Market Data Aggregation Firms, 
Broker-Dealers That Aggregate Market Data, Exclusive SIPs, New 
Entrants, and SROs
    The Commission preliminarily believes that once a competing 
consolidator's system has been built, the entities that have become 
competing consolidators (originally, the existing market data 
aggregation firms, broker-dealers that aggregate market data, exclusive 
SIPs, new entrants, and SROs) will incur annual ongoing burden hours 
and external costs to operate and maintain their systems to comply with 
Rules 614(d)(1)-(d)(4). The Commission also preliminarily believes that 
these annual ongoing burdens should be similar across the competing 
consolidators because such systems would likely be similar in nature. 
Therefore, the burden hours and costs associated with operating and 
maintain a competing consolidator system should be comparable across 
competing consolidators. The Commission is therefore applying the same 
annual ongoing burden hour and external cost estimates across the five 
types of entities that the Commission anticipates may choose to become 
competing consolidators.

[[Page 16805]]

    The Commission preliminarily believes that entities choosing to 
become competing consolidators would incur annual ongoing burden hours 
and external costs to operate and maintain their modified systems to 
comply with Rules 614(d)(1)-(d)(4). The Commission preliminarily 
believes that each entity would incur 540 annual ongoing burden hours 
\712\ and $123,725 in annual ongoing external costs \713\ to operate 
and maintain its systems to comply with Rules 614(d)(1)-(d)(4).
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    \712\ The Commission preliminarily believes that once a 
competing consolidator's infrastructure is in place, the burden of 
operating and maintaining the infrastructure will be less than the 
burdens associated with establishing the infrastructure. The 
Commission estimates the monetized initial burden for this 
requirement to be $176,250. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead: [(Sr. Programmer at $332 for 210 hours) + 
(Sr. Systems Analyst at $285 for 180 hours) + (Compliance Manager at 
$310 for 60 hours) + (Director of Compliance at $489 for 30 hours) + 
(Compliance Attorney at $366 for 60 hours)] = 540 burden hours per 
entity and $176,250.
    \713\ This estimate is based on the initial external cost 
estimate for a market data aggregation firm to modify its systems to 
comply with Rules 614(d)(1)-(d)(4), but reduced because the 
Commission preliminarily believes that once a competing 
consolidator's infrastructure is in place, the burden of operating 
and maintaining the infrastructure will be less than the burdens 
associated with establishing the infrastructure.
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    Additionally, the Commission estimates that each entity would incur 
annual ongoing external costs of $168,000 to purchase market data from 
the SROs,\714\ and an additional annual ongoing external cost of 
$4,602,720 to co-locate itself at four exchange data centers,\715\ for 
a total annual ongoing external cost of $4,894,445 per entity.\716\ 
Because the Commission preliminarily believes that there will be two 
entities per category of potential competing consolidators for existing 
market data aggregators, broker-dealers that currently aggregate market 
data, exclusive SIPs and new entrants, for each of these categories, 
the aggregate estimates would amount to estimate of 1,080 annual 
ongoing burden hours \717\ and $9,797,530 in annual ongoing external 
costs.\718\
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    \714\ The Commission is using the monthly market data access and 
redistribution fees currently charged by the CTA/CQ SIP and Nasdaq 
UTP SIP as the basis of this estimate ($14,000), multiplied by 12 
months.
    \715\ This estimate is based on an estimated $95,890 in monthly 
co-location fees as calculated from NYSE Price List 2020, multiplied 
by four exchange data centers over 12 months. The Commission 
preliminarily believes that the market data aggregators would 
already be co-located at the four exchange data centers, which may 
lower this estimate for this category of respondent. See NYSE Price 
List 2020, supra note 408.
    \716\ $4,894,445 = [($123,725 to operate and maintain systems to 
comply with Rules 614(d)(1)-(d)(4)) + ($168,000 in monthly market 
data fees over 12 months) + ($4,602,720 to co-locate within four 
exchange data centers over 12 months)].
    \717\ The Commission estimates the monetized annual ongoing 
burden for this requirement to be $352,500. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Sr. Programmer at $332 for 210 
hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance 
Manager at $310 for 60 hours) + (Director of Compliance at $489 for 
30 hours) + (Compliance Attorney at $366 for 60 hours)] x [(2 market 
data aggregation firms/broker-dealers that currently aggregate 
market data/existing SIPs/new entrants)] = 1,080 annual ongoing 
burden hours and $352,500.
    \718\ The Commission preliminarily estimates that the market 
data aggregation firms/broker-dealers that currently aggregate 
market data for their own usage/exclusive SIPs/new entrants would 
incur the following aggregate annual ongoing external costs: 
[($123,725 to operate and maintain systems to comply with Rules 
614(d)(1)-(d)(4)) + ($168,000 in monthly market data fees over 12 
months) + ($4,602,720 to co-locate within four exchange data centers 
over 12 months)] x [(2 entities)] = $9,788,890.
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    Since the Commission preliminarily believes that there may be four 
SROs that will choose to become competing consolidators, it is 
estimating that these SROs will incur an aggregate estimate of 2,160 
annual ongoing burden hours \719\ and $19,577,780 in annual ongoing 
external costs.\720\ The Commission solicits comment on the accuracy of 
this information.
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    \719\ The Commission estimates the monetized initial burden for 
this requirement to be $353,500. The Commission derived this 
estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Sr. Programmer at $332 for 210 
hours) + (Sr. Systems Analyst at $285 for 180 hours) + (Compliance 
Manager at $310 for 60 hours) + (Director of Compliance at $489 for 
30 hours) + (Compliance Attorney at $366 for 60 hours)] x [(4 SROs)] 
= 2,160 annual ongoing burden hours across the SROs and $705,000.
    \720\ The Commission preliminarily estimates that the SROs would 
incur the following initial external costs: [($123,725 to operate 
and maintain systems to comply with Rules 614(d)(1)-(d)(4)) + 
($168,000 in monthly market data fees over 12 months) + ($4,602,720 
to co-locate within four exchange data centers over 12 months)] x 
[(4 SROs)] = $19,577,780 across the SROs.
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(g) Initial Burden and Costs for Proposed Rule 614(c)
    As discussed above, proposed Rule 614(c) would require each 
competing consolidator to make public on its website a direct URL 
hyperlink to the Commission's website that contains each effective 
initial Form CC, order of ineffective initial Form CC, and amendments 
to effective Form CCs. The Commission preliminarily estimates an 
initial burden of 0.5 hours per competing consolidator to publicly post 
the Commission's direct URL hyperlink to its website upon filing of the 
initial Form CC,\721\ for an aggregate initial burden of approximately 
six hours for the competing consolidators to publicly post the direct 
URL hyperlink to the Commission's website on their own respective 
websites.\722\
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    \721\ The Commission bases this estimate on a full-time 
Programmer Analyst spending approximately 0.5 hours to publicly post 
the URL hyperlink per competing consolidator. The Commission 
estimates the monetized initial burden for this requirement to be 
$120.50. The Commission derived this estimate based on per hour 
figures from SIFMA's Management & Professional Earnings in the 
Securities Industry 2013, modified by Commission staff to account 
for an 1,800-hour work-year and inflation, and multiplied by 5.35 to 
account for bonuses, firm size, employee benefits and overhead: 
Programmer Analyst at $241 for 0.5 hours = 0.5 initial burden hours 
per competing consolidator and $120.50.
    \722\ The Commission estimates the monetized initial aggregate 
burden for this requirement to be $1,446. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Programmer Analyst at $241 for 0.5 
hours) x (12 competing consolidators)] = 6 initial burden hours 
across the competing consolidators and $1,446.
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(h) Ongoing Burden and Costs for Proposed Rule 614(c)
    The Commission preliminarily believes that each competing 
consolidator would check the Commission's website whenever it submits 
amendments to effective Form CCs to ensure that the Commission's direct 
URL hyperlink that the competing consolidator has posted to its own 
website remains valid. The Commission preliminarily believes that a 
competing consolidator will file two amendments per year, so the 
Commission preliminarily estimates that each competing consolidator 
will incur an ongoing burden of 0.25 hours per amendment, or 0.5 hours 
per year, to ensure that it has posted the correct direct URL hyperlink 
to the Commission's website on its own website,\723\ for an aggregate 
annual

[[Page 16806]]

burden of approximately six hours for the competing consolidators to do 
so.\724\
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    \723\ The Commission bases this estimate on a full-time 
Programmer Analyst spending approximately 0.25 hours to check the 
Commission's website when the competing consolidator submits an 
amendment to effective Form CCs to ensure that the Commission's 
direct URL hyperlink that the competing consolidator has posted to 
its own website remains valid. Since the Commission preliminarily 
believes that a competing consolidator would file two amendments per 
year, the Commission preliminarily estimates that each competing 
consolidator would incur a burden of 0.5 hours per year. [(0.25 
hours) x (2 amendments per year)] = 0.5 hours per year to check the 
URL hyperlink. The Commission estimates the monetized annual burden 
for this requirement to be $120.50. The Commission derived this 
estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: Programmer Analyst at $241 for 0.5 
hours = 0.5 annual burden hours per competing consolidator and 
$120.50.
    \724\ The Commission estimates the monetized aggregate annual 
burden for this requirement to be $1,446.00. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Programmer Analyst at $241 for 0.5 
hours) x (12 competing consolidators)] = 6 annual burden hours 
across the competing consolidators and $1,446.00.
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3. Recordkeeping
(a) Initial Burden and Costs
    Proposed Rule 614(d)(7) would require each competing consolidator 
to keep and preserve at least one copy of all documents made or 
received by it in the course of its business and in the conduct of its 
business. These documents must be kept for a period of no less than 
five years, the first two years in an easily accessible place. Proposed 
Rule 614(d)(8) would require each competing consolidator to promptly 
furnish these documents to any representative of the Commission upon 
request. Based on the Commission's experience with recordkeeping costs 
and consistent with prior burden estimates for similar provisions,\725\ 
the Commission preliminarily estimates that this requirement will 
create an initial burden of 40 hours (for a total cost of $8,720),\726\ 
for a total initial burden of 480 hours for all respondents (for a 
total cost of $104,640).
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    \725\ See Securities Exchange Act Release No. 74246, supra note 
554, at 14541.
    \726\ The Commission based this estimate on the $218 hourly rate 
as of May 2019 for a paralegal x 40 hours. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead.
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(b) Ongoing Burden and Costs
    The Commission preliminarily believes that the ongoing annual 
burden of recordkeeping in accordance with proposed Rules 614(d)(7) and 
614(d)(8) would be 20 hours per respondent (for a total cost of $4,360) 
and a total ongoing annual burden of 240 hours for all respondents (for 
a total cost of $52,320).
4. Reports and Reviews
(a) Initial Burden and Costs
    The Commission preliminarily believes that the average one-time, 
initial burden to program systems to produce the monthly reports 
required by proposed Rules 614(d)(5) and (d)(6), including keeping the 
information publicly posted and free and accessible (in downloadable 
files under Rule 614(d)(5)), would be 246 hours per competing 
consolidator (for a total cost of $80,507) \727\ and $800 in external 
costs.\728\ The Commission estimates that the total initial burden 
would be 2,952 hours (for a total cost of $966,804) \729\ and a total 
initial external cost of $9,600.\730\
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    \727\ This figure is based on the estimated initial paperwork 
burden for Rule 606(a), which requires each broker or dealer to make 
publicly available on a website a quarterly report on its routing of 
non-directed orders in NMS stocks that are submitted on a held basis 
and of non-directed orders that are customer orders in NMS 
securities. See Disclosure of Order Handling Information, Securities 
Exchange Act Release No. 84528, supra note 10. For purposes of this 
proposal, the Commission is converting the 10 hour estimate for a 
quarterly report to an estimate for a monthly report. Additionally, 
the Commission is adding the burden of posting the required 
information to the website. The Commission estimates the monetized 
initial burden for this requirement to be $80,507. The Commission 
derived this estimate based on per hour figures from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
modified by Commission staff to account for an 1,800-hour work-year 
and inflation, and multiplied by 5.35 to account for bonuses, firm 
size, employee benefits and overhead: [(Sr. Programmer at $332 per 
hour for 160 hours) + (Sr. Database Administrator at $342 per hour 
for 20 hours) + (Sr. Business Analyst at $275 per hour for 20 hours) 
+ (Attorney at $417 per hour for 4 hours) + (Sr. Operations Manager 
at $366 per hour for 20 hours) + (Systems Analyst at $263 per hour 
for 16 hours) + ($308.50 blended rate for Sr. Systems Analyst and 
Sr. Programmer for 6 hours)] = 246 initial burden hours per 
competing consolidator and $80,507.
    \728\ The Commission estimates that each competing consolidator 
would incur an initial external cost of $800 for an external website 
developer to create the website.
    \729\ The Commission estimates the monetized initial aggregate 
burden for this requirement to be $966,804. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Sr. Programmer at $332 per hour 
for 160 hours) + (Sr. Database Administrator at $342 per hour for 20 
hours) + (Sr. Business Analyst at $275 per hour for 20 hours) + 
(Attorney at $417 per hour for 4 hours) + (Sr. Operations Manager at 
$366 per hour for 20 hours) + (Systems Analyst at $263 per hour for 
16 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr. 
Programmer for 6 hours)] x [(12 competing consolidators)] = 2,952 
initial aggregate burden hours across the competing consolidators 
and $966,804.
    \730\ $9,600 = ($800 for an external website developer to create 
the website) x (12 competing consolidators).
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(b) Ongoing Burden and Costs
    The Commission estimates that each competing consolidator would 
incur an average burden of 11 hours to prepare and make publicly 
available a monthly report in the format required by proposed Rules 
614(d)(5) and (d)(6) (for a total cost of $3,768.50), or a burden of 
132 hours per year (for a total cost of $45,222).\731\ Once a report is 
posted on an internet website, the Commission does not estimate that 
there would be an additional burden to allow the report to remain 
posted for the period of time specified in the rules. The total burden 
per year for all competing consolidators to comply with the monthly 
reporting requirement in proposed Rules 614(d)(5) and (d)(6) is 
estimated to be 1,584 hours (for a total cost of $542,664).\732\
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    \731\ This figure is based on the estimated ongoing paperwork 
burden for Rule 606(a), which requires each broker or dealer to make 
publicly available on a website a report on a quarterly basis. In 
the Paperwork Reduction Act discussion for Rule 606(a), the 
Commission established that the average annual burden for a broker-
dealer to comply with Rules 606(a)(1)(i)-(iii) would be 10 hours. 
See supra note 727, at 58388. For purposes of this proposal, the 
Commission is converting the 10 hour estimate for a quarterly report 
to an estimate for a monthly report. Additionally, the Commission is 
adding the burden of updating the website. The Commission estimates 
the monetized annual burden for this requirement to be $3,768.50. 
The Commission derived this estimate based on per hour figures from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013, modified by Commission staff to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead: [(Sr. Business 
Analyst at $275 per hour for 5 hours) + (Attorney at $417 per hour 
for 5 hours) + ($308.50 blended rate for Sr. Systems Analyst and Sr. 
Programmer for 1 hour)] x [(12 months)] = 132 initial burden hours 
per competing consolidator and $45,222.
    \732\ The Commission estimates the monetized annual aggregate 
burden for this requirement to be $542,664. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Sr. Business Analyst at $275 per 
hour for 5 hours) + (Attorney at $417 per hour for 5 hours) + 
($308.50 blended rate for Sr. Systems Analyst and Sr. Programmer for 
1 hour)] x [(12 competing consolidators)] x [(12 months)] = 1,584 
aggregate burden hours across the competing consolidators and 
$542,664.
---------------------------------------------------------------------------

5. Amendment to the Effective National Market System Plan(s) for NMS 
Stocks
    As discussed above, the proposed rule would require an amendment to 
the effective national market system plan(s) for NMS stocks from the 16 
national securities exchanges and one national securities association 
respondents who are participants in the effective national market 
system plan(s). The Commission preliminarily estimates that it would 
take the participants to the effective

[[Page 16807]]

national market system plan(s) approximately 420 hours to prepare the 
amendment. This preliminary estimate includes 210 hours for a 
respondent to comply with the timestamps required by the proposed rule, 
including a review and any applicable change of the respondent's 
technical systems and rules. Each SRO already employs some form of 
timestamping, and the Commission does not necessarily expect that the 
burden to comply with the timestamp requirement would be particularly 
burdensome.\733\ The preliminary estimate also includes 105 hours for 
the participants to compose the form of annual report on competing 
consolidator performance. Finally, the preliminary estimate includes 20 
hours the participants to compile and confirm the primary listing 
exchange for each NMS stock. The initial burden hours for all 
respondents would be 420 hours x 17 (for a total cost of 
$2,977,380).\734\
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    \733\ Currently, under the Equity Data Plans, the SROs attach 
timestamps to quotation information and transaction information 
provided to the exclusive SIPs. See, e.g., Nasdaq UTP Plan, supra 
note 13, at Section VIII; CQ Plan, supra note 13, at Section VI; CTA 
Plan, supra note 13, at Section VI.
    \734\ The Commission estimates the monetized burden for this 
requirement to be $130,860. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead: [(Attorney at $417 for (420 x 17) hours)].
---------------------------------------------------------------------------

6. Collection and Dissemination of Information by National Securities 
Exchanges and National Securities Associations
    As discussed above, the proposed amendment to Rule 603(b) would 
require every national securities exchange on which an NMS stock is 
traded and national securities association to make available to all 
competing consolidators and self-aggregators all information with 
respect to quotations for and transactions in NMS stocks, including all 
data necessary to generate consolidated market data, in the same manner 
and using the same methods, including all methods of access and using 
the same formats, as such exchange or association makes available any 
information with respect to quotations for and transactions in NMS 
stocks to any person. Accordingly, the SROs would be required to 
collect the information necessary to generate proposed consolidated 
market data, which would be required to be made available under 
proposed Rule 603(b). The respondents to this collection of information 
are the 16 national securities exchanges and the one national 
securities association who are participants in the effective national 
market system plan(s). The new data elements of proposed consolidated 
market data that the national securities exchanges and national 
securities associations must make available include auction 
information, depth of book data, round lot data, regulatory data 
(including LULD price bands), and administrative data. The Commission 
understands that the national securities exchanges and national 
securities associations currently collect and/or calculate all data 
necessary to generate proposed consolidated market data.\735\ 
Therefore, the Commission believes that the proposed amendments to 
603(b) would impose minimal initial and ongoing burdens on these 
respondents, including any changes to their systems, because they 
already collect and provide the data necessary to generate proposed 
consolidated market data, including regulatory data, to the exclusive 
SIPs and to subscribers of their proprietary data feeds.
---------------------------------------------------------------------------

    \735\ For example, the primary listing exchanges currently 
calculate LULD price bands and related information to generate 
synthetic LULD price bands. See Nasdaq, Equity Trader Alert #2016-
79: NASDAQ Announces Improved Protections for Equity Markets Coming 
Out of Halts (``Leaky Bands'') (Apr. 12, 2016), available at https://www.nasdaqtrader.com/TraderNews.aspx?id=ETA2016-79; NYSE, Trader 
Update: NYSE and NYSE MKT: Enhanced Limit Up Limit Down Procedures 
(Aug. 1, 2016), available at https://www.nyse.com/trader-update/history#110000029205; Securities Exchange Act Release No. 34-78435 
(July 28, 2016), 81 FR 51239 (Aug. 3, 2016) (SR-FINRA-2016-028).
---------------------------------------------------------------------------

(a) Initial Burden and Costs
    The Commission preliminarily estimates, in order to collect the 
information necessary to generate consolidated market data as required 
by proposed Rule 603(b), that a national securities exchange on which 
an NMS stock is traded or national securities association will require 
an average of 220 \736\ initial burden hours of legal, compliance, 
information technology, and business operations personnel time to 
prepare and implement such a system (for a total cost per exchange of 
$70,865).\737\
---------------------------------------------------------------------------

    \736\ The Commission based its estimate on the burden hour 
estimate provided in connection with the adoption of Regulation SHO 
because the requirements are similar to what a national securities 
exchange or national securities association would need to do to 
comply with proposed Rule 603(b). See Commission, Supporting 
Statement for the Paperwork Reduction Act Information Collection 
Submission for Rule 201 and Rule 200(g) of Regulation SHO (Sept. 5, 
2019).
    \737\ The Commission estimates the monetized initial burden for 
this requirement to be $70,865. The Commission derived this estimate 
based on per hour figures from SIFMA's Management & Professional 
Earnings in the Securities Industry 2013, modified by Commission 
staff to account for an 1,800-hour work-year and inflation, and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead: [(Compliance Manager at $310 for 105 hours) + 
(Attorney at $417 for 70 hours) + (Sr. Systems Analyst at $285 for 
20 hours) + (Operations Specialist at $137 for 25 hours)] = 220 
initial burden hours and $70,865.
---------------------------------------------------------------------------

(b) Ongoing Burden and Costs
    The Commission estimates that each national securities exchange on 
which an NMS stock is traded and national securities association would 
incur an annual average burden on an ongoing basis of 396 hours to 
collect the information necessary to generate proposed consolidated 
market data required by proposed Rule 603(b) (for a total cost per 
exchange of $128,064).\738\
---------------------------------------------------------------------------

    \738\ The Commission estimates the monetized ongoing, annual 
burden for this requirement to be $128,064. The Commission derived 
this estimate based on per hour figures from SIFMA's Management & 
Professional Earnings in the Securities Industry 2013, modified by 
Commission staff to account for an 1,800-hour work-year and 
inflation, and multiplied by 5.35 to account for bonuses, firm size, 
employee benefits and overhead: [(Compliance Manager at $310 for 192 
hours) + (Attorney at $417 for 48 hours) + (Sr. Systems Analyst at 
$285 for 96 hours)] = 336 initial burden hours and $128,064.
---------------------------------------------------------------------------

E. Collection of Information Is Mandatory

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

F. Confidentiality

1. Registration Requirements and Form CC
    As discussed above, under proposed Rule 614(b)(2), the Commission 
would make public via posting on the Commission's website each: (i) 
Effective initial Form CC, as amended; (ii) order of ineffectiveness of 
a Form CC; (iii) filed Form CC Amendment; and (iv) notice of cessation.
2. Competing Consolidator Duties and Data Collection and Maintenance
    The collection of information regarding competing consolidator 
duties and data collection and maintenance relates to the proposed 
consolidated market data that competing consolidators will collect, 
calculate, and provide to subscribers.
3. Recordkeeping
    The collection of information relating to recordkeeping would be 
available to the Commission and its staff, and to other regulators.
4. Reports and Reviews
    The collection of information regarding reports and reviews relates 
to information that would be published on competing consolidator 
websites.

[[Page 16808]]

5. Amendment to the Effective National Market System Plan(s) for NMS 
Stocks
    Amendments to the effective national market system plan(s) for NMS 
stocks would be required to be filed with the Commission pursuant to 
Rule 608. Once filed, the Commission would publish the amendments for 
public comment. Finally, the annual report of competing consolidator 
performance would be submitted to the Commission.
6. Collection and Dissemination of Information by National Securities 
Exchanges and National Securities Associations
    As discussed above, the proposed amendment to Rule 603(b) would 
require national securities exchanges and national securities 
associations to collect and provide information to the competing 
consolidators and self-aggregators, not to the Commission. Therefore, 
no assurances of confidentiality are necessary because the information 
will be made available to the public for a fee from the competing 
consolidators.

G. Revisions to Current Regulation SCI Burden Estimates

    As described above, the Commission is proposing to expand the 
definition of ``SCI entities'' under Regulation SCI to include 
``competing consolidators,'' which would be defined to have the same 
meaning as set forth in the proposed amendments to Rule 600(b)(16) of 
Regulation NMS.\739\ Thus, under the proposal, competing consolidators 
would be subject to the requirements of Regulation SCI.
---------------------------------------------------------------------------

    \739\ See proposed amendment to Rule 1000 of Regulation SCI.
---------------------------------------------------------------------------

    The rules under Regulation SCI impose ``collection of information'' 
requirements within the meaning of the PRA.\740\ Rule 1001(a) of 
Regulation SCI requires each SCI entity to establish, maintain, and 
enforce written policies and procedures for systems capacity, 
integrity, resiliency, availability, and security. Rule 1001(b) 
requires each SCI entity to establish, maintain, and enforce written 
policies and procedures to ensure that its SCI systems operate in a 
manner that complies with the Exchange Act, the rules and regulations 
thereunder, and the SCI entity's rules and governing documents, as 
applicable. Rule 1001(c) requires each SCI entity to establish, 
maintain, and enforce written policies and procedures for the 
identification, designation, and documentation of responsible SCI 
personnel and escalation procedures. Rule 1002(a) requires each SCI 
entity to begin to take appropriate corrective action upon any 
responsible SCI personnel having a reasonable basis to conclude that an 
SCI event has occurred. Rule 1002(b) requires each SCI entity to notify 
the Commission of certain SCI events. Rule 1002(c) requires each SCI 
entity, with certain exceptions, to disseminate information about SCI 
events to affected members or participants, and disseminate information 
about major SCI events to all members or participants. Rule 1003(a) 
requires each SCI entity to notify the Commission of material systems 
changes quarterly. Rule 1003(b) requires each SCI entity to conduct 
annual SCI reviews. Rule 1004 requires each SCI entity to designate 
certain members or participants for participation in functional and 
performance testing of the SCI entity's business continuity and 
disaster recovery plans, and to coordinate such testing with other SCI 
entities. Rules 1005 and 1007 set forth recordkeeping requirements for 
SCI entities. Rule 1006 requires, with certain exceptions, that each 
SCI entity electronically file required notifications, reviews, 
descriptions, analysis, or reports to the Commission on Form SCI.\741\
---------------------------------------------------------------------------

    \740\ For a complete analysis of Regulation SCI under the PRA, 
see SCI Adopting Release, supra note 28, at 18141; and Proposed 
Collection; Comment Request; Extension: Regulation SCI, Form SCI; 
SEC File No. 270-653, OMB Control No. 3235-0703, 83 FR 34179 (``2018 
PRA Extension'').
    \741\ For further details regarding the requirements of 
Regulation SCI, see Regulation SCI Adopting Release, supra note 28. 
See also ``Responses to Frequently Asked Questions Concerning 
Regulation SCI,'' September 2, 2015 (updated August 21, 2019), 
available at: https://www.sec.gov/divisions/marketreg/regulation-sci-faq.shtml.
---------------------------------------------------------------------------

    In 2018, there were an estimated 42 entities that met the 
definition of SCI entity and were subject to the collection of 
information requirements of Regulation SCI (``respondents'').\742\ At 
that time, an estimate of approximately 2 entities would become SCI 
entities each year, one of which would be an SRO. Accordingly, under 
these estimates, over the following three years, there would be an 
average of approximately 44 SCI entities each year.\743\
---------------------------------------------------------------------------

    \742\ See 2018 PRA Extension, supra note 740, at 34180.
    \743\ Id.
---------------------------------------------------------------------------

    As discussed above, the Commission preliminarily estimates that, 
under the current proposal, there could be 12 competing consolidators 
that would be subject to Regulation SCI as SCI entities.\744\ As 
discussed below, some of these entities may already be SCI entities and 
subject to the requirements of Regulation SCI. While the Commission 
estimates that the number of respondents would increase as a result of 
this proposal, the Commission preliminarily believes that its prior 
paperwork burden estimates per entity under Regulation SCI generally 
would be applicable to these new competing consolidators because they 
would be subject to the same requirements and burdens as other SCI 
entities.\745\ At the same time, the Commission preliminarily believes 
that burden estimates also should take into account the extent to which 
the entities that may register to become competing consolidators 
already comply with the requirements of Regulation SCI.
---------------------------------------------------------------------------

    \744\ See supra Section V.C.
    \745\ See 2018 PRA Extension, supra note 740. As discussed 
below, the Commission believes that 6 of the 12 entities estimated 
to register as competing consolidators are currently SCI entities. 
Thus, the Commission preliminarily estimates that, if the proposal 
were adopted, there would be an average of approximately 50 SCI 
entities each year.
---------------------------------------------------------------------------

    In particular, the Commission preliminarily believes that 2 of the 
estimated 12 competing consolidators may be the existing exclusive 
SIPs, which are currently subject to Regulation SCI as plan processors. 
Because these entities are responsible for collecting, consolidating, 
and disseminating proposed consolidated market data to market 
participants and thus would be operating a substantially similar 
business and performing a similar function in their role as competing 
consolidators, the Commission preliminarily believes that the current 
ongoing burden estimates for existing SCI entities would be applicable 
and there would be no material change in the estimated paperwork 
burdens for these entities under Regulation SCI.\746\
---------------------------------------------------------------------------

    \746\ Id. The burden estimates for SCI entity respondents 
included initial burdens for new SCI entities and ongoing burdens 
for all SCI entities. For the reasons discussed herein, the 
Commission preliminarily believes that the initial paperwork burdens 
for new SCI entities would not be applicable to these entities.
---------------------------------------------------------------------------

    As stated above, the Commission also preliminarily believes that 4 
of the entities that may register to become competing consolidators may 
be either: (i) An SRO currently subject to Regulation SCI; or (ii) an 
entity affiliated with an SCI SRO, formerly subject to Regulation SCI. 
The burden estimates for SCI entity respondents include both initial 
burdens for new SCI entities and ongoing burdens for all SCI 
entities.\747\ Because these SRO entities that would become competing 
consolidators are current SCI entities and are already required to 
implement the requirements of Regulation SCI with regard to SCI systems 
that they operate in their role as

[[Page 16809]]

SCI SROs, the Commission preliminarily believes that these entities 
would not have initial burdens equivalent to those estimated for new 
SCI entities. At the same time, as discussed above, the Commission 
preliminarily believes that these SROs may be a national securities 
association and/or equities national securities exchanges that do not 
currently operate an exclusive SIP. Because these entities would be 
entering an entirely new business and performing a new function with 
new SCI systems, unlike the current exclusive SIPs who may register to 
become competing consolidators discussed above, the Commission 
preliminarily believes that these SRO entities would have some initial 
burden that would be a percentage of that which entirely new SCI 
entities have. In particular, the Commission preliminarily estimates 
that the initial burdens for existing SCI SROs who register as 
competing consolidators would be 50 percent of the estimated initial 
burdens for entirely new SCI entities. For example, the Commission 
believes that such SCI SROs would need to develop and draft the 
policies and procedures required by Rule 1001(a) for new SCI systems 
utilized in their role as competing consolidators, but unlike 
completely new SCI entities, SCI SROs would already have existing Rule 
1001(a) policies and procedures in place for other types of SCI systems 
that they could utilize as a model and modify as needed for new SCI 
systems.\748\ The Commission also believes that the estimated ongoing 
paperwork burden estimates for all SCI entities would be applicable to 
these entities as well.\749\
---------------------------------------------------------------------------

    \747\ Id.
    \748\ As an example, the estimate of an initial recordkeeping 
burden was 694 hours per new respondent to comply with the policies 
and procedures requirement of Rule 1001(a). Id. at 34180. The 
Commission preliminarily estimates that, for an SCI SRO who 
registers as a competing consolidator, the initial burden for Rule 
1001(a) would be 50 percent of this estimated amount, or 347 hours.
    \749\ The ongoing paperwork burden estimates in the PRA 
Extension do not distinguish between different categories of SCI 
entities, but rather provides an average for all SCI entities.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the remaining 6 
estimated competing consolidators may be entities that are not 
currently subject to Regulation SCI. As discussed above, the Commission 
believes that these 6 entities may be market data aggregation firms, 
broker-dealers that currently aggregate market data for internal uses, 
and entities that would be entering the market data aggregation 
business for the first time.\750\ Accordingly, the Commission 
preliminarily believes that these entities would have the same 
estimated initial paperwork burdens as those estimated for new SCI 
entities and the same ongoing paperwork burdens as all other SCI 
entities.\751\
---------------------------------------------------------------------------

    \750\ See supra Section V.D.2.
    \751\ See 2018 PRA Extension, supra note 740.
---------------------------------------------------------------------------

H. Request for Comments

    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments to:
    156. Evaluate whether the proposed collections of information are 
necessary for the proper performance of the functions of the agency, 
including whether the information shall have practical utility;
    157. Evaluate the accuracy of our estimates of the burden of the 
proposed collection of information;
    158. Determine whether there are ways to enhance the quality, 
utility, and clarity of the information to be collected;
    159. Evaluate whether there are ways to minimize the burden of 
collection of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology; and
    160. Evaluate whether the proposed amendments would have any 
effects on any other collection of information not previously 
identified in this section.
    Persons submitting comments on the collection of information 
requirements should direct them to the Office of Management and Budget, 
Attention: Desk Officer for the Securities and Exchange Commission, 
Office of Information and Regulatory Affairs, Washington, DC 20503, and 
should also send a copy of their comments to Vanessa Countryman, 
Secretary, Securities and Exchange Commission, 100 F Street NE, 
Washington, DC 20549-1090, with reference to File Number S7-03-20. 
Requests for materials submitted to OMB by the Commission with regard 
to this collection of information should be in writing, with reference 
to File Number S7-03-20 and be submitted to the Securities and Exchange 
Commission, Office of FOIA/PA Services, 100 F Street NE, Washington, DC 
20549-2736. As OMB is required to make a decision concerning the 
collection of information between 30 and 60 days after publication, a 
comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication.

VI. Economic Analysis

A. Introduction and Market Failures

1. Introduction
    Section 3(f) of the Exchange Act requires the Commission, whenever 
it engages in rulemaking and is required to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider, in addition to the protection of investors, whether the 
action would promote efficiency, competition, and capital 
formation.\752\ In addition, Section 23(a)(2) of the Exchange Act 
requires the Commission, when making rules under the Exchange Act, to 
consider the impact such rules would have on competition.\753\ Exchange 
Act Section 23(a)(2) prohibits the Commission from adopting any rule 
that would impose a burden on competition not necessary or appropriate 
in furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \752\ 15 U.S.C. 78c(f).
    \753\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Wherever possible, the Commission has quantified the likely 
economic effects of the proposed amendments. The Commission is 
providing both a qualitative assessment and quantified estimates of the 
potential economic effects of the proposed amendments where feasible. 
The Commission has incorporated data and other information provided by 
commenters to assist it in the analysis of the economic effects of the 
proposed amendments. However, as explained in more detail below, 
because the Commission does not have, and in certain cases does not 
believe it can reasonably obtain data that may inform the Commission on 
certain economic effects, the Commission is unable to quantify certain 
economic effects. Further, even in cases where the Commission has some 
data, it is not practicable due to the number and type of assumptions 
necessary to quantify certain economic effects, which render any such 
quantification unreliable. Our inability to quantify certain costs, 
benefits, and effects does not imply that such costs, benefits, or 
effects are less significant. The Commission requests that commenters 
provide relevant data and information to assist the Commission in 
analyzing the economic consequences of the proposed amendments.
    In general, the Commission preliminarily believes that the proposed 
amendments would result in benefits by enhancing the consolidated 
market data content, reducing the latency of consolidated market data, 
and improving the dissemination of

[[Page 16810]]

consolidated market data. This would reduce information asymmetries 
that exist between market participants who subscribe to proprietary DOB 
and other proprietary products and market participants who only 
subscribe to SIP data, and could allow some market participants who 
subscribe to the more expensive proprietary DOB products to replace 
them with potentially cheaper consolidated market data feeds. 
Improvements to the content and latency of consolidated market data 
from the proposed amendments could also help market participants that 
currently rely on SIP data to make more informed trading decisions, 
which would facilitate their ability to trade competitively and improve 
their execution quality, and would facilitate best execution.
    The Commission preliminarily believes there are three main benefits 
from the expanded content of consolidated market data, which as noted 
above includes proposed ``core data.'' First, the expanded content of 
consolidated market data could allow market participants that currently 
only subscribe to SIP data to get additional content from expanded 
consolidated market data and to experience increased gains from trade 
by allowing them to take advantage of trading opportunities they may 
not have been aware of due to the lack of information in existing SIP 
data.\754\ Second, the expanded content of consolidated market data 
could also allow these market participants to improve their order 
routing and order execution capabilities, potentially lowering investor 
transaction costs. Finally, the expanded consolidated market data 
content and associated changes in how the NBBO and protected quotes are 
calculated could result in a narrower NBBO and wider protected quote in 
some stocks. A narrower NBBO and changes in protected quotes could 
affect price improvement that trading venues, including ATSs, 
exchanges, and internalizers, could offer.
---------------------------------------------------------------------------

    \754\ Here and throughout, the phrase ``gains from trade'' is 
meant to refer to a situation in which two market participants would 
each be better off if they exchanged their respective property. It 
captures the idea of a potential welfare benefit that could be 
realized if trade was allowed and possible. Generally in this 
proposal the relevant property will be securities and cash.
---------------------------------------------------------------------------

    The Commission preliminarily believes that there are costs to 
expanding the content of consolidated market data, including costs to 
new competing consolidators related to upgrading existing 
infrastructure in order to handle the dissemination of the increased 
message traffic; upgrading software and trading systems that consume 
consolidated market data; costs to market participants receiving 
consolidated market data from technological investments required to 
handle increased content and message traffic; as well as other costs. 
Expanding consolidated market data would also result in transfers among 
various market participants, including transfers from the current 
beneficiaries of asymmetric information associated with the uneven 
distribution of market data to market participants who currently do not 
have access to the additional information contained in proprietary DOB 
products and other proprietary products. There could also be costs to 
SROs associated with the dissemination of consolidated market data.
    With respect to the introduction of the decentralized consolidation 
model, the Commission has several reasons to believe that it is likely 
that a sufficient number of firms would be willing to enter the space 
of competing consolidators so that the market would be competitive. 
Under this assumption, the potential economic benefits of the proposed 
decentralized consolidation model would include a reduction in the 
latency differential that exists between SIP data and proprietary data 
feeds (as measured at the location of market participants using the 
data) and potential improvements in innovation and efficiency in the 
consolidated market data delivery space. Moreover, the fees for 
proposed consolidated market data could be lower than fees that market 
participants pay for similar depth of book data today because today 
market participants would need to subscribe to both the exclusive SIPs 
and proprietary data feeds to receive the same content that would be 
included in proposed consolidated market data. However, the Commission 
recognizes that there is uncertainty in the fees for proposed 
consolidated market data because they would depend on the structure of 
fees ultimately proposed for data content by an effective national 
market system plan(s) and on the ultimate fee structure of competing 
consolidators.\755\ The Commission also recognizes uncertainty in the 
fees that subscribers choosing to receive a subset of consolidated 
market data would pay under the proposed rule and that these 
subscribers could pay higher or lower fees than they do today for 
equivalent data.
---------------------------------------------------------------------------

    \755\ See infra Section VI.C.2(b).
---------------------------------------------------------------------------

    At the same time, the introduction of the decentralized 
consolidation model would impose direct costs on SROs, the existing 
exclusive SIPs, and potential competing consolidators. It would also 
impose indirect costs on the existing exclusive SIPs and market 
participants. The direct costs for potential competing consolidators 
(such as SROs, exclusive SIPs, and current market data aggregators) 
would include registration and compliance costs and implementation and 
incremental infrastructure costs. The Commission, however, 
preliminarily believes that many of the potential competing 
consolidators have currently already invested in this infrastructure 
for the existing business services that they provide (e.g., proprietary 
data aggregation services). The indirect costs to the existing 
exclusive SIPs would be a potential loss in revenue to competing 
consolidators from no longer being the exclusive distributors of 
consolidated market data. The indirect costs for market participants 
would include implementation costs and potential effects on prices that 
market participants would pay for the proposed consolidated market 
data. However, new fees for the data content of consolidated market 
data would need to be proposed by the effective NMS plan(s) for NMS 
stocks and filed with the Commission.
    The Commission preliminarily believes that there are a number of 
economic effects that are only possible as a result of expanding 
consolidated market data and the introduction of the decentralized 
consolidation model. These changes would lead to the benefits of less 
expensive alternatives to proprietary DOB products for market 
participants; potential new entrants into the broker-dealer, market 
making, and other latency sensitive trading businesses; expansion of 
business opportunities for market data aggregators; improved regulatory 
oversight from the Consolidated Audit Trail; and enhancements to the 
quality of service data vendors are able to provide. Further, as noted 
above, the Commission preliminarily believes that the proposal would 
facilitate best execution and reduce information asymmetries. These 
changes could also result in a number of costs including costs to 
market participants in the form of lower revenues for SROs; higher 
costs for the implementation of the Consolidated Audit Trail; 
potentially higher costs for certain market data vendors; as well as 
other costs. Some of these benefits and costs would result from 
transfers among various market participants.
2. Market Failures
    The Commission is proposing to amend Rules 600 and 603 and to adopt 
new Rule 614 of Regulation NMS under

[[Page 16811]]

the Exchange Act to increase the availability and improve the 
dissemination of information regarding quotations for and transactions 
in NMS stocks to market participants. First, the Commission proposes to 
define terms ``consolidated market data,'' ``core data,'' ``regulatory 
data,'' and ``administrative data,'' and to enhance the content of core 
data to include certain odd-lot quote information, certain depth of 
book data, and information on orders participating in auctions. Second, 
the Commission proposes to introduce a decentralized consolidation 
model whereby competing consolidators and self-aggregators would assume 
responsibility for the collection, consolidation, and dissemination 
functions currently performed by the exclusive SIPs.\756\
---------------------------------------------------------------------------

    \756\ See supra Sections III, IV.
---------------------------------------------------------------------------

    As discussed above,\757\ currently, some market participants have 
stated their view that they are unable to rely solely on SIP data to 
trade competitively in today's markets. One reason is that SIP data 
does not currently include some important data elements such as odd-lot 
quotations (except, as explained above,\758\ to the extent that odd-
lots quotations are aggregated into round lots pursuant to exchange 
rules), depth of book data, and information about orders participating 
in auctions.\759\ Exchanges directly sell these additional data 
elements to market participants and market data aggregation firms as 
part of proprietary DOB data products at significant premiums to SIP 
products.\760\ Another reason some market participants have raised 
concerns about SIP data is that there is a substantial latency 
differential between market data provided via the exclusive SIPs and 
proprietary data products delivered by the exchanges directly to market 
participants or to market data aggregators as part of proprietary data 
feeds.\761\ The latency and content disparity between SIP data feeds 
and proprietary DOB data products has the effect of increasing the 
market participants' demand for proprietary products to the extent 
market participants view acquiring such products as a competitive 
necessity.
---------------------------------------------------------------------------

    \757\ Id.
    \758\ See supra Section III.C.1(a).
    \759\ As explained above, only limited auction-related 
information is currently included in SIP data. See supra Section 
III.C.3(a).
    \760\ See infra Section VI.B.2(a).
    \761\ See infra Section VI.B.2(b).
---------------------------------------------------------------------------

    The Commission understands that there is an inherent conflict of 
interest in that the exchanges, as voting members of the Equity Data 
Plan operating committees, may not be incentivized to improve the 
content or latency of SIP data.\762\ Many of the exchanges have 
actively pursued commercial interests that do not necessarily further 
the regulatory objective to ``preserve the integrity and affordability 
of the consolidated data stream,'' \763\ which is necessary to ensure 
that there is a ``comprehensive, accurate, and reliable source of 
information for the prices and volume of any NMS stock at any time 
during the trading day.'' \764\ One example of this divergence of 
interest has been the development by certain exchanges of proprietary 
data products with reduced latency and expanded content (i.e., 
proprietary DOB products), without the exchanges, in their role as 
participants to the Equity Data Plans, similarly enhancing the data 
products offered by the Equity Data Plans.\765\ These proprietary DOB 
products have evolved to be considered competitive necessities by many 
market participants and are offered at significant premiums to 
exclusive SIP products.\766\ Another example of the divergence between 
commercial interests and regulatory goals has been the development by 
certain exchanges of limited TOB data products, which are offered at a 
discount compared to the SIP data and marketed to a more price-
sensitive segment of the market, without corresponding development by 
the exclusive SIPs of a less expensive SIP product for the price-
sensitive segment of the market.\767\ The exchanges have continued to 
develop and enhance their proprietary market data businesses--which 
generate revenue that, unlike SIP data revenues, do not have to be 
shared with the other SROs--while remaining fully responsible for the 
governance and operation of the Equity Data Plans, including content, 
infrastructure, and pricing, as well as data consolidation and 
dissemination.\768\ At the same time, the operation of the Equity Data 
Plans has not kept pace with the efforts of the exchanges to expand the 
content of and to employ technology to reduce the latency and increase 
the throughput of certain proprietary data products.
---------------------------------------------------------------------------

    \762\ See supra Section IV.A; supra note 267 (describing an 
exchange-led initiative to enhance the SIPs).
    \763\ See Regulation NMS Adopting Release, supra note 10, at 
37503.
    \764\ See Equity Market Structure Concept Release, supra note 
11, at 3600.
    \765\ See Proposed Governance Order, supra note 8, at Section 
II.B.1.
    \766\ See id.
    \767\ See id.; supra note 25.
    \768\ See Proposed Governance Order, supra note 8, at Section 
II.B.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that there are two additional 
factors related to the Equity Data Plan processors that may impede 
improvements to the dissemination of SIP data. First, pursuant to 
Regulation NMS, each exclusive SIP has exclusive rights to collect 
trade and quotation data related to NMS stocks from multiple SROs and 
then aggregate and disseminate market data to market participants.\769\ 
This structure may further impede improvements in the dissemination of 
SIP data \770\ because Equity Data Plan participants that govern 
exclusive SIPs do not have incentives to innovate due to the lack of 
competition in dissemination of SIP data.
---------------------------------------------------------------------------

    \769\ See supra note 21 and accompanying text.
    \770\ See infra Section VI.B.2(b).
---------------------------------------------------------------------------

    Second, the exclusive SIPs are either SROs themselves or affiliates 
of SROs.\771\ This gives them a dual role in that they serve as both 
existing plan processors and as entities selling directly their own 
proprietary market data products that can reach market participants 
faster than SIP data, or as affiliates of entities that do so. As 
discussed above, this may create an additional conflict of interest 
that could provide incentives making the Equity Data Plan participants 
that oversee the Equity Data Plans reluctant to improve the content and 
latency of the SIP data, because a divergence in the usefulness of SIP 
data provided by the exclusive SIPs as compared to the proprietary data 
feeds increases the value of the proprietary market data products.
---------------------------------------------------------------------------

    \771\ See supra note 42.
---------------------------------------------------------------------------

B. Baseline

    The Commission has assessed the likely economic effects of the 
proposed amendments, including benefits, costs, and effects on 
efficiency, competition, and capital formation, against a baseline that 
consists of the existing regulatory process for collecting, 
consolidating, and disseminating market data, and the structure of the 
markets for SIP data products and for connectivity and trading 
services.
1. Current Regulatory Process for Equity Data Plans and SIP Data
    As discussed above,\772\ the current regulatory framework for SIP 
data relies upon a centralized consolidation model, whereby the SROs 
provide certain quotation and transaction information for each NMS 
stock to a single exclusive SIP, which then consolidates this data and 
makes it available to market participants.\773\ This SIP data includes 
what historically has commonly been

[[Page 16812]]

referred to as core data, as well as certain regulatory data related to 
Commission and SRO rules and NMS plan requirements.\774\
---------------------------------------------------------------------------

    \772\ See supra Section II.A.
    \773\ Id.
    \774\ Id.
---------------------------------------------------------------------------

    As discussed in more detail below,\775\ SIP data currently includes 
transaction information for both round lot and odd-lot sized 
transactions as well as quotation information for round lot top of book 
quotes for each SRO. Additionally, several exchanges, pursuant to their 
own rules, aggregate odd-lot orders into round lots and report such 
aggregated odd-lot orders as quotation information to the exclusive 
SIPs.\776\ Thus, SIP data lacks information on odd-lot quotations at 
prices better than the best bid and offer and on depth of book 
quotations (i.e., limit orders resting at exchanges at prices outside 
of the bid and offer). Additionally, only limited auction-related 
information is included in SIP data.\777\
---------------------------------------------------------------------------

    \775\ See infra Section VI.B.2(a); supra Section III.C.1.
    \776\ See supra Section III.C.1(a).
    \777\ See supra Section III.C.3.
---------------------------------------------------------------------------

    Currently, the operating committees of the Equity Data Plans, which 
are governed exclusively by the SROs,\778\ select the exclusive SIPs to 
consolidate and disseminate market data to market participants. The 
selection process for the exclusive SIPs is organized through a bidding 
process, and once selected, an exclusive SIP has exclusive rights to 
consolidate and disseminate market data for a given Equity Data 
Plan.\779\ Currently, SIAC (a NYSE affiliate) is the exclusive SIP for 
the CTA and CQ Plans, and Nasdaq is the exclusive SIP for the UTP Plan.
---------------------------------------------------------------------------

    \778\ Under the Proposed Governance Order, the operating 
committee of the New Consolidated Data Plan would include non-SRO 
members. See Proposed Governance Order, supra note 8.
    \779\ The Nasdaq UTP Plan contains the description of its 
approach to the selection and evaluation of the processor. See 
Nasdaq UTP Plan, supra note 13, at 10. The CTA/CQ Plan does not 
contain a similar provision. See CTA Plan, supra note 13; CQ Plan, 
supra note 13. Historically, exchanges or exchange affiliates had 
always been selected to be plan processors.
---------------------------------------------------------------------------

    As explained above, each exclusive SIP is physically located in a 
different data center.\780\ The exchanges' primary data centers are 
also located in different locations. Each exchange and FINRA must 
transmit its quotation and transaction information from its own data 
center to the appropriate exclusive SIP's data center for 
consolidation, at which point SIP data is then further transmitted to 
market data end-users, which are often located in other data centers. 
The exclusive SIPs do not compete with each other in the collection, 
consolidation, or dissemination of SIP data. As discussed in more 
detail below,\781\ the dispersed physical locations of exclusive SIPs 
and SROs contribute to increased latency in delivering SIP data to 
market participants.
---------------------------------------------------------------------------

    \780\ See supra Section II.A; supra note 43.
    \781\ See infra Section VI.B.2(a); supra Section IV.A.
---------------------------------------------------------------------------

2. Current Process for Collecting, Consolidating, and Disseminating 
Market Data
    As discussed above,\782\ in addition to the provision of SIP data 
pursuant to the Equity Data Plans, the national securities exchanges 
separately sell their individual proprietary market data products 
directly to market participants via proprietary data feeds. Proprietary 
data feeds may include SIP data elements and a variety of additional 
data elements and can vary in content from proprietary top of book 
products to proprietary depth of book products.\783\ In addition, in 
connection with proprietary data feed products, the exchanges offer 
various connectivity services (e.g., co-location at primary data 
centers, fiber optic connectivity, wireless connectivity, and point-of-
presence connectivity at third-party data centers), which may result in 
higher speed transmissions.\784\ Typically, proprietary data is 
transmitted directly from each exchange to the data center of the 
subscriber, where the subscriber's broker-dealer or vendor (or the 
subscriber itself) privately consolidates such data with the 
proprietary data of the other exchanges. This section describes the 
current content of SIP data and proprietary data feeds, current process 
of data dissemination, and current process for costs of generating SIP 
data and proprietary data feeds.
---------------------------------------------------------------------------

    \782\ See supra Section II.A.
    \783\ See supra Section III.C.2.
    \784\ See supra note 51 and accompanying text; supra Section 
IV.A.
---------------------------------------------------------------------------

(a) Current Content of SIP Data and Proprietary Data Feeds
    As discussed above,\785\ today SIP data does not include some of 
the content that certain market participants rely on when handling 
customer orders and trading. The Commission preliminarily believes that 
while a large portion of retail investors rely solely on SIP data for 
trading decisions,\786\ a certain portion of market participants do not 
rely solely on SIP data to trade competitively in today's markets and 
instead purchase proprietary data from SROs to supplement or even 
replace SIP data.\787\ In particular, the Commission understands that 
approximately 50 to 100 firms purchase all of the DOB proprietary feeds 
from the exchanges and do not rely on the SIP data for their 
trading.\788\ Conversely, the number of users of the SIP data is much 
larger (in the millions),\789\ suggesting that many users rely on the 
exclusive SIPs alone. This creates significant information asymmetries 
between market participants who rely solely on SIP data and market 
participants who also rely on proprietary data feeds.
---------------------------------------------------------------------------

    \785\ See supra Section III.C.
    \786\ In response to a question about the need for Nasdaq's 
other market data products since the exclusive SIPs consolidate all 
market data, Nasdaq has stated: ``[t]here are a minority of market 
participants who want data that go `deeper' than SIP data, such as 
pending buy and sell interest at different price levels. For these 
customers of market data, Nasdaq and other firms offer proprietary 
products that include so-called `depth of book' and related auction 
data from our exchanges.'' See Nasdaq, Revenues Trend Down for U.S. 
Stock Market Data Backbone (Mar. 14, 2018), available at https://www.nasdaq.com/articles/revenues-trend-down-us-stock-market-data-backbone-2018-03-14.
    \787\ The Commission preliminarily believes that when market 
participants purchase proprietary data feeds to replace SIP data, 
they also almost always purchase SIP data as a back-up system to 
proprietary data. See also supra note 101.
    \788\ See supra note 140.
    \789\ As of the fourth quarter of 2018, there were approximately 
2-3 million non-professional and approximately 0.3 million 
professional use cases across the UTP and CTA/CQ SIPs. Additionally, 
there were approximately 300 non-display vendor use cases at each of 
the exclusive SIPs. The Commission understands that there is an 
overlap in subscribers across the exclusive SIPs. See, e.g., CTA 
Plan, Q3 2019 CTA Tape A & B Quarterly Population Metrics, available 
at https://www.ctaplan.com/publicdocs/CTAPLAN_Population_Metrics_3Q2019.pdf; Nasdaq UTP Plan, Q3 2019 UTP 
Quarterly Population Metrics, available at https://www.utpplan.com/DOC/UTP_2019_Q3_Stats_with_Processor_Stats.pdf.
---------------------------------------------------------------------------

    As described in Section II.A above, SIP data consists of certain 
quotation \790\ and transaction data \791\ that the SROs are required 
to provide to the exclusive SIPs for consolidation and dissemination to 
the public on the consolidated tapes. Specifically, the SIP data 
includes: (1) An NBBO; \792\ (2) the best bids and best offers from 
each SRO; \793\ and (3) information on trades such as prices and sizes. 
The SIP data also includes certain regulatory data,

[[Page 16813]]

such as information required by the LULD Plan,\794\ information 
relating to regulatory halts and MWCBs,\795\ information regarding 
short sale circuit breakers,\796\ and other data, such as data relating 
to retail liquidity programs, market and settlement conditions, the 
financial condition of the issuer, OTCBB data, last sale prices for 
corporate bonds, and information about indices.\797\
---------------------------------------------------------------------------

    \790\ See Rule 602 of Regulation NMS, 17 CFR 242.602.
    \791\ See Rule 601 of Regulation NMS, 17 CFR 242.601.
    \792\ The national best bid and offer are constructed from the 
best bid and offer prices across all exchanges in which the quoted 
size is at least one round lot. See supra Section III.C.1.
    \793\ The best bids and offers on an exchange are determined by 
the best prices in which the quoted size is at least one round lot. 
Some exchanges aggregate odd-lot orders at better prices into round 
lots and report such aggregated orders as their best bid or offer at 
the least aggressive price of the aggregated orders. Typically, the 
best bids and offers on each exchange are protected quotes under NMS 
Rule 611 and cannot be traded-through. See supra Section III.C.1(a).
    \794\ See supra note 38.
    \795\ See supra note 39.
    \796\ See supra note 40.
    \797\ See supra note 41.
---------------------------------------------------------------------------

    The exchanges separately sell their individual market data directly 
to market participants via proprietary data feeds. For example, the 
exchanges have developed proprietary DOB products that provide greater 
content (e.g., odd-lot quotations, orders at prices above and below the 
best prices, and information about orders participating in auctions, 
including auction order imbalances) at lower latencies,\798\ relative 
to the exclusive SIPs, for certain segments of the data market, such as 
automated trading systems. They have also developed proprietary TOB 
products that provide data that is generally limited to the highest bid 
and lowest offer and last sale price information at a lower price for 
another segment of the data market that is less sensitive to latency 
(e.g., retail or non-professional investors and wealth managers that 
access market data visually).\799\ Proprietary data feeds are available 
as part of exchanges' standard offerings. All exchanges, with the 
exception of IEX,\800\ offer for sale as part of their proprietary DOB 
products the complete set of orders at prices above and below the best 
prices (e.g., depth of book data), complete odd-lot quotation 
information, and information about orders participating in auctions, 
including auction order imbalances (for listing exchanges).\801\
---------------------------------------------------------------------------

    \798\ See, e.g., Nasdaq Global Data Products, Real-Time--NYSE 
Proprietary Market Data, and Cboe Equities Exchanges Market Data 
Product Offerings, supra note 19 (describing low-latency DOB data 
products).
    \799\ Examples of such proprietary TOB products include NYSE 
BBO, Nasdaq Basic, and Cboe One Feed. See supra note 19. NYSE BBO 
provides TOB data. Nasdaq Basic and Cboe One's Summary Feed provide 
TOB and last sale information. Nasdaq Basic also provides Nasdaq 
Opening and Closing Prices and other information, including 
Emergency Market Condition event messages, System Status, and 
trading halt information. Cboe One also offers a Premium Feed that 
includes DOB data. Each of these products is sold separately by the 
relevant exchange group. See TD Ameritrade Letter, supra note 19, at 
5-8 (stating that the lower cost of exchange TOB products, coupled 
with costs associated with the process to differentiate between 
retail professionals and non-professionals imposed by the Equity 
Data Plans, and associated audit risk, favors retail broker-dealer 
use of exchange TOB products).
    \800\ IEX makes proprietary data available but does not charge 
for it. See, e.g., IEX, Market Data, available at https://iextrading.com/trading/market-data/ (last accessed Jan. 8, 2020); 
Ramsay Letter II.
    \801\ See supra note 335.
---------------------------------------------------------------------------

    One notable gap between SIP data and proprietary DOB data is that 
SIP data does not include complete odd-lot quotation information even 
though odd-lots represent a large share of all trades in the U.S. stock 
market and can represent economically significant trading opportunities 
at prices that are better than the prices of displayed and disseminated 
round lots.\802\ While several exchanges aggregate odd-lot orders into 
round lots and report such aggregated orders as quotation information 
to exclusive SIPs,\803\ market participants must purchase proprietary 
data feeds, available from the exchanges, to see the odd-lot quotations 
that are priced better than the best bid or offer.\804\
---------------------------------------------------------------------------

    \802\ See Alexander Osipovich, supra note 166.
    \803\ See supra Section III.C.1(a). Exchange rules specify how 
the aggregation process works in different terms and with different 
levels of specificity, but many exchanges aggregate odd-lots across 
multiple prices and provide them to the exclusive SIPs at the least 
aggressive price if the combined odd-lot interest is equal to or 
greater than a round lot. See supra notes 157, 158, 789.
    \804\ See supra note 163.
---------------------------------------------------------------------------

    Odd-lot transactions make up a significant proportion of 
transaction volume in NMS stocks, including ETPs. As discussed 
above,\805\ based on data from the SEC's MIDAS analytics tool, the 
daily exchange odd-lot rate (i.e., the number of exchange odd-lot 
trades as a proportion of the number of all exchange trades) for all 
corporate stocks ranged from approximately 29% to 42% of trades and the 
daily exchange odd-lot rate for all ETPs ranged from 14% to 20% of 
trades in 2018, with the daily exchange odd-lot rate for all corporate 
stocks exceeding 50% several times in June 2019 (and exceeding 65% 
several times for the top decile by price) and reaching almost 30% for 
all ETPs in the same period.
---------------------------------------------------------------------------

    \805\ See supra Section III.C.1(b).
---------------------------------------------------------------------------

    Additionally, the staff analysis, referenced above, found that a 
significant portion of quotation and trading activity occurs in odd-
lots, particularly for frequently traded, high-priced tickers, and that 
as stock prices rise, the difference in spreads calculated using the 
different feeds also rises, indicating that odd-lots are more likely to 
set the best quote as stock prices rise.\806\ In addition, one 
commenter provided data supporting the findings of the staff analysis 
and showing that the odd-lot quotes provide superior pricing compared 
to the SIP data.\807\ A panelist at the Roundtable stated that odd-lot 
quotation data is needed to make effective decisions in trading 
applications and to fill client orders effectively.\808\ The Commission 
is unable to differentiate in the data between original round lot 
quotes and odd-lot quotes that were aggregated by the exchanges to be a 
round lot quote. The Commission invites comments on this issue.
---------------------------------------------------------------------------

    \806\ Id. The staff analysis in Section III.C.1(b) found that 
for the 500 top tickers by dollar volume, odd-lot quotes represented 
a significant price improvement over the exclusive SIP quotes. This 
analysis further found that as the price of the stock increased, the 
duration-weighted amount by which the odd-lot quote improved on the 
SIP quote increased as well.
    \807\ See supra note 177 and accompanying text.
    \808\ See supra note 173 and accompanying text.
---------------------------------------------------------------------------

    Another gap between SIP data and proprietary DOB data is that SIP 
data currently lacks quotation information in NMS stocks beyond the top 
of book \809\ even though the decimalization of securities pricing in 
2001 led to a dispersion of quoted volume away from the top of book. 
Consequently, the NBBO currently shown in SIP data became less 
informative and some market participants have come to view depth of 
book data as necessary to their efforts to trade competitively and to 
provide best execution to customer orders.\810\ Market participants 
interested in such depth of book data must rely upon the proprietary 
DOB products offered by the exchanges that include varying degrees of 
depth data.\811\
---------------------------------------------------------------------------

    \809\ See supra Section III.C.2.
    \810\ See supra Section III.C.2(d).
    \811\ See supra note 270.
---------------------------------------------------------------------------

    A staff review of depth of book quotations for corporate stocks 
using data from July 19, 2019, referenced above,\812\ revealed that 
there is a substantial amount of quotation volume at several levels 
below the best bid. During active parts of the trading day, there is 
quotation interest at every $0.01 increment at least ten levels out for 
the most liquid stocks; for the least liquid stocks, there is a large 
gap between the best bid and the next highest bid and large gaps are 
generally also present between the next several bid levels.
---------------------------------------------------------------------------

    \812\ See supra Section III.C.2(d).
---------------------------------------------------------------------------

    The Commission recognizes that market participants have diverse 
market data needs. Depth of book data can assist SORs and electronic 
trading systems with the optimal placement of orders across markets. 
Specifically, depth of book data can help market participants improve 
trading strategies and lower execution costs by placing liquidity 
taking orders that are larger than the displayed best bid or best offer

[[Page 16814]]

and achieve queue priority for liquidity providing orders that post at 
prices away from the best bid or offer.\813\ At the same time, the 
depth of book data may be less valuable to a certain segment of market 
participants (e.g., retail or non-professional customers). For example, 
a relatively small portion of orders execute at prices outside the NBBO 
indicating that some market participants do not find ``walking the 
book'' useful.\814\
---------------------------------------------------------------------------

    \813\ See id.; infra Section VI.C.1(b)(ii).
    \814\ That is, an order so large that it executes against all 
the volume at the top of the book and then executes against orders 
behind the top of the book. See Craig W. Holden and Stacey Jacobsen, 
Liquidity Measurement Problems in Fast Competitive Markets, 69 J. 
FIN. 1760, at Table I (2014) (showing that 3.3% of orders clear 
outside the NBBO). This does not necessarily mean that limit orders 
outside the NBBO are irrelevant. There are limitations to using the 
observation of trades at prices outside the NBBO at the time of 
trade execution as an indicator for orders that executed at prices 
outside of the NBBO at the time of trade order (specifically, these 
events are not necessarily the same thing).
---------------------------------------------------------------------------

    Finally, yet another gap between SIP data and proprietary DOB data 
is that SIP data includes only limited auction-related information even 
though auctions, especially opening and closing auctions, represent a 
significant proportion of trading volume on the primary listing 
exchanges.\815\ In particular, auctions account for approximately 7% of 
daily equity trading volume.\816\ Auctions are important for the 
implementation of passive investment strategies and generate prices 
that are used for a variety of market purposes, including setting 
benchmark prices for index rebalances and for mutual fund pricing. As 
such, the Commission recognizes that auction information may be 
valuable to a certain segment of market participants (e.g., those 
market participants that participate or would participate in auctions).
---------------------------------------------------------------------------

    \815\ See supra note 330.
    \816\ See supra Section III.C.3(c); supra note 348.
---------------------------------------------------------------------------

    Today, some NYSE auction data, such as pre-opening indicators,\817\ 
is disseminated through the CTA/CQ SIP, and no auction information 
generated by the other primary listing exchanges is distributed through 
the exclusive SIPs, except very limited LULD information related to 
auction collar messages.\818\ Thus while the exchanges' proprietary 
data includes detailed information on several aspects of their 
auctions, only a small subset of the auction-related information is 
included in SIP data.\819\
---------------------------------------------------------------------------

    \817\ See NYSE Rule 15.
    \818\ See supra note 333; UTP Plan, UTP Participant Input 
Specification (Dec. 3, 2019), available at https://www.utpplan.com/DOC/UtpBinaryInputSpec.pdf.
    \819\ See, e.g., NYSE, TAQ NYSE Order Imbalance--Quick Reference 
Card, available at https://www.nyse.com/publicdocs/nyse/data/TAQ_NYSE_Order_Imbalance_QRC.pdf (last accessed Jan. 8, 2020).
---------------------------------------------------------------------------

    While all listing exchanges make auction information available to 
market participants through proprietary data feeds, only some exchanges 
offer this information through specialized feeds for a lower price than 
full DOB products. For instance, NYSE Order Imbalances is an example of 
such proprietary auction data product offered by NYSE,\820\ while 
Nasdaq does not offer such specialized product.\821\
---------------------------------------------------------------------------

    \820\ See NYSE, Real-Time Data Imbalances, available at https://www.nyse.com/market-data/real-time/imbalances (last accessed Jan. 8, 
2020) (describing the NYSE Order Imbalances product).
    \821\ The Nasdaq Net Order Imbalance Indicator is a feature of 
Nasdaq's BookViewer proprietary data feed product rather than a 
stand-alone product. See Nasdaq, Net Order Imbalance Indicator, 
available at https://data.nasdaq.com/NOII.aspx (last accessed Jan. 
8, 2020).
---------------------------------------------------------------------------

    Currently, the gap in information between data in the exclusive SIP 
and proprietary DOB products may limit the current level of price 
efficiency if market participants with access to proprietary DOB 
products do not incorporate this information into prices quickly enough 
through their trading or quoting activity.\822\ However, the Commission 
does not know the extent of this possible effect.
---------------------------------------------------------------------------

    \822\ See infra Section VI.D.1. Price efficiency is greater when 
prices reflect current information faster.
---------------------------------------------------------------------------

(b) Current Process for Dissemination of SIP Data and Proprietary Data 
Feeds
    As discussed above,\823\ today SIP data is disseminated to 
investors and market participants through a centralized consolidation 
model with an exclusive SIP for each NMS stock, centrally collecting 
market data transmitted from the dispersed SRO data centers and then 
redistributing the consolidated market data to market participants who 
are often in different locations. The SROs typically transmit their 
market data through fiber optic cables to the SIPs.\824\
---------------------------------------------------------------------------

    \823\ See supra Sections I, II.A.
    \824\ See supra Section II.A.
---------------------------------------------------------------------------

    Typically, proprietary data is transmitted directly from each 
exchange to the data center of the subscriber and does not first travel 
to a centralized consolidation location. Furthermore, unlike the 
standardized transmission of SIP data over fiber optic cable, 
proprietary data is frequently transmitted using low-latency wireless 
connectivity or other forms of connectivity (often provided by the 
exchanges) that are faster than fiber.\825\
---------------------------------------------------------------------------

    \825\ Id.
---------------------------------------------------------------------------

    There is a significant latency differential between SIP data and 
the proprietary market data products that are delivered directly to 
market participants or to market data aggregators who generally have 
better connectivity, communications, and aggregation technology than 
the SIPs.\826\ Specifically, the centralized consolidation model has 
three sources of latency: (a) Geographic latency; (b) aggregation or 
consolidation latency; and (c) transmission or communication latency. 
The latency differentials between SIP data and proprietary data, in 
their various forms, are meaningful as detailed below, and market 
participants believe these differentials impact their ability to trade 
and their order execution quality.\827\
---------------------------------------------------------------------------

    \826\ See supra note 397; Bartlett and McCrary, supra note 418, 
at 45.
    \827\ See supra note 412 and accompanying text; Martin Scholtus 
et al., Speed, algorithmic trading, and market quality around 
macroeconomic news announcements, 38 J. BANKING & FIN. 89 (2014) 
(``This paper documents that speed is crucially important for high-
frequency trading strategies based on U.S. macroeconomic news 
releases. Using order-level data on the highly liquid S&P 500 ETF 
traded on Nasdaq from January 6, 2009 to December 12, 2011, we find 
that a delay of 300 ms or more significantly reduces returns of 
news-based trading strategies.''); Grace Hu et al., Early peek 
advantage? Efficient price discovery with tiered information 
disclosure, 126 J. FIN. ECON. 399 (2017) (``Calibrating the speed of 
price discovery at a finer scale, we find that the first 
200;milliseconds at 9:54:58 accounts for 89% of the one-second 
return at 9:54:58 on negative news days, and 85% of the one-second 
return at 9:54:58 on positives news days. In other words, most of 
the price discovery happens during the first 200 milliseconds, 
faster than the blink of an eye.''); Tarun Chordia et al., Low 
Latency Trading on Macroeconomic Announcements (Jan. 2016), 
available at https://www.business.unsw.edu.au/About-Site/Schools-Site/banking-finance-site/Documents/Low-Latency-Trading-on-Macroeconomic-Announcements.pdf (``Trading in the direction of the 
announcement surprise results in average dollar profits (across 
market participants) of $19,000 per event for the S&P500 ETF. 
Profits are larger for index futures, roughly $50,000 per event, yet 
this dollar amount translates to just two basis points of return 
relative to the $80 million of notional value traded in the 
direction of the surprise, and our measured profits do not account 
for commissions or the expense incurred in subscribing to real-time 
data services.'').
---------------------------------------------------------------------------

    Geographic latency refers to the time it takes for data to travel 
from one physical location to another. Greater distances usually equate 
to greater geographic latency, though geographic latency is also 
affected by the mode of data transmission. The Commission understands 
that geographic latency is typically the most significant component of 
the additional latency that SIP data feeds experience compared to 
proprietary data feeds.\828\ Because each exclusive SIP must collect 
data from geographically-dispersed SRO data centers, consolidate the 
data, and then

[[Page 16815]]

disseminate it from its location to end-users, which are often in other 
locations, this hub-and-spoke form of centralized consolidation creates 
additional latency.\829\ The Commission understands that the geographic 
latency of SIP data may be up to a millisecond.\830\
---------------------------------------------------------------------------

    \828\ See supra Section IV.A.
    \829\ Id.
    \830\ See supra note 396.
---------------------------------------------------------------------------

    Aggregation or consolidation latency refers to the amount of time 
an exclusive SIP takes to aggregate the multiple sources of SRO market 
data into SIP data and includes the time it takes to calculate the 
NBBO. This latency reflects the time interval between when an exclusive 
SIP receives data from an SRO and when it disseminates consolidated 
data to the end-user. Even though in recent years the exclusive SIPs 
made improvements to address aggregation latency, the related latency 
differential remains: as mentioned above, in the second quarter of 
2019, for Tapes A and B average quote feed and average trade feed 
aggregation latencies were 69 and 139 microseconds, respectively.\831\ 
In the same time period, the Tape C aggregation latency was an average 
of 16.9 microseconds for quotes and 17.5 microseconds for trades.\832\ 
Notably, these latency differentials remain even though the Equity Data 
Plans' operating committees have made some improvements to certain 
aspects of the exclusive SIPs and related infrastructure, including 
improvements to address aggregation latency.\833\
---------------------------------------------------------------------------

    \831\ See supra Section IV.A.
    \832\ Id.
    \833\ Id.
---------------------------------------------------------------------------

    Although exclusive SIPs are tasked with calculating and 
disseminating the NBBO, at each particular instant the NBBO being used 
by various market participants could be different due to market 
participants using proprietary data feeds. In particular, because of 
geographic and aggregation latencies, market participants that 
aggregate proprietary data feeds internally or that purchase 
proprietary data feeds from market data aggregators are likely to have 
NBBO quotes different from each other and different from the NBBO quote 
distributed by the exclusive SIPs.
    Transmission latency refers to the time interval between when data 
is sent (e.g., from an exchange) and when it is received (e.g., at an 
exclusive SIP and/or at the data center of the subscriber), and the 
transmission latency between two fixed points is determined by the 
transmission communications technology through which the data is 
conveyed. Transmission latency also varies depending on the geographic 
distance between where the data is sent and where it is received. There 
are several options currently used for transmitting market data, such 
as fiber optics, which typically are used by the exclusive SIPs for 
receipt and dissemination of SIP data, and wireless microwave 
connections, which the exchanges offer as an alternative for their 
proprietary data feeds but not for SIP data.\834\ Fiber optics are 
generally more reliable than wireless networks since the data signal is 
less affected by weather. The modes of transmission for SIP data are 
typically slower than the modes of transmission used for proprietary 
data. For instance, the Commission understands that currently each of 
the CTA/CQ Plan participants must transmit its data through 
connectivity options that have a round-trip latency of at least 280 
microseconds.\835\
---------------------------------------------------------------------------

    \834\ Id.
    \835\ See supra note 410.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the benefits of greater 
speed on the timescales at which the market currently measures latency 
have mostly to do with being faster than one's competitors. That is, 
the Commission understands that a speed increase on the microsecond 
timescale is less useful unless it makes a market participant faster 
than its rivals in the market. This means that in some situations small 
latency differentials that leave enough time for certain market 
participants to observe and react to information before other, slower 
market participants can be as costly to slower market participants as 
larger latency differentials.\836\
---------------------------------------------------------------------------

    \836\ Academic literature examines the effects of trading speed 
on revenues, adverse selection, and liquidity. See, e.g., Matthew 
Baron et al., Risk and Return in High-Frequency Trading, 54 J.Fin. & 
Quantitative Analysis 993 (2019) (testing the connection between 
high frequency trading (``HFT'') latency and trading performance; 
the authors find that relative latency matters and that ``HFT firms 
exhibit large, persistent cross-sectional differences in 
performance, with trading revenues disproportionally accumulating to 
a few firms.'' Furthermore, when HFT firms use their relative 
latency advantages to trade on news to create short-term arbitrage 
opportunities, they generate adverse selection on slower traders.); 
Bruno Biais et al., Equilibrium fast trading, 116 J. Fin. Econ. 292 
(2015) (arguing that fast trading technology ``provides advance 
access to value-relevant information, which creates adverse 
selection, lowering welfare,'' and ``generates a negative 
externality''); Thierry Foucault et al., Toxic Arbitrage, 30 Rev. 
Fin. Stud. 1053 (2017) (providing evidence that ``[a]rbitrage 
opportunities due to asynchronicities in the adjustment of prices to 
news are toxic because they expose dealers to the risk of trading 
with arbitrageurs at stale quotes.'' The authors then claim that 
these toxic arbitrage opportunities that come with higher trading 
speed impair market liquidity.).
---------------------------------------------------------------------------

    Currently, some market participants obtain proprietary data feeds 
from many SROs.\837\ Of these market participants, some prefer to have 
consolidated proprietary data. There are two ways these market 
participants can obtain consolidated data. First, market participants 
may independently create consolidated data by purchasing individual 
exchange proprietary market data products and consolidating that 
information for their own use.
---------------------------------------------------------------------------

    \837\ The exchanges, as a subset of SROs, sell proprietary data 
feeds to market participants.
---------------------------------------------------------------------------

    Second, market participants may obtain consolidated data from 
market data aggregators, which are mostly firms that purchase direct 
access to exchange data,\838\ consolidate the data, and disseminate the 
data (after various levels of processing) to market participants.\839\ 
Additionally, some market data aggregators do not purchase direct 
access to exchanges. Instead they provide hardware and software for 
market data aggregation to the parties that have contractual 
relationships to purchase or license the market data. These market data 
aggregators offer the opportunity for market participants to outsource 
the significant hardware, software, and personnel expertise that is 
required to consolidate the proprietary feeds directly. The products 
provided by these market data aggregators are used by many of the most 
sophisticated market participants in the market, and despite the fact 
that they create an additional chain link between market participants 
and proprietary feeds, the Commission preliminarily believes that these 
firms still deliver the data to the market participants faster than the 
exclusive SIPs.\840\
---------------------------------------------------------------------------

    \838\ As mentioned below, even when obtaining consolidated 
market data from market data aggregators, market participants also 
have to pay data fees directly to the exchanges. See infra Section 
VI.B.2(c).
    \839\ Market participants who consolidate market data 
independently may use other market data aggregators' products and 
services such as software.
    \840\ See, e.g., Roundtable Day One Transcript at 128-129 (Mark 
Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------

(c) Current Costs of Generating SIP Data and Proprietary Data Feeds
    As mentioned above,\841\ currently the exclusive SIPs consolidate 
and disseminate SIP data to market participants. The data fees that 
exclusive SIPs charge to market participants for obtaining SIP data are 
set by the operating committees of the Equity Data Plans.\842\ A 
portion of the

[[Page 16816]]

SIP data revenues is used to pay for the cost of maintaining and 
administering the exclusive SIP,\843\ and the remaining funds are 
distributed to the SRO members proportionately to their trading and 
quoting activity.\844\ In the case of the UTP SIP, there is an 
additional FINRA cost for the oversight of the OTC markets that is also 
taken out of the exclusive SIP's revenues before distributing funds to 
the plan participants.
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    \841\ See supra Section VI.B.1.
    \842\ Currently, these fees are immediately effective on filing, 
although the Commission has the ability to abrogate them. See Rule 
608(b)(3)(i) and (iii), 17 CFR 242.608(b)(3)(i) and (iii). The 
Commission recently proposed to amend Rule 608 to rescind the 
effective-on-filing nature of the fees and make them subject to the 
procedures in Rule 608(b)(1) and (2) for NMS plan amendments. If 
adopted as proposed, the Commission would publish a proposed fee and 
provide an opportunity for public comment on the proposed fee, and 
the proposed fee would not become effective unless approved by the 
Commission. See Effective on Filing Proposal, supra note 37.
    \843\ Once an exclusive SIP is selected, upgrades to that 
processor's SIP infrastructure are mandated and funded by the 
operating committee of the relevant Equity Data Plan. This comes out 
of SIP revenues distributed to the SROs.
    \844\ The market data revenue allocation formula is summarized 
at, e.g., UTP Plan, Summary of Market Data Revenue Allocation 
Formula, available at https://www.utpplan.com/DOC/Revenue_Allocation_Formula.pdf (last accessed Jan. 8, 2020). FINRA 
rebates a portion of the SIP revenue it receives back to broker-
dealer internalizers and ATSs based on the trade volume they report. 
See FINRA Rule 7610B. One Roundtable commenter estimated that from 
2013 to 2017, through the Nasdaq/UTP plan, the FINRA/Nasdaq TRF gave 
83 percent of SIP revenue it received to broker-dealers. See Wittman 
Letter, supra note 290, at 19.
---------------------------------------------------------------------------

    Exclusive SIP revenues from data fees totaled more than $430 
million in 2017.\845\ There are three broad categories of SIP data 
fees: Access fees, content fees, and distribution/redistribution 
fees.\846\ An access fee is a flat monthly fee for physical 
connectivity to SIP data and does not depend on the type of market 
participant (e.g., market data vendor vs. institutional broker).
---------------------------------------------------------------------------

    \845\ See Proposed Governance Order, supra note 8.
    \846\ See, e.g., CTA Plan, Q3 2019 CTA Quarterly Revenue 
Disclosure, available at https://www.ctaplan.com/publicdocs/Q3_2019_CTA_Quarterly_Revenue_Disclosure.pdf; Nasdaq UTP Plan, Q3 
2019 UTP Quarterly Revenue Disclosure, available at https://www.utpplan.com/DOC/UTP_Revenue_Disclosure_Q32019.pdf; Jones Letter, 
supra note 291.
---------------------------------------------------------------------------

    There are three categories of content fees that depend on how 
market participants access SIP data. First, if SIP data is displayed 
for market participants on computer screens or other devices, the 
market participant is charged a display fee (a professional or a non-
professional subscriber fee depending on the type of market 
participant). These fees can be per screen displaying the data, per 
user as part of the multi instance single user (MISU) program, and per 
application where multiple applications can run on one screen. Second, 
if SIP data is not displayed on computer screens and instead is 
directly sent to an automated system such as a trading algorithm or a 
smart order router, then the market participant is charged a non-
display fee. Display and non-display fees are monthly fees and entitle 
the subscriber to an unlimited amount of real-time market information 
during the month. In 2018, around 65% to 75% of total SIP revenue was 
accounted for by professional and non-professional display fees, and 
around 8% to 13% of revenue was accounted for by non-display fees.\847\ 
A third type of content fee is the query quote fee, which are fees 
collected from market participants accessing SIP data on a per quote 
basis. Under the per-query fee structure, subscribers are required to 
pay an amount for each request for a packet of real-time market 
information. Around 4% to 10% of total SIP revenue is accounted for by 
quote query fees in 2018.\848\ Finally, exclusive SIPs charge 
distribution/redistribution fees when the market data is delivered to a 
user other than the initial purchaser.
---------------------------------------------------------------------------

    \847\ Id.
    \848\ Id.
---------------------------------------------------------------------------

    Based on the exclusive SIPs' public disclosures, as of fourth 
quarter of 2018 there were approximately 2-3 million non-professional 
subscription use cases and approximately 0.3 million professional 
subscription use cases across the UTP and CTA/CQ SIPs. Additionally, 
there were approximately 300 non-display vendor use cases at each of 
the exclusive SIPs.\849\ The Nasdaq UTP SIP operating expenses totaled 
around $7 million in 2017.\850\ The CTA/CQ SIP operating expenses 
totaled around $8.8 million in 2018.
---------------------------------------------------------------------------

    \849\ See supra note 789.
    \850\ Operating expenses for the Nasdaq UTP Plan represent 
support costs, paid to the SIP, and are a pre-determined amount 
agreed upon by the Nasdaq UTP Plan's SRO participants. The Nasdaq 
UTP SIP costs do not include the costs of the exchanges generating 
the data they send to the Nasdaq UTP SIP. The UTP Plan also incurs 
administrative costs and other miscellaneous expenses, which 
together totaled around $3.6 million.
---------------------------------------------------------------------------

    The Commission preliminarily believes that there is a substantial 
difference between the fees market participants pay for SIP data and 
the fees they pay for proprietary DOB data products. For instance, 
monthly non-display fees charged by the CTA/CQ SIP is $2,000 for 
Network A and $1,000 for Network B,\851\ while monthly non-display fees 
charged by NYSE as part of proprietary data feed is $20,000,\852\ which 
is an order of magnitude larger than the SIP data fee. Additionally, 
proprietary data feed fees have increased significantly over the past 
decade. For instance, SIFMA estimates that between 2010 and 2018 data 
fees charged by some exchanges went up by three orders of magnitude or 
more.\853\ In comparison, SIP data fees went up by 5% during the same 
time period.\854\ Based on Commission staff experience, the Commission 
understands that the number of subscribers to proprietary market data 
is relatively small.\855\ The Commission understands that the number of 
subscribers of proprietary market data and proprietary market data 
revenues vary across exchanges and that some exchanges obtain a larger 
percentage than other exchanges of their total market data revenue from 
proprietary data products (as opposed to revenue from SIP data 
products). For example, the Commission estimates that in 2018, NYSE 
collected approximately 5% of its net revenues from selling proprietary 
market data products. On the other hand, according to the Commission's 
estimates, Cboe BYX collected approximately 9% of its revenues from 
selling proprietary market data products.\856\
---------------------------------------------------------------------------

    \851\ See CTA Plan, Schedule of Market Data Charges (Jan. 1, 
2015), available at https://www.ctaplan.com/publicdocs/ctaplan/notifications/trader-update/Schedule%20Of%20Market%20Data%20Charges%20-%20January%201,%202015.pdf.
    \852\ See SIFMA Letter.
    \853\ See SIFMA Letter.
    \854\ SIFMA's study submitted in connection with the Roundtable 
contained analysis examining the change in fees that some broker-
dealers paid for CTA SIP data between 2010 and 2018. The analysis 
showed that CTA SIP fees for most categories of data increased by an 
average of 5% between 2010 and 2018. However, the change in the 
total amount each broker-dealer spent on CTA SIP data varied based 
on the type of broker-dealer. The analysis found that the average 
amount of money spent on CTA SIP data by retail broker-dealers 
declined by 4% between 2010 and 2017, but the average amount spent 
by institutional broker-dealers increased by 7%. See id. at 21-28.
    \855\ See supra note 140.
    \856\ See infra Section VI.B.2(d). The Commission estimates are 
based on NYSE and Cboe BYX's Form 1 filings and UTP and CTA/CQ 
revenue metrics. NYSE's Form 1 filings disclose $968 million as its 
net revenues in 2018. NYSE's revenues from the SIP redistribution is 
approximately $47 million. Note 2 to the exchange's financial 
statements states that NYSE collects market data revenues from the 
exclusive SIPs and ``to a lesser extent for (sic) New York Stock 
Exchange proprietary data products,'' indicating that the 
approximately $47 million in revenues from SIP data could be a 
benchmark for their proprietary market data revenues. NYSE Form 1, 
available at https://www.sec.gov/Archives/edgar/vprr/1900/19003689.pdf (last accessed Jan. 29, 2020). Similarly, Cboe BYX Form 
1 filings report $58 million in net revenues. Of this $58 million, 
$26 million were market data revenue--approximately $21 million from 
SIP data revenues and $5 million from proprietary market data 
revenues. Cboe BYX Form 1, available at https://www.sec.gov/Archives/edgar/vprr/1900/19003669.pdf (last accessed Jan. 29, 2020).
---------------------------------------------------------------------------

    As mentioned above,\857\ market participants who purchase 
proprietary data feeds from multiple SROs may

[[Page 16817]]

choose to self-aggregate multiple data feeds, or, alternatively, they 
can purchase already consolidated data from market data aggregators. 
The exchanges charge a data fee to any market participant that 
purchases exchanges' data from market data aggregators.\858\ Therefore, 
these fees are effectively a part of the total price that a market 
participant must pay when purchasing data from a market data 
aggregator. In some cases, these fees may be so high that only a subset 
of market participants can afford to self-aggregate proprietary feeds 
from all exchanges or purchase market data aggregator products.\859\ 
The Commission preliminarily believes that more active market makers 
and some sophisticated broker-dealers including a number of HFT firms 
and some of the larger banks with proprietary data feed trading desks 
either self-aggregate or purchase aggregation services or products from 
third-party vendors.
---------------------------------------------------------------------------

    \857\ See supra Section VI.B.2(b).
    \858\ Some exchanges charge redistribution fees or their 
equivalents to market data aggregators and separately, one or more 
data fees (based on different use cases such as professional or non-
professional, display or non-display) to market participants who 
purchase the exchanges' data from market data aggregators. See Virtu 
Letter I, at 16-79 (Exhibit ``A,'' lists of data and connectivity 
fees by several exchanges).
    \859\ See, e.g., Roundtable Day One Transcript at 128-129 (Mark 
Skalabrin, Redline Trading Solutions).
---------------------------------------------------------------------------

    Based on Commission staff expertise, the Commission understands 
that the data fees the exchanges charge to market participants that 
purchase the exchanges' data from market data aggregators may account 
for a significant portion of the total price market participants pay 
for the market data aggregators' data products. However, the Commission 
does not have information on the pricing of market data aggregators' 
data and cannot break down market data product prices between the 
direct data fees charged by the exchanges and the fees charged by 
market data aggregators for their services; the Commission invites 
comments on the issue.
    Among other fees, the exchanges charge fees for various 
connectivity services they offer (e.g., co-location, fiber 
connectivity, and wireless connectivity). Connectivity services permit 
a customer to access an exchange's proprietary market data and/or its 
trading and execution systems as well as SIP data. The purchase and use 
of certain connectivity services is necessary to directly access an 
exchange's market data and to directly participate in that market, at 
least for those market participants that represent the vast majority of 
trading activity on exchanges. Additionally, these connectivity 
services may be needed in order to take advantage of the reduced 
latencies offered by the proprietary data feeds, including when market 
participants prefer the contents of SIP data consolidated from the 
proprietary data feeds--rather than delivered by an exclusive SIP--to 
avoid additional latencies.
    Connectivity fees can be substantial. For instance, the annual 
fiber connectivity fees per port at the exchanges' primary data centers 
are $90,000 at Cboe, $120,000 at Nasdaq, and $168,000 at NYSE.\860\ Co-
location services may have two components: An initial fee and an 
ongoing monthly fee based on the kilowatt (kW) usage. For example, at 
NYSE an initial fee for a dedicated high-density cabinet that consumes 
9kW per month is $5,000, and an ongoing monthly fee per kW is 
$1,050.\861\ At Nasdaq, an initial fee is $3,500, and an ongoing 
monthly fee is $4,500.\862\ Thus, for a year of co-location in a 
dedicated cabinet with 9kW power, these fees add up to over $118,000 
for NYSE and over $57,000 for Nasdaq.
---------------------------------------------------------------------------

    \860\ See Letter to Brent J. Fields, Secretary, Commission, from 
Brad Katsuyama, CEO, Investors Exchange LLC, at Table 7 (Jan. 29, 
2019) (``Katsuyama Letter II'') (10Gb fiber connectivity).
    \861\ See NYSE price list 2020, supra note 408.
    \862\ See Nasdaq, Price List--Trading Connectivity, available at 
https://www.nasdaqtrader.com/Trader.aspx?id=PriceListTrading2 (last 
accessed Dec. 19, 2019).
---------------------------------------------------------------------------

(d) Current Aggregate Exchange Revenues From Selling Market Data and 
Connectivity
    The Commission estimates that in 2018 the exchanges earned a total 
revenue of approximately $941 million from selling both proprietary and 
SIP market data products and connectivity services in the equities 
market. In addition, the Commission estimates that the exchanges earned 
approximately $596 million of this $941 million revenue from selling 
market data products and approximately $345 million of this revenue 
from selling connectivity services. With respect to the revenue from 
market data products, the Commission estimates that in 2018 the 
exchanges earned approximately $327 million of the $596 million revenue 
from equity SIP data and approximately $269 million from selling 
proprietary data products. Further, approximately $63 million of the 
$327 million equity SIP revenue in 2018 was distributed to FINRA.\863\
---------------------------------------------------------------------------

    \863\ When taking this $63 million into account, total SIP 
revenues shared by SROs were approximately $390 million in 2018, 
which is consistent with the $430 million estimate for 2017 noted in 
the Proposed Governance Order (which also included the amount paid 
to the plan processor). See supra note 845 and accompanying text. 
This estimate is also consistent with the $387 million estimate for 
2017. See Jones Letter, supra note 291, at 25.
---------------------------------------------------------------------------

    The Commission's estimates above are mainly based on revenue 
information that the exchanges submitted as part of their Form 1 
filings.\864\ In addition, the Commission used SIP revenue information 
disclosed by the CTA/CQ Plans and the Nasdaq UTP Plan in their 
quarterly revenue disclosures.\865\ Furthermore, because revenue 
information provided by some exchanges in their Form 1 filings is not 
sufficiently detailed for this calculation, the Commission had to make 
certain assumptions in order to derive these estimates. First, the Form 
1 filings for NYSE and NYSE MKT combine revenue from connectivity fees 
with revenue from market data fees. For these exchanges, the Commission 
derived the revenue earned from connectivity fees by assuming that the 
revenue that these exchanges earn from proprietary data is slightly 
smaller than the revenue that they earn from SIP data (based on notes 
in their Form 1 filings which indicate that SIP revenue exceeds 
proprietary data revenue). Second, the Form 1 filing for Nasdaq 
combines revenue from connectivity fees with revenue from transaction 
fees. The Commission derived the revenue that Nasdaq earned from 
connectivity fees by assuming that Nasdaq's revenues from connectivity 
fees and transaction fees were in the same proportion to one another as 
NYSE's revenues from these two business lines. Third, Form 1 filings 
for exchanges that offer trading in both equities and options provide 
revenue information for these two asset classes combined. For these 
exchanges, the Commission assumed that their combined revenues from 
market data fees and connectivity fees in the equities market and in 
the options market were in the same proportion to one another as the 
market data and connectivity revenues that these exchanges would have 
earned in each of these markets based on their dollar volume market 
share (as compared to the dollar volume market share of the exchanges 
that trade only equities or only options).
---------------------------------------------------------------------------

    \864\ See Commission, National Securities Exchange Periodic 
Amendments to Form 1 (Modified June 20, 2019), available at https://www.sec.gov/rules/national-securities-exchanges-amendments.htm 
(providing links to exchanges' Form 1 filings).
    \865\ See supra note 846.
---------------------------------------------------------------------------

3. Competition Baseline
    This section discusses, as it relates to this rulemaking, the 
current state of the market for core and SIP data products, the market 
for proprietary data

[[Page 16818]]

products, the market for connectivity services, and the market for 
trading services as well as broker-dealers' competitive strategies for 
trading services.
(a) Current Structure of Market for Core and SIP Data Products
    As discussed above,\866\ under the NMS plans, SIP data is 
collected, consolidated, processed, and disseminated by the exclusive 
SIPs.\867\ Equity Data Plan operating committees, which are composed of 
the SROs, set the fees the exclusive SIPs charge for SIP data.\868\ Any 
revenue earned by the exclusive SIPs, after deducting their operating 
costs and FINRA's OTC oversight costs, is split among the SROs. FINRA 
rebates a portion of the exclusive SIP revenue it receives back to 
broker-dealer internalizers and ATSs based on the trade volume they 
report.\869\
---------------------------------------------------------------------------

    \866\ See supra Section II.A.
    \867\ Id.
    \868\ See supra note 842 and accompanying text.
    \869\ See supra note 844.
---------------------------------------------------------------------------

    The fact that Equity Data Plan operating committees approve all NMS 
plan proposed fee changes can create conflicts of interest for the SROs 
because their duties administering NMS plans that either charge or 
could charge fees could potentially come into conflict with other 
products the SROs sell or costs they incur as part of their businesses. 
For example, some of the SROs sell proprietary data products that are 
considered by some to be substitutes for SIP data. This can create a 
conflict of interest regarding the three NMS plans that set fees for 
SIP data because the SROs vote to set SIP fees, own and control the 
dissemination of data, and set the prices of some of the proprietary 
data products the exclusive SIPs may compete against.
    As discussed in detail above, each Equity Data Plan selects a 
single exclusive SIP through a bidding process to be the exclusive 
distributor of the NMS plan's data.\870\ This grants the SIP a monopoly 
franchise in the distribution of the NMS plan's data, which means that 
the SIPs may not be subject to competitive forces. The Commission 
acknowledges that there is uncertainty about this conclusion. In 
particular, the economic literature provides theory and evidence that 
could predict either more efficient or less efficient outcomes under a 
monopoly structure. A paper by Demsetz would predict that the current 
monopolistic structure is most efficient.\871\ In industries where 
there are economies of scale, a monopoly structure may lead to the most 
efficient means of production. This profile applies to the distribution 
of core data because of the high fixed costs.\872\ Demsetz (1968) 
argues that just because an industry has a monopolistic provider of a 
service does not mean that it is not subject to competitive forces. In 
particular, Demsetz (1968) argues that if the monopolistic provider of 
a service is subject to competition in the bidding process it could 
provide sufficient competitive incentives to achieve a competitive 
outcome. However, many theories provide examples of situations in which 
the monopolistic structure is less efficient than other 
structures.\873\ The Commission does not believe that the exclusive SIP 
bidding process provides sufficient competitive incentives for three 
reasons. First, the bidding process could be subject to conflicts of 
interest since some of the SROs voting to select the exclusive SIP are 
also bidding to be the SIP. Second, the contracts are not bid out 
regularly, so there may not be a significant chance that the current 
exclusive SIP will be replaced. Third, historically in some cases the 
bidding process may not be competitive due to the number of bidders. 
Therefore, the Commission does not believe that the bidding process for 
exclusive SIPs is likely to produce the most efficient outcome and 
subject the exclusive SIPs to competitive forces.
---------------------------------------------------------------------------

    \870\ See supra Section IV.A.
    \871\ See Harold Demsetz, Why Regulate Utilities?, 11 J.L. & 
Econ. 55 (1968) (``Demsetz (1968)'').
    \872\ See infra note 882 and accompanying text.
    \873\ See, e.g., Oliver E. Williamson, Franchise Bidding for 
Natural Monopolies--in General and with Respect to CATV, 7 The Bell 
J. Econ. 73 (1976) (discussing why bidding for monopolies may not 
work well); Robin A. Prager, Firm behavior in franchise monopoly 
markets, 21 Rand J. Econ. 211 (1990).
---------------------------------------------------------------------------

    The exclusive SIPs have significant market power in the market for 
core and aggregated market data products and are monopolistic providers 
of certain information, which means that for all such products they 
would have the market power to charge supracompetitive prices. Fees for 
core data are paid by a wide range of market participants, including 
investors, broker-dealers, data vendors, and others.
    One reason the exclusive SIPs have significant market power is 
that, although some market data products are comparable to SIP data and 
could be used by some core data subscribers as substitutes for SIP data 
in certain situations, these products are not perfect substitutes and 
are not viable substitutes across all use cases. For example, as 
mentioned above, some market data aggregators buy direct depth of book 
feeds from the exchanges and aggregate them to produce products similar 
to SIP data.\874\ However, these products do not provide market 
information that is critical to some subscribers and only available 
through the exclusive SIPs, such as LULD plan price bands and 
administrative messages.\875\ Additionally, some SROs offer top of book 
data feeds, which may be considered by some to be viable substitutes 
for SIP data for certain applications.\876\ However, broker-dealers 
typically rely on the SIP data to fulfill their obligations under Rule 
603 of Regulation NMS, i.e., the ``Vendor Display Rule,'' which 
requires a broker-dealer to show a consolidated display of market data 
in a context in which a trading or order routing decision can be 
implemented.\877\
---------------------------------------------------------------------------

    \874\ The feeds produced by market data aggregators offer 
additional features, such as lower latency, but usually cost more 
than SIP data. See Roundtable Day One Transcript at 126-129 (Mark 
Skalabrin, Redline Trading Solutions).
    \875\ See supra Section III.D, III.E.
    \876\ In the equity markets, the top of book feeds offered by 
the SROs are usually cheaper than SIP data. However, they may only 
contain information from one exchange, or one exchange family. See, 
e.g., Nasdaq Basic, supra note 19; CBOE One, supra note 19; NYSE 
BQT, supra note 19; TD Ameritrade Letter, supra note 19 (stating 
that the lower cost of exchange TOB products, coupled with costs 
associated with the process to differentiate between retail 
professionals and non-professionals imposed by the SIP Plans, and 
associated audit risk, favors retail broker-dealer use of exchange 
TOB products).
    \877\ See Vendor Display Rule, Rule 603 of Regulation NMS; supra 
Section IV.B.2(a).
---------------------------------------------------------------------------

    The purchase of SIP data or proprietary market data from all 
exchanges, either directly or indirectly, is necessary for all market 
participants executing orders in NMS securities.\878\ SROs have 
significant influence over the prices of most market data products. For 
example, the exchanges individually set the pricing of the top of book 
data feeds that they sell to market data aggregators and broker-dealers 
that self-aggregate who in turn generate consolidated data. At the same 
time, SROs collectively, as participants in the national market system 
plans, decide what fees to set for SIP data.\879\ Although market data 
aggregators might compete with the exclusive SIPs by offering products 
that provide consolidated data, they ultimately derive their data from 
the exchanges' direct proprietary data feeds, whose prices are set by 
the exchanges, a subset of SROs.\880\
---------------------------------------------------------------------------

    \878\ For example, Rule 611(a) of Regulation NMS requires 
trading centers to establish policies and procedures to prevent 
trade-throughs. In order to prevent trade-throughs, executing 
broker-dealers need to be able to view the protected quotes on all 
exchanges. They can fulfill this requirement by using SIP data, 
proprietary data feeds offered by the SROs, or a combination of 
both.
    \879\ See supra note 842.
    \880\ Pursuant to Section 19(b) of the Exchange Act and Rule 
19b-4 thereunder, SROs must file with the Commission proposed rules, 
in which they set prices for their direct feed data. Those prices 
can vary depending on the type of end user.

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[[Page 16819]]

    Regarding the level of competition among non-SRO market data 
aggregators that sell consolidated data to market participants, the 
Commission currently does not have a precise estimate of the number of 
players in this market and does not know how specialized these players 
are.\881\ The Commission invites comments on this issue.
---------------------------------------------------------------------------

    \881\ The Commission assumes that certain entities from the list 
of market data vendors published on Nasdaq's website currently 
perform the market data aggregator function. See supra note 516.
---------------------------------------------------------------------------

    Additionally, the production of both core data and proprietary data 
feeds involves relatively high fixed costs and low variable costs.\882\ 
Fixed costs are composed of, among others, costs to set up 
infrastructure, regulatory approval costs, software development costs, 
administrative costs and overhead costs, while variable costs include 
costs to contract with and establish connectivity to each customer. 
Importantly, fixed costs of the production of both core data and 
proprietary data feeds are not specific to the production of data but 
also support the exchanges' other services such as intermediating 
trade. In such markets, the firms have additional incentives to 
increase the number of their customers in order to spread the fixed 
cost across a larger base of consumers.
---------------------------------------------------------------------------

    \882\ See, e.g., Paul M. Romer, Endogenous Technological Change, 
98 J. Pol. Econ. S71-102 (1990) (pointing out that information is 
fundamentally distinct from other goods because it has a fixed cost 
of discovery and a near zero cost of replication).
---------------------------------------------------------------------------

(b) Current Structure of Market for Proprietary Market Data Products
    In addition to SIP data, the exchanges voluntarily disseminate 
proprietary data and charge fees for this data. As noted above,\883\ 
the proprietary DOB products are generally characterized as fast, low 
latency products designed for automated trading systems that include 
additional content, such as depth of book data, while proprietary TOB 
products are limited in content, such as the exchange's top of book 
quotation information and transaction information and are designed 
largely for the non-automated segment of the market (e.g., non-
professional investors and wealth managers that access market data 
visually). Proprietary DOB products typically include odd-lot 
quotations, orders at prices above and below the best prices (i.e., 
depth of book data), and information about orders participating in 
auctions, including auction order imbalances.
---------------------------------------------------------------------------

    \883\ See supra Section II.A.
---------------------------------------------------------------------------

    Proprietary data fees have increased significantly over the past 
decade, as suggested by SIFMA estimates that show that, for some 
broker-dealers, data fees charged by some exchanges went up by three 
orders of magnitude or more between 2010 and 2018.\884\ 
Correspondingly, exchanges' revenues from selling proprietary data and 
connectivity services also went up over the last several years. For 
example, Budish, et al. (2019) observe that exchanges earn significant 
revenues from selling proprietary data (as well as connectivity 
services).\885\ According to NYSE's Form 1 filings, its revenues from 
data services (including connectivity revenues but excluding SIP data 
revenues) increased approximately 93% from 2014 to 2018. Similarly, 
Nasdaq's Form 1 filings show an approximately 21% increase in their 
revenues from data services (excluding revenues from connectivity 
services and SIP data revenues). On the other hand, during the same 
period, revenues distributed back to NYSE by the exclusive SIPs 
increased approximately 18% and the revenues distributed back to Nasdaq 
increased approximately 12%. The exchanges' differences in their 
reporting of these numbers make it difficult to compare revenue numbers 
across exchanges. However, for both of these exchanges, their revenues 
from the proprietary data and connectivity business have been growing 
faster than the revenues they collect from SIP data.\886\
---------------------------------------------------------------------------

    \884\ See SIFMA Letter; Virtu Letter I, at 4 (discussing double 
``dipping'' on fees by the exchanges).
    \885\ See Eric Budish et al., supra note 15.
    \886\ According to its 2014 Form 1 filing, NYSE collected 
approximately $138 million as market data revenues, covered under 
the ``data services fees'' income statement line item. According to 
the notes to NYSE's financial statements, these market data revenues 
include proprietary data revenues, SIP data revenues, and revenues 
from connectivity services. NYSE's same revenue line item increased 
to approximately $236 million by the end of 2018. Whereas during 
this same time period, the revenues NYSE collected from the 
exclusive SIPs went from approximately $40 million to approximately 
$47 million. Nasdaq's 2014 Form 1 filing discloses approximately 
$206 million in ``information services'' line item in its income 
statement. According to the footnotes to its financial statements, 
this line item includes Nasdaq's market data revenues and 
redistributed SIP revenues but does not include connectivity service 
revenues. In its 2018 Form 1 filing, Nasdaq disclosed $242 million 
in revenues under the same information services line item. During 
the same time period, Nasdaq's SIP data revenues went up from 
approximately $76 million to $85 million, a smaller revenue increase 
relative to its market data revenues.
---------------------------------------------------------------------------

    Indicia that exchanges may not be subject to robust competition 
include that many broker-dealers state that even in the face of 
increasing proprietary data fees they feel compelled to buy proprietary 
data to be able to provide competitive trading strategies for their 
clients.\887\ Additionally, some academic research suggests that each 
particular exchange's proprietary data has no substitutes for some uses 
of the data and no perfect substitutes for any uses. For example, 
Budish et al. (2019) conclude that each exchange has market power with 
respect to the data products (and the speed technology) specific to 
that particular exchange because of a lack of substitutes for many 
applications of their data.\888\
---------------------------------------------------------------------------

    \887\ See supra note 598.
    \888\ See Eric Budish et al., supra note 15.
---------------------------------------------------------------------------

(c) Current Structure of Market for Connectivity Services
    Exchanges are exclusive providers of their own connectivity 
services, and for many market participants, effective trading 
strategies require connecting to many if not all of the exchanges, 
making their demand for these connectivity services less elastic (i.e., 
less sensitive to price changes). The Commission examined data on 
exchange orders that shows that large broker-dealers (as measured, for 
example, by the number of messages sent to exchanges) connect to all or 
almost all exchanges.\889\ This is consistent with commenters' and 
Roundtable participants' stated view that in order to avoid a 
competitive disadvantage, market participants have little choice but to 
purchase direct connectivity services from multiple SROs.\890\
---------------------------------------------------------------------------

    \889\ Based on the sample of audit trail data made available to 
the Commission by FINRA, firms that are connected to all exchanges 
account for 76.6% of the message volume (there are 37 such firms out 
of a total of 327 firms in the sample). Firms that are connected to 
at least all but one of the exchanges account for 91.6% of the 
message volume (there are 50 such firms). The FINRA data sample 
covers the week of December 5, 2016, and includes messages sent to 
11 exchanges (NYSE National and Chicago Stock Exchange are not part 
of this sample).
    \890\ See supra Section III.C.2(c); supra Section II.A.
---------------------------------------------------------------------------

    As mentioned above, the exchanges offer different connectivity 
options to transmit market data to market participants. These options 
may include fiber optics connections, wireless microwave connections, 
and laser transmission, all of which vary in speeds and 
reliability.\891\ The fastest and more reliable connections (e.g., 
laser transmission) offer market participants an advantage over other 
market participants with slower or less reliable connections. 
Therefore, the Commission preliminarily believes that the

[[Page 16820]]

exchanges have incentives to offer multiple levels of connectivity so 
that the fastest connections have the least elastic demand and the 
exchanges could charger higher prices for these connections.
---------------------------------------------------------------------------

    \891\ See supra Section II.A.
---------------------------------------------------------------------------

(d) Current Structure of the Market for Trading Services in NMS Stocks
    The market for trading services is served by exchanges, ATSs, and 
liquidity providers. The market relies on competition to supply 
investors with execution services at efficient prices. These trading 
venues, which compete to match traders with counterparties, provide a 
framework for price negotiation and disseminate trading information. 
The market for trading services in NMS stocks currently consists of 16 
national securities exchanges, as well as off-exchange trading venues 
including wholesalers \892\ and 33 NMS stock alternative trading 
systems.\893\
---------------------------------------------------------------------------

    \892\ Wholesalers are broker-dealers that pay retail brokers for 
sending their clients' orders to the wholesaler to be filled 
internally (as opposed to sending the trade orders to an exchange). 
Typically a wholesaler promises to provide price improvement 
relative to the NBBO for filled orders.
    \893\ As of February 7, 2020, 33 NMS stock ATSs are operating 
pursuant to an initial Form ATS-N. A list of NMS stock ATSs, 
including access to initial Form ATS-N filings that are effective, 
can be found at https://www.sec.gov/divisions/marketreg/form-ats-n-filings.htm.
---------------------------------------------------------------------------

    Since the adoption of Regulation NMS in 2005, the market for 
trading services has become more fragmented. The number of exchanges 
increased from eight in 2005 to 16 exchanges operating today.\894\ 
Additionally, the market shares of individual exchanges became less 
concentrated, with a shift in market shares from some of the bigger and 
older exchanges to the newer ones.\895\ For instance, from 2005 to 
2013, there was a decline in the market share of trading volume for 
exchange-listed stocks on NYSE.\896\ At the same time, there was an 
increase in the market share of newer national securities exchanges 
such as NYSE Arca, Cboe BYX, and Cboe BZX.\897\
---------------------------------------------------------------------------

    \894\ See supra note 660.
    \895\ See Letter to Brent J. Fields, Secretary, Commission, from 
Edward T. Tilly, Chairman and Chief Executive Officer, Cboe (May 25, 
2018), at note 9.
    \896\ See Securities Exchange Act Release No. 76474 (Nov. 18, 
2015), 80 FR 80998, 81112 (Dec. 28, 2015) (Regulation of NMS Stock 
Alternative Trading Systems Proposing Release).
    \897\ Id.
---------------------------------------------------------------------------

    During the same time period, the proportion of NMS stocks trading 
off-exchange (which includes both internalization and ATS trading) 
increased; for example, as of August 2018, NMS stock ATSs alone 
comprised approximately 14 percent of consolidated volume, and other 
off-exchange volume totaled approximately 21 percent of consolidated 
volume.\898\ Aside from trading venues, exchange market makers provide 
trading services in the securities market. These firms stand ready to 
buy and sell a security ``on a regular and continuous basis at a 
publicly quoted price.'' \899\ Exchange market makers quote both buy 
and sell prices in a security held in inventory, for their own account, 
for the business purpose of generating a profit from trading with a 
spread between the sell and buy prices. Off-exchange market makers also 
stand ready to buy and sell out of their own inventory, but they do not 
quote buy and sell prices.\900\
---------------------------------------------------------------------------

    \898\ See Securities Exchange Act Release No. 84875 (Dec. 19, 
2018), 84 FR 5202, 5255 (Feb. 20, 2019) (Transaction Fee Pilot for 
NMS Stocks).
    \899\ See Commission, Fast Answers: Market Maker (modified Mar. 
17, 2000), available at https://www.sec.gov/answers/mktmaker.html.
    \900\ See Laura Tuttle, OTC Trading: Description of Non-ATS OTC 
Trading in National Market System Stocks, Commission (Mar. 2014), 
available at https://www.sec.gov/dera/staff-papers/white-papers/otc-trading-white-paper-03-2014.pdf.
---------------------------------------------------------------------------

    All of these developments increased the competitiveness of the 
market for trading services in NMS stocks. However, the Commission 
recognizes that while the market is more competitive, the actual level 
of competition that any given trading venue faces may depend on 
multiple factors including the liquidity of a stock as well as the type 
of trading venue and market participant engaging in the trade.
(e) Broker-Dealers' Competitive Strategies for Trading Services
    While many market participants use market data to make investment 
decisions, not all market participants are equally competitive in their 
use of real-time data. The Commission understands that while some 
investors (including retail investors) may use a broker-dealer to 
execute a trade on their behalf, others, such as the broker-dealers 
themselves and other latency sensitive traders, utilize sophisticated 
routing tools to strategically decide how to fill an order on an 
exchange, including when and where to submit the order, how to split a 
larger order (i.e., into how many pieces, or ``child orders'' \901\), 
how large the child order sizes should be, and what order type(s) 
should be used, e.g., whether to use a market order, limit order, or 
some other order type. The strategies employed by broker-dealers and 
other latency sensitive traders in this regard are designed to secure 
the best possible execution price(s) for an order. For example, the 
Commission understands that methodologies utilized in trading orders 
can impact the price of the stock being purchased or sold in a manner 
that can increase or decrease its execution cost.
---------------------------------------------------------------------------

    \901\ Child order refers to a smaller order that was a piece of 
a larger ``parent'' order.
---------------------------------------------------------------------------

    The Commission understands that broker-dealers in particular 
compete with each other to provide the lowest possible execution costs 
for their clients (i.e., high execution quality) as quickly as 
possible.
    An example of routing tools as noted above is smart order routing 
(``SOR''). SORs employ the use of algorithms (e.g., by broker-dealers 
on behalf of a client) designed to optimally send parts of an order 
(child orders) to various market centers (e.g., exchange and ATSs) so 
as to optimally access market liquidity while minimizing execution 
costs. SORs help to determine how to quickly access (``take'') 
available market liquidity before other market participants, and help 
to determine how to strategically place limit orders to optimize queue 
priority across various limit order books among exchanges. The ability 
to optimize queue priority facilitates the ability for a broker to 
``capture the quoted'' spread, i.e., buy on the bid or sell on the 
offer, while also potentially benefitting from exchange rebates paid to 
liquidity providers.
    The Commission understands that data beyond the NBBO with minimal 
latency are important inputs to strategies designed to optimize the 
ability to access market liquidity and minimize execution costs. 
Further, the Commission understands that competing with the most 
effective SORs is more difficult without possessing real-time market 
data while minimizing data latency.\902\ The Commission understands 
that those traders who do not access trading tools that utilize 
comprehensive market data with low latency experience higher execution 
costs on average.
---------------------------------------------------------------------------

    \902\ The Commission preliminarily believes that there is also a 
significant personnel and technological cost to producing a 
sophisticated, competitive smart order router.
---------------------------------------------------------------------------

4. Request for Comments on Baseline
    The Commission requests comments on its baseline analysis. In 
particular, the Commission solicits comment on the following:
    161. Do you agree with the Commission's assessment of the market 
failures and the need for regulation to solve market data problems? Why 
or why not? Do additional market failures exist that are not described 
in this release? If so, what are they? Please explain in detail.

[[Page 16821]]

    162. Do you agree that some market participants are unable to rely 
solely on SIP data to trade competitively in today's markets? Why or 
why not? Please explain in detail. If so, what businesses rely on the 
purchase of proprietary market data? The Commission is also seeking 
information on the number, type and sizes of market participants that 
purchase proprietary market data products either directly from 
exchanges for self-aggregation or through market data aggregators. The 
Commission requests that commenters provide such information where 
available.
    163. Do you agree that exchanges are disincentivized from making 
improvements to the content or latency of SIP data? Why or why not? 
Please explain in detail.
    164. Does the Economic Analysis contain all relevant baseline 
information? If not, what else should the baseline contain? Please 
explain in detail.
    165. How competitive is the selection process for the exclusive 
SIPs? How does the selection process affect the performance of the SIP? 
How does past performance factor into the selection process? Please 
explain in detail.
    166. The Commission is seeking information on the number of market 
participants that rely solely on SIP data for their trading needs, and, 
separately, on the number of market participants that do not rely 
solely on SIP data for their trading needs. The Commission requests 
that commenters provide such information where available.
    167. The Commission is seeking information on the consequences 
(both positive and negative) of the limited amount of odd-lot quotation 
information currently included in SIP data. Please be specific about 
exact odd-lot quotation information that results in these consequences 
and provide data analysis where possible. Do the consequences vary 
across stocks and/or exchanges? Please explain and provide data 
analysis where possible.
    168. The Commission is seeking information on the consequences 
(both positive and negative) of the lack of depth of book information 
currently included in SIP data. Please be specific about exact depth of 
book information that results in these consequences and provide data 
analysis where possible. Do the consequences vary across stocks and/or 
exchanges? Please explain and provide data analysis where possible.
    169. The Commission is seeking information on the consequences 
(both positive and negative) of the lack of auction-related information 
currently included in SIP data. Please be specific about exact auction-
related information that results in these consequences and provide data 
analysis where possible. Do the consequences vary across stocks and/or 
exchanges? Please explain and provide data analysis where possible.
    170. The Commission requests comment on the scope and content of 
exchange proprietary data feeds. Are the proprietary data offerings 
similar across exchanges? Please explain in detail.
    171. What are the consequences of the differences in latency 
between the SIP and proprietary feeds? Please explain in detail.
    172. The Commission requests comment on the comparison of SIP 
versus proprietary data access experiences and costs. How do the types 
of fees and discount programs compare? Do the exclusive SIPs offer 
services that target the same clients as the exchanges do? Please 
explain in detail. Do exclusive SIPs offer services that target the 
same clients as third-party aggregators? Please explain in detail.
    173. The Commission is seeking information on specific revenues and 
expenses associated with processing and disseminating market data by 
market data aggregators. The Commission requests that commenters 
provide such information where available.
    174. The Commission is seeking information on pricing of market 
data aggregators' data and the breakdown of such product prices between 
the direct data fee charged by the exchanges and the fees charged by 
market data aggregators for their services. The Commission requests 
that commenters provide such information where available.
    175. Do you agree with the Commission's competition baseline? Why 
or why not? Please explain in detail.
    176. Do you agree that the exclusive SIPs have market power? Why or 
why not? Please explain in detail.
    177. Do you agree with the Commission's assessment of the state of 
competition in the market for core and aggregated market data products 
in the equities market? Why or why not? Please explain in detail. What 
is the magnitude of this market? What are the total expenses incurred 
by broker-dealers on market data products? What are the total revenues 
earned by exchanges on market data products? Who else incurs costs or 
earns revenues on market data products?
    178. The Commission requests that commenters provide information on 
the number of players in the market data aggregator space, and provide 
information on how specialized these companies are.
    179. To what extent is it necessary for market participants 
executing orders in NMS securities to purchase market data from all 
SROs? Please explain in detail.
    180. How does the market for proprietary data differ from the 
market for consolidated data? Please explain in detail.
    181. Do you believe that exchanges have significant market power in 
the market for proprietary data products? Why or why not? Please 
explain in detail.
    182. In what situations can top of book data products serve as 
substitutes for SIP data in the equities market? In what situations are 
top of book data products not viable substitutes for SIP data? Please 
explain in detail.
    183. Do you agree with the Commission's assessment of the market 
for connectivity services? Why or why not? Please explain in detail. Do 
you believe that exchanges have significant market power with respect 
to connectivity services? Why or why not? Please explain in detail. 
What is the magnitude of this market? What are the total expenses 
incurred by broker-dealers on connectivity services? What are the total 
revenues earned by exchanges on connectivity services? Who else incurs 
costs or earns revenues on connectivity services?
    184. Do you agree with the Commission's assessment of the market 
for trading services? Why or why not? Please explain in detail. How 
does market data and connectivity relate to the market for trading 
services? Can market power in one market translate into market power in 
another? Please explain in detail.
    185. Characterizing competitors as producers (an entity that 
creates a good or service for trade) or intermediaries (an entity that 
facilitates the trading of goods or services produced by others) could 
have implications for the competitive landscape. To what extent are 
exchanges producers versus intermediaries in market data products and/
or other services (e.g., execution services, connectivity services)? 
Please explain in detail.
    186. To what extent is market execution on one exchange a 
substitute for execution on another exchange? To what extent are they 
complements? Please explain in detail.
    187. To what extent is market data from one exchange a substitute 
for market data from another exchange? To what extent are they 
complements? Please explain in detail.

[[Page 16822]]

C. Economic Effects of the Rule

1. Core Data and Consolidated Market Data
    The Commission preliminarily believes that the proposed 
enhancements to consolidated data, namely expanding core data and the 
amendments to the definitions of ``national best bid and offer'' and 
``protected bid or protected offer,'' would result in numerous economic 
effects. These economic effects derive from codifying the definition of 
core data, from expanding the content of the core data, and from 
changing the prices that determine the NBBO and the protected quotes.
    The proposed change would have the benefit of mitigating the 
influence of existing conflicts of interest inherent in the existing 
exclusive SIP model.\903\ The proposed change establishes a required 
amount of data to be included in proposed consolidated market data, and 
thus reduces the divergence between exchanges' proprietary DOB products 
and current SIP data.
---------------------------------------------------------------------------

    \903\ For a discussion of these conflicts of interest, see supra 
Section VI.A.2.
---------------------------------------------------------------------------

(a) Definitions of Consolidated Market Data, Core Data, Administrative 
Data, and Regulatory Data
    The Commission's proposed definitions of ``consolidated market 
data,'' ``core data,'' ``regulatory data,'' ``administrative data,'' 
and ``exchange-specific program data'' under Regulation NMS would 
specify the quotation and transaction information in NMS stocks that 
must be collected, consolidated, and disseminated under rules of the 
national market system and pursuant to an effective national market 
system plan(s). This definition would codify the dissemination of 
certain current SIP data elements, and would include some additional 
data elements, but would not include some data that the exclusive SIPs 
currently disseminate. This section discusses the secondary economic 
effects of this proposed expansion to core data that would come from 
codifying the inclusion of some current SIP data in ``core data,'' 
while the next section discusses the economic effects of expanding the 
content of core data. These secondary effects are providing flexibility 
to the Data Plans for including new data elements, requiring that 
regulatory data would continue to be provided in the decentralized 
consolidation model, cost to update the national market system plan(s), 
and costs to obtain data that is currently in SIP data but not in 
proposed consolidated market data elsewhere.
    The proposed definitions of ``exchange-specific program data,'' 
``regulatory data'' and ``administrative data,'' along with the 
proposed ability for the Equity Data Plans to add elements to these 
proposed definitions, promotes regulatory efficiency by providing 
flexibility for consolidated market data to include data elements 
beyond those explicitly defined as ``consolidated market data'' in the 
proposal. It provides a mechanism for the participants in the national 
market system plan(s) to propose to add additional data elements, such 
as elements similar to current retail liquidity programs. This would 
allow for organic change in consolidated market data that may become 
useful due to future market and regulatory developments.
    Further, while the underlying data elements of ``regulatory data'' 
are currently included in disseminated SIP data, the proposed 
definition of ``regulatory data'' would help ensure that market 
participants continue to have access to this information.
    The Commission recognizes that market data plans would incur one-
time initial implementation costs in ensuring the plans are consistent 
with the proposed definitions of ``consolidated market data,'' ``core 
data,'' ``administrative data,'' ``regulatory data,'' and ``exchange-
specific program data,'' but the plans would not incur significant 
ongoing costs as a result of the codification of these five 
definitions.\904\ These initial implementation costs would come from 
the operating committees needing to draft revisions to their respective 
plans that are consistent with the proposed definitions.
---------------------------------------------------------------------------

    \904\ Below in Section VI.C.1(b)(iv), the Commission discusses 
the costs of including data elements to the proposed definition of 
``core data'' that are not currently in SIP data.
---------------------------------------------------------------------------

    The Commission preliminarily believes that not including some data 
elements that the exclusive SIPs currently transmit \905\ in the 
definition of ``consolidated market data'' could have some costs to 
those market participants who would want to arrange to get this data 
elsewhere. As discussed above, the UTP SIP offers OTCBB quotation and 
transaction feeds for unlisted stocks, and the CTA Plan permits the 
dissemination of ``concurrent use'' data related to corporate bonds and 
indexes.\906\ As proposed, these data elements would not be defined as 
consolidated market data or core data elements. However, the proposal 
would not preclude the provision of these data elements by the SROs via 
proprietary data products to market participants and investors who wish 
to receive them.
---------------------------------------------------------------------------

    \905\ See supra Section III.B.
    \906\ See supra Section III.C.
---------------------------------------------------------------------------

(b) Expanding Core Data Content
    As discussed above,\907\ the Commission proposes to define core 
data to include certain odd-lot quote information, certain depth of 
book data, and information on orders participating in auctions. This 
section discusses the economic effects of expanding the core data 
content separately for each additional core data element and then 
discusses the additional economic effects that may accrue to market 
participants from the combined new core data elements, although market 
participants may choose not to take in all of the new core data 
elements in every instance. The economic effects discussed in this 
section depend on the fees for core data charged by the effective 
national market system plan(s) for NMS stocks and the competing 
consolidators. The fees for new core data are discussed later.\908\
---------------------------------------------------------------------------

    \907\ Id.
    \908\ See infra Section VI.C.1(b)(iv).
---------------------------------------------------------------------------

(i) Effects of New Round Lot Definition
    The Commission proposes to define a round lot according to a tiered 
system based on the price of the stock.\909\ This definition would 
result in the inclusion of quotes at better prices in core data that 
were previously excluded from being reported because they consisted of 
too few shares. These new quotes would now become visible to anyone who 
subscribes to core data, thereby improving transparency. The Commission 
preliminarily believes that the proposed changes to the round lot 
definition would create an economic benefit for market participants who 
currently rely exclusively on SIP data to obtain market information, 
and for market participants who post odd-lot quotes at prices superior 
to the NBBO. These market participants would benefit from being able to 
see more information on these smaller quotes at better prices before 
they send in their orders, which could improve their trading decisions 
and order execution quality by providing an opportunity to realize 
gains from trade,\910\ as discussed below in this section.\911\ The 
proposed change

[[Page 16823]]

could also improve price efficiency. This is because certain odd-lot 
information not currently disseminated as part of SIP data would be 
made available as part of proposed core data; therefore market 
participants who use SIP data who previously did not use the 
information contained in odd-lots would be able to incorporate this 
information into their trading decisions. These trading decisions are 
integral to how market prices are formed. Also, the proposed change 
could affect order routing and the share of order flow received by each 
exchange, since more traders will be aware of quotes at better prices 
that are currently in odd-lots sizes, and these may not be on the same 
exchange as the one that has the best 100 share quote.
---------------------------------------------------------------------------

    \909\ See supra Section III.C.1(d)(i).
    \910\ See supra note 754.
    \911\ The proposed round-lot definition may benefit retail 
investors even without changes to their decision to submit orders 
based on seeing the price-improving quotes. This is because the 
proposed round-lot definition would likely cause the NBBO to become 
narrower, and this would affect the execution quality provided by 
retail wholesalers to retail investors. See infra Section 
VI.C.1(c)(i) for additional discussion on this point.
---------------------------------------------------------------------------

    The Commission preliminarily believes that changing the round lot 
definition to include smaller-size orders would be a significant 
benefit for market participants who would have traded with price-
improving odd-lot quotes in certain stocks but do not do so because 
they cannot see information on odd-lot quotes.\912\ Under the proposed 
rule, some of these quotes at better prices would be reported as the 
NBBO in the new core data. This would mean that these traders would be 
able to see the quotes,\913\ and make a decision about whether to trade 
based on this newly visible, improved price. This may benefit traders 
because they would be able to realize the gains from trade that are 
available in this situation and are not currently occurring because of 
the lack of information. Also, some traders may wish to exchange an 
odd-lot quantity of a stock by posting a limit order for an odd-lot 
amount. Currently, this order's price is not visible to traders who 
rely solely on SIP data, and thus there may be delays in getting this 
limit order filled, since such traders would not send market orders in. 
Thus, adding smaller-size quotes in core data for certain stocks would 
result in a benefit to both the market participants who would submit 
the market orders and the market participants who post the odd-lot 
quotes they execute against.
---------------------------------------------------------------------------

    \912\ Currently, some information about odd-lot quotes ends up 
in core data through certain exchanges rolling up odd lot quotes. 
But even in this case, the rolled up quote is reported to the 
exclusive SIPs at the worst price out of all the odd-lots that were 
rolled up to produce the quote, so the full amount of price 
improvement available on that exchange is still not visible to 
market participants relying solely on exclusive SIPs for market 
data.
    \913\ The traders able to see these quotes as a result of the 
proposed round-lot definition would include retail investors as a 
result of the Vendor Display Rule, among others. See supra Section 
III.C.1(d)(i).
---------------------------------------------------------------------------

    The magnitude of this benefit depends on the amount of additional 
trading generated by the inclusion of odd-lot information. In 
particular, the Commission preliminarily believes that to the extent 
many market participants who rely solely on SIP data and lack 
information on odd-lot quotes would have traded frequently against odd-
lot quotes had they known about them, the benefit would be large. 
However, if it is uncommon for market participants who would trade 
frequently against odd-lot quotes to rely solely on SIP data and to 
lack information on odd-lot quotes, then the Commission preliminarily 
believes that the associated economic benefit from including odd-lot 
quotes in core data would be small. The Commission preliminarily 
believes it is not possible to observe this willingness to trade but 
for lack of information with existing market data, and invites comments 
on this issue.
    However, the Commission can quantify the frequency with which the 
hypothetical trader discussed above would see better prices under the 
new round lot definition in the current market environment. Based on 
this quantification, the Commission preliminarily believes that market 
participants relying on new core data would see a significant 
improvement in quoted spreads within a large percentage of the dollar 
volume of stock trading. Specifically, Table 4 shows the percentage of 
instances in a sample of MIDAS data that the NBBO provided at the time 
by an exclusive SIP \914\ was inferior in price to the price of a round 
lot computed according to the new definition in the proposed rule. For 
instance, the table shows that for stocks with prices of $1,000 or 
greater, the new round lot definition would cause a quote to be 
displayed that improved on the current round lot quote 92.2% of the 
time. The frequency of this instance of price improvement appears to 
increase uniformly through the round lot tiers in the sample, starting 
lower at 9.7% for the $50.01-$100 tier. This analysis shows that, 
within each round lot tier in which the round lot size would change, 
there is a significant number of instances in which the new round lot 
definition would improve the quoted spread.
---------------------------------------------------------------------------

    \914\ Since the source used for this SIP NBBO is an exclusive 
SIP itself, this quote includes quotes the exchanges produce by 
aggregating or ``rolling up'' odd-lots to obtain a round lot-sized 
quote.
---------------------------------------------------------------------------

    The quantity of instances of price improvement as a result of the 
new round lot definition depends on the volume of stocks in the tiers 
for which the round lot size would change. Table 1 above documents the 
number of stocks in each tier. It shows that while most stocks (80.9%) 
would remain unaffected by the new round lot definitions, most of the 
dollar trading volume, around 68.3%, currently is in stocks that would 
have a new round lot definition under the proposed rule. Based on this 
analysis, the Commission preliminarily believes that a meaningful 
amount of dollar volume is concentrated in stocks that would have 
significant changes to the quoted spread displayed under the new round 
lot definition.
    The amount of price improvement available in the event that any 
price improvement is available, is also a relevant consideration when 
deciding whether to trade. Table 5 quantifies the average price 
improvement offered by the best quote under the new round lot 
definition, conditional on the event that price improvement is 
available in the first place. The table shows, for example, that the 
new round lot definition in the $50.01-$100 tier could yield an 8 basis 
point reduction in the spread (conditional on a price improving quote 
being available). Since the average quoted half spread is 31 basis 
points, this represents a significant reduction in the half spread. In 
the case of the $1000+ tier, the difference of 8.8 basis points 
represents an even more significant fraction of the 17 basis point 
average half spread. Based on this analysis, the Commission 
preliminarily believes that the size of price improvement, conditional 
on it being available, is also substantial.

[[Page 16824]]



                                     Table 4--Instances of Price Improvement
----------------------------------------------------------------------------------------------------------------
                                                                      Instances of price improvement  (%) \3\
                                                                 -----------------------------------------------
                       Round lot tier 1 2                                                           Best bid or
                                                                     Best bid        Best ask        best ask
----------------------------------------------------------------------------------------------------------------
1. < = $50......................................................             n/a             n/a             n/a
2. $50.01-$100..................................................             5.3             5.0             9.7
3. $100.01-$500.................................................            11.5            11.4            20.6
4. $500.01-$1000................................................            46.8            50.1            72.8
5. 1000.01+.....................................................            73.5            70.5            92.2
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior calendar month's average closing price on the primary listing exchange in
  August 2019.
\2\ Seven stocks were excluded due to trading in round lots different than 100 shares (i.e., 1 or 10 shares:
  Symbols BH, BH.A, BRK.A, DIT, MKL, NVR, and SEB).
\3\ Overall frequency of price improving NBBO quotes during September 2019 using the proposed round lot tier
  criteria versus the current 100 share round lot criteria (see footnote 4 of Table 5 for more details). An
  instance of a price improving quote is calculated from a sample of MIDAS data, which consists of hourly
  snapshots from 10:30 a.m. to 3:30 p.m. for each trading day in September 2019. Calculation is based on the
  difference between the best bid/best ask calculated under the new round lot tier definition (source: direct
  feeds) compared to the NBBO based on the current 100 share round lot criteria (source: SIP).


                                       Table 5--Size of Price Improvement
----------------------------------------------------------------------------------------------------------------
                                          Best bid:          Best ask:           Average
                                        Average price      Average price      difference in       SIP: Average
         Round lot tier 1 2            improvement  ($)   improvement  ($)     quoted half       quoted percent
                                             \3\                \3\          spread  (%) \4\    half spread  (%)
----------------------------------------------------------------------------------------------------------------
1. < = $50..........................                n/a                n/a                n/a                n/a
2. $50.01-$100......................               0.09               0.12              0.080               0.31
3. $100.01-$500.....................               0.15               0.14              0.044               0.14
4. $500.01-$1000....................               0.79               0.89              0.080               0.22
5. 1000.01+.........................               1.35               1.36              0.088               0.17
----------------------------------------------------------------------------------------------------------------
\1\ Tier based on the stock's prior calendar month's average closing price on the primary listing exchange in
  August 2019.
\2\ Seven stocks were excluded due to trading in round lots different than 100 shares (i.e. 1 or 10 shares:
  Symbols BH, BH.A, BRK.A, DIT, MKL, NVR, and SEB).
\3\ Overall frequency of price improving NBBO quotes during September 2019 using the proposed round lot tier
  criteria versus the current 100 share round lot criteria. Conditional on a the instance of a price improving
  quote, stock-day average price improvement is calculated from a sample of MIDAS data, which consists of hourly
  snapshots from 10:30 am to 3:30 pm for each trading day in September 2019. Calculation is based on the
  difference between the best bid/best ask calculated under the new round lot tier definition (source: direct
  feeds) compared to the NBBO based on the current 100 share round lot criteria (source: SIP).
\4\ Conditional on a the instance of a price improving quote (bid or ask), stock-day average difference in
  percent quoted half spread is calculated by SIP NBBO quoted percent half spread minus the new percent quoted
  half spread under the proposed round lot tier criteria. Quoted half spread is defined by: Quoted half-spread =
  QSit = 100 * (Askit-Bidit) / (2*Mit), where M is the midpoint between the best bid and best ask.

    The Commission preliminarily believes that the new round-lot 
definition would benefit market participants who utilize strategies 
related to order routing, provided that they do not already obtain 
information on odd-lots from proprietary feeds. For instance, traders 
who wish to fill an order at the best possible price, including at 
sizes of less than 100 shares, would be better able to do so if the new 
round lot sizes are visible to them, e.g., the exchange with the best 
100 share quote may not be the exchange with the best 10 share 
quote.\915\ The use of this information could improve order execution 
quality and facilitate best execution for these traders.\916\ The 
Commission preliminarily believes that many of the market participants 
who utilize such strategies already have access to full odd-lot 
information via proprietary feeds; for these traders the proposal would 
not produce a direct benefit.\917\
---------------------------------------------------------------------------

    \915\ Battalio, Corwin, and Jennings (2016) examines the 
frequency of trading at inferior prices as compared to available 
unprotected odd-lot quotes in a sample of 10 high-priced stocks 
during one week in 2015. They find that there was an unprotected 
odd-lot limit order available at a better price for 2.52% of the 
trades that occurred. See Robert Battalio et al, Unrecognized Odd 
Lot Liquidity Supply: A Hidden Trading Cost for High Priced Stocks, 
12 J. Trading 35 (2016).
    \916\ For discussion of order execution quality and the 
provision of execution services by broker-dealers, see supra Section 
VI.B.3(e).
    \917\ The new round-lot definition may benefit those market 
participants who already obtain odd-lot information by providing 
them with alternatives to proprietary feeds. For discussion of this 
effect, see infra Section VI.C.4(a). Also, the Commission 
preliminarily understands that some market participants who use 
proprietary feeds as their main source of market data also use the 
SIP feeds as a backup. For such market participants, the change in 
the round lot definition may improve the value of a core data feed 
as a backup.
---------------------------------------------------------------------------

    Also, the Commission preliminarily believes that there may be 
market participants that would start running these order routing 
strategies if the data were available to them at prices comparable to 
SIP data. These market participants might currently find that the value 
of attempting such strategies without information on odd-lots is too 
low to justify running the strategies, but they might find that access 
to data on such orders through the new round-lot definition would 
enable them to run such strategies effectively. To the extent that such 
market participants exist, the change to the round-lot definition would 
be a benefit to them as well.\918\
---------------------------------------------------------------------------

    \918\ For further discussion of new entrants to the competitive 
order routing business, see infra Section VI.C.4(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the new round lot 
definition could improve price efficiency. The wider availability of 
information about smaller-sized quotes could mean that more market 
participants (who currently rely solely on SIP data) would incorporate 
the information contained in those quotes into their trading decisions. 
This could have the effect of improving the

[[Page 16825]]

efficiency with which this information becomes reflected in 
prices.\919\
---------------------------------------------------------------------------

    \919\ For additional discussion of the price efficiency point, 
see infra Section VI.D.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the new round lot 
definition could cause changes to order flow as market participants 
change their trading strategies to take advantage of newly visible 
quotes.\920\ This could mean that there would be changes to the share 
of order flow each exchange receives as a result of this rule. The 
Commission is uncertain about the magnitude and direction of this 
effect, and invites comments on the issue.
---------------------------------------------------------------------------

    \920\ For example, currently a market participant, relying on 
SIP data, may submit an order to the exchange with the exclusive SIP 
NBBO and in the process trade at an inferior price to an odd-lot 
quote that the market participant was not aware of on another 
exchange. If the market participant would have preferred to route to 
the price-improving odd-lot quote, and if that quote would count as 
a round-lot under the proposal, then under the proposal the market 
participant would send the order to the exchange with the smaller, 
price improving quote.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the use of the previous 
calendar month's average closing price on the primary listing exchange 
to determine the round lot tier for a given stock balances certain 
tradeoffs that should be considered when selecting such a benchmark. 
The Commission is balancing a more up-to-date stock price estimate 
against the costs imposed on market participants from having to 
frequently make updates to systems and practices to account for changes 
to a stock's round lot tier. A more recent average (e.g., the past 
week's average closing price) may better reflect the stock's current 
price level, and thereby lead to the stock being placed in the correct 
tier more frequently. However, such a recent estimate may be more 
volatile and thus more prone to causing frequent changes to the stock's 
status, especially if the stock's price level is close to a round lot 
tier cutoff point, which could then require more frequent adjustments 
from market participants, including SROs and competing consolidators, 
to account for what a stock's round-lot tier is and what the NBBO for 
that stock would be given its tier.
(ii) Effects of Addition of Depth of Book Information
    The Commission proposes to add certain depth of book information to 
the definition of core data, which would result in this information 
becoming available to anyone who subscribes to this element of core 
data. The Commission preliminarily believes that this information could 
be useful in trading, and therefore disseminating this information as 
an element of core data could have the effect of causing changes to the 
trading strategies of those market participants who currently rely 
solely on SIP data. This could potentially lead to these traders being 
able to reduce their execution costs and facilitate best execution, 
changes in order flow to different exchanges, improvements in price 
efficiency of markets, and gains from trade that are not currently 
being realized.
    The Commission preliminarily believes that adding the depth of book 
information as an element of core data would benefit traders who 
previously relied exclusively on SIP data and who, as a result of the 
proposed rule, would receive information they previously did not get. 
Academic research has found evidence that valuable trading information 
can be obtained from the full depth of a limit order book.\921\ As 
noted above, market participants also believe that depth of book 
information is valuable.\922\ Currently, only traders who subscribe to 
exchanges' proprietary data feeds can receive this information. As a 
result of the proposed amendments, additional depth of book information 
would become available to anyone who subscribes to these elements of 
core data. The Commission preliminarily believes that market 
participants that currently rely solely on SIP data could use the 
additional depth of book information to improve trading strategies and 
to lower execution costs. To the extent that the advantage of having 
this information depends on other traders not having it, this economic 
effect would represent a transfer from the current users of depth of 
book information to those market participants who would now get access 
to, and would be able to utilize, this information. In particular, a 
more widespread dissemination of depth of book information may cause 
market prices to adjust to this information more rapidly as more people 
react to this information. Once market prices settle to a level that 
reflects this information, the opportunity to profit from having 
additional depth of book information may be lost.
---------------------------------------------------------------------------

    \921\ See Lawrence E. Harris and Venkatesh Panchapagesan, The 
Information Content of the Limit Order Book: Evidence from NYSE 
Specialist Trading Decisions, 8 J. Fin. Mkts. 25 (2005); Jonathan 
Brogaard et al., Price Discovery without Trading: Evidence from 
Limit Orders, 74 J. Fin. 1621-1658 (2019); Shmuel Baruch, Who 
Benefits from an Open Limit-Order Book?, 78 J. Bus 1267 (2005), 
available at https://www.jstor.org/stable/10.1086/430860 (presenting 
some theoretical results showing that liquidity takers benefit more 
from an open limit order book).
    \922\ See supra Section III.C.2(c) (describing how market 
participants have stated that they believe they need depth of book 
information in order to run their businesses).
---------------------------------------------------------------------------

    The Commission preliminarily believes that market participants who 
utilize strategies related to order routing, order placement, and order 
execution, could benefit from the new depth of book information, 
provided that currently they do not already obtain this information via 
proprietary data feeds. For instance, traders may seek to get priority 
in the queue at a particular price level behind the top of book by 
posting a limit order. Such a strategy could benefit from being able to 
see the depth at these price levels at multiple exchanges in order to 
evaluate which exchange's queue would provide the order with the 
highest execution priority. To the extent this is the case, the 
Commission believes that the traders who previously did not have access 
to additional depth of book information would benefit by being able to 
better run such strategies. This could improve order execution quality 
for these traders.\923\ The Commission preliminarily believes that many 
of the market participants who utilize such strategies already have 
access to full depth of book information via subscriptions to 
proprietary feeds; for these traders the rule would not produce a 
direct benefit.\924\ The Commission is unable to quantify the number of 
market participants who currently run these types of strategies without 
using depth of book information because the Commission does not have 
access to information on specific strategies utilized by individual 
traders in the market.\925\
---------------------------------------------------------------------------

    \923\ For discussion of order execution quality and the 
provision of execution services by broker-dealers, see supra Section 
VI.B.3(e).
    \924\ The inclusion of depth of book information may benefit 
those market participants who already use depth of book information 
by providing alternatives to proprietary feeds. For discussion of 
this effect, see infra Section VI.C.1(b)(iv). Also, the Commission 
preliminarily understands that some market participants who use 
proprietary feeds as their main source of market data also use the 
exclusive SIP feeds as a backup. For such market participants, the 
expansion of DOB information may improve the value of a core data 
feed as a backup.
    \925\ The Commission preliminarily believes that it is possible 
that the inclusion of this information in the proposed definition of 
core data, along with reductions in the latency differential that 
would result from the decentralized consolidation model, could 
benefit market participants who do not currently run these 
strategies but who would choose to start running them as a result of 
the proposed changes. For more discussion on this possibility, see 
infra Section VI.C.4(b).
---------------------------------------------------------------------------

    Also, the Commission preliminarily believes that there may be 
market participants that would start running these order routing 
strategies if the data were available to them at core data

[[Page 16826]]

prices. These market participants might currently find that the value 
of attempting such strategies without DOB data is too low to justify 
them, but that access to additional DOB data through these elements of 
new core data would enable them to run such strategies effectively. To 
the extent that such market participants exist, the additional DOB data 
would be a benefit to them as well.
    The revision in trading strategies discussed above could result in 
changes to the decisions traders make about where to route their orders 
among the various exchanges. Market participants may find that depth of 
book information suggests trading opportunities on exchanges to which 
they would not have otherwise routed their orders. The Commission is 
uncertain about the magnitude of this effect or which exchanges may 
gain or lose order flow as a result. The Commission cannot determine 
how many market participants may choose to change routing strategies as 
a result of the new depth of book information, nor to what extent the 
new depth of book information would cause market participants to change 
where they route their orders. The Commission invites comments on this 
issue.
    Also, the Commission preliminarily believes that the more 
widespread dissemination of depth of book information could result in 
more efficient pricing.\926\ The Commission preliminarily believes that 
as more traders take advantage of information contained in the depth of 
book data, prices would reflect this information more quickly. 
Therefore, more widespread dissemination of depth of book information 
has the potential to lead to pricing that better reflects available 
information. If many current users of SIP data are capable of utilizing 
the information in the new core depth of book data, this effect may be 
large, but if only a few choose to make use of the new data or are 
capable of utilizing it, then this effect would be small. The size of 
this effect depends on the willingness and ability of current market 
participants who currently rely solely on SIP data to make use of the 
information in the new depth of book data, which is unobservable.
---------------------------------------------------------------------------

    \926\ For further discussion of this point, see infra Section 
VI.D.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that there may be gains from 
trade that would be realized as a result of adding this depth of book 
information as an element of core data. The possibility for this 
benefit to materialize relies on the extent to which there exist 
traders who would be willing to send orders that ``walk the book'' 
\927\ but currently do not do so because they do not see what is beyond 
the top of the book. This situation represents an economic inefficiency 
because there are potential gains from trade that are not realized 
because of a lack of information. This would presumably be a benefit to 
both the trader walking the book and the traders who posted orders 
behind the BBO that would be filled as a result of the trade.
---------------------------------------------------------------------------

    \927\ See supra note 814.
---------------------------------------------------------------------------

    Relatively few orders actually execute at prices outside the 
NBBO,\928\ which implies that trading against quotes away from the NBBO 
on a single exchange, using a single marketable order, does not occur 
frequently. In addition, an analysis of a sample of trading in ten 
stocks on the Nasdaq exchange found that an average of 0.65% of market 
orders walked through the best displayed price level for these ten 
stocks.\929\ Therefore, the Commission preliminarily believes that 
there may be limited benefits from additional DOB information in the 
particular hypothetical case of traders who currently rely solely on 
SIP data for market information and who would submit market orders to 
trade against limit orders beyond the top of the book on a single 
exchange if the depth of book information were available. However, the 
size of the benefit depends on the willingness of traders to walk the 
book after receiving the new DOB information, as well as their trading 
interest, and this is unobservable in the current market.
---------------------------------------------------------------------------

    \928\ See supra note 814.
    \929\ See Nikolaus Hautsch and Ruihong Huang, Limit Order Flow, 
Market Impact and Optimal Order Sizes: Evidence from NASDAQ 
TotalView-ITCH Data, at 10, Table 3 (Aug. 22, 2011), available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1914293.
---------------------------------------------------------------------------

(iii) Effects of Addition of Auction Information
    The Commission proposes to add ``auction information'' as an 
element of core data. This proposal would result in all auction 
information currently disseminated by exchanges via proprietary data 
feeds being made available to subscribers of these elements of core 
data feeds. The Commission preliminarily believes that the addition of 
auction information as an element of core data would make this 
information more readily available to anyone who subscribes to these 
elements of core data and would have effects that include changes to 
market participants' trading strategies, gains from trade as a result 
of new participation in auctions, potential improvements to price 
discovery in auctions, changes to order routing decisions, and a 
significant reduction in the value of dedicated proprietary auction 
feeds.
    As discussed above, some auction information is currently available 
to market participants through specialized feeds for a lower price than 
full DOB feeds,\930\ and also a limited set of auction information is 
available through the current SIP feeds.\931\ This enables access to a 
limited set of auction information for some market participants, at 
lower prices than full DOB feeds. To the extent that any market 
participants find these auction feeds sufficient for their trading 
needs, the Commission preliminarily believes that the addition of all 
auction information as an element of core data will have a limited 
effect on these market participants. To the extent that these market 
participants make up a large share of the market participants who would 
be interested in using additional auction information, the Commission 
preliminarily believes that the effect of adding auction information 
may be limited.\932\ The Commission preliminarily believes that the 
extent of this limitation is reduced by the fact that not all auction 
information is available to market participants through such feeds. The 
Commission does not have data on the number of market participants with 
proprietary feed subscriptions.
---------------------------------------------------------------------------

    \930\ See supra Section VI.B.2(a).
    \931\ See supra Section VI.B.2(a).
    \932\ Since the cost to integrate multiple auction feeds into a 
single feed is a fixed cost in producing a market data feed, the 
Commission preliminarily believes that there would still be a 
benefit from the rule in the form of competing consolidator 
integrated auction feeds, which could be cheaper for market 
participants than integrating the feeds themselves.
---------------------------------------------------------------------------

    The Commission preliminarily believes that auction information 
contains insights useful to traders in devising and executing trading 
strategies.\933\ Therefore, the Commission preliminarily believes that 
adding this information as an element of core data would produce a 
benefit for those traders who currently do not access such information. 
To the extent that these traders can exploit this auction information, 
the addition of this information as an element of core data should 
enable them to produce better trading strategies and lower execution 
costs, as well as facilitate best execution. To the extent that the 
advantages of possessing auction information come from exploiting the

[[Page 16827]]

trading decisions of market participants who lack this information, 
this effect would represent a transfer from those traders who currently 
have auction information to those traders who would obtain access to it 
through this rule and are able to exploit it to improve their trading 
strategies. The Commission preliminarily believes that this auction 
information could potentially be used across all trading venues, 
including exchange auctions, continuous exchange trading, and off-
exchange venues.
---------------------------------------------------------------------------

    \933\ See supra notes 344-346.
---------------------------------------------------------------------------

    The Commission preliminarily believes that there may be potential 
gains from trade that would be realized through the addition of auction 
information as an element of core data. The Commission believes that 
there may be market participants who would trade in auctions but 
currently do not trade in auctions because they do not access auction 
data. To the extent such traders exist, the addition of auction 
information as an element of core data would give them that data. This 
trade could benefit both sides of the trade, thus resulting in an 
economic benefit.
    To the extent that market participants who start trading in 
auctions as a result of gaining access to auction information possess 
insights beyond what can be inferred from auction information, 
increasing the number of participants in auctions as described above 
should improve price discovery in the auction process. The Commission 
preliminarily believes that those who do not participate in auctions 
because they do not access auction information are unlikely to possess 
insights beyond what can be inferred from auction information. This is 
because any market participant who has such insights would find it 
worthwhile to purchase auction information and participate in the 
auction so as to exploit the value of the insights. Therefore, this 
benefit could be small. The size of this effect depends on the relative 
number of traders who possess such insights to those who do not who 
start participating in auctions as a result of this rule and the size 
of their auction traders in that event, both of which are unobservable 
in the current market.
    The Commission preliminarily believes that the addition of auction 
information as an element of core data may affect the order routing 
decisions of market participants who currently do not have access to 
auction information. For example, some off-exchange trading venues 
cross market-on-close orders before the closing auction takes place and 
later settle the trades at the closing auction price. Having access to 
auction imbalance information may affect market participants' decision 
to route a closing order to either an off-exchange venue or to the 
closing auction on the primary listing exchange. For example, a market 
participant who gets access to auction information through a 
subscription to these elements of new core data might decide not to 
route the order to an off-exchange venue so as to be able to 
participate in the auction using the new information available. This 
auction information could also affect decisions made during the time 
when auction information is disseminated about whether to send orders 
to continuous trading venues instead of auctions or off-exchange 
venues. However, the Commission preliminarily believes that the overall 
effect of auction information on order routing decisions is uncertain 
and likely would vary based on market conditions.
    The Commission preliminarily believes that the value of dedicated 
auction feeds would be substantially reduced as a result of the 
proposed addition of auction information to core data, and that this 
would result in a loss of revenue for those exchanges who offer such 
feeds. Since the full set of all auction information currently 
available in the market would be included in the definition of core 
data proposed by this rule, the Commission preliminarily believes that 
the value of any existing data product that provides only auction data 
\934\ that is not currently in the exclusive SIP feeds would be 
substantially reduced. The Commission expects that many market 
participants who are executing a trade, either for themselves or for a 
client, have, and would continue to have, a subscription to core data. 
Therefore, when this subscription includes all available auction 
information, the value of dedicated proprietary auction data feeds 
could be substantially reduced.
---------------------------------------------------------------------------

    \934\ See supra note 335.
---------------------------------------------------------------------------

(iv) General Costs To Expanding Consolidated Data
    The Commission preliminarily believes that there are three 
potential costs to adding the new core data elements proposed in this 
rule, which are common across all these elements. The first potential 
cost is the cost to the new competing consolidators that would be 
necessary to implement or upgrade existing infrastructure and software 
in order to handle the dissemination of the additional core data 
message traffic. The second cost is the technological investments 
market participants might have to make in order to receive the new core 
data message traffic. The third cost is the cost to users of certain 
kinds of trading strategies that may currently be relying on the fact 
that this data is not widely distributed today.
    The Commission preliminarily believes that the cost for firms that 
wish to become competing consolidators to implement or upgrade 
infrastructure to handle the dissemination of new round lot quotes, 
depth of book information, and auction information would be limited. As 
discussed in more detail below,\935\ the Commission preliminarily 
believes that the new competing consolidators will likely be firms that 
already have the technological infrastructure necessary to process full 
depth of book data and to generate the NBBO using this data. Therefore, 
for these firms, requiring the competing consolidators to be able to 
process the new message traffic resulting from the additional core data 
may add only a minimal cost to becoming a competing consolidator. 
However, for a firm that does not currently subscribe to, or process 
data from, exchange proprietary feeds, the new core data message volume 
would increase the cost of becoming a competing consolidator beyond 
what it would have cost if the rule did not propose to expand core 
data. In particular, if the existing exclusive SIPs should decide to 
enter the competing consolidator business, they may incur such costs as 
they do not currently disseminate full depth of book data.\936\
---------------------------------------------------------------------------

    \935\ See infra Section VI.C.2(a) for a discussion of the 
technological capabilities of firms the Commission preliminarily 
believes are most likely to become competing consolidators. It is 
possible that the addition of this proposed definition of core data 
would make consolidation more difficult for core data than it is 
currently, and that this added difficulty would result in additional 
latency. However, the Commission preliminarily believes that the 
risk of this is minimal, again because of the technological 
capabilities of competing consolidators and the market forces that 
will be in effect in the decentralized consolidation model.
    \936\ These costs are included in the discussion of costs for 
current exclusive SIPs to provide competing consolidator services. 
See infra Section VI.C.2(d).
---------------------------------------------------------------------------

    The Commission preliminarily believes that there would be limited 
infrastructure investment required on the part of SROs to provide the 
information necessary to process and disseminate new core data. This is 
because the SROs currently provide all elements of new core data over 
their proprietary feed infrastructure.\937\ In addition, the Commission 
preliminarily believes that many competing consolidators would be firms 
that already subscribe to these feeds,\938\ and

[[Page 16828]]

thus, the SROs would likely not have a large amount of new data 
connections to service and therefore would not need to invest in 
infrastructure to handle them. However, exchanges, particularly primary 
markets, may incur some infrastructure costs related to the 
dissemination of new regulatory data.\939\ Currently, the new 
regulatory data component to the proposed consolidated market data is 
distributed through the SIPs. In order for this information to be 
distributed through the new decentralized consolidation model, the rule 
requires the exchanges to provide a feed to competing consolidators and 
self-aggregators that contains the regulatory data. The Commission 
preliminarily believes that the infrastructure and operational 
processes provide such a feed is currently not completely in place and 
would require investment on the part of exchanges.\940\
---------------------------------------------------------------------------

    \937\ See supra Section VI.B.2(a).
    \938\ See infra Section VI.C.2(a).
    \939\ As discussed above, this new regulatory data would consist 
of all the same messages as current regulatory data distributed 
through the exclusive SIPs. See supra Section III.D.
    \940\ The costs to SROs to produce a feed for such regulatory 
data is included in the numbers for the general costs to SROs for 
providing the data necessary to generate consolidated market data in 
Section V.D.6.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the costs for 
infrastructure investment on the part of market participants \941\ that 
choose to receive the new DOB and auction information components of 
core data would have only a limited impact.\942\ Adding these 
components to core data could substantially increase the total message 
traffic in core data,\943\ and this increase in message traffic may be 
accompanied by costs to market participants to set up the 
infrastructure required to handle this new level of traffic. However, 
the proposed amendments would not require market participants to 
receive (or display) the complete set of proposed consolidated market 
data, and competing consolidators would not be required to deliver all 
proposed consolidated market data for each data product they 
offer.\944\ Therefore, those market participants who do not want to 
incur the costs associated with the expanded core data message traffic 
due to additional depth of book information or auction information 
would be able to choose not to receive any such additional information. 
Presumably, a market participant would therefore only seek to obtain 
the full set of consolidated market data if it believed that the 
benefits of receiving the data justified the costs. Thus, the 
Commission preliminarily believes that no market participant who does 
not consider this cost of the infrastructure investments necessary to 
receive the new core data worthwhile would have to incur it. For those 
market participants who do wish to incur the cost, the Commission is 
unable to estimate the associated costs because it does not have access 
to information about the infrastructure expenses a market participant 
incurs to process market data and because of the likelihood that such 
costs depend on each market participant's existing infrastructure.
---------------------------------------------------------------------------

    \941\ These market participants would include any entity that 
subscribes to the new consolidated market data.
    \942\ See also supra Section VI.C.1(b)(i).
    \943\ The Commission preliminarily believes that the addition of 
DOB information, in particular, may substantially increase message 
traffic. See supra note 294.
    \944\ A market participant that has obligations under Rule 
603(c) would have to receive all data necessary to generate 
consolidated market data to comply with the rule. The specific cost 
associated with some of this data is discussed below. See infra 
Section VI.C.1(c)(i).
---------------------------------------------------------------------------

    The Commission preliminarily believes that adding the depth of book 
and auction information to core data could impose a cost on traders who 
rely on strategies that take advantage of the fact that the information 
in depth of book and auction data is not widely distributed (i.e., 
those traders who are beneficiaries of existing informational 
asymmetries). To the extent that some of the value of depth of book and 
auction information lies in the fact that they currently are not 
observed by a number of market participants, the Commission 
preliminarily believes that the dissemination of this data would 
adversely impact the profitability of such trading strategies. For 
traders using trading strategies based on depth of book information, 
the magnitude of the cost caused by the proposed amendments would 
depend on the extent to which the five aggregated levels of depth 
proposed in this rule approximate the information contained in the full 
depth of book information. To the extent that these strategies exploit 
the lack of information on the part of exclusive SIP-reliant traders, 
this cost would represent a partial transfer to traders who currently 
rely solely on SIP data. The Commission is unable to estimate the size 
of this effect, since it does not have a method for detecting the use 
of such trading strategies from market data or determining what the 
profit on such strategies would be if they could be detected. The 
Commission invites comments on the issue.
    Regarding the proposed amendment to change the round lot 
definition, the Commission preliminarily believes that the proposed 
amendment may negatively affect certain trading strategies, but the 
associated costs are likely to be small. First, the Commission 
preliminarily believes that there may be traders who currently attempt 
not to display their orders to wide public view by posting them in odd-
lot sizes, in pursuit of trading strategies that take advantage of a 
market's limited knowledge of odd-lot size quotes. The Commission 
understands that certain traders (ones who are the most likely to 
recognize any advantage being sought in this manner) obtain proprietary 
feeds and so currently can see these odd-lot quotes. This means that 
this strategy cannot be used to hide quotes from users of proprietary 
feeds. To the extent that it is necessary to hide the quotes from such 
users in order for the strategy to work, the benefits of such a trading 
strategy are likely to be minimal. If this is the case, then to the 
extent that the new round lot definition makes this strategy more 
difficult, the Commission preliminarily believes that the cost to these 
traders of losing such an opportunity would also be minimal. On the 
other hand, if there is some benefit to posting quotes in odd-lot sizes 
to hide them from view (or at least from the view of exclusive SIP 
users) despite the fact that users of proprietary feeds can still see 
the quotes, the Commission preliminarily believes that to the extent 
that the new round lot definition makes this strategy more difficult, 
there could be a cost to the traders who use such a strategy. The 
Commission cannot observe whether an odd-lot quote is being used to 
hide the order or not but invites comments on the issue.
    Second, there may be costs to those traders who currently enjoy the 
position of being among the traders who can see odd-lot quotes via 
proprietary data feeds. The Commission preliminarily believes that odd-
lot quotes are more easily taken advantage of by those traders who can 
see the quotes. Currently, this advantage is available only to those 
traders who purchase proprietary data feeds. The Commission 
preliminarily believes that this gives these traders an advantage over 
other traders by improving their order execution costs. Under the 
proposed changes to core data, this advantage is likely to be reduced. 
If this were to happen, it would be because other traders would obtain 
the advantage as well and may take advantage of these quotes before the 
current direct feed subscribers do. To the extent that this happens, 
this cost to current direct feed subscribers from losing this advantage 
represents a transfer to the traders who can see the liquidity 
currently in odd-lots. The Commission is uncertain about

[[Page 16829]]

the size of the loss in advantageous trading opportunities to traders 
who subscribe to the proprietary data. To quantify this requires 
knowing (among other things) when an odd-lot quote is traded with by a 
participant who had access to full odd-lot information and when it was 
traded with by a participant who did not know the quote was there, and 
this is not observable from available market data. However, the 
Commission invites comments on the issue.
(v) Request for Comments
    The Commission requests comments on its analysis of the economic 
effects the proposed amendments regarding core data and consolidated 
market data. In particular, the Commission solicits comment on the 
following:
    188. Do you agree with the Commission's analysis of the economic 
effects of creating definitions for ``consolidated market data,'' 
``core data,'' ``administrative data,'' and ``regulatory data''? Why or 
why not? Please explain in detail.
    189. Do you agree with the Commission's analysis of the economic 
effects of expanding the content of core data? Why or why not? Please 
explain in detail.
    190. To what extent would the expansion of core data reduce the 
value of current market data products? What would be the economic 
effect of any reduction? Who would benefit and who would incur costs of 
any value reduction? Would the reduced value result in a net welfare 
gain or loss? Please explain in detail and quantify if possible.
    191. To what extent would market participants who wish to receive 
information currently contained in the exclusive SIP feeds that will 
not be included in the proposed definition of consolidated market data 
be able to obtain this information from other sources? What would be 
the likely price of such sources?
    192. The Commission requests comments on the potential uses of 
expanded core data content. How would market participants use the 
expanded core data? Which market participants would be likely to use 
the additional depth of book data? To what extent would the users or 
uses differ from current users and uses? What would be the potential 
economic effects of the expanded core data? Please be specific.
    193. The Commission requests comment on the capacity requirements 
needed by exchanges, competing consolidators, and users resulting from 
expanded core data. Would any of these participant types need to 
upgrade systems to be able to handle the expanded data? If so, what 
would be the aggregate one-time and ongoing expenses of these upgrades? 
Would such expenses vary by type of entity or other factors? If so, 
what factors might affect these expenses and what would a reasonable 
range of expenses be for exchanges, competing consolidators, and users? 
Would the expansion of core data increase any data latencies relative 
to today? If so, what would be the economic effect of the increased 
latency? Please be specific.
    194. The Commission requests that commenters provide any insights 
they may have as to the effect of the addition of depth of book 
information, smaller quotes (from the definition of round lot), and the 
inclusion of auction information on the share of order flow received by 
various exchanges, ATSs, and other trading systems. If you expect the 
inclusion of such information to alter order routing decisions, please 
explain the factors that could determine the winners and losers and 
whether such changes would result in net welfare gains or losses. 
Please provide estimates of these potential effects.
    195. The Commission requests that commenters provide any insights 
they may have as to the effect of adding the depth of book, smaller 
quotes, and auction information to the core data on traders who 
currently benefit from information asymmetries. Would any losses to 
these traders be offset by gains to others? If so, would there be net 
welfare gains or losses? Please explain in detail and also submit any 
insights you may have as to the size this effect.
    196. The Commission requests that commenters provide any insights 
they may have as to the effect of the proposed round lot definition on 
the informational advantage currently possessed by those traders who 
obtain odd-lot quotes via proprietary feeds. Would any transfers 
between those who currently have access to this data and those who do 
not result in any welfare gains or losses? What effect would the 
proposed round lot definition have on trading strategies that exploit 
the hidden nature of odd-lots? Please explain in detail.
    197. Do you agree with the Commission's assessment that the traders 
currently reliant on SIP data, who will be able to see price-improving 
odd-lot quotes in certain stocks, could create additional trades that 
do not currently take place? Why or why not? Please explain in detail.
    198. The Commission requests that commenters provide any insights 
they may have as to the effect of including depth of book information 
in core data on trading strategies that exploit the information in 
current depth of book data products.
    199. The Commission requests that commenters provide any insights 
they may have as to the effect of including depth of book information 
in core data on the informational advantage currently possessed by 
those traders who obtain depth of book via proprietary feeds. Would any 
transfers between those who currently have access to this data and 
those who do not result in any welfare gains or losses? Please explain 
in detail.
    200. The Commission requests that commenters provide any insights 
they may have as to the use of depth of book information in running 
strategies that attempt to establish priority in the queue at a 
particular price level behind the top of book. Are such strategies ever 
run without access to depth of book information? How common are such 
strategies in the market?
    201. Would the inclusion of depth of book information in core data 
strain current throughput, processing, or storage capacities? If so, by 
how much? How costly would it be and who would incur the costs of 
upgrading capacity to handle depth of book information in core data?
    202. Do you agree that the inclusion of odd-lot or depth of book 
information in core data would result in more efficient pricing? Why or 
why not? Please explain in detail.
    203. To what extent would any benefits of including depth of book 
information in core data depend on the degree to which orders ``walk 
the book''? Which benefits, if any, depend on this? Please explain how.
    204. To what extent would adding all auction information to core 
data result in such information being more widely disseminated, and 
what role do existing dedicated auction feeds play in this? If so, how 
would market participants use this more widely disseminated data and 
what would be the economic effect of this usage? Please explain in 
detail.
    205. Would disseminating auction information in core data increase 
participation in auctions? Why or why not? What would be the economic 
effect of any change in auction participation? Would this change in 
auction participation improve price discovery? Please explain.
    206. What are the initial and ongoing technology costs that 
competing consolidators would incur to collect, compile, process, and 
disseminate the expanded core data? How would these costs vary across 
potential competing consolidators--current exclusive SIPs, current 
market data aggregators and self-aggregators, and new entrants? Would

[[Page 16830]]

these costs constitute a significant barrier to entry to becoming a 
competing consolidator? Why or why not? Please explain and provide 
quantified costs.
    207. What are the initial and ongoing technology costs that 
exchanges would incur to disseminate the expanded core data to 
competing consolidators? Please quantify these costs. Do commenters 
agree that these costs would be minimal to the extent that exchanges 
are already disseminating such information in proprietary data feeds? 
Why or why not? Please explain.
    208. What would be the initial and ongoing technology expenses 
incurred by market participants to receive and process the expanded 
core data for their intended uses? Please quantify these expenses. Do 
you agree that such technology expenses would be minimal for those 
market participants that currently receive and process such information 
from proprietary data feeds? Why or why not? Do you agree that such 
technology expenses would be mitigated by the fact that only those 
market participants that would significantly benefit from receiving and 
using such data would choose to receive it? Why or why not? Please 
explain in detail.
    209. Do you agree with the Commission's range of the potential 
increase in message traffic associated with the expansion of market 
data? Please explain and provide alternate estimates as necessary. How 
would the costs incurred by exchanges, competing consolidators, and 
data users depend on the increase in message traffic? Would the 
relation between message traffic and costs for each of these entities 
be linear, concave, or something else?
(c) Amendments to the NBBO and Protected Quotes and Other Conforming 
Changes
    The proposal to change the round lot size for stocks with prices 
greater than $50 would mechanically change NBBO spreads for these 
stocks, as explained below. Specifically, almost all stocks with prices 
above $50 would experience narrower NBBO spreads. In addition to the 
direct effect of narrower quoted spreads, the Commission recognizes 
that these mechanical changes to the NBBO may affect other Commission 
or SRO rules and regulations. For some of these rules and regulations, 
the Commission is proposing conforming changes, which themselves can 
have economic effects. For other rules and regulations, the Commission 
analyzes below the follow-on economic effects of the mechanical changes 
to the NBBO.
(i) Changes in the National Best Bid and Offer and Protected Quotes
    As discussed in detail above,\945\ the proposed amendments would 
reduce the number of shares included in the definition of a round lot 
for NMS stocks for which the prior calendar month's average closing 
price on the primary listing exchange was greater than $50.00.\946\ 
Higher priced stocks would be grouped into tiers based on their price 
and stocks in higher price tiers would have fewer shares in their 
definition of a round lot. In addition, the proposed amendments would, 
as part of the proposed definition of core data, require that the best 
bid and offer and national best bid and offer include odd-lots that, 
when aggregated, are equal to or greater than a round lot and that such 
aggregation shall occur across multiple prices and shall be 
disseminated at the least aggressive price of all such aggregated odd-
lots.\947\
---------------------------------------------------------------------------

    \945\ See supra Section III.C.1(d).
    \946\ The round lot size for the twelve stocks that currently 
have round lot sizes less than 100 shares could also change as a 
result of the proposed amendments. For some of these stocks, the 
round lot size may increase, which could cause the quoted spread 
derived from the NBBO to widen. See supra Section III.C.1.
    \947\ See supra Section III.C.1. Several exchanges already 
aggregate odd-lot orders into round lots and report such aggregated 
odd-lot orders as quotation information to the exclusive SIPs. See 
supra notes 157-158 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that these amendments could 
potentially change the spread between national best bid and offer for 
these higher priced stocks because the NBBO would now be calculated 
based off of the smaller round lot size. To the extent that odd-lot 
shares exist in these stocks at prices that are better than the 
national best bid and offer (i.e., at prices higher than the national 
best bid and prices lower than the national best offer), the new 
national best bid and offer under the proposed amendments may be at a 
higher/lower price because fewer odd-lot shares would need to be 
aggregated together (possibly across multiple price levels) to form a 
round lot. This could result in a quoted spread that is calculated 
based off of the NBBO being smaller for these stocks. The Commission 
preliminarily believes that the reduction in spreads would be greater 
in higher priced stocks because stocks in higher priced tiers would 
have fewer shares included in the definition of a round lot.\948\
---------------------------------------------------------------------------

    \948\ See supra Section III.C.1. Also, for additional analysis 
of the narrowing of spreads as a result of the new round lot 
definition, see supra VI.C.1(b)(i).
---------------------------------------------------------------------------

    The proposed amendments would also change the definition of a 
protected quote from a round lot to 100 shares.\949\ This would 
increase the number of shares required for a quote to be protected for 
the twelve stocks that currently have round lot sizes of less than 100 
shares.\950\ Additionally, the proposed amendments would only allow 
odd-lot orders at a single price point to be aggregated together to 
form a protected quote.\951\ As discussed above, several exchanges 
already aggregate odd-lot orders across different price levels into 
round lots and report such aggregated odd-lot orders as protected 
quotes to the exclusive SIPs.\952\ To the extent that a stock currently 
has odd-lot shares inside the NBBO, the Commission preliminarily 
believes the proposed amendments could cause the protected quotes to 
widen because odd-lot shares at multiple price levels could no longer 
be aggregated together to create a protected quote.\953\ Additionally, 
if stocks have periods of time when they do not have 100 aggregated 
shares at the same price point, then under the proposed amendments, 
they could have increased periods of time during which they might not 
have a protected quote. The Commission cannot quantify to what extent 
protected quotes would widen because the effects would partially depend 
on how market participants adjust their order submissions based on the 
new round lot size, which the Commission is unable to predict. However, 
the Commission preliminarily believes that these effects would vary 
based on the price of the stock. For stocks with prices in the lowest 
proposed round lot tier, i.e. stocks with prices of $50.00 or less, the 
Commission preliminarily believes that the effects would be minimal 
because the round lot size would not change for these stocks and 
because there is evidence that these stocks have fewer odd lots inside 
the current NBBO.\954\ The Commission preliminarily believes that the 
effect on protected quotes would be greater for stocks with higher 
prices. Since higher priced stocks appear to have more odd lots inside 
the current NBBO,\955\ the Commission preliminarily believes that under 
the proposed amendments their protected quotes could widen. The

[[Page 16831]]

Commission preliminarily believes that both the amount by which, and 
the proportion of time, the protected quote would be wider under the 
proposed amendments would increase with the price of the stock.\956\ 
The Commission invites comments and analysis in order to estimate to 
what extent the protected quotes would widen under the proposed 
amendments.
---------------------------------------------------------------------------

    \949\ See supra Section III.C.1(d)(i).
    \950\ See supra notes 141, 251.
    \951\ See supra Section III.C.1.
    \952\ See supra note 85 and accompanying text.
    \953\ Although such a widening of the protected quote could 
impact execution quality of orders, the Commission preliminarily 
believes that best execution obligations of broker-dealers may 
mitigate this result.
    \954\ See supra Section III.C.1(b) (discussing staff odd-lot 
analysis).
    \955\ Id.
    \956\ The Commission preliminarily believes that under the 
proposed amendments some high priced stocks that currently have 
round lot sizes of less than 100 shares may not have a protected 
quote in place for much of the trading day because they might have 
price levels with size greater than or equal to 100 shares.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the change in the round 
lot and protected quote definition could have an effect on retail order 
flow internalization businesses. Currently, some wholesalers,\957\ by 
arranging to execute orders on behalf of retail broker-dealers, offer 
superior prices relative to the existing NBBO (i.e., price improvement) 
to retail investors. As part of this arrangement, the wholesaler 
typically agrees that some percentage of the broker-dealer's orders 
will execute at prices better than the NBBO and/or agrees to certain 
execution quality metrics. The Commission expects that the new 
definition of a round lot will, at times, make the NBBO narrower for 
the affected stocks because the new definition would include orders 
that are at superior prices to the 100 share NBBO at a size less than 
100 shares. As a result, it may become more difficult for the retail 
execution business of wholesalers to provide price improvement and 
execution quality metrics at levels similar to those provided under the 
100 share round lot definition today.
---------------------------------------------------------------------------

    \957\ See supra note 892 for discussion of wholesalers and 
retail internalization.
---------------------------------------------------------------------------

    It is also possible that by the same mechanism retail investors 
could experience an improvement in execution quality from these 
wholesalers.\958\ Assuming that the NBBO has narrowed, and wholesalers 
continue to agree to provide a certain level of price improvement off 
of the narrower spread, this would lead to better execution prices for 
retail investors. To the extent that retail wholesalers are held to 
similar execution quality standards by retail broker-dealers in a 
narrower spread environment, this could have a negative effect on the 
profitability of the retail execution business for wholesalers, given 
that there would be less ``spread profit'' available to the wholesaler 
in a narrow spread environment. This is, in part, because the 
wholesaler may often keep a portion of the spread profit that is not 
given as price improvement to the investor who submitted the order. 
Therefore, if the NBBO has narrowed and price improvement must still be 
provided, there would be less revenue for the wholesaler.\959\ To the 
extent this happens, it would be a transfer from the wholesaler to 
retail investors.
---------------------------------------------------------------------------

    \958\ This improvement may not be transparent to the retail 
investor. See infra note 976 for further discussion of this point.
    \959\ The NBBO based off of the new round-lot definition would 
be relevant to the spread considered by the wholesalers because, 
among other things, it would be used for Rule 605 execution 
statistics. See infra Section VI.C.1(c)(iii) for further discussion 
of Rule 605 statistics.
---------------------------------------------------------------------------

    To make up for lower revenue per order filled in a narrower spread 
environment, wholesalers could respond by changing how they conduct 
their business in a way that could affect retail broker-dealers. There 
are several possibilities, including but not limited to, reducing per 
order costs associated with their internalization programs, such as 
reducing any payments for order flow or reducing the agreed upon 
metrics for price improvement. In the event that wholesalers reduce 
payments for order flow, retail broker-dealers could respond by 
changing certain aspects of their business. The Commission is uncertain 
as to how wholesalers may respond to this proposal, and, in turn, how 
retail broker-dealers may respond to those changes, and the Commission 
is uncertain as to the extent of these effects.
    The effect of lost revenue for wholesalers discussed above may be 
reduced if wholesalers use proprietary feeds to trade, to the extent 
they already see and respond to odd-lot quotations inside the NBBO and 
currently provide execution quality to customers based upon the 
superior odd-lot quotations.
    The Commission preliminarily believes that the change in the NBBO 
and the protected quote caused by this proposal could change the share 
of order flow captured by each exchange. Currently, Rule 611 requires 
that the trading center on which the order is executed prevent 
executions that result in trade-throughs of protected quotes,\960\ and 
exchange rules provide for the aggregation or ``rolling up'' of odd-
lots of different prices to produce protected quotes.\961\ With the 
NBBO based off of the new round lot definition, the protected quote 
remaining at 100 share quotes, and a change in the ``roll up'' practice 
for odd-lot quotes, the Commission preliminarily believes that there 
would be changes in how orders are routed to fulfill both best 
execution requirements and protected quote requirements. These changes 
might not be uniform across exchanges, and it is possible that some 
exchanges would see an increase in order flow. This particular effect 
would represent a transfer of business (and therefore transaction fees) 
between the exchanges.
---------------------------------------------------------------------------

    \960\ See supra notes 234-235.
    \961\ See supra note 157.
---------------------------------------------------------------------------

    Also, the Commission preliminarily believes that changes in the 
NBBO caused by the new round lot and protected quote definitions could 
also affect other trading venues, including exchanges and ATSs.\962\ 
Exchanges and ATSs have a number of order types that are based off of 
the national best bid and offer.\963\ Changes in the NBBO could affect 
how these order types perform and could also affect other orders they 
interact with. Some ATS matching engines also derive their execution 
prices based off of price improvement measured against the NBBO. 
Changes in the definition of the NBBO could affect execution prices on 
these platforms. Overall, the Commission preliminarily believes that 
these interactions could affect order execution quality on different 
trading platforms, but it is uncertain of the direction or magnitude of 
these effects.
---------------------------------------------------------------------------

    \962\ See supra Section VI.C.1(c)(iii) for additional discussion 
of effects on exchange rules.
    \963\ For example, the apparent price improvement over the NBBO 
calculated off of core data that is offered by a midpoint crossing 
network would be reduced as a result of these changes to the NBBO.
---------------------------------------------------------------------------

    Changes in execution quality could in turn affect competition for 
order flow between different trading venues, with trading venues that 
experience an improvement/decline in execution quality attracting/
losing order flow. However, the Commission is uncertain of the 
direction or magnitude of these effects.
    The Commission preliminarily believes that market participants who 
currently rely solely on core data to obtain NBBO feeds would incur 
some infrastructure investment costs as a result of the proposed 
amendment to change the definition of a round lot. This is based on the 
Commission's belief that the proposed amendment would lead to more 
frequent updates to the NBBO and that this would result in an increase 
in message traffic for NBBO feeds.\964\ The Commission acknowledges 
that having an NBBO feed is an essential component of the broker-dealer 
business. The Commission is unable to estimate the associated costs 
because it does not have access to

[[Page 16832]]

information about the infrastructure expenses a broker-dealer incurs to 
process market data and because of the likelihood that such costs vary 
substantially according to the existing infrastructure of broker-
dealers, but the Commission invites comments on the issue.
---------------------------------------------------------------------------

    \964\ As discussed previously, this will happen more in high-
priced stocks where the new round lot definition will have more of 
an effect. See supra Section III.C.1(d)(i).
---------------------------------------------------------------------------

    For certain core data use cases, the costs described in the 
preceding paragraph are likely to be minimal. Many broker-dealers, when 
accessing data for the purposes of visual display, currently obtain 
NBBO quotes from the exclusive SIPs with a ``per query'' use case. This 
use case is set up so that a quote is only sent when it is asked for. 
The Commission preliminarily believes that this setup has very little 
technological cost associated with it and that furthermore whatever 
cost there is to receiving such a feed would not be impacted by 
increasing the number of times the NBBO is updated over a given time 
period. Thus, the Commission believes that for those broker-dealers who 
rely on per query use cases for their quotes, the upgrade costs 
resulting from changing the round lot definition would be minimal.\965\
---------------------------------------------------------------------------

    \965\ This conclusion is contingent on the assumption that 
competing consolidators would choose to offer a per query service to 
market participants so that this arrangement could continue after 
the rule takes effect.
---------------------------------------------------------------------------

    Trading venues and broker-dealers could also experience 
implementation costs from having to modify and reprogram their systems, 
including matching engines and SORs, to account for the changes in the 
NBBO and protected quotes caused by the proposed amendments. For costs 
to trading venues as a result of changes to the protected quotations, 
NBBO, and the new restriction on roll up quotes, the Commission does 
not have detailed information on the operation of exchange matching 
engines. However, the Tick Size Pilot required re-programming of 
exchange matching engines as well. For that pilot, CHX estimated that 
total costs for implementing the pilot were $140,000 per SRO and market 
center.\966\ The Commission preliminarily believes that this number may 
provide some sense of the level of cost associated with the changes 
SROs, ATSs, and other off-exchange trading venues would have to make in 
order to comply with the new rules regarding protected quotes. In 
addition, there could be variation in this cost between different 
market centers or categories of market centers depending on the 
existing state of their infrastructure. The Commission invites comments 
on the reasonableness of this number as an approximation for the cost 
to update matching engines.
---------------------------------------------------------------------------

    \966\ See Letter to Brent J. Fields, Secretary, Commission, from 
James G. Ongena, General Counsel, Chicago Stock Exchange, Inc. (Dec. 
22, 2014).
---------------------------------------------------------------------------

    Broker-dealers may also incur implementation costs. For example, a 
broker-dealer who runs an SOR off of core data alone would now have to 
adapt this system to keep track of the NBBO separately from the 
protected quote. This is particularly relevant for the submission of 
Intermarket Sweep Orders (``ISOs''), where the broker-dealer assumes 
responsibility for preventing trade-throughs. For ISOs, the broker-
dealer's SOR would now have to simultaneously target liquidity 
available at the NBBO while keeping track of protected quotes to 
prevent trade-throughs. The Transaction Fee Pilot required re-
programming of SORs as well, and forms a basis for an estimate of these 
costs. For that pilot, the Commission estimated that the costs of a 
one-time adjustment to the order routing systems of a broker-dealer 
would $9,000 per broker-dealer.\967\ The Commission preliminarily 
believes that this number may provide some sense of the level of cost 
associated with changes that broker-dealers, as well as other entities 
making real-time order routing decisions based off of SIP data, would 
have to make as a result of the proposed changes to the NBBO and 
protected quote and other implementation costs discussed below.\968\ 
Such costs are likely to vary substantially across broker-dealers 
according to the state of their existing infrastructure. The Commission 
invites comment on the reasonableness of this number as an 
approximation for the costs to update trading systems to deal with this 
implementation cost and the implementation costs discussed below.
---------------------------------------------------------------------------

    \967\ See Securities Exchange Act Release No. 84875 (Dec. 19, 
2018), 84 FR 5202 (Feb. 20, 2019) (Transaction Fee Pilot for NMS 
Stocks).
    \968\ The Commission preliminarily believes that this $9,000 
estimate would cover the changes that would have to be made as a 
result of the proposed distinction between the NBBO and the 
protected quote as well as changes that would result from the effect 
of the proposal on locked or crossed markets. These costs are 
discussed below, see infra Section VI.C.1(c)(ii).
---------------------------------------------------------------------------

    The Commission is also deleting the reference to ``The Nasdaq Stock 
Market, Inc.'' from the definition of protected bid or offer and 
believes that this changes would have no economic effects. As explained 
above in Section III.C.1(d)(ii), Nasdaq is now a national securities 
exchange and is thus otherwise bound by the definition.
(ii) Amendments to Locked/Crossed Markets
    The Commission preliminarily believes that the proposed amendments 
could cause an increase in the frequency of locked and crossed NBBOs in 
certain stocks.\969\ This is expected to occur due to the fact that the 
existing locked and crossed markets prohibition, as affected by the 
proposed amendments, would only apply to protected quotations (or the 
PBBO) and not to the new round lot sizes, which may often constitute 
the NBBO. As described above in Section III.C.1(d)(ii), Rule 610(d), 
which requires trading centers to establish procedures to prevent 
orders being entered that would lock or cross markets, is based solely 
on protected quotations, which, as proposed to be defined, may not be 
the NBBO. If a locked and crossed NBBO is not prohibited by rule, it is 
more likely to occur.
---------------------------------------------------------------------------

    \969\ Locked and crossed markets already occur with respect to 
odd-lot quotes and are observable to market participants who 
subscribe to proprietary feeds. See supra note 256 and accompanying 
text. Even if there is no increase in the frequency of locked and 
crossed markets, their occurrence may still be observed by a higher 
number of market participants under the proposed amendments because 
of the change in the round lot definition.
---------------------------------------------------------------------------

    The Commission preliminarily believes that this increase is 
unlikely to have much economic effect. The new round lot definition may 
cause the NBBO to narrow. The Commission preliminarily understands that 
it can sometimes happen that a market becomes locked or crossed in odd-
lot orders. To the extent that these odd-lots are included in the new 
definition of a round lot, the NBBO will appear locked or crossed on 
occasion. The Commission preliminarily anticipates that the fact that 
they will now be classified as a locked or crossed NBBO will not make 
much difference, because these locked or crossed conditions already 
occur in odd-lots. Furthermore, the effect of having these locked or 
crossed quotes visible to market participants who rely solely on core 
data is unlikely to be different from the general effects discussed for 
the added information as a result of the change in the round lot 
definition. In particular, to the extent that these crosses and locks 
in odd-lot sizes represent a profitable trading opportunity to those 
market participants who rely solely on exclusive SIPs, being able to 
observe the occurrence of these events as a result of the proposed 
change to the round-lot definition would be a benefit to these

[[Page 16833]]

market participants.\970\ Also, to the extent that market participants 
who currently subscribe to proprietary feeds are able to profit from 
being the only market participants to observe crossed or locked odd-
lots, the proposed change will represent a cost to them.\971\ To the 
extent that the ability to profit from observing crossed or locked odd-
lot quotes comes from exploiting those market participants who cannot 
see the crosses or locks, this change will represent a transfer from 
those who currently trade on this information to those who acquire the 
information through new core data and are able to use it 
effectively.\972\ It is also possible that traders avoid sending orders 
because of the risk of being exploited if they cross or lock the 
market. To the extent that this happens, and to the extent that the 
proposed expansion of core data addresses this concern, the increase in 
trading that would result would represent a benefit to both sides of 
the trade.\973\
---------------------------------------------------------------------------

    \970\ See supra Section VI.C.1(b)(i) for further discussion of 
such benefits resulting from the new round-lot definition.
    \971\ See supra Section VI.C.1(b)(iv) for further discussion of 
such costs resulting from the new round-lot definition.
    \972\ See supra Sections VI.C.1(b)(i) and VI.C.1(b)(iv) for 
further discussion of transfers resulting from the changes to the 
round-lot definition.
    \973\ See supra Section VI.C.1(b)(i) for further discussion of 
such benefits resulting from the new round-lot definition.
---------------------------------------------------------------------------

    The Commission preliminarily believes that some crossed or locked 
quotes represent traders who are not aware at the time they post their 
quote that the quote could be filled by a marketable order elsewhere. 
To the extent this happens it represents a cost to this trader since 
the posted order is exposed to the risk that it will be executed with a 
marketable order at a price inferior to what is available on the market 
to the trader who posted the order.
    Market participants would also experience implementation costs in 
order to modify their systems to account for locked and crossed NBBOs. 
The Commission preliminarily believes that to the extent that market 
participants currently rely on the exclusive SIPs to keep track of 
whether trading restrictions imposed by Rule 610(d) would apply, their 
systems would have to be updated to take into account the fact that the 
NBBO is no longer the price point at which such restrictions are 
triggered. Instead, they would have to keep track of both the NBBO for 
trading purposes, and the new protected bid and offer in order to 
monitor whether a 610(d) restriction would apply. The costs to make 
such changes are covered by the estimate provided above for costs to 
implement changes that would result from changes to the NBBO and 
protected quote, since that estimate is related to trading system 
adjustments.\974\ Such costs are likely to vary substantially across 
market participants depending on their existing infrastructure.
---------------------------------------------------------------------------

    \974\ See supra note 968 and accompanying text.
---------------------------------------------------------------------------

    An increase in the frequency of locked and crossed markets could 
also have additional economic effects. As discussed above, it could 
cause a change in order routing behavior and order flow between trading 
venues. Furthermore, as discussed below, it could also affect the 
calculation of Rule 605 execution statistics.
(iii) Other Rules and Regulations
    The changes to core data, particularly the changes to the 
definition of ``national best bid and national best offer'' affect how 
other rules and regulations operate. In particular, this change affects 
which orders determine the reference price for numerous rules, 
including rules under the Exchange Act, SRO rules, and NMS plans. The 
Commission discussed many of these above in Section III.C.1(d)(i). 
Specifically, the Commission preliminarily believes that the changes to 
the NBBO may present changes to the benchmark prices used in Regulation 
SHO, LULD, retail liquidity programs, market maker obligations, and 
certain exchange order types and recognizes that the change in the 
benchmark price could result in economic effects. Further, changing the 
NBBO would alter the estimation mechanics for Rule 605 metrics, 
resulting in implementation costs. In addition, the proposed round lot 
definition would result in economic effects through its impact on the 
Rule 606 compliance. Finally, the Commission preliminarily believes 
that the proposed rules, though appearing to change the requirements of 
several other rules and regulations, would not necessarily have an 
economic impact through these other rules and regulations.
    For Rule 201 of Regulation SHO, the reference bid for the execution 
of a short sale transaction could be higher under that proposal than it 
is currently, potentially slightly increasing the burdens on short 
selling. Currently, after the Short Sale Circuit Breaker triggers, 
short sales can only execute at prices greater than the NBB. While 
short sales are currently permitted to execute against any odd-lot 
quotations that exist above the NBB, the proposed round lot definition 
would reduce the instances of such odd-lot quotations. Therefore, the 
proposal could result in a higher NBB and thus result in a slightly 
higher benchmark price for short sale executions in stocks priced more 
than $50, reducing the fill rate of short sales or increasing the time 
to fill for short sales.
    In addition, a potentially higher NBB price or potentially lower 
protected best bid could marginally affect the trigger of the Short 
Sale Circuit Breaker. In particular, the proposal could result in 
slight delays in or a reduction in the number of Short Sale Circuit 
Breaker triggers, or it could have the opposite effect. In particular, 
an NBB that includes smaller round lots could result in a higher-priced 
execution relative to an NBB that does not include smaller round lots. 
This higher-priced execution could be above the price that would 
trigger the Short Sale Circuit Breaker whereas an execution on a 100-
share quote would have triggered the circuit breaker. This could delay 
the trigger if the price continues downward, such that the circuit 
breaker still triggers, or the circuit breaker may not trigger at all 
if the price rebounds after such an execution. On the other hand, if 
the proposal results in a lower protected bid, it could have the 
opposite effect on circuit breaker triggers: Triggering sooner and more 
often.
    The Commission preliminarily believes that the economic effects of 
the potential impact on the Short Sale Circuit Breaker are unlikely to 
be significant. These effects should not create implementation costs, 
and the Short Sale Circuit Breaker should continue to function 
consistent with its stated purpose. Notably, if the proposal would 
result in not triggering as many Short Sale Circuit Breakers, it could 
reduce ongoing compliance costs in situations in which the price 
rebounds despite the lack of a price test on short sales.
    Similarly, a potentially higher bid price or lower offer price 
could affect the trigger of a Limit State under the LULD Plan. A lower-
priced NBO or a high-priced NBB could result in that quote being more 
likely to touch a price band, thus triggering a Limit State, when it 
otherwise would not have. Depending on whether the quote would have 
otherwise rebounded, this could increase the number of Limit States 
and/or Trading Pauses or could merely trigger such Limit States or 
Trading pauses sooner. As in the case of the Short Sale Circuit 
Breaker, the effects should not create implementation costs, and LULD 
should continue to function consistent with its stated purposes. In

[[Page 16834]]

addition, the economic effects of this potential marginal change 
depends largely on how often odd-lot quotations lead price declines or 
lead price increases.
    As discussed above,\975\ a number of Rule 605 execution quality 
statistics are benchmarked to the NBBO. Under the proposed amendments, 
the NBBO would be based on the proposed tiered, price-based round lot 
sizes, which means any Rule 605 execution quality statistics that rely 
on the NBBO as a benchmark would reflect the modified definition of the 
NBBO. This could cause certain execution quality statistics to change 
in higher priced stocks. As discussed above, the Commission 
preliminarily believes that the NBBO would become narrower for some 
stocks in higher price tiers. This could cause execution quality 
statistics that are measured against the NBBO to change because they 
would be measured against the new, narrower NBBO. For example, 
execution quality statistics on price improvement for higher priced 
stocks may show a reduction in the number of shares of marketable 
orders that received price improvement because price improvement would 
be measured against a narrower NBBO. However, the Commission 
preliminarily believes that some of these changes may cause some Rule 
605 statistics to more accurately reflect actual execution quality 
because the NBBO based on the new definition for round lots may now 
take into account more liquidity that the current NBBO ignores.\976\ 
The Commission preliminarily believes that these effects would be 
larger for stocks in higher price tiers because their new round lot 
definition would include fewer shares.
---------------------------------------------------------------------------

    \975\ See supra Section III.C.1(d)(i).
    \976\ In the hypothetical case of a stock in which there are 
often valuable odd-lot quotes, broker-dealers trading in this stock 
can currently use these odd-lot quotes to improve on the NBBO, and 
this improvement might be reflected in Rule 605 statistics. Under 
the proposed change, if this stock is priced over $50 per share, 
then some of these odd-lot quotes could end up being defined as 
round lots under the new definition and thereby end up the basis for 
the NBBO. With these quotes as the NBBO, the broker-dealer would no 
longer appear to be improving over the NBBO in its execution, and 
Rule 605 statistics may appear to indicate a decrease in execution 
quality. However, they would, in fact, merely be reflecting a more 
accurate picture of the market circumstances at the time of 
execution.
---------------------------------------------------------------------------

    In addition, the NBBO midpoint in stocks priced higher than $50 
could be different under the proposal than it otherwise would be, 
resulting in changes in the estimates for Rule 605 statistics 
calculated using NBBO midpoint, such as effective spreads. In 
particular, at times when bid odd-lot quotations exist within the 
current NBBO but no odd-lot offer quotations exist (and vice versa), 
the midpoint of the proposed NBBO would be higher than the current NBBO 
midpoint. For example, if the NBB is $60 and the NBO is $60.10, the 
NBBO midpoint is $60.05. Under the proposal a 50 share buy quotation at 
$60.02 would increase the NBBO midpoint to $60.06. Using this proposed 
midpoint, effective spread calculations for buy orders would be lower 
but would be higher for sell orders. More broadly, the proposal would 
have these effects whenever the new round lot bids do not exactly 
balance the new round lot offers. However the Commission does not know 
to what extent or direction that odd-lot imbalances in higher priced 
stocks currently exist, so it is uncertain of the extent or direction 
of the change.
    Additionally, a change in the rate of locked and crossed markets 
could also affect how Rule 605 execution quality statistics are 
calculated. The Commission preliminarily believes that orders received 
when the NBBO is crossed for more than 30 seconds are generally not 
included in Rule 605 execution statistics. To the extent the changes in 
the definitions of round lots and protected quotes cause an increase in 
the frequency or length of crossed markets, more orders could end up 
being excluded from Rule 605 execution statistics, which could cause 
some Rule 605 execution statistics to less accurately reflect actual 
execution quality.
    Finally, the Commission recognizes that such changes could force 
market centers (or their third-party service providers) to revise their 
processes for estimating the Rule 605 execution statistics. Such 
changes would result in implementation costs.
    The Commission recognizes that the NBBO serves as a benchmark in 
SRO rules in addition to Exchange Act rules and NMS plans. For example, 
the NBBO acts as a benchmark for various retail liquidity programs on 
exchanges, for exchange market maker obligations, for some order types, 
and for potentially many other purposes.\977\ As such, including 
smaller quotes in the NBBO would change how these rules operate and 
these changes could have economic effects. For example, having to post 
more aggressive limit orders into retail liquidity programs could 
reduce the already low volume by reducing the liquidity available but 
could result in better prices for those retail investors able to 
execute against that liquidity. In addition, a narrower NBBO could 
effectively increase some market maker obligations, which could improve 
execution quality for investors and/or provide a disincentive to being 
a market maker on the margin. Alternatively, the exchanges with such 
retail liquidity programs, order types, or market maker obligations 
could elect to propose rule changes to maintain the current operation 
of these rules. Such proposals could mitigate any follow-on economic 
effects (both benefits and costs) but would require exchanges to incur 
the expenses associated with proposing amendments to their rules. The 
Commission understands that the proposed changes to the NBBO could 
affect numerous other SRO rules and requests comment on any significant 
follow-on economic effects.
---------------------------------------------------------------------------

    \977\ For a discussion of the effect of changes to the NBBO on 
order types and to exchange odd-lot ``roll-up'' practices for 
protected quotes, see supra Section VI.C.1(c)(i). For discussion 
related to changes to round lot size for stocks with round lots of 
less than 100 shares, see supra note 946.
---------------------------------------------------------------------------

    As discussed above,\978\ the proposed definition of round lot could 
result in an increase in the number of indications of interest in 
higher priced stocks that would be required to be included in 606(b)(3) 
reports. Depending on the number of potential indications of interest 
included as a result of the proposed rule, the Commission preliminarily 
believes that these changes could increase the benefits of Rule 
606(b)(3) with little to no effect on costs.\979\ In particular, the 
inclusion could result in clients receiving information on order 
routing for more of their orders, with the resulting benefits. Further, 
because the incremental cost of adding orders to the reports is low, 
the Commission does not expect that adding additional indications of 
interest to the reports would significantly increase costs.
---------------------------------------------------------------------------

    \978\ See supra Section III.C1 (discussion of how the definition 
impacts Rule 606).
    \979\ See 606 Adopting Release, supra note 227, for a discussion 
of the benefits of 606(b)(3).
---------------------------------------------------------------------------

    In addition, the Commission preliminarily believes that the 
proposal may result in some rules appearing to change but such changes 
might not result in economic effects. For example, the proposed 
amendments may impact the compliance with Rules 602(a), 602(b), 
604(a)(1), 604(a)(2), and Rule 610(c). It is unclear whether these 
impacts would have economic effects. For example, exchanges may already 
have procedures to collect and make available their best bids and 
offers to vendors, regardless of the size of those best bids and 
offers. Further, broker-dealers may already treat all bids and offers 
as firm quotes regardless of size and may already display all customer 
limit orders regardless of size. Finally,

[[Page 16835]]

exchanges may already pay the same rebates or charge the same access 
fees regardless of order size. To the extent that these practices are 
in place, there would be no economic effect from these changes. To the 
extent that these practices are not in place, the proposal may result 
in some additional compliance costs. The Commission invites comments on 
the impact of the proposal with compliance cost for Rules 602(a), 
602(b), 604(a)(1), 604(a)(2), and Rule 610(c).
(iv) Request for Comments
    The Commission requests comments on its analysis of the economic 
effects of the proposed amendments to the NBBO, protected quotes, and 
other conforming changes. In particular, the Commission solicits 
comment on the following:
    210. Effectively, the proposed round lot definition reduces the 
minimum quotation size for the NBBO, depending on the price of the 
security. The Commission requests that commenters provide any insights 
they may have as to the economic effects of price-improving odd-lot 
quotes being reported as the NBBO in the new core data.
    211. Do you agree with the Commission's data analysis of the 
potential frequency of improvements to the NBBO and the magnitude of 
improvements to the NBBO spread? Why or why not? Please provide 
additional data analysis as needed to support your answer.
    212. What would be the economic effects of the proposed changes to 
the PBBO? For the twelve stocks that currently have a round lot defined 
as one share, how often would such securities not have a protected best 
bid (``PBB'') or protected best offer (``PBO'')? What would be the 
economic effects of not having a PBB or PBO in these stocks? For stocks 
that tend to have a significant number of odd-lots that are rolled-up 
into the current PBBO, the proposed changes to the PBBO could widen the 
PBBO spread. What would the magnitude of this increased spread be and 
how often would the PBBO be wider? Would a wider PBBO necessarily 
result in higher transaction costs for investors? If so, by how much 
would transaction costs increase? Please explain and provide any data 
analysis needed to support your answer.
    213. How do exchanges currently calculate their protected quotes? 
If the proposal were to allow odd-lots to be rolled up across prices to 
create a protected quote, how would the PBBO be different than the 
proposed PBBO? Would the economic effects of such a change be different 
than the economic effects of the proposed protected quotes? Please 
explain.
    214. How would the changes to the NBBO and protected quotes affect 
off-exchange executions? What benchmark price would ATSs, 
internalizers, and other off-exchange venues use to price transactions? 
Would this differ from current practice? Please explain. What would be 
the effect of this on transaction costs of off-exchange executions? How 
large would any change in transaction costs be?
    215. How would the proposed changes to the NBBO and protected 
quotes affect transaction costs incurred by various investor types--
e.g., active institutional investors, passive institutional investors, 
and retail investors? Please explain. How large would any change in 
transaction costs be for each investor type? Please provide any data 
analysis needed to support your answer.
    216. How would the proposed changes to the NBBO and PBBO affect 
order routing decisions and the share of order flow captured by each 
exchange and off-exchange venue? Would some exchanges or other venues 
gain order flow while others lose order flow? What are the factors that 
could determine a gain or loss in order flow? Can you quantify this 
change in order flow? What would be the economic effects of any changes 
in order flow? Would such changes result in net welfare gains or 
losses? Please explain in detail.
    217. Under the proposed NBBO, what would ATSs and other off-
exchange venues use as a benchmark to price executions on their system? 
How would this affect execution quality for investors? How would the 
proposed NBBO affect the operation of certain orders types on ATSs? 
Please explain.
    218. To what extent would the proposed NBBO result in additional 
message traffic for those market participants who currently rely on SIP 
data and, under the proposal, would receive and use NBBO but not depth 
of book information? Would these market participants incur significant 
initial costs to prepare to receive and use such additional message 
traffic? Would these market participants incur significant ongoing 
costs in receiving and using such additional message traffic? Do you 
agree that most such broker-dealers currently pay for SIP NBBO data on 
a ``per query'' basis and, therefore, would not incur significant 
initial or ongoing costs as a consequence of any increase in message 
traffic? Please explain.
    219. To what extent would the proposal result in exchanges and 
other trading venues incurring costs to reprogram their matching 
engines to account for changes in the NBBO and protected quotes?
    220. Do you agree with the Commission's assessment about the 
implementation costs for implementing a definition of the protected 
quote that differs from the NBBO? Why or why not? Please also submit 
any insights you may have as to the size and scope of the effect of 
this change.
    221. Would the change to the NBBO result in an increase in the 
proportion of time in which the market is locked or crossed? Why or why 
not? If so, what would be the economic effects of this increase? Would 
this effect vary across securities? Please explain in detail.
    222. How often do locks or crosses occur between odd lot orders 
today? Please provide any data analysis needed to support your answer.
    223. Would an increase in locked or crossed markets result in 
market participants incurring additional implementation costs to 
account for this increase? If so, what would be the magnitude of the 
additional implementation costs? Please quantify. Do you agree with the 
Commission's assessment of the relevant costs?
    224. Do you agree that the proposed definition of the NBBO could 
change the benchmark price for short sale executions following a 
trigger of Rule 201 of Regulation SHO? What would be the economic 
effects of the changes in the benchmark? Would the proposal 
significantly increase the burdens on short selling following a 
trigger? Please explain.
    225. Do you agree that the proposed definition of the NBBO could 
reduce the frequency of triggers of Rule 201 of Regulation SHO? Would 
such a reduction have significant economic effects? Why or why not? 
Please explain.
    226. How would the proposal alter the operation of Rule 605? If so, 
would such changes have any economic effects? Would execution quality 
appear better or worse for all market participants or would it affect 
the relative appearance of execution quality? Would the changes result 
in actual changes to execution quality or just apparent changes in 
execution quality? Would the changes result in fewer orders being 
included in the Rule 605 statistics? Please explain.
    227. The proposed changes to the NBBO and Protected Quotes likely 
affect the operation of numerous SRO rules. Please provide information 
on the number and type of SRO rules that rely on the NBBO or protected 
quotes. Assuming the SROs do not propose amendments to these rules, 
what would be the effect of the proposed changes to the NBBO and 
protected quotes on the

[[Page 16836]]

operation of these SRO rules and the likely resulting economic effects? 
How much would SROs expend in proposing to amend their rules, assuming 
the SROs choose to amend their rules? Please provide estimates of such 
costs.
2. Decentralized Consolidation Model
    This section focuses on the economic effects pertaining to the 
proposed decentralized consolidation model. The section first discusses 
relevant broad economic considerations and economic benefits and costs 
of the proposed model with regards to competing consolidators, then 
addresses economic benefits and costs for self-aggregators, and 
concludes with the discussion of conforming changes.
(a) Broad Economic Considerations About the Decentralized Consolidation 
Model
    The economic analysis of the effects of the decentralized 
consolidation model assumes that upon the introduction of the model, a 
sufficient number of competing consolidators would enter the market so 
that competitive market forces would have a significant effect on their 
behavior. Several factors affect the reasonableness of this assumption: 
Competing consolidators' ability to offer differentiated products, 
barriers to entry into the competing consolidator space, the fees for 
data content and consolidation and dissemination services, and the 
uncertainty regarding connectivity charges for proposed consolidated 
market data. While the Commission recognizes uncertainty in these 
factors and that certain economic impacts depend on this assumption, 
the Commission believes that the risk of few or zero competing 
consolidators is low. Further, the Commission notes that it would 
consider the state of the market and the general readiness of the 
competing consolidator infrastructure in determining whether to approve 
an NMS plan amendment that would effectuate a cessation of the 
operation of the existing exclusive SIPs.
(i) Factors
    This section discusses the factors affecting the reasonableness of 
the assumption that a sufficient number of competing consolidators 
would enter the market.
a. Competing Consolidators' Ability To Offer Differentiated Products
    The first factor that may affect the number of firms willing to 
register as competing consolidators is firms' ability to offer 
differentiated products. Market participants' demand for proposed 
consolidated market data is likely to be heterogeneous because there 
are many different investor types (e.g., retail investors, small banks, 
market participants focused on value investment) that have differing 
investment strategies. The ability of competing consolidators to 
attract different investor types would depend on fees set by the 
national market system plan(s) and competing consolidators' ability to 
differentiate among themselves.\980\
---------------------------------------------------------------------------

    \980\ See infra Section VI.C.2(a)(iii) for a discussion of the 
influence of fees on the ability to differentiate.
---------------------------------------------------------------------------

    Competing consolidators' ability to differentiate may be necessary 
to ensure multiple competing consolidators are serving the market for 
the following reasons. As discussed above, the production of 
consolidated data involves relatively higher fixed costs and lower 
variable costs.\981\ In such markets, the firms have additional 
incentives to increase the number of their customers in order to spread 
the fixed cost across a larger base of consumers. Therefore, due to the 
fixed-cost nature of the market and resulting economies of scale, 
without differentiation, the competing consolidator market could 
consist of only one competing consolidator because the largest 
competing consolidator would be able to offer the most competitive 
price.
---------------------------------------------------------------------------

    \981\ See supra Section VI.B.3(a).
---------------------------------------------------------------------------

    However, the Commission preliminarily believes that the competing 
consolidators would be able to differentiate among themselves by 
product customization; by focusing on different segments of demand; 
and/or by offering varying levels of other services such as customer 
service, ease of user interface, analytics, data reformatting and 
normalization services, and latency rates. Competing consolidators 
could offer different consolidated data products that range from full 
consolidated market data to subsets of consolidated market data such as 
top of book products. In addition, because exchanges offer different 
connectivity options, some competing consolidators could differentiate 
themselves by specializing in lower latency data. Other competing 
consolidators could target data users who might prefer not to have the 
lowest latency product if the higher latency products came with a lower 
price or additional analytics. Competing consolidators could offer a 
range of user interfaces and analytics (e.g., various ways to display 
consolidated data, or provide forecasting services) that appeal to 
different data users or could even offer an analytical environment to 
customize analytics (e.g., offer software tools allowing market 
participants to analyze and summarize consolidate data). 
Differentiation along these dimensions would allow competing 
consolidators to offer different services at potentially different 
prices to different types of end users. Therefore, the market would be 
able to sustain multiple competing consolidator businesses, and this 
would encourage further entry into the market.
b. Barriers to Entry
    The second factor that would affect the number of competing 
consolidators is the barriers to entry into the competing consolidator 
space. Potential entrants into the competing consolidator business 
could incur two types of barriers to entry: Business implementation 
costs that emerge from the technical necessities of becoming a 
competing consolidator and regulatory compliance costs. The business 
implementation costs would include creation or modification of 
technical systems to receive, consolidate, and disseminate the proposed 
consolidated market data. Competing consolidators would need to have 
systems and connections in place to receive data content from all SROs 
and then to disseminate the proposed consolidated market data to a 
variety of market participants who would purchase their products. 
Further, based on the proposed rule, potential entrants would need to 
satisfy two compliance requirements to become competing consolidators. 
The first is the Regulation SCI requirements \982\ that would be 
applicable to competing consolidators because the proposed rule amends 
Rule 1000 of Regulation SCI to expand the definition of ``SCI entity'' 
and include competing consolidators. The second is the proposed Rule 
614 requirements, including the Form CC requirements.\983\ There would 
be both initial implementation and ongoing costs to comply with these 
two regulatory requirements. Both the business implementation and 
regulatory compliance costs would differ based on the entrant type. As 
discussed above,\984\ the Commission preliminarily believes that five 
types of entities may register to become competing consolidators: (1) 
Market data aggregation firms, (2) broker-dealers that currently 
aggregate market data for internal uses, (3) the existing exclusive 
SIPs, (4) new non-SRO entrants, and (5) SROs. The

[[Page 16837]]

barriers to entry would differ across these five types of entities.
---------------------------------------------------------------------------

    \982\ See supra Section IV.B.2(e)(ii).
    \983\ See supra Section IV.B.2(e).
    \984\ See supra Section V.D.2.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the existing market data 
aggregation firms and some broker-dealers that currently aggregate 
market data for internal uses could face large barriers to entry to 
become competing consolidators. Because they currently collect, 
consolidate, and, in some cases, disseminate market data to their 
customers, much like competing consolidators would, the Commission 
preliminarily believes that firms and broker-dealers that currently 
aggregate proprietary market data would not have to extensively modify 
their systems. However, the Commission preliminarily believes that each 
of these firms and broker-dealers would incur costs to expand their 
bandwidth and purchase hardware to receive information that is not 
currently disseminated in the exchange proprietary market data feeds, 
such as the proposed regulatory data and administrative data. Further, 
based on the proposed rule, current market data aggregators and broker-
dealers that currently aggregate market data for internal uses would 
incur new compliance costs to satisfy the two regulatory compliance 
requirements to become competing consolidators. As discussed 
below,\985\ these costs could be large and therefore may affect entry 
and the benefits of the decentralized consolidation model.
---------------------------------------------------------------------------

    \985\ See infra Section VI.C.2(e)(ii).
---------------------------------------------------------------------------

    The Commission preliminarily believes that barriers to entry for 
exclusive SIPs to become competing consolidators are low and are likely 
lower than the barriers to entry of the existing market data 
aggregation firms and some broker-dealers that currently aggregate 
market data for internal uses. The Commission preliminarily believes 
that the existing exclusive SIPs may choose to become competing 
consolidators due to their years of experience in collecting, 
consolidating, and disseminating market data. Because the systems used 
by the exclusive SIPs already collect information in quotations and 
transactions from the SROs, aggregate it, and disseminate it, the 
Commission preliminarily believes that the exclusive SIPs would not 
have to extensively modify their systems.\986\ The Commission 
preliminarily believes that each exclusive SIP would incur costs to 
expand their bandwidth and connections to consume and disseminate the 
expanded consolidated data as well as to transmit it with lower 
latency, and to program feed handlers to receive and normalize the 
different formats of the data feeds developed by the exchanges. 
Additionally, the exclusive SIPs would have some compliance costs. The 
exclusive SIPs already are required to satisfy Regulation SCI 
requirements since they are currently SCI entities. And they also have 
experience with the consolidated market data business. Thus, any 
exclusive SIP entering the competing consolidator business would only 
have ongoing Regulation SCI and initial and ongoing compliance costs. 
The Commission preliminarily believes that the difference between 
compliance costs to satisfy these requirements and current exclusive 
SIP compliance costs are small.\987\
---------------------------------------------------------------------------

    \986\ Based on Commission staff expertise, the Commission 
understands that existing exclusive SIPs' protocols for receiving 
direct data from exchanges are not standardized and introduce 
additional operational complexities. However, the operators of 
exclusive SIPs, the exchanges, have figured out how to aggregate 
direct feeds for the purposes of their exchange matching engines, so 
they have the technology that would be deployable in the new 
decentralized consolidation model.
    \987\ See infra Sections VI.C.2(d) and VI.C.2(e)(ii).
---------------------------------------------------------------------------

    The Commission anticipates that firms without prior experience in 
the market data aggregation business may become competing consolidators 
but that they would have the highest barriers to entry because they 
would have to build new systems to comply with the proposed rules. The 
new entrants would incur costs to program feed handlers to be able to 
receive and normalize exchange data in different formats, and purchase 
bandwidth and connections to exchanges and colocation. These costs 
increase the fixed costs of participating as a competing consolidator 
in the market, further contributing to the barriers to entry. New 
entrants would also have the highest compliance costs among all 
potential entrants, since they would have to build compliance systems 
from scratch to satisfy both Regulation SCI and proposed Rule 614, 
including Form CC, requirements. Therefore, the Commission 
preliminarily believes that there may be a limited number of firms that 
could enter the market data aggregation business for the first time.
    The Commission anticipates that SROs may choose to become competing 
consolidators. Although SROs may be able to leverage existing systems 
in developing a system compliant with the proposed rules, the 
Commission preliminarily believes that SROs would likely have to build 
at least some new systems and thus may incur initial costs.\988\ At the 
same time, despite higher initial costs, the Commission preliminarily 
believes that the barriers to entry for SROs are relatively low due to 
their current unique position in the industry and their particular 
infrastructure and expertise. Similar to the existing exclusive SIPs, 
SROs already are required to comply with Regulation SCI. SROs that have 
experience in the consolidated market data business (e.g., exchanges 
that currently operate an exclusive SIP) would only incur ongoing 
Regulation SCI and initial and ongoing Form CC compliance costs. SROs 
that do not have experience in consolidated market data business would 
incur some initial Regulation SCI costs in addition to the ongoing 
Regulation SCI costs. These SROs would also incur initial and ongoing 
proposed Rule 614, including Form CC, compliance costs. The Commission 
preliminarily believes that SROs that wish to become competing 
consolidators could find it convenient to arrange an affiliate to do 
this work so as to avoid having their competing consolidator business 
subject to the same regulatory regime as an SRO.\989\
---------------------------------------------------------------------------

    \988\ See supra Section V.D.2(e).
    \989\ As explained above, SROs that wish to act as competing 
consolidators would not be required to register with the Commission 
on Form CC. See supra note 537.
---------------------------------------------------------------------------

c. Fees for Consolidated Market Data
    Another factor that would affect the number of competing 
consolidators relates to the fees that the effective national market 
system plan(s) would set for the proposed consolidated market data 
content and the price competing consolidators would charge market 
participants for consolidation and dissemination services.\990\ If 
these fees are set too high or have the effect of limiting product 
differentiation,\991\ they could limit the opportunities for competing 
consolidators to build profitable businesses.
---------------------------------------------------------------------------

    \990\ See infra Section VI.C.2(b) (discussing economic analysis 
of data content, consolidation, and dissemination, and connectivity 
fees).
    \991\ See supra Section VI.C.2(a)(i)a. (discussing potential 
dimensions of product differentiation by competing consolidators).
---------------------------------------------------------------------------

    Regarding the fees for the proposed consolidated market data 
content, the Commission recognizes uncertainty in these fees. The fees 
charged by the effective national market system plan(s) for the data 
content necessary to create proposed consolidated market data would be 
proposed by the operating committee(s) of the national market system 
plan(s) and filed with the Commission.\992\ Because such fees depend on 
future action by the effective national market system plan(s), the 
Commission cannot be certain of the level of those fees or whether such 
fees would provide discounts for those end users who wish to receive 
subsets of

[[Page 16838]]

consolidated market data.\993\ As discussed further below, while these 
fees would not be set by competition, they must be fair and reasonable 
and not unreasonably discriminatory. Assuming that such fees would be 
reasonably related to costs,\994\ the Commission believes the resulting 
data content fees could be set at a level that could help sustain the 
competing consolidator business. Further, if the national market system 
plan(s) choose(s) to offer discounts for subsets of consolidated market 
data, competing consolidators would have greater opportunity to offer 
differentiated products to market participants. Likewise, exchanges 
continuing to offer connectivity at different latencies would further 
promote product differentiation by competing consolidators. The 
Commission preliminarily believes that the national market system 
plan(s) could propose such discounts because at least one exchange has 
suggested tiered SIP data products.\995\
---------------------------------------------------------------------------

    \992\ See supra Section IV.B.2(c).
    \993\ See infra Section VI.C.2(b)(ii) for further discussion.
    \994\ See supra note 439. (The Commission has previously stated 
that similar fees can be shown to be fair and reasonable if they are 
reasonably related to costs.)
    \995\ See supra note 316 (citing an NYSE proposal to enhance the 
exclusive SIPs by offering depth of book, odd-lot quotes, and 
primary auction imbalance information in three new tiers of service, 
each of which with different levels of data content).
---------------------------------------------------------------------------

    The fees charged by competing consolidators to market participants 
would also determine how many competing consolidators could profitably 
exist. Given the high fixed-cost nature of the business, with multiple 
competing consolidators each competing consolidator's fixed costs would 
be spread over fewer customers than the costs with just one or few 
competing consolidators. However, the market for consolidated market 
data is relatively large enough \996\ that the Commission preliminarily 
believes that the average cost per customer is likely to be reasonable 
enough to support multiple competing consolidators.
---------------------------------------------------------------------------

    \996\ See supra Section VI.B.2(c).
---------------------------------------------------------------------------

d. Connectivity
    The fourth factor affecting the number of competing consolidators 
is the uncertainty regarding connectivity charges for proposed 
consolidated market data and their effects on the viability of the 
decentralized model. The data connectivity fees would continue to be 
set forth in the exchanges' fee schedules.\997\ Connectivity fees for 
the provision of consolidated market data would be a fixed input cost 
for competing consolidators, and, therefore, the level of connectivity 
fees for proposed consolidated market data may affect the economies of 
scale and the resulting number of competing consolidators. The 
Commission invites comments on the likely effects of connectivity fees 
for consolidated market data on the proposed competing consolidator 
business.
---------------------------------------------------------------------------

    \997\ See supra note 440.
---------------------------------------------------------------------------

(ii) Impact on Economic Effects of Decentralized Consolidation Model
    As discussed in the previous section, there are several factors 
that may affect the number of competing consolidators entering the 
market. While the Commission recognizes uncertainty in some of these 
factors, the Commission preliminarily believes that the risk of few 
competing consolidators entering the market is low. The Commission also 
preliminarily believes that the risk of zero competing consolidators is 
even lower because the possibility of being the only consolidator in 
the market for proposed consolidated market data could represent a 
substantial business opportunity--especially given market participants' 
different preferences for data content and latency--thus leading to 
entry into the competing consolidator market space. In particular, a 
monopolist in the market for proposed consolidated market data would be 
able to charge high prices for the service fee portion of the overall 
price \998\ and thus capture supra-competitive profits from all market 
participants.\999\ Based on the discussion above, the Commission 
preliminarily believes that entry into the competing consolidator 
market space will continue until competing consolidators' profits 
decrease to competitive levels.
---------------------------------------------------------------------------

    \998\ See infra Sections VI.C.2(b) and VI.C.2(c).
    \999\ Supra-competitive profits are profits above what can be 
sustained in a competitive market.
---------------------------------------------------------------------------

    The assumption that there would be a sufficient number of competing 
consolidators entering the market affects some economic effects of the 
decentralized consolidation model. Generally, many of the benefits and 
competitive considerations below depend on this assumption. For 
example, the Commission preliminarily believes that a higher number of 
competing consolidators would lead to lower fees paid by market 
participants for proposed consolidated market data,\1000\ larger gains 
in efficiency in the delivery of proposed consolidated market data and 
market data communication innovations,\1001\ as well as a reduction in 
data consolidation and dissemination latencies.\1002\ In addition, some 
of the costs discussed below also depend on this assumption. For 
example, the transition to a competing consolidator model would 
decrease regulatory compliance costs imposed by Regulation SCI on 
existing exclusive SIPs that may register as competing consolidators, 
by changing their status from ``critical SCI systems'' to standard 
``SCI systems.'' \1003\
---------------------------------------------------------------------------

    \1000\ See infra Section VI.C.2(b).
    \1001\ See infra Section VI.C.2(c).
    \1002\ Id.
    \1003\ See infra Section VI.C.2(e)(ii) (discussing heightened 
requirements for ``critical SCI systems'' versus standard 
requirements for ``SCI systems'').
---------------------------------------------------------------------------

    While the Commission preliminarily believes that the risk of few 
competing consolidators is low, as discussed above,\1004\ in 
determining whether to approve an NMS plan amendment that would 
effectuate a cessation of the operation of the existing exclusive SIPs, 
the Commission would consider the state of the market and the general 
readiness of the competing consolidator infrastructure. Examples of 
some of the things that the Commission could consider include the 
status of registration, testing, and operational capabilities of 
multiple competing consolidators, self-aggregators, and market 
participants; capabilities of competing consolidators to provide 
monthly performance metrics and other data required to be published 
pursuant to proposed Rule 614(d)(5)-(6); and the consolidated market 
data products offered by competing consolidators. Therefore, the 
Commission believes the economic analysis below represents a reasonable 
assessment of the potential economic effects of the proposal 
notwithstanding the assumption of sufficient competing consolidators.
---------------------------------------------------------------------------

    \1004\ See supra Section IV.B.6.
---------------------------------------------------------------------------

(b) Analysis of the Impact on Data Fees
    This section discusses potential effects of the introduction of the 
decentralized consolidation model on prices market participants pay for 
consolidated market data. When comparing data fees for proposed 
consolidated market data with current data fees, this economic analysis 
holds data content constant. In other words, the fee comparison in this 
analysis is between what market participants would pay under the 
proposed rule versus what they currently would have to pay to access 
the same content of the proposed consolidated market data. After 
analyzing how fees could change for the same data content, the analysis 
then considers the costs to various market participants, including 
those market participants who are likely to expand the content of data 
from that

[[Page 16839]]

they currently utilize. This last analysis is critical to understanding 
the potential for many of the benefits and costs discussed above in 
Section VI.C.1 and below in Section VI.D.1.
    The Commission preliminarily believes that the fees for 
consolidated market data could be lower than fees that market 
participants pay for equivalent data today, but recognizes significant 
uncertainty. The Commission also recognizes uncertainty in the fees 
that subscribers choosing to receive a subset of consolidated market 
data would pay under the proposed rule and that these subscribers could 
pay higher or lower fees than they do today for equivalent data.
(i) Fees for Proposed Consolidated Market Data Content
    The Commission first considers the effect of the proposed rule on 
fees market participants would pay for proposed consolidated market 
data versus what they currently would have to pay to access the same 
content of the proposed consolidated market data. The Commission 
preliminarily believes that fees for proposed consolidated market data 
could be lower than fees for equivalent data today, but recognizes 
significant uncertainty about how the effective national market system 
plan(s) would set the fees for the data content and how SROs would set 
the fees for connectivity necessary to create proposed consolidated 
market data as well as how the competing consolidators would price 
their services. For the purposes of this section, the Commission 
assumes that the effective national market system plan(s) would set 
fees for the proposed consolidated market data content that are 
reasonably related to costs.\1005\
---------------------------------------------------------------------------

    \1005\ See supra note 439. (The Commission has previously stated 
that similar fees can be shown to be fair and reasonable if they are 
reasonably related to costs.)
---------------------------------------------------------------------------

    The Commission preliminarily believes that three sets of fees may 
be affected as a result of the proposed rule: fees for the data content 
necessary to create proposed consolidated market data, fees for the 
consolidation and dissemination of proposed consolidated market data, 
and fees for the connectivity services necessary to receive the 
components of proposed consolidated market data from the SROs. 
Regarding the SIP data, the first two fees are currently bundled into a 
single fee, which covers SROs' data and the exclusive SIPs' operations 
such as consolidation and dissemination of data. The proposed rule 
would unbundle these two components and would allow competing 
consolidators to provide the data consolidation and dissemination 
services. Under the proposed rule, the fee for data content would be 
set by the effective national market system plan(s).\1006\ The 
operating committee(s) of the effective national market system plan(s) 
would propose the data content fees for the SROs' data required to 
create proposed consolidated market data and would then file the 
proposed fees with the Commission for consideration pursuant to Rule 
608.\1007\ Competing consolidators would charge a second fee for their 
consolidation and dissemination services, which could also include 
associates costs for data access at exchanges and transmission of data 
between data centers. The fees for data consolidation and dissemination 
would be determined by competition among competing consolidators. 
Finally, SROs currently charge connectivity fees for both exclusive SIP 
and proprietary data feeds. Under the proposal, SROs could charge 
connectivity fees to competing consolidators and self-aggregators, 
which must be consistent with statutory standards.\1008\ Competing 
consolidators could charge connectivity fees to end users, which would 
be subject to competitive forces.
---------------------------------------------------------------------------

    \1006\ See supra note 96 (discussing amendments to the provision 
regulating NMS plan(s) fee filings).
    \1007\ See supra Section IV.B.4; supra note 433.
    \1008\ Currently, connectivity fees are charged to the market 
participants that connect to the exchange and not to end users. See 
infra note 1017.
---------------------------------------------------------------------------

    First, the Commission preliminarily believes that how the proposed 
rule would affect the fees for the data content used to create proposed 
consolidated market data is uncertain, primarily because they depend on 
future action by the effective national market system plan(s), but the 
Commission preliminarily believes that such fees would likely be lower 
than today's fees for the equivalent data. Currently, market 
participants who would like to access content equivalent to the data 
content of the proposed consolidated market data would need to 
separately purchase SIP data and additional data elements via 
proprietary data feeds. Under the proposed rule, market participants 
would be able to receive substantially similar content from one 
source.\1009\ Further, market participants would pay the data content 
fees set by the effective national market system plan(s) for NMS 
stocks, which would be filed with the Commission under Rule 608 and be 
subject to public comment.\1010\ Therefore, the analysis of the 
potential impact on data content fees depends on, among other things, 
whether the current fees for the proprietary data content that will be 
included in the newly defined consolidated market data are fair and 
reasonable and on how costs are likely to change. As discussed above, 
the Commission does not believe that the proposal would significantly 
increase SRO costs specifically for distributing data.\1011\ The 
proposal could, on the other hand, increase the allocation of fixed 
exchange costs to consolidated market data because the data content 
would expand.\1012\ However, the Commission lacks the necessary 
information to ascertain those impacts.\1013\
---------------------------------------------------------------------------

    \1009\ Currently, fees for SIP data and proprietary data are 
generally charged based on the number and type of end user of the 
data. For example, the CTA/CQ Plan Schedule of Charges distinguishes 
fees by professional and non-professional subscribers and the number 
of devices. See CTA Plan, Schedule of Market Data Charges, supra 
note 851. The Nasdaq UTP Plan, Exhibit 2 provides separate fees for 
non-professionals and per device fees. See Nasdaq UTP Plan, supra 
note 13. Similar user distinctions are made in proprietary data 
products. See Nasdaq, Price List--U.S. Equities, available at 
www.nasdaqtrader.com/Trader.aspx?id=DPUSdata#tv (last accessed Jan. 
30, 2020) (showing Nasdaq TotalView usage fees, which provide fees 
for professional and non-professional subscribers); NYSE Proprietary 
Market Data Fees (as of Nov. 4, 2019), available at https://www.nyse.com/publicdocs/nyse/data/NYSE_Market_Data_Fee_Schedule.pdf 
(showing the NYSE Integrated Feed fee schedule, which distinguishes 
between professional and non-professional users).
    \1010\ Rule 608 of Regulation NMS, 17 CFR 242.608.
    \1011\ See supra Section VI.C.1(b)(iv).
    \1012\ See infra Section VI.C.4(a) for a discussion of the 
likely effects of the proposal on the revenues exchanges receive for 
proprietary data.
    \1013\ In a comment letter, IEX provided data that the SRO 
markups on proprietary data may be large. In particular, IEX 
compared its own costs of providing proprietary market data with the 
fees charged by other exchanges for comparable produces and found 
markups of 900-1,800 percent. See Katsuyama Letter II; Letter to 
Brent J. Fields, Secretary, Commission, from John Ramsay, Chief 
Market Policy Officer, Investors Exchange LLC (Feb. 4, 2019) 
(discussing the ``all-in'' cost to trade concept advocated by other 
exchanges).
---------------------------------------------------------------------------

    The Commission can deduce, however, that data content fees for the 
proposed consolidated market content are unlikely to increase. As 
discussed above,\1014\ the Commission understands that SRO proprietary 
feeds for depth of book data are significantly more expensive than the 
exclusive SIP feeds. The effective national market system plan(s) for 
NMS stocks would be unlikely to implement fees for the proposed 
consolidated market data content that are higher than the current fees 
for equivalent data unless it is demonstrated that the higher proposed 
fees are justified under the applicable legal standard.
---------------------------------------------------------------------------

    \1014\ See supra Section VI.B.2(c).

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

[[Page 16840]]

    The Commission preliminarily believes that the proposal is likely 
to reduce data content fees. The Commission expects that unless the 
Commission approves a filing for data content fees that would set fees 
at a level that the effective national market system plan(s) has shown 
is consistent with statutory standards, the fees for the proposed 
consolidated market data--which is equivalent to the existing exclusive 
SIP data plus additional proprietary DOB data product elements--would 
remain at current SIP data fee levels and thus would be lower than the 
current fees for the equivalent data.\1015\ Absent information on data 
costs, the Commission, at this time, recognizes that such fees could be 
lower than current exclusive SIP fees, similar to current exclusive SIP 
fees, greater than current exclusive SIP fees but less than the fees 
for the current equivalent of proposed consolidated market data, or 
similar to the current equivalent of proposed consolidated market data. 
However, the Commission preliminarily believes that such data content 
fees would be lower than current fees for equivalent data because, 
between 2010 and 2018, the proprietary data feed portion of the current 
fees for equivalent data appears to have increased at a rate that seems 
unlikely that costs have matched.\1016\
---------------------------------------------------------------------------

    \1015\ See supra note 96 (noting the Commission's proposal to 
rescind the provision of Rule 608 that allows a proposed amendment 
to an effective national market system plan(s) to become effective 
upon filing if the proposed amendment establishes or changes a fee 
or other charge).
    \1016\ See supra Section VI.B.2(c).
---------------------------------------------------------------------------

    Second, the Commission preliminarily believes that data 
consolidation and dissemination fees for proposed consolidated market 
data would be lower than consolidation and dissemination fees market 
participants currently pay to receive equivalent data. Consolidation 
and dissemination fees that competing consolidators would charge would 
cover several associated costs, including fixed costs of hardware and 
software; processing to take in data; processing for consolidation 
(including compiling the NBBO and protected quotes); distribution of 
the data; and connectivity fees paid to exchanges to acquire the data 
for consolidation. The variable costs of the competing consolidators 
would be minor in comparison because additional data users would have a 
minimal impact on the costs of competing consolidators. The fixed costs 
of the competing consolidators could be spread out among its 
subscribers, including subscribers utilizing other proprietary data 
services provided by competing consolidators that are not covered by 
the fees established by the effective national market system plan(s).
    To receive data equivalent to proposed consolidated market data 
today, market participants would have to pay separately for a portion 
of exclusive SIPs' cost to perform consolidation and dissemination of 
market data and a fee for consolidation and dissemination of additional 
data elements of proposed consolidated market data that are available 
via third-party providers of proprietary market data, who face 
competitive pressures. As discussed above,\1017\ exclusive SIPs are not 
constrained by competition and thus have lower incentives to reduce 
their costs. By comparison, the Commission preliminarily expects that 
the competition among competing consolidators would put downward 
pricing pressure on these service fees. The Commission recognizes that 
the stronger the competition among competing consolidators, the harder 
it would be for any given competing consolidator to increase its 
consolidation and dissemination fees and make supra-competitive profits 
from these services.\1018\ Further, because having more subscribers 
could help competing consolidators spread their fixed costs out, any 
increase in the number of subscribers of current market data 
aggregators who would become competing consolidators would reduce the 
service fees of those aggregators in equivalent data. For these 
reasons, the Commission preliminarily believes that the competition 
among competing consolidators would lead to lower consolidation and 
dissemination fees for proposed consolidated market data as compared to 
these fees for equivalent data today.
---------------------------------------------------------------------------

    \1017\ See supra Section VI.A.2.
    \1018\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------

    Third, the Commission preliminarily believes that connectivity fees 
charged by competing consolidators for proposed consolidated market 
data would also be lower than connectivity fees market participants 
would currently have to pay to receive equivalent data. To receive data 
equivalent to proposed consolidated market data today, market 
participants currently have to pay separately a connectivity fee to the 
exchanges to access SIP data and a connectivity fee to the exchanges or 
market data aggregators to access additional data elements of proposed 
consolidated market data that are not part of SIP data. Under the 
proposed rule, the Commission expects that market participants would 
pay only one connectivity fee for proposed consolidated market data, 
set by competing consolidators, and this connectivity fee would be 
subject to competition among competing consolidators. By contrast, 
current exchange connectivity fees are not as competitive because an 
exchange has sole control over its own connectivity charge for its 
proprietary market data. Therefore, the Commission preliminarily 
believes that connectivity fees that would be charged by competing 
consolidators for proposed consolidated market data would be lower than 
the connectivity fees for equivalent data today.
    The Commission recognizes that SROs would charge connectivity fees 
to competing consolidators and self-aggregators. The exchanges could 
continue to set connectivity fees for data feeds as part of their SRO 
fee schedules and these fees must continue to meet statutory 
standards.\1019\ The exchanges' connectivity fees are not currently 
based on the number of end users, and therefore the Commission 
preliminarily believes that the connectivity fees for proposed 
consolidated market data would not be directly passed through to the 
end users. SRO connectivity fees would be fixed costs incurred by self-
aggregators and by competing consolidators, a cost the latter could 
spread out among their end users as a part of the consolidation and 
dissemination fees.
---------------------------------------------------------------------------

    \1019\ For example, under Section 6(b)(4) of the Exchange Act, 
the rules of an exchange must ``provide for the equitable allocation 
of reasonable dues, fees, and other charges among its members and 
issuers and other persons using its facilities.'' 15 U.S.C. 
78f(b)(4).
---------------------------------------------------------------------------

    Additionally, because the total fees for the equivalent of proposed 
consolidated market data are likely to decline as a result of the 
proposal, some market participants may choose to purchase more 
consolidated market data content than they purchase today, such as 
purchasing the expanded core data. The likelihood of this outcome would 
depend on the difference between total fees for proposed consolidated 
market data and current total fees for equivalent data content. The 
economic effect of more market participants purchasing expanded core 
data is discussed above in Section VI.C.1(b).
(ii) Fees for the Content of Current SIP Data
    The Commission also considers the effect of the proposed rule on 
fees market participants currently pay for SIP data content versus what 
they would pay for equivalent content under the decentralized 
consolidation model.

[[Page 16841]]

The Commission recognizes that a significant proportion of market 
participants currently purchase only SIP data and/or the unconsolidated 
equivalent of SIP data.\1020\ Under the proposed rule and conditional 
on fees for proposed consolidated market data, while some of these 
market participants would choose to purchase more data than they 
purchase today, other market participants would continue to purchase 
content equivalent to current SIP data (e.g., NBBO and TOB). The 
Commission preliminarily believes that data fees paid for equivalent 
data content could be higher than current SIP data fees or could be 
lower than current SIP data fees. Whether the fees are higher or lower 
depends on several factors: the data content fee structure proposed by 
the effective national market system plan(s) for NMS stocks, how 
competing consolidators allocate their costs of processing (i.e., 
receiving, consolidating, and disseminating) consolidated market data, 
and any connectivity fees charged by competing consolidators for 
consolidated market data.
---------------------------------------------------------------------------

    \1020\ See supra Section VI.B.2(a).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the data content fee 
structure proposed by the effective national market system plan(s) for 
NMS stocks under the decentralized consolidation model is an important 
factor in determining whether total data fees (i.e., the sum of data 
content fees, consolidation and dissemination fees, and connectivity 
fees) for the equivalent of current SIP data could be higher or lower 
under the proposed rule.\1021\ The Commission recognizes that because 
of the expanded scope of proposed consolidated market data relative to 
the current SIP data, the data content fee market participants would 
pay for data necessary to create proposed consolidated market data 
might be higher than the portion of current SIP data fees that accounts 
for the data content. Until the effective national market system 
plan(s) propose fees for the data content necessary to create proposed 
consolidated market data, the Commission is unable to determine whether 
this fee structure would charge lower fees for end users who wish to 
receive subsets of consolidated market data from competing 
consolidators. In other words, the Commission is unable to determine 
whether the effective national market system plan(s) for NMS stocks 
would propose a fee structure reflecting different tiers of data 
content for the proposed consolidated market data. Without such a 
structure, all subscribers to consolidated market data would pay the 
same data content fee regardless of whether they wish to receive all or 
a subset of consolidated market data. As a result, the proposal could 
increase the content fees for the equivalent of SIP data. This 
potential outcome is highly dependent on the effective national market 
system data plan(s) and fee proposals.\1022\
---------------------------------------------------------------------------

    \1021\ See supra Section VI.B.2(c).
    \1022\ The Commission has proposed an order to modernize the 
governance of the data plans. See supra note 8.
---------------------------------------------------------------------------

    The fees for data consolidation and dissemination depend on how 
competing consolidators allocate fixed costs among subscribers 
receiving different subsets of data. As discussed above,\1023\ the 
Commission expects competing consolidators to offer a menu of products 
and services, regardless of the data structure of the effective 
national market system plan(s). Competing consolidators could elect to 
charge lower consolidation and dissemination fees to subscribers 
receiving subsets of data compared to fees charged to subscribers 
receiving all consolidated market data. In fact, the Commission 
preliminarily believes that competitive pressure could result in such a 
fee structure. As a result, the data consolidation and dissemination 
component of total fees charged to those who purchase content 
equivalent to SIP data could be lower than this component of current 
SIP data fees today.
---------------------------------------------------------------------------

    \1023\ See supra Section VI.C.2(a).
---------------------------------------------------------------------------

    The fees for connectivity services paid by end users are likely to 
decline for some users but could increase for others. Currently, some 
SIP data users connect to the exchanges that are the administrators of 
exclusive SIPs and pay connectivity fees to access the SIP data. These 
connectivity fees are paid directly to the exchanges and do not go to 
the exclusive SIPs. There are also SIP data users that do not connect 
to the exchanges and thus do not pay SRO connectivity fees for SIP 
data, but may pay fees to other market data service providers. Under 
the proposed rule, both types of current SIP data subscribers may be 
charged a connectivity fee by competing consolidators when they 
subscribe to proposed consolidated market data. The Commission 
acknowledges that there is uncertainty over whether the competing 
consolidator connectivity fees would be larger or smaller than what 
some of the SIP data users currently pay in connectivity fees. The 
overall connectivity fees under the proposed rule may be larger if 
competing consolidators are not constrained by competition such that 
they can charge higher connectivity fees without concern for 
subscribers' scope of content. On the other hand, as discussed above 
\1024\ and given the potential connectivity options available, the 
Commission preliminarily believes competing consolidators will be under 
competitive pressure, and as such, they may offer a range of 
connectivity fees, including based on market participants' scope of 
data content and speed choice. In that case, SIP data subscribers who 
currently pay connectivity fees to the exchanges may see their 
connectivity fees decline.
---------------------------------------------------------------------------

    \1024\ See supra Section VI.C.2(b)(i).
---------------------------------------------------------------------------

(c) Benefits of the Decentralized Consolidation Model Pertaining to 
Competing Consolidators
    As discussed above,\1025\ currently SIP data is collected, 
calculated, and disseminated to market participants through a 
centralized consolidation model with an exclusive SIP for each NMS 
stock. Even though current exclusive SIPs are selected through a 
bidding process,\1026\ the Commission preliminarily believes that a 
competitive marketplace is more capable of producing the benefits that 
come from competitive forces than the process of soliciting bids for 
exclusive contracts.\1027\ In particular, the Commission preliminarily 
believes that the decentralized consolidation model would have three 
potential benefits for market participants. First, the Commission 
believes that the decentralized consolidation model offers the 
potential for more gains in efficiency in the delivery of consolidated 
market data, which may include cost savings that could be passed on to 
market participants, to emerge over time. Second, the Commission 
believes the model would enable consolidated market data delivery to 
continue to keep up with market data communication innovations in the 
future, in a way that the current centralized consolidation model has 
not. Third, the Commission preliminarily expects the new model would 
significantly reduce the various types of content and latency 
differentials that currently exist between SIP data and proprietary 
data products.\1028\
---------------------------------------------------------------------------

    \1025\ See supra Sections IV.A, VI.B.2(b).
    \1026\ See supra Section VI.B.1.
    \1027\ See supra Section VI.A.2; infra Section VI.D.2.
    \1028\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that introducing competition 
into the provision of consolidated

[[Page 16842]]

market data and dissemination services would present more incentives 
for reducing costs and lowering prices for those services,\1029\ and 
innovating on product offerings more tailored to the needs of the 
consumers. It is therefore the Commission's preliminary expectation 
that the decentralized consolidation model would result in a meaningful 
increase in investments intended to lower costs and/or improve quality 
in the provision of consolidated market data. This represents an 
economic benefit for the industry, some of which would be kept by 
competing consolidators as profit, and some of which would be received 
by market participants in the form of lower fees and/or improved 
quality for competing consolidator services.
---------------------------------------------------------------------------

    \1029\ See infra Section VI.D.2.
---------------------------------------------------------------------------

    As discussed above,\1030\ some market participants may benefit as a 
result of the introduction of the decentralized consolidation model 
because of the lower price for proposed consolidated market data 
relative to today's price for consolidated market data holding data 
content constant. These market participants are likely interested in 
expanded consolidated market data, and currently would have to pay to 
obtain additional data elements via proprietary data feeds. Therefore, 
these market participants could pay a lower price for expanded 
consolidated market data under the decentralized consolidation model.
---------------------------------------------------------------------------

    \1030\ See supra Section VI.C.2(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the decentralized 
consolidation model would provide a benefit to market participants by 
increasing the amount of innovation in the consolidation and 
dissemination of consolidated market data. This is a benefit because it 
represents an improvement over the current system for dissemination of 
SIP data, in which the lack of competitors reduces the incentives of 
the exchanges that govern SIPs to innovate.\1031\ As mentioned above, 
the Commission preliminarily believes that the current system of 
disseminating SIP data through exclusive SIPs, which are managed by 
Equity Data Plans' operating committees, is not well suited to keep up 
with the pace of innovation in data processing and communication in the 
market.\1032\ The decentralized consolidation model would place the 
task of determining the method of consolidation and dissemination to 
free market forces, which the Commission preliminarily believes would 
make it easier to innovate rapidly and maintain competitive parity with 
other market participants. The end result of this improved efficiency 
in investment decisions by consolidators would be to improve the 
quality and reliability of market data consolidation and dissemination 
services, which would result in market participants having better data 
to make trading decisions.\1033\ The Commission preliminarily believes 
this would lead to better trading decisions, lower execution costs, and 
would help reduce information asymmetries between market participants 
that currently solely rely on SIP data and market participants who 
purchase the exchanges' proprietary data products. The Commission 
preliminarily believes that the magnitude of this benefit depends on 
the assumption that there would be a sufficient number of competing 
consolidators entering the market.
---------------------------------------------------------------------------

    \1031\ See supra Section VI.A.2.
    \1032\ Id.
    \1033\ See infra Section VI.D.1.
---------------------------------------------------------------------------

    The Commission preliminarily believes that another benefit of the 
decentralized consolidation model would be to substantially reduce the 
latency differential between proposed consolidated market data and 
proprietary data. This belief is based upon the Commission's assumption 
that the business practices of current market data aggregators, some of 
which will likely become competing consolidators, would serve as a 
model for how competing consolidators would operate under the 
decentralized consolidation model.\1034\ Current market data 
aggregators have achieved connectivity, transmission, consolidation, 
and distribution speeds that are meaningfully faster than SIP data even 
as they process larger amounts of data than SIP data.\1035\ Therefore, 
the Commission believes that competition among competing consolidators 
would keep market data consolidation and distribution feeds close to 
the speeds achieved in the private market currently.
---------------------------------------------------------------------------

    \1034\ See supra Section VI.C.2(a).
    \1035\ The Commission preliminarily believes that if the 
existing exclusive SIPs choose to become competing consolidators in 
the decentralized consolidation model, the competition with other 
competing consolidators will incentivize them to improve their 
connectivity, transmission, consolidation, and distribution speeds 
to the levels of other competing consolidators.
---------------------------------------------------------------------------

    The Commission preliminarily believes that all forms of latency 
discussed previously--geographic, consolidation, and transmission 
latency \1036\--have the potential to be the source of these reductions 
in the latency differential. The Commission understands that the 
existing market data aggregator business does not rely on the single-
instance consolidator model but instead produces a separate 
consolidated feed at each data center. This has the potential to 
substantially reduce geographic latency for data centers that are not 
co-located with one of the existing exclusive SIPs because it means new 
information at a data center can be used immediately at that data 
center instead of being returned to the processing center first. The 
Commission therefore expects that the decentralized consolidation model 
would serve to substantially reduce geographic latency in the same way 
for market participants. For instance, the existing market data 
aggregators already have infrastructure in place to consolidate market 
data in the described way. And if the existing exclusive SIPs become 
competing consolidators, they would also have to produce separate 
consolidated feeds at each data center to be able to compete with other 
competing consolidators. Therefore, the Commission preliminarily 
believes that the geographic latency reduction in the decentralized 
consolidation model can be achieved even if one existing market data 
aggregator enters the competing consolidator business. Therefore, the 
benefit of the decentralized consolidation model with regard to 
geographic latency would not rely heavily on the assumption that a 
large number of consolidators would enter the market.\1037\ 
Importantly, as discussed above,\1038\ geographic latency is the 
biggest cause of latency differentials between current SIP data 
distributed by exclusive SIPs and current proprietary data feeds.
---------------------------------------------------------------------------

    \1036\ See supra Section VI.B.2(b).
    \1037\ See supra Section VI.C.2(a).
    \1038\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------

    Also, the Commission understands that many current market data 
aggregators rely on wireless communications to receive data from 
various exchange data centers, using fiber connections as a backup in 
case of bad weather. To the extent that wireless communications are 
faster than current transmission methods for SIP data, the Commission 
expects the decentralized consolidation model to reduce transmission 
latency as well. In addition, to the extent that existing market 
aggregators have developed faster consolidation methods, the Commission 
expects that the decentralized consolidation model would also reduce 
consolidation latency. The Commission preliminarily believes that the 
effect of the decentralized consolidation model on the consolidation 
and transmission

[[Page 16843]]

latencies depends on robust competition among competing consolidators 
going forward. The Commission preliminarily believes that to the extent 
that the benefits of faster access to market data come from the ability 
to engage in more timely participation in the provision of liquidity, 
this effect represents an economic benefit to the equity market 
generally because it would provide more fair and equal access to market 
data and would reduce information asymmetries among market 
participants. In particular, to the extent that the existing advantages 
of having access to fast proprietary data feeds are derived from 
trading strategies exploiting differentials in the speed of access to 
market data (i.e., exploiting traders in the market who currently rely 
solely on slower SIP data), this benefit would represent a transfer 
from current users of faster proprietary data to the users of proposed 
consolidated market data in the decentralized consolidation model that 
would now also have access to faster data.\1039\
---------------------------------------------------------------------------

    \1039\ See also Don Bollerman, A NYSE Speed Bump You Weren't 
Aware Of, IEX available at https://iextrading.com/about/press/op-ed/ 
(last accessed Jan. 8, 2020) (discussing the effect of speed 
differentials on trading).
---------------------------------------------------------------------------

    In order for both economic benefits and transfers to be realized, 
at least some market participants that are new users of fast and more 
content-rich consolidated market data would need to possess the 
technological capability to take advantage of the speed improvements 
the decentralized consolidation model is likely to provide. It is the 
Commission's preliminary understanding that such technological 
capabilities are expensive to acquire, and this fact would reduce the 
amount of benefit and the degree to which individual market 
participants can profit (through the transfers mentioned above) from 
the decrease in data latency.
    If even a small delay remains between the typical competing 
consolidator's consolidated market data feed and proprietary data 
feeds, then the benefits of increased consolidated market data delivery 
speed described above are likely to be smaller. This belief is based on 
the Commission's preliminary understanding that speed gains at these 
timescales only matter insofar as to help a market participant react to 
new information faster than other market participants.\1040\
---------------------------------------------------------------------------

    \1040\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------

    Additionally, the Commission notes two other potential benefits of 
the proposed amendments. First, market participants could potentially 
save on the cost of consolidated market data because they will only 
need to subscribe to one competing consolidator instead of two 
exclusive SIPs (i.e., Nasdaq UTP and CTA/CTQ). To the extent market 
participants can subscribe to one competing consolidator, they could 
save money by not having to pay the costs of processing consolidated 
market data to two different providers. Additionally, market 
participants may also save on their infrastructure costs if they have 
the ability to customize their data purchases and receive, for example, 
narrower data content than proposed consolidated market data. Market 
participants may achieve this if competing consolidators offer tiered 
levels of service with different data contents and different service 
fees based on the needs of specific types of investors similar to what 
one SIP proposed recently.\1041\
---------------------------------------------------------------------------

    \1041\ See supra Section VI.C.2(b); supra note 267.
---------------------------------------------------------------------------

    Second, expanding Regulation SCI to include competing consolidators 
would help ensure that competing consolidators' systems involved in the 
collection, consolidation, and dissemination of proposed consolidated 
market data are able to maintain their operational capability, 
including the ability to maintain effective operations, minimize or 
eliminate the effect of performance degradations, and have sufficient 
backup and recovery capabilities. The Commission preliminarily believes 
that competing consolidators being subject to the Regulation SCI 
requirements would lead to, among other things, fewer interruptions in 
the data delivery process and, thus, may result in better trading 
decisions.\1042\
---------------------------------------------------------------------------

    \1042\ See infra Section VI.C.2(e)(i).
---------------------------------------------------------------------------

(d) Costs of the Decentralized Consolidation Model Pertaining to 
Competing Consolidators
    The Commission preliminarily believes that the proposed amendments 
that introduce a decentralized consolidation model are likely to have 
both direct and indirect costs on potential competing consolidators, 
SROs, existing exclusive SIPs, and market participants, as detailed 
below. As explained below, the Commission preliminarily estimates that 
the direct costs to each potential competing consolidator would be 
between around $5.12 MM and $5.13 MM in ongoing annual costs, and total 
one-time costs of up to between approximately $897,000 and $2.40 MM, 
depending on entity type.\1043\ Further, the Commission preliminarily 
estimates that costs to each SRO from the proposed amendments regarding 
the decentralized consolidation model include up to around $246,000 in 
the direct one-time costs, and around $128,000 in the ongoing annual 
costs. The Commission expects, however, that the proposed amendments 
that introduce a decentralized consolidation model would have 
additional indirect costs. Some of these direct and indirect costs are 
likely to be passed on to investors.
---------------------------------------------------------------------------

    \1043\ These costs do not include the costs of compliance with 
expanded Regulation SCI, which are discussed below. See infra 
Section VI.C.2(e)(ii).
---------------------------------------------------------------------------

    As discussed above,\1044\ the Commission preliminarily believes 
that five types of entities may register to become competing 
consolidators and would have to build systems, or modify existing 
systems, that comply with the proposed rules: (1) Market data 
aggregation firms, (2) broker-dealers that currently aggregate market 
data for internal uses, (3) the existing exclusive SIPs, (4) new 
entrants, and (5) SROs. The Commission preliminarily estimates that all 
direct ongoing annual costs and some one-time costs would be common 
among all competing consolidators and that some one-time costs would 
vary depending on entity type.
---------------------------------------------------------------------------

    \1044\ See supra Sections V.D.2, VI.C.2(a).
---------------------------------------------------------------------------

    For purposes of the PRA,\1045\ the Commission preliminarily 
estimates that direct ongoing costs for each competing consolidator, 
except for SROs, would be $5,126,167 and consist of the following 
costs: Costs of $5,744 to amend Form CC prior to the implementation of 
material changes to pricing, connectivity, or products as well as to 
correct inaccurate or incomplete information; \1046\ costs of $25 to 
obtain digital IDs for the purposes of signing the Form CC 
annually,\1047\ costs of around $5.07 MM associated with operating and 
maintaining a competing consolidator system; \1048\ costs of $120 to 
ensure that it has posted the correct direct URL hyperlink to the 
Commission's website on its own website; \1049\ costs of $4,360 of 
recordkeeping; \1050\ and costs of

[[Page 16844]]

$45,222 to prepare and make publicly available a monthly report.\1051\
---------------------------------------------------------------------------

    \1045\ Direct costs cited in this section are quantified from 
estimates in the PRA. See supra Section V.
    \1046\ See supra Section V.D.1(b); supra note 671.
    \1047\ See supra Section V.D.1(b).
    \1048\ These costs are composed of labor costs of $176,250, 
external costs of $123,725 to operate and maintain systems to comply 
with Rules 614(d)(1)-(d)(4), external costs of $168,000 to purchase 
market data from the SROs, and an additional annual ongoing external 
cost of $4,602,720 to co-locate itself at four exchange data 
centers. See supra Section V.D.2(f).
    \1049\ See supra Section V.D.2(h); supra note 724.
    \1050\ See supra Section V.D.3(b).
    \1051\ See supra Section V.D.4(b); supra note 732.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that direct ongoing costs 
for each SRO as a competing consolidator would be $5,120,398 and would 
consist of the same costs as for all other competing consolidators 
excluding the costs of $5,744 to amend Form CC prior to the 
implementation of material changes to pricing, connectivity, or 
products as well as to correct inaccurate or incomplete information, 
and the costs of $25 to obtain digital IDs for the purposes of signing 
the Form CC.\1052\
---------------------------------------------------------------------------

    \1052\ These costs are excluded because SROs are not required to 
file Form CC. See supra Section V.D.1(a).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that direct one-time costs 
that are common across all competing consolidators would be $89,348 and 
consist of the following costs: Costs of $120.50 to publicly post the 
Commission's direct URL hyperlink to its website upon filing of the 
initial Form CC; \1053\ costs of $8,720 to keep and preserve at least 
one copy of all documents made or received by it in the course of its 
business and in the conduct of its business; \1054\ and costs of 
$80,507 to produce the monthly reports.\1055\
---------------------------------------------------------------------------

    \1053\ See supra Section V.D.2(g); supra note 721.
    \1054\ See supra Section V.D.3(a); supra note 726.
    \1055\ See supra Section V.D.4(a); supra note 727.
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the total direct costs 
to each market data aggregation firm or each broker-dealer that 
currently aggregate market data for internal uses that would decide to 
register as a competing consolidator would include $5,126,167 in 
ongoing annual costs, as discussed above, and total one-time costs of 
$896,542. The one-time costs are composed of costs of $93,540 to 
complete the initial Form CC; \1056\ costs of $50 to obtain digital IDs 
for the purposes of signing the initial Form CC; \1057\ costs of $5,604 
to file two amendments to Form CC; \1058\ labor costs of $293,750; 
\1059\ external costs of $206,250 to modify its systems to comply with 
Rules 614(d)(1)-(d)(4), external costs of $14,000 to purchase market 
data from the SROs, an additional initial external cost of $194,000 to 
co-locate itself at four exchange data centers; \1060\ as well as 
$89,348 in costs that are common to all competing consolidators, as 
described above.
---------------------------------------------------------------------------

    \1056\ See supra Section V.D.1(a); supra note 664.
    \1057\ See supra Section V.D.1(a).
    \1058\ Id.
    \1059\ See supra Sections V.D.2(a), V.D.2(b); supra notes 676, 
683.
    \1060\ See supra Sections V.D.2(a), V.D.2(b).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the total direct costs 
to each existing SIP that would decide to register as a competing 
consolidator would include $5,126,167 in ongoing annual costs, as 
discussed above, and total one-time costs of $1,396,542. The one-time 
costs per existing SIP are composed of costs of $93,540 to complete the 
initial Form CC; \1061\ costs of $50 to obtain digital IDs for the 
purposes of signing the initial Form CC; \1062\ costs of $5,604 to file 
two amendments to Form CC; \1063\ labor costs of $587,500; \1064\ 
external costs of $412,500 to modify its systems to comply with Rules 
614(d)(1)-(d)(4), external costs of $14,000 to purchase market data 
from the SROs, an additional initial external cost of $194,000 to co-
locate itself at four exchange data centers; \1065\ as well as $89,348 
in costs that are common to all competing consolidators, as described 
above.
---------------------------------------------------------------------------

    \1061\ See supra Section V.D.1(a); supra note 664.
    \1062\ See supra Section V.D.1(a).
    \1063\ Id.
    \1064\ See supra Section V.D.2(c); supra note 691.
    \1065\ See supra Section V.D.2(c).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the total direct costs 
to each new entrant in the competing consolidator space would include 
$5,126,167 in ongoing annual costs, as discussed above, and total one-
time costs of $2,396,542. The one-time costs are composed of costs of 
$93,540 to complete the initial Form CC; \1066\ costs of $50 to obtain 
digital IDs for the purposes of signing the initial Form CC; \1067\ 
costs of $5,604 to file two amendments to Form CC; \1068\ labor costs 
of $1.175 MM,\1069\ external costs of $825,000 to build its systems to 
comply with Rules 614(d)(1)-(d)(4), external costs of $14,000 to 
purchase market data from the SROs, an additional initial external cost 
of $194,000 to co-locate itself at four exchange data centers; \1070\ 
as well as $89,348 in costs that are common to all competing 
consolidators, as described above.
---------------------------------------------------------------------------

    \1066\ See supra Section V.D.1(a); supra note 664.
    \1067\ See supra Section V.D.1(a).
    \1068\ Id.
    \1069\ See supra Sections V.D.2(d), V.D.2(e); supra notes 698, 
705.
    \1070\ See supra Sections V.D.2(d), V.D.2(e).
---------------------------------------------------------------------------

    The Commission preliminarily estimates that the total direct costs 
to each SRO that would decide to register as a competing consolidator 
would include $5,120,398 in ongoing annual costs, as discussed above, 
and total one-time costs of $2,297,348. The one-time costs are composed 
of labor costs of $1.18 MM; \1071\ external costs of $825,000 to build 
systems to comply with Rules 614(d)(1)-(d)(4), external costs of 
$14,000 to purchase market data from the SROs, an additional initial 
external cost of $194,000 to co-locate itself at four exchange data 
centers,\1072\ as well as $89,348 in costs that are common to all 
competing consolidators, as described above.
---------------------------------------------------------------------------

    \1071\ See supra Sections V.D.2(d), V.D.2(e); supra notes 698, 
705.
    \1072\ See supra Sections V.D.2(d), V.D.2(e).
---------------------------------------------------------------------------

    Separately, the Commission preliminarily estimates that the total 
direct costs to each SRO would include $128,064 in ongoing annual 
costs, and total one-time costs of $246,005. The ongoing annual costs 
are composed of costs to collect the information necessary to generate 
proposed consolidated market data required by proposed Rule 
603(b).\1073\ The total one-time direct costs include up to $175,140 to 
prepare an amendment to the effective national market system plan for 
NMS stocks,\1074\ and labor costs of $70,865 of legal, compliance, 
information technology, and business operations personnel to collect 
the information necessary to generate consolidated market data as 
required by proposed Rule 603(b).\1075\
---------------------------------------------------------------------------

    \1073\ See supra Section V.D.2(f).
    \1074\ Half of these costs, or $87,570, would be incurred to 
comply with the timestamps required by the proposed rule, including 
a review and any applicable change of the respondent's technical 
systems and rules. A quarter of these costs, or $43,785, would be 
incurred to compose the form of annual report on competing 
consolidator performance. Additionally, $8,340 would be incurred to 
compile and confirm the primary listing exchange for each NMS stock. 
See supra Section V.D.5; supra note 734.
    \1075\ See supra Section V.D.6; supra note 737.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed amendments 
that introduce a decentralized consolidation model are likely to have 
indirect costs to existing exclusive SIPs, some market participants, 
and investors. The Commission preliminarily believes that the proposed 
amendments may impose a substantial cost for existing exclusive SIPs in 
terms of loss of business because exclusive SIPs would no longer be 
exclusive consolidators and disseminators of consolidated market data, 
and at least one of the exclusive SIPs--Nasdaq UTP--would no longer be 
paid out of the NMS plan for its processing costs.\1076\ The Commission 
preliminarily believes that this loss of business would be mitigated by 
the opportunity for the exclusive SIPs to become competing 
consolidators. If exclusive SIPs decide

[[Page 16845]]

to become competing consolidators, they would compete for business with 
each other and with other competing consolidators. This competition may 
lead to revenue that is lower than their current revenue. This 
potential decrease in revenue would represent a transfer of resources 
to other competing consolidators and to market participants potentially 
increasing social welfare. On the other hand, the exclusive SIPs have 
the benefit of having been in this business for a long time. The 
exclusive SIPs have significant connectivity to market participants and 
vendors and can leverage their existing customer base and established 
relationships with vendors and purchasers at firms. If the exclusive 
SIPs decide to become competing consolidators, their experience with 
this market may give them a competitive advantage and help mitigate 
their potential revenue losses.
---------------------------------------------------------------------------

    \1076\ This does not apply to CTA/CQ Plan that, as discussed 
above, is paid differently. See supra Section VI.B.2(c).
---------------------------------------------------------------------------

    Some market participants may also incur indirect costs as a result 
of the introduction of the decentralized consolidation model. First, as 
discussed above,\1077\ the price that some market participants would 
pay for proposed consolidated market data may be higher than today's 
price for consolidated market data, holding data content constant. 
These market participants are likely interested in the current scope of 
SIP data, and, therefore, may have to pay a higher price for expanded 
data content that they are not interested in.
---------------------------------------------------------------------------

    \1077\ See supra Section VI.C.2(b).
---------------------------------------------------------------------------

    Second, the Commission preliminarily believes that there would be 
an implementation cost for market participants to switch from using 
current exclusive SIP providers or proprietary data feeds to using 
competing consolidators. This cost is likely to vary among types of 
market participants; for instance, existing purchasers of proprietary 
DOB data products are likely to assume limited additional costs while 
new customers of proposed consolidated market data from competing 
consolidators would need, for example, to establish new connectivity 
and integrate a larger set of data into their operations. This 
implementation cost would include administrative costs for subscribing 
to a new provider of the data, as well as any infrastructure 
investments that may be needed to handle the data as delivered by the 
competing consolidator. The Commission is uncertain about the size of 
these costs but notes that these costs and the magnitude of their 
effect may vary by market participant.
    Additionally, one of the current exclusive SIPs, SIAC, processes 
and disseminates the academic TAQ dataset. If SIAC discontinues its SIP 
business, there may be interruptions to the availability of this data, 
which would create a cost for both the academic community and investors 
that otherwise benefit from regulators' use of this dataset. Other data 
vendors also provide comprehensive historical data products that may 
become more readily available from competing consolidators.\1078\ The 
Commission is unable to quantify the incremental social welfare cost of 
the interruption of availability of the TAQ dataset and invites 
comments on this issue.
---------------------------------------------------------------------------

    \1078\ See, e.g., MayStreet, Market Data, available at https://maystreet.com/products/market-data/ (last accessed Jan. 2, 2020).
---------------------------------------------------------------------------

    Finally, the Commission preliminarily believes that the 
decentralized consolidation model may result in multiple NBBO quotes 
observed by different market participants due to different aggregation 
methods used by competing consolidators. As discussed above,\1079\ 
currently market participants may already observe multiple NBBO quotes. 
Therefore, the Commission preliminarily believes that the decentralized 
consolidation model would result in no meaningful difference in 
practice with respect to the existence of multiple NBBOs.
---------------------------------------------------------------------------

    \1079\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------

    The proposed amendments would impose a cost for SROs from losing 
SIP fees. However, the Commission preliminarily believes that this loss 
of fees would be offset by the data content and access fees paid to 
SROs by competing consolidators.
(e) Economic Effects of Competing Consolidators Being Subject to 
Regulation Systems Compliance and Integrity
    The proposed rule amends Rule 1000 of Regulation SCI by expanding 
the definition of ``SCI entities'' to include ``competing 
consolidators.'' \1080\ Under the proposed rule, competing 
consolidators would be subject to the standard requirements of 
Regulation SCI (i.e., requirements for SCI systems that are not 
critical SCI systems).\1081\ The Commission preliminarily believes that 
expanding Regulation SCI to include competing consolidators would help 
prevent market disruptions due to one or more competing consolidators' 
systems issues and reduce the severity and duration of any effects that 
may result if a systems issue were to occur for a competing 
consolidator. But expanding Regulation SCI to include competing 
consolidators would also impose costs on various entities, most 
significantly on competing consolidators. Competing consolidators would 
incur a number of direct and indirect compliance costs, such as initial 
and on-going paperwork burdens as well as competing consolidators' 
potential switching costs to find vendors that can satisfy the 
Regulation SCI requirements. Additionally, Regulation SCI would impose 
some indirect costs on other market participants because of their 
specific business relationships with competing consolidators. For 
example, third-party vendors employed by competing consolidators to 
provide services used in their SCI systems would incur Regulation SCI 
compliance costs similar to those incurred by competing consolidators.
---------------------------------------------------------------------------

    \1080\ See supra Section IV.B.2(f) and note 557 and accompanying 
text.
    \1081\ See supra Section IV.B.2(f) and note 563 and accompanying 
text.
---------------------------------------------------------------------------

(i) Benefits To Expanding Regulation SCI To Include Competing 
Consolidators
    Currently, the exclusive SIPs are SCI entities and the benefits 
discussed in Regulation SCI already apply to them and to market 
participants.\1082\ Under the proposed amendments, competing 
consolidators would also be considered SCI entities and the benefits of 
Regulation SCI would apply to them and would continue to apply to 
market participants, i.e., maintain the status quo, if the exclusive 
SIPs cease operating as exclusive plan processors. This section 
discusses the benefits that would apply to competing consolidators and 
would continue to apply to market participants from adding competing 
consolidators to the list of SCI entities.\1083\
---------------------------------------------------------------------------

    \1082\ See Regulation SCI Adopting Release, supra note 28, at 
72404.
    \1083\ More specifically, the benefits discussed in this section 
are not measuring a change from the baseline but are discussing the 
benefits that would continue to apply from including competing 
consolidators in the list of SCI entities.
---------------------------------------------------------------------------

    The Commission preliminarily believes that at least three benefits 
would continue to apply by expanding Regulation SCI to include 
competing consolidators.\1084\ First, imposing the requirements of 
Regulation SCI on competing consolidators would help

[[Page 16846]]

prevent market disruptions due to one or more competing consolidators' 
systems issues. Second, it would help reduce the severity and duration 
of any effects that may result if a systems issue were to occur for one 
of these competing consolidators, which could also help prevent 
potential catastrophic events that might start out as a minor systems 
problem but then quickly spread across the national market system, 
potentially causing damage to market participants, including investors. 
Third, expanding the Regulation SCI framework would help ensure more 
effective Commission oversight of competing consolidators' systems.
---------------------------------------------------------------------------

    \1084\ As discussed in detail above, the Commission 
preliminarily believes that a number of entities who would become 
competing consolidators are already subject to Regulation SCI. The 
Commission preliminarily believes that many of the benefits 
described below would not apply to these entities, because they 
already have systems that meet the requirements for Regulation SCI. 
Instead, the Commission preliminarily believes that many of the 
benefits from extending Regulation SCI to include competing 
consolidators would come from new entities who become competing 
consolidators who are not currently subject to Regulation SCI. See 
supra Section V.G.
---------------------------------------------------------------------------

    The Commission preliminarily believes that adding competing 
consolidators to the list of SCI entities would help prevent market 
disruptions by strengthening the infrastructure and improving the 
resiliency of the systems of new competing consolidators who are not 
currently SCI entities. The proposed amendments to Regulation SCI would 
help new competing consolidators who are not currently SCI entities 
establish robust systems that are less likely to experience a system 
disruption by requiring these competing consolidators to establish, 
maintain and enforce written policies and procedures reasonably 
designed to ensure that their SCI systems have levels of capacity, 
integrity, resiliency, availability, and security, adequate to maintain 
the SCI entity's operational capability and promote the maintenance of 
fair and orderly markets.\1085\ The Commission preliminarily believes 
that some potential new competing consolidators may already have 
policies and procedures in place to maintain and test critical systems. 
However, the Commission preliminarily believes that the requirements of 
Regulation SCI would strengthen these policies and procedures, which 
would help improve the robustness of critical systems.
---------------------------------------------------------------------------

    \1085\ See supra Section IV.B.2(f).
---------------------------------------------------------------------------

    The Commission preliminarily believes that complying with the 
provisions of Regulation SCI would help reduce the severity and 
duration of any effects that may result if a systems issue were to 
occur for one of the new competing consolidators who are not currently 
SCI entities. For example, Rule 1002(a), which requires an SCI entity 
to take corrective action if an SCI event occurs, could reduce the 
length of systems disruptions, systems compliance issues, and systems 
intrusions, and thus reduce the negative effects of those interruptions 
on the competing consolidator and market participants. Additionally, 
each SCI entity must establish, maintain and enforce business 
continuity and disaster recovery plans that include maintaining backup 
and recovery capabilities sufficiently resilient and geographically 
diverse and that are reasonably designed to achieve next business day 
resumption of trading and two-hour resumption of critical SCI systems 
following a wide-scale disruption. These plans would help competing 
consolidators restore their systems more quickly in the event of a 
disruption.
    The Commission also preliminarily believes that the requirement for 
competing consolidators to establish procedures to disseminate 
information about SCI events to responsible SCI personnel, competing 
consolidator subscribers, and the Commission would help reduce the 
duration and severity of any system distributions that do occur for one 
of the new competing consolidators who are not currently SCI entities. 
The procedures would help these competing consolidators quickly provide 
the affected parties with critical information in the event that it 
experiences a system disruption. This could allow the affected parties 
to respond more quickly and more appropriately to the incident, which 
could help shorten the duration and reduce the effects of a system 
event. This could also potentially help prevent an event that might 
start out as a minor systems issue from becoming a catastrophic problem 
that quickly spreads across the national market system, potentially 
causing damage to market participants, including investors.
    Additionally, the Commission believes that the requirement for a 
competing consolidator to conduct testing of its business continuity 
and disaster recovery plans with its designated participants and other 
industry SCI entities would help detect and improve the coordination of 
responses to system issues that could affect multiple market 
participants in the NMS stock market. This testing should help prevent 
these system disruptions from occurring and help reduce the severity of 
their effects, if they do occur.
    The Commission preliminarily believes expanding Regulation SCI to 
include competing consolidators would help ensure more effective 
Commission oversight of new competing consolidators who are not 
currently SCI entities. As SCI entities, these competing consolidators 
would have to immediately notify the Commission upon the occurrence of 
an SCI event (unless de minimis) and, each quarter, would have to 
inform the Commission of any planned material changes to its SCI 
systems and the security of indirect SCI systems, as well as any SCI 
events that had a de minimis impact on its operations or on market 
participants. Each year these competing consolidators would also have 
to provide the Commission with an SCI review of their compliance with 
Regulation SCI. This information would help ensure more effective 
Commission oversight by enhancing the Commission's review of these 
competing consolidators and helping make the Commission aware of 
potential areas of weakness in the competing consolidator's systems 
that may pose risk to the entity or the market as a whole, as well as 
areas of non-compliance with Regulation SCI.
    Additionally, the Commission preliminarily believes that the 
exclusive SIPs could realize an incremental benefit relative to the 
baseline from lower SCI-related costs. Because the Commission assumes 
that enough competing consolidators would enter the market to provide 
for multiple viable sources of consolidated market data,\1086\ the 
Commission preliminarily believes that if the exclusive SIPs become 
consolidators then they would be considered SCI entities subject to the 
standard obligations of Regulation SCI, rather than subject to the 
additional costs associated with being subject to the heightened 
requirements applicable to ``critical SCI systems.''
---------------------------------------------------------------------------

    \1086\ See supra Section VI.C.2(a) for a discussion of this 
assumption.
---------------------------------------------------------------------------

(ii) Costs of Expanding Regulation SCI To Include Competing 
Consolidators
    Competing consolidators would incur both paperwork and non-
paperwork related direct and indirect compliance costs as SCI entities. 
Because Regulation SCI imposes some indirect requirements on other 
market participants interacting with SCI entities (e.g., vendors 
providing SCI systems to SCI entities), those market participants would 
also incur indirect costs from competing consolidators being defined as 
SCI entities.
    The Commission preliminarily believes that the 2018 estimates of 
initial paperwork burdens for new SCI entities and ongoing paperwork 
burdens for all SCI entities under Regulation SCI are largely 
applicable to potential entrants into the competing consolidator 
business.\1087\ The 2018 PRA Extension includes estimates 
distinguishing between new versus existing SCI entities. The Commission 
preliminarily believes that, using the same new versus existing SCI 
entity framework, the 12 estimated entrants into the competing

[[Page 16847]]

consolidator business could be divided into three groups: Entrants that 
are existing SCI entities with experience in the consolidated market 
data business (e.g., exclusive SIPs or exchanges or entities affiliated 
with an exchange that currently operate an exclusive SIP); entrants 
that are existing SCI entities but with no experience in the 
consolidated market data business and needing to performing a new 
function with new SCI systems (e.g., a national securities association 
or national securities exchanges that do not currently operate an 
exclusive SIP); and finally, entrants that are entirely new SCI 
entities that are not currently subject to Regulation SCI (e.g., third-
party aggregators that are not currently subject to Regulation SCI). As 
discussed above,\1088\ the Commission preliminarily believes that the 
existing SCI entities in the first category would not have any initial 
burden, whereas the existing SCI entities in the second category would 
incur approximately 50% of the Commission's initial burden estimates 
for an entirely new SCI entity. Further, the 2018 ongoing burden 
estimates for existing SCI entities in both of these categories would 
continue to be applicable. Similarly, the Commission preliminarily 
believes that new SCI entities in the third category would have the 
same estimated initial paperwork burdens as those estimated for new SCI 
entities and the same ongoing paperwork burdens as all other SCI 
entities.
---------------------------------------------------------------------------

    \1087\ See supra note 740.
    \1088\ See supra Section V.G.
---------------------------------------------------------------------------

    As SCI entities, competing consolidators would also incur non-
paperwork related direct compliance costs. In 2014, the Regulation SCI 
adopting release estimated that an SCI entity would incur an initial 
cost of between approximately $320,000 and $2.4 million.\1089\ 
Additionally, an SCI entity would incur an annual ongoing cost of 
between approximately $213,600 and $1.6 million.\1090\ The Commission 
preliminarily believes that similar to the paperwork burden estimates, 
these non-paperwork related costs are also largely applicable to 
competing consolidators. But the Commission is uncertain about the 
actual level of costs competing consolidators would incur, because 
these costs could differ based on the type of potential entrant into 
the competing consolidator business. The Commission preliminarily 
believes that there are two reasons why competing consolidators' costs 
are likely to be on the lower end of these cost estimates.
---------------------------------------------------------------------------

    \1089\ Regulation SCI Adopting Release, supra note 28, at notes 
1943-1944.
    \1090\ Id. at notes 1945-1946.
---------------------------------------------------------------------------

    First, these cost estimates include costs of having part of an SCI 
entity's system be a ``critical SCI system,'' and therefore be subject 
to certain heightened resilience and information dissemination 
provisions of Regulation SCI. For instance, as discussed above,\1091\ 
the existing exclusive SIPs currently represent single points of 
failure and are subject to heightened requirements for ``critical SCI 
systems.'' Under the proposed rule, competing consolidators' systems 
are not included within the scope of ``critical SCI systems.'' The 
Commission preliminarily believes that if competing consolidators' 
systems are subject to the standard requirements of Regulation SCI, 
they would not incur compliance costs of the heightened requirements 
for ``critical SCI systems.'' To the extent that the incremental costs 
of being subject to the heightened requirements for ``critical SCI 
systems'' versus the standard requirements for ``SCI systems'' is 
small, these cost savings could be low.
---------------------------------------------------------------------------

    \1091\ See supra Section IV.B.2(f).
---------------------------------------------------------------------------

    Second, among all of the SCI entities, competing consolidators have 
relatively simpler systems and fewer functions, and thus would have 
compliance costs closer to the lower end of the above cost estimates. 
The above cost estimates provide an average for all SCI entities, 
without distinguishing between different categories of SCI entities. 
However, the Regulation SCI adopting release explains that compliance 
costs would depend on the complexity of SCI entities' systems and they 
would be higher for SCI entities with more complex systems.\1092\ 
Competing consolidators would likely have simpler systems and fewer 
functions relative to some of the other SCI entities, such as 
exchanges. As a result, the Commission preliminarily believes that 
competing consolidators' compliance costs are likely to be on the lower 
end of the average cost estimates for all SCI entities.
---------------------------------------------------------------------------

    \1092\ Regulation SCI Adopting Release, supra note 28, at 634.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily believes that some of 
competing consolidators' subscribers associated with the testing of 
business continuity and disaster recovery plans would incur Regulation 
SCI-related connectivity costs. Rule 1004 of Regulation SCI sets forth 
the requirements for testing an SCI entity's business continuity and 
disaster recovery plans with its designated members or 
participants.\1093\ Competing consolidators and their designated 
subscribers would be subject to these same costs. The Regulation SCI 
adopting release estimated connectivity costs as part of these business 
continuity and disaster recovery plans to be approximately $10,000 per 
SCI entity member or participant.\1094\ The Commission preliminarily 
believes that these connectivity cost estimates would also be 
applicable to competing consolidators' designated subscribers.
---------------------------------------------------------------------------

    \1093\ Id.; Rule 1004.
    \1094\ Id. at note 2065.
---------------------------------------------------------------------------

    The Commission preliminarily believes that competing consolidators 
and various other market participants would incur certain indirect 
costs related to compliance requirements for competing consolidators as 
SCI entities.
    The Commission preliminarily believes that the costs to comply with 
Regulation SCI discussed above would also fall on third-party vendors 
employed by competing consolidators to provide services used in their 
SCI systems. Regulation SCI requires that any system provided by a 
vendor to an SCI entity and used by that entity in its SCI system must 
also comply with Regulation SCI requirements. The Commission 
preliminarily believes that all costs discussed above for competing 
consolidators to comply with Regulation SCI would also fall on third-
party vendors employed by competing consolidators in the course of 
providing consolidated market data. Examples of such vendors may 
include communications firms employed by competing consolidators to 
transport data from exchanges to the competing consolidator's 
aggregation servers at various data centers. If many third-party 
vendors are employed by potential competing consolidators in their 
consolidated market data business, the size of this cost could be 
significant. The Commission invites comment on the issue.
    Additionally, the Commission preliminarily believes there is the 
potential for these costs to cause the vendors to end existing business 
relationships with market participants who become competing 
consolidators. It is possible that third-party vendors would not want 
to incur the costs that competing consolidators may impose to assure 
that the competing consolidator can comply with Regulation SCI 
requirements, and as a result be unwilling to provide services to the 
competing consolidator's consolidated market data business. To the 
extent that this happens, competing consolidators would incur costs 
from having to find new vendors, form a new business relationship, and 
adapt their systems to the infrastructure of the new vendor.

[[Page 16848]]

Competing consolidators may also elect to perform the relevant 
functions internally. To the extent that competing consolidators either 
find new vendors or perform the functions internally, it would 
represent an increased inefficiency in the market, since presumably the 
current market data vendors are the most efficient means of performing 
these functions.
    The Commission preliminarily believes that the technology 
supporting some of the services provided by vendors to current data 
aggregators (notably communications, such as microwave transmission) 
require significant expertise in order to be competitive and are 
difficult to replicate. To the extent this is the case, and to the 
extent that Regulation SCI requirements prevent competing consolidators 
from using these vendors, the ability of competing consolidators to 
provide consolidated market data in a manner that rivals current third-
party aggregation practices could be significantly reduced.
(f) Economic Effects of the Decentralized Consolidation Model 
Pertaining to Self-Aggregators
    As discussed above,\1095\ a number of market participants currently 
purchase proprietary data products from the exchanges and consolidate 
this data for their internal use. To permit self-aggregation under the 
proposed decentralized consolidation model, the Commission proposes to 
define a self-aggregator as a broker or dealer that would receive 
information from the exchanges necessary to generate consolidated 
market data solely for internal use.\1096\
---------------------------------------------------------------------------

    \1095\ See supra Section IV.B.2(e)(iii).
    \1096\ Id.
---------------------------------------------------------------------------

    Market participants that currently effectively self-aggregate and 
that decide to become self-aggregators under the proposed decentralized 
consolidation model will have two choices regarding the use of the 
exchanges' proprietary data products. First, they may decide to limit 
the use of exchange data to the creation of proposed consolidated 
market data, in which case they would be charged for proposed 
consolidated market data pursuant to the fee schedules of the effective 
national market system plan(s) for NMS stocks. In this case, market 
participants would likely benefit from lower data fees as compared to 
current fees they pay for proprietary data and connectivity 
products.\1097\
---------------------------------------------------------------------------

    \1097\ See infra Section VI.C.4.
---------------------------------------------------------------------------

    Second, they may decide they need data beyond the scope of proposed 
consolidated market data, in which case they would be additionally 
charged for the proprietary data and connectivity services pursuant to 
the individual exchange fee schedules. In this case, the potential 
price gain would be limited to the price decline for the portion of the 
data corresponding to the proposed consolidated market data. The 
Commission is uncertain about the extent of this effect.
    Market participants that currently effectively act as self-
aggregators and that would choose to become self-aggregators under the 
proposed decentralized consolidation model may incur some switching 
costs, especially if the exchanges provide components of the 
consolidated market data with feeds and connections other than what 
these market participants currently use. However, since these market 
participants already have the infrastructure to receive the proprietary 
data products from the exchanges, the Commission expects these 
switching costs to be minimal.
(g) Other Conforming Changes
    The Commission is proposing conforming changes for some of the 
previous Commission or SRO rules and regulations, which themselves can 
have economic effects. This section discusses the conforming changes 
and corresponding economic effects.
(i) Amendments to Regulation SHO
    As described above in section III.D.1, the Commission is proposing 
amendments to Regulation SHO to adjust the process of determining 
whether a Short Sale Circuit Breaker has been triggered and 
disseminating such trigger information. First, the primary listing 
exchange would decide how to obtain the consolidated data necessary to 
determine whether a Short Sale Circuit Breaker should be triggered. 
Second, the primary listing exchange would be responsible for notifying 
competing consolidators and self-aggregators rather than a single plan 
processor. The first change allows the primary listing exchange to 
select the most cost-effective means of fulfilling its 
responsibilities. The second change could entail some compliance costs 
for competing consolidators but is necessary to ensure that all 
competing consolidators are on a level playing field. The resulting 
compliance costs for exchanges are included in the Commission's general 
compliance estimate above.\1098\ The resulting compliance costs for 
competing consolidators are included in the Commission's estimate of 
the general costs to becoming a competing consolidator above.\1099\
---------------------------------------------------------------------------

    \1098\ See supra Section V.D.6.
    \1099\ See supra Section V.B.2.
---------------------------------------------------------------------------

    In addition, the Commission is proposing to define ``primary 
listing exchange'' in Regulation NMS and to amend the definition of 
``listing market'' in Regulation SHO to refer to the proposed 
definition of primary listing exchange. The Commission preliminarily 
believes that this change would have no direct economic effects, other 
than harmonizing Regulation SHO with Regulation NMS.
(ii) Effective Changes to Responsibilities Under the Limit Up Limit 
Down Plan and Market Wide Circuit Breaker Rules
    The proposed definition of ``regulatory data'' requires the primary 
listing exchange to be the entity responsible for monitoring, 
calculating, and disseminating certain information necessary to 
implement the LULD Plan and the MWCB rules. These functions are 
currently the responsibility of a single exclusive SIP, however, the 
Commission is proposing that the primary listing exchanges be 
responsible for disseminating information regarding Price Bands and 
Limit States and the primary listing exchange with the largest portion 
of S&P 500 Index stocks be responsible for determining whether an MWCB 
has been triggered. While the Commission preliminarily believes that 
these amendments could result in implementation and ongoing costs for 
primary listing markets that currently do not operate a SIP, these 
amendments ensure a single set of Price Bands and a consistent message 
that MWCBs have triggered. The Commission preliminarily believes that 
the additional cost of calculating the information necessary to 
implement the LULD Plan and WMCB rules would be minimal. The cost 
imposed on these primary listing markets is included in the general 
compliance cost the Commission has estimated for SROs above.\1100\
---------------------------------------------------------------------------

    \1100\ See id.
---------------------------------------------------------------------------

(h) Request for Comments
    The Commission requests comments on its analysis of the economic 
effects pertaining to the proposed decentralized consolidation model. 
In particular, the Commission solicits comment on the following:
    228. Do you agree with the reasonableness of the Commission's 
assumption that the proposed amendments would lead to multiple 
competing consolidators participating in

[[Page 16849]]

the consolidated market data business and distributing data to market 
participants? Why or why not? Please explain in detail.
    229. Are you an organization that would want to provide the 
competing consolidator service described? If so, please include an 
estimate of how much effort would be required for you to begin 
providing this service in the market. If you are willing to provide 
price estimates, please do so as well.
    230. What factors are likely to influence the decision of various 
market participants to become competing consolidators? How large would 
be the barriers to entry to becoming a competing consolidator? Would 
there be any sources of barriers to entry other than building the 
technological infrastructure, filing Form CC, and complying with the 
other regulatory requirements associated with being a competing 
consolidator?
    231. Which market participants would be likely to become competing 
consolidators? Are the current exclusive SIPs likely to become 
competing consolidators? Why or why not? Would existing market 
aggregation firms become competing consolidators? Why or why not? Would 
any other types of firms likely become competing consolidators? Why or 
why not?
    232. How would the Commission's assessment of the economic effects 
of the rule be affected by too few competing consolidators? Please be 
specific.
    233. To what extent would the adoption of the various proposals in 
Section III independently respond to some or all of the issues the 
proposed competing consolidator model is intended to address?
    234. Do you agree with the Commission's assessment of the potential 
effect of the proposal on data fees? In particular, do commenters agree 
with the Commission's conclusion that the proposal could reduce overall 
data fees? What is the likely effect of the proposal on each of the 
components of the overall data fees, fees for consolidated market data, 
fees for proprietary market data, and fees for connectivity? What are 
some of the important factors that could result in fee increases and 
decreases? Please explain in detail.
    235. The Commission requests that commenters provide any insights 
or data they may have as to potential changes in connectivity fees and 
the effect of these new connectivity fees on the proposed competing 
consolidator business.
    236. Do you agree that there would be three potential benefits from 
the increased competition provided by the decentralized consolidation 
model: Efficiency gains in the delivery of consolidated market data, 
improvements in technological innovation in consolidated market data, 
and reductions in latency? Why or why not? If not, which benefits do 
you disagree with? Please explain.
    237. What are the benefits of expanding Regulation SCI to define 
competing consolidators as ``SCI entities''? What are the costs of 
expanding Regulation SCI to define competing consolidators as ``SCI 
entities''? Please explain and provide cost estimates, if available.
    238. The Commission requests that commenters provide relevant data 
and analysis to assist in analyzing how the total price of proposed 
consolidated market data (including the data fee paid to the operating 
committee(s) of the effective national market system plan(s) for NMS 
stocks and service fees paid to competing consolidators) in the 
decentralized consolidation model would compare to current pricing of 
SIP data. More specifically, how would the aggregate fees paid by 
various types of market participants under the decentralized 
consolidation model likely compare to the aggregate fees paid by the 
same types of market participants for the same data today, assuming the 
content of the data consumed by market participants remains constant 
but the providers of that data change? Would any market participant 
types be likely to expand the data they purchase if such data is 
included in the definition of consolidated market data? Please explain. 
How would the aggregate fees paid by such market participants under the 
decentralized consolidation model likely compare to the aggregate fees 
paid by them today, assuming such market participants expand the data 
they purchase? Please quantify if possible.
    239. Do you agree with the Commission's assessment of the costs 
incurred by potential competing consolidators as a result of the 
proposal? Specifically, do you agree that potential competing 
consolidators would incur initial costs of $0.6 million to $3.9 million 
and ongoing costs of $2 million and $2.6 million? Why or why not? 
Please provide revised cost estimates, if possible. How would these 
costs vary across the types of entities likely to become competing 
consolidators? What costs would be common across competing 
consolidators?
    240. Do you agree with the Commission's assessment of the costs to 
each SRO of amending effective national market system plan(s) for NMS 
stocks to implement the proposed decentralized consolidation model? Why 
or why not? Please explain and provide alternative cost estimates, if 
possible.
    241. Would existing SIPs and exchanges lose business as a result of 
the proposed decentralized consolidation model? If so, what is the 
nature and potential magnitude of the business they would lose? Could 
any exclusive SIPs or exchanges gain business as a result of the 
decentralized consolidation model? Please explain.
    242. Would the proposed decentralized consolidation model result in 
more NBBOs than could be viewed today? If so, would this increase the 
complexity of our markets? Why or why not? Please describe any economic 
effects resulting from an increase in multiple NBBOs.
    243. Do you agree with the Commission's assessment of the costs to 
data users of potentially switching from purchasing market data from 
exclusive SIPs and/or exchanges to purchasing market data from 
competing consolidators? Why or why not? Please explain. Do you agree 
that these costs are likely to vary among types of market participants?
    244. Would the proposed amendments result in the interruption of 
data available for research by the academic community and investors, 
such as TAQ data? If so, the Commission requests that commenters 
provide relevant data and analysis to assist us in determining the 
incremental social welfare cost of such interruption of data to the 
academic community and investors.
    245. How costly would be the proposed changes to the entities 
responsible for requirements of Regulation SHO, LULD and MWCB for 
listing exchanges? What is the magnitude of such costs that derive from 
implementing processes to continuously calculate and track data metrics 
for compliance with the proposed changes? What is the magnitude of such 
costs that derive from notifying the competing consolidators and others 
of price bands and triggers? Does the magnitude of such costs depend on 
the number of competing consolidators?
    246. Do you agree with the Commission's assessment of the benefits 
of subjecting competing consolidators to Regulation SCI requirements? 
Why or why not?
    247. Do you agree with the Commission's assessment of the costs of 
subjecting competing consolidators to Regulation SCI requirements? Why 
or why not? Do you agree with the Commission's estimates of the costs 
involved? Please explain in detail.

[[Page 16850]]

    248. Are geographically diverse backup systems a standard practice 
among firms likely to become competing consolidators today? What effect 
does the answer to this question have on the likely cost for competing 
consolidators to maintain geographically diverse backup systems?
    249. Do you agree with the Commission's assessment on the impact of 
Regulation SCI requirements on third-party vendors employed by 
competing consolidators? Why or why not? To what extent do potential 
competing consolidators contract with third-party vendors for systems 
that would meet the definition of an SCI system? What is the magnitude 
of costs to third-party vendors who operate these systems to make sure 
these systems meet the requirements of Regulation SCI? What effect will 
this impact have on the ability of competing consolidators to provide 
reliable data products? Please explain and provide estimates, if 
possible.
    250. Do you believe that the amendments to Regulation SCI could 
reduce innovation among new competing consolidators? Please explain. If 
so, which provisions of Regulation SCI affect innovation the most and 
how? Please explain.
    251. How significant is the barrier to entry provided by Regulation 
SCI requirements on potential competing consolidators? Do you believe 
this will have a significant impact on the number of entities who enter 
the competing consolidator business? Why or why not?
3. Economic Effects of Form CC
    As discussed above in Section IV.B, the proposed amendments would 
not let a person, other than an SRO, act as a competing consolidator, 
i.e., generating proposed consolidated market data for dissemination to 
non-affiliated persons, unless that person files with the Commission an 
initial Form CC and the initial Form CC has become effective. The 
proposed amendments would require the public disclosure of Form CC, 
which requires a number of disclosures about a competing consolidator's 
services and fees and operations, and metrics related to the 
performance of competing consolidators. As a result, the proposed 
amendments would provide transparency for investors who might purchase 
the products and services of a competing consolidator. The Commission 
preliminarily believes that the information provided in Form CC and the 
resulting transparency would help market participants make better-
informed decisions about which competing consolidator to subscribe to 
in order to achieve their trading or investment objectives.
    Additionally, the Commission preliminarily believes that the 
process for the Commission to declare an initial Form CC ineffective 
would improve the quality of information the Commission receives from 
competing consolidators, which would allow the Commission to better 
protect investors from potentially incomprehensible or incomplete 
disclosures that would misinform market participants about the 
operations and services of a competing consolidator.
(a) Public Disclosure of Form CC and Other Competing Consolidator 
Information
    The proposed Form CC would require competing consolidators to 
publicly disclose four sets of information on the Commission 
website.\1101\ First, proposed Form CC would require competing 
consolidators to disclose general information, along with contact 
information. Second, proposed Form CC would require competing 
consolidators to disclose information regarding their business 
organizations. Third, proposed Form CC would require competing 
consolidators to disclose information regarding their operational 
capabilities. Fourth, proposed Form CC would require competing 
consolidators to disclose information regarding their services and 
fees. The proposed rule also includes requirements for amendments under 
defined circumstances and a notice of cessation of operations at least 
30 business days before the date the competing consolidator ceases to 
operate as a competing consolidator. Proposed Form CC, any amendments 
to it, and any notices of cessation would be made public via posting on 
the Commission's website. The proposed rule also has a disclosure 
requirement about competing consolidators' performance metrics on their 
own websites. Additionally, the proposed rule would require competing 
consolidators to disclose operational information on their websites 
related to vendor alerts, data quality and systems issues, and clock 
drift in the clocks they use to create timestamps. Generally, these 
requirements promote transparency and competition among competing 
consolidators and effective regulatory oversight within a streamlined 
approach to avoid significant barriers to entry.
---------------------------------------------------------------------------

    \1101\ See supra Section IV.B.2(e).
---------------------------------------------------------------------------

    The business organization disclosures would give market 
participants a window into the ownership as well as the organizational 
structures of competing consolidators. The Commission preliminarily 
believes that this information would help market participants make 
better-informed decisions about which competing consolidator to 
subscribe to as well as how to avoid any potential conflicts of 
interest. For example, if a broker-dealer is considering subscribing to 
a competing consolidator for consolidated data and any other potential 
additional services such as analytics, they may search for a competing 
consolidator that is not owned by a competitor or an affiliate of a 
competitor in the broker-dealer space. Purchases of data and additional 
market intelligence services between two competitors could potentially 
create conflicts of interest. Thus, the required disclosure of a 
competing consolidator's business organization--which would, for 
example, clarify the ownership information--would provide transparency 
on its potential conflicts of interest.
    The information on operational capabilities would provide market 
participants detailed information about each competing consolidator's 
product portfolio and technical capabilities. Since market participants 
vary in their data and technical capability needs, information on 
competing consolidators operational capabilities would allow the market 
participants to make better-informed purchase decision. For example, 
market participants who trade frequently and who need robust backup 
systems might choose competing consolidators with those capabilities. 
Whereas other market participants who have longer term investment 
strategies with potentially less frequent trades might prefer competing 
consolidators with less aggressive backup systems. Proposed Form CC 
disclosures would facilitate a better match between market 
participants' needs and competing consolidators' offerings, and would 
also help to ensure consistent disclosures between competing 
consolidators.
    With the consistent disclosures on services and fees, market 
participants could compare and contrast the various services provided 
and the corresponding fees asked by competing consolidators. Market 
participants could then make better purchase decisions, based on their 
individual needs. Additionally, the service and fee transparency 
resulting from these disclosures would promote competition in similar 
products and/or services across different competing consolidators, 
which could result in similar prices, and would help to protect market 
participants from unfair and unreasonable prices.

[[Page 16851]]

    The Commission preliminarily believes that the proposed requirement 
for competing consolidators to amend Form CC prior to implementing 
material changes to their pricing, products, or connectivity options 
would provide transparency into changes in the operations of competing 
consolidators and better inform subscribers and other market 
participants about significant changes in the fees and services offered 
by a competing consolidator. This would allow subscribers to a 
competing consolidator to better evaluate if it would continue to serve 
their business needs. Additionally, it would facilitate effective 
oversight by the Commission.
    Similarly, the Commission preliminarily believes that the 
requirement for a notice of cessation would also benefit subscribers to 
the competing consolidator, because it would give them advanced notice 
before the competing consolidator ceases to operate. Thus those 
subscribers would have more time to find another competing consolidator 
to supply them with consolidated market data.
    The fact that the information on Form CC would be in a single 
location instead of dispersed across the competing consolidators' own 
websites would aid market participants by introducing only minimal 
search costs when evaluating and comparing potential competing 
consolidators to decide which one best suits their business interests.
    As discussed above,\1102\ the Commission preliminarily believes the 
proposed rule would cause each competing consolidator, except for SROs, 
to incur an approximately $93,540 in implementation compliance cost in 
order to collect the information required to fill out and file an 
initial Form CC as well as $5,744 in ongoing costs in order to file 
amendments to an effective Form CC. The Commission believes these 
requirements are streamlined to include only what is necessary to 
achieve the benefits discussed above without creating significant 
barriers to entry that would discourage entities from becoming 
competing consolidators.
---------------------------------------------------------------------------

    \1102\ See supra Sections V.D.1(a), VI.C.2(d); supra note 664.
---------------------------------------------------------------------------

    Competing consolidators would also experience implementation costs 
because initial Form CC and any amendments to Form CC would be required 
to be filed electronically with the Commission. The Commission 
preliminarily believes that requiring Form CC to be filed 
electronically would reduce filing costs compared to requiring the 
competing consolidator to file paper forms.
    To file a form CC, competing consolidators would need to access the 
Commission's EFFS system. Each competing consolidator would have to 
submit an application and register each individual who would access the 
EFFS system on behalf of the competing consolidator. The Commission 
believes that each competing consolidator would initially designate two 
individuals to access the EFFS system, with each application taking 
0.15 hours for a total of 0.3 hours per competing consolidator. On an 
ongoing basis, each competing consolidator will add one individual to 
access the EFFS system for amendments, adding 0.15 hours per competing 
consolidator. To make a submission into the EFFS system, the competing 
consolidator must download a proprietary viewer; however, the 
Commission would cover the cost of the license for all competing 
consolidators, as it currently does for other filers that use the EFFS 
system.
    Because the EFFS system is not available to the public, when the 
Commission makes an effective Form CC available to the public, the 
Commission will transform the data into an unstructured format, meaning 
that it is not machine-readable. Market participants that would use the 
Form CC data to evaluate and compare competing consolidators would bear 
the costs of locating, comparing, and evaluating the information on the 
Commission's website and take steps to put the information ``side by 
side'' for comparison purposes.
    The Commission preliminarily believes that the public disclosure of 
performance metrics and additional information would introduce 
transparency to the operations of competing consolidators. These 
metrics would allow subscribers and potential subscribers to better 
evaluate the performance and current and future capabilities of a 
competing consolidator. Market participants, based on their individual 
needs, could review competing consolidators' performance statistics and 
choose ones that would best serve their trading needs. While the 
requirements to post the monthly performance metrics and operational 
information on websites would introduce transparency, it would not 
completely eliminate costs incurred when market participants want to 
compare competing consolidators because collecting the information 
would involve market participants expending some resources to go to 
each competing consolidator's website.
    Competing consolidators would also incur implementation and ongoing 
compliance costs in order to setup and maintain systems required to 
calculate and produce the information for the performance metrics as 
well as other information the competing consolidator would be required 
to post to its website.
    Each month, competing consolidators would be required to post the 
monthly performance metrics and operational information on their own 
websites. Excluding the cost of preparing the information, the 
Commission estimates an average competing consolidator would incur a 
one-time cost of $2,651 (6 hours (for website development) x $308.50 
per hour (blended rate for a senior systems analyst ($285) and senior 
programmer ($332)) + $800 for an external website developer to develop 
the web page = $2,651) for posting the required information to a 
website, and would incur an ongoing annual cost of up to $3,702 (1 hour 
(for website updates) x $308.50 per hour (blended rate for a senior 
systems analyst ($285) and senior programmer ($332)) x 12 monthly 
postings = $3,702) to update the relevant web page each month. Because 
the monthly performance metrics and operational information may be 
posted in any format the competing consolidator finds most convenient, 
market participants that would use the data to evaluate and compare 
competing consolidators would bear the costs of locating, comparing, 
and evaluating the information on each competing consolidator's 
website. The Commission preliminarily believes that the operational 
information that competing consolidators would be required to publicly 
disclose on their websites would create a mechanism for market 
participants to hold competing consolidators accountable for any 
systems issues they may experience. One strong accountability mechanism 
market participants have is their purchasing power. The disclosure 
requirements would alert market participants to any system breaches or 
any data quality or systems issues a competing consolidator 
experiences. Market participants could hold competing consolidators 
accountable by abandoning competing consolidators that repeatedly 
experience system issues and gravitating toward competing consolidators 
that demonstrate more reliable systems through their disclosures. This 
demand shift could cause competing consolidators with less reliable 
systems to exit the market.
    In addition to the requirements of Regulation SCI promoting 
competing consolidators to develop resilient

[[Page 16852]]

systems,\1103\ the requirement that competing consolidators publicly 
disclose information on systems issues as well as performance metrics 
regarding system availability could also encourage competing 
consolidators to make investments that would ensure the resiliency of 
their systems. These disclosures would help market participants 
determine which competing consolidators have more reliable systems. 
Competing consolidators who display more reliable systems with greater 
system availability would attract more subscribers. This should 
incentivize competing consolidators to invest in better backup systems 
or other technology that would improve the resiliency of their systems 
and increase their system uptime.
---------------------------------------------------------------------------

    \1103\ See supra Section VI.C.2(e)(i).
---------------------------------------------------------------------------

    The Commission preliminarily believes that information from the 
disclosures in Form CC and the performance metrics and operational 
information competing consolidators would provide on their websites 
would promote effective regulatory oversight of competing consolidators 
and increased investor protection by providing the Commission and 
relevant SROs with information about competing consolidators. With this 
information, the Commission and the SROs could identify competing 
consolidators that are not properly complying with the proposed 
amendments or parts of them. The Commission and SROs, then, could 
utilize this information to help prioritize examinations and possibly 
help identify potential issues.
    The Commission preliminarily believes that the public disclosure of 
the information in Form CC and the performance metrics and operational 
information competing consolidators would provide on their websites 
could also increase competition between competing consolidators and 
also expose some competing consolidators to certain competitive 
effects. If the public disclosures show that certain competing 
consolidators have higher fees or poorer performance, it may result in 
those competing consolidators losing subscribers and earning lower 
revenues. Similarly, competing consolidators who display lower prices 
or superior system performance may be able to attract more subscribers 
and earn more revenue. The public disclosure of the fee and performance 
information on the Commission and competing consolidator websites would 
facilitate competing consolidator comparison and would also promote 
competition. Greater competition between competing consolidators could 
in turn incentivize competing consolidators to innovate--particularly 
in terms of their technology--so that they can attract more 
subscribers.\1104\
---------------------------------------------------------------------------

    \1104\ See infra Section VI.D.2 (discussing the potential 
effects of the proposal on competition).
---------------------------------------------------------------------------

(b) Commission Review and Process for Declaring Initial Form CC 
Ineffective
    The Commission preliminarily believes that the process of reviewing 
an initial Form CC would allow the Commission to evaluate, among other 
things, the completeness and comprehensibility of the competing 
consolidators' disclosures and, if necessary, declare the Form CC 
ineffective. To be a consolidated market data provider, a competing 
consolidator is required to have a Form CC that has become effective 
pursuant to proposed Rule 614(a)(1)(v). Thus, for competing 
consolidators that submit low quality and potentially inaccurate data, 
the Commission's review and declaration of their Form CC ineffective 
could start an iterative cycle of increasingly better information 
provision, until the competing consolidator can have an effective Form 
CC. The Commission preliminarily believes that this public disclosure 
and review process would improve the quality of information the 
Commission receives from competing consolidators, which would allow the 
Commission to better protect investors from potentially 
incomprehensible or incomplete disclosures that would misinform market 
participants about the operations of the competing consolidator. 
Additionally, an entity cannot operate as a competing consolidator 
without an effective Form CC. The Commission's review would be designed 
to ensure that the competing consolidators serving the investors would 
be the ones that meet the Commission's qualification requirements.
    The Commission preliminarily believes that the filing requirements 
of Form CC and the Commission review period could impose costs on 
competing consolidators. The Commission preliminarily believes that 
declaring a Form CC ineffective could impose costs on a competing 
consolidator--such as delaying the start of operations while the 
competing consolidator resubmits its Form CC--and could impose costs on 
individual market participants and the overall market for competing 
consolidators resulting from a potential reduction in competition. 
However, competing consolidators and market participants would not 
incur these costs unless the competing consolidator submitted a 
deficient Form CC. Therefore, the Commission preliminarily believes 
that a competing consolidator would be incentivized to submit Form CC 
disclosures that are complete and comprehensive to avoid bearing the 
costs of resubmitting a Form CC filing or of having its Form CC 
declared ineffective.
    The Commission recognizes that the registration process would 
create uncertainty about whether the form would be declared 
ineffective. This uncertainty could create a disincentive for entities 
to become competing consolidators, which could potentially reduce 
competition in the competing consolidator market.\1105\
---------------------------------------------------------------------------

    \1105\ See infra Section VI.D.2 (discussing the potential 
effects of the proposal on competition).
---------------------------------------------------------------------------

(c) Request for Comments
    The Commission requests comments on its analysis of the economic 
effects of proposed Form CC. In particular, the Commission solicits 
comment on the following:
    252. Do you agree that Form CC would help market participants make 
better-informed decisions about which competing consolidators to 
subscribe to in order to achieve their trading or investment 
objectives? Why or why not?
    253. Do you agree that the process for the Commission to declare an 
initial Form CC ineffective would promote the quality of information 
the Commission receives from competing consolidators? Do you agree that 
the quality would affect the ability of the Commission to protect 
investors? Why or why not?
    254. Do you agree with the Commission's assessment of the costs of 
Form CC? Please explain and provide cost estimates, if available.
    255. Do you agree that filing initial Form CC and amendments to 
Form CC electronically with the Commission through the EFFS system 
would reduce filing costs and increase benefits compared to filing 
paper forms? Please explain.
    256. The Commission has provided cost estimates that competing 
consolidators would incur for accessing and filing using the 
Commission's EFFS system. Do you believe these cost estimates are 
accurate? If not, please explain. Do you believe there are other costs 
potential competing consolidators would incur related to using the EFFS 
system that the Commission should consider?
    257. Do you agree that the proposed performance metrics would 
create operational transparency of competing consolidators and allow 
subscribers and potential subscribers to evaluate and compare the 
performance of competing

[[Page 16853]]

consolidators? Please explain. Do you agree that posting the monthly 
performance metrics on the websites of the competing consolidators 
would limit the ability to compare competing consolidators relative to 
posting or filing the metrics in a central location? Please explain.
    258. How costly would it be for competing consolidators to 
calculate and post the performance metrics? Please explain and provide 
cost estimates.
    259. The Commission has provided cost estimates that competing 
consolidators would incur for posting monthly statistics on their 
websites. Do you believe these cost estimates are accurate? If not, 
please explain. Do you believe there are other costs competing 
consolidators would incur related to posting monthly statistics on 
their websites that the Commission should consider? Please explain.
    260. Do you agree with the Commission's assessment of the costs 
imposed by the process for declaring an initial Form CC ineffective, 
including the uncertainty it would create? Please explain.
4. Economic Effects From the Interaction of Changes to Core Data and 
the Decentralized Consolidation Model
    The Commission preliminarily believes that the proposed amendments 
would have a number of economic effects that are only possible as a 
result of a combination of the expanded content of core data and 
latency reductions due to the introduction of the decentralized 
consolidation model.\1106\ Specifically, the Commission preliminarily 
believes that the combination of these factors would affect proprietary 
data feed business; market participants who choose to engage in market 
making, smart order routing, and other latency sensitive trading 
businesses; the Consolidated Audit Trail; and data vendor business.
---------------------------------------------------------------------------

    \1106\ See supra Section VI.C.2(c) (discussing the effect of the 
decentralized consolidation model on consolidated market data 
latency).
---------------------------------------------------------------------------

(a) Economic Effects on the Proprietary Data Feed Business
    The Commission preliminarily believes that the expanded content of 
core data and latency reduction due the introduction of the 
decentralized consolidation model could make proposed consolidated 
market data a reasonable alternative to exchange proprietary data feeds 
for some market participants. This would have the effect of providing 
these market participants with a potentially lower cost option 
(relative to proprietary feeds) for low latency, high content market 
data. The lower cost of either self-aggregating proposed consolidated 
market data or obtaining a competing consolidator's data feed would 
come at the expense of losing the full set of data currently available 
via proprietary feeds, because the proposed consolidated market data 
definition does not include all data elements currently available via 
proprietary data feeds. Nevertheless, some market participants may find 
that the expanded content of core data makes the trade-off worth it and 
may choose to drop their proprietary feed subscriptions in favor of the 
proposed consolidated market data.
    This effect would represent a transfer from exchanges who sell 
proprietary data feeds to the market participants who would save money 
by either self-aggregating proposed consolidated market data or 
subscribing to a competing consolidator's data feed. In the latter 
case, a portion of the benefit is also transferred to the competing 
consolidator in the form of additional business. The Commission 
preliminarily believes that a transfer from the exchanges to market 
participants may help market participants enhance their product and 
service offerings to their customers. Additional business and revenues 
for competing consolidators may enhance competing consolidators' 
efforts to offer higher quality products and a wider range of product 
offerings.\1107\
---------------------------------------------------------------------------

    \1107\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------

    It is possible that changes to the pricing and customer base of 
core and proprietary data feeds may not have a uniform impact across 
all exchanges. Some exchanges currently have more proprietary feed 
revenue than others, and some exchanges may currently rely more on 
revenue from SIP data fees than other exchanges. To the extent that an 
exchange receives a large share of revenue from its proprietary feed 
business, the impact of these potential reductions in proprietary feed 
subscriptions could be large for that exchange. To the extent that an 
exchange receives only a small portion of its revenue from proprietary 
feed subscriptions, the impact of these potential reductions in 
subscriptions could be small for that exchange. The Commission invites 
comment on the issue.
    The Commission also notes that the exchanges' revenues from 
connectivity services may increase or decrease, depending on any new 
data connectivity fees that the exchanges may propose for data content 
use cases. The connectivity fees for proposed consolidated market data 
must be fair and reasonable and not unreasonably discriminatory.\1108\ 
If these new connectivity fees are higher than current fees, there is a 
possibility that the exchanges' overall revenue from connectivity 
services would increase. It is also possible that exchanges could lose 
revenue from existing customers reducing the number of ports or the 
amount of bandwidth they purchase as they switch to competing 
consolidators for some use cases. The overall effect on the exchanges' 
connectivity revenues is uncertain, and the impact on connectivity 
revenues could differ across different exchanges.
---------------------------------------------------------------------------

    \1108\ See supra note 620.
---------------------------------------------------------------------------

    The Commission preliminarily believes that these competitive 
pressures on the exchange proprietary feed and connectivity business 
could also have the effect of causing the exchanges to lower the fees 
they charge for these services in an effort to stay competitive with 
the proposed consolidated market data. This effect represents a 
transfer from the exchanges to the customers of these services. To the 
extent that existing customers of these services invest the money saved 
from lower fees in new products (such as expanding brokerage services) 
this effect will also have benefit of encouraging the creation of new 
products and services. To the extent that the lower fees for these 
services enable new market participants to subscribe to these feeds and 
offer the services that these feeds are required for (such as high 
quality execution brokerage services), this effect will also represent 
a benefit in the form of new competition in the broker-dealer business.
    The Commission preliminarily believes, however, that if a small 
latency differential between competing consolidator feeds and the 
proprietary data feeds remains, then the above effects are likely to be 
small, owing to the nature of high speed competition.\1109\ However, 
this limitation would only be for the case where current subscribers to 
proprietary data feeds switch to using a competing consolidator feed. 
In the case of those proprietary feed subscribers who become self-
aggregators, the Commission preliminarily believes that it is unlikely 
that this would result in a latency differential compared to receiving 
proprietary data.\1110\ It is also

[[Page 16854]]

possible that the data that would remain exclusive to proprietary feeds 
would also reduce the incentives for market participants to switch to 
using consolidated market data only, further reducing the size of the 
above effects.
---------------------------------------------------------------------------

    \1109\ See supra Section VI.B.2(b).
    \1110\ More generally, the proposed rule would enable some 
reduction in the latency differential between current market 
participants to the extent that such market participants would be 
willing to make the necessary technology and personnel investments 
to take advantage of the latency reductions provided by the 
decentralized consolidation model. Thus, while some differences in 
latency may remain, the barriers to entry for market participants to 
compete in the latency sensitive businesses at various levels of 
sophistication and competitiveness would be reduced.
---------------------------------------------------------------------------

    In the event that proprietary data feed subscribers are willing to 
switch to receiving new consolidated market data and a latency 
differential remains between these feeds and feeds provided by 
competing consolidators, the effects discussed in this section would 
apply only to those market participants who become self-aggregators. 
The Commission preliminarily believes that the set of current 
subscribers of proprietary feeds willing to become self-aggregators may 
be smaller than the set of current subscribers willing to switch to 
using a competing consolidator, as it is possible that subscribing to a 
competing consolidator would be more convenient or less costly. To the 
extent this is the case, the size of the effects described in this 
section will be reduced. Furthermore, these self-aggregators may 
continue to enjoy a latency advantage over customers of competing 
consolidators.
    To the extent that the changes to proprietary feed subscriptions 
described above are realized, the exchanges would have corresponding 
losses in revenue or profit from the provision of proprietary data. 
Since the Commission is unable to determine how many broker-dealers or 
other market participants would no longer want to use proprietary data 
feeds as a result of this rule, it is unable to determine the size of 
this potential reduction in revenue or profit.
(b) New Entrants Into the Market Making, Broker-Dealer and Other 
Latency Sensitive Trading Businesses
    The Commission preliminarily believes that proposed amendments may 
lead to new market participants entering the market making, smart order 
routing broker-dealer, and other latency sensitive trading businesses. 
For instance, it is possible that currently there are broker-dealers 
who would try to compete in the business of sophisticated order routing 
but choose not to because of the cost of the market data necessary to 
be competitive. To the extent that the expanded content of new core 
data and the latency reductions due to the introduction of the 
decentralized consolidation model make consolidated market data a 
viable data product for smart order routing, the Commission 
preliminarily believes that these changes could induce these broker-
dealers to enter the business.\1111\ This would have the benefit of 
increasing competition in the sophisticated order routing broker-dealer 
business.
---------------------------------------------------------------------------

    \1111\ These would be broker dealers who have not entered these 
businesses because, currently, the only way to obtain the benefits 
associated with the new, expanded core data and decentralized 
consolidation model is to subscribe to proprietary data feeds, which 
the Commission preliminarily expects to remain more expensive than 
core data.
---------------------------------------------------------------------------

    The Commission preliminarily believes that access to this new, 
faster consolidated market data could encourage new entrants into the 
automated market maker business. This would not only improve the 
competitiveness of this business but also may increase liquidity in the 
corresponding markets.
    The Commission preliminarily believes that if these new entrants 
would want to use a competing consolidator, and if a small latency 
differential between competing consolidator feeds and the proprietary 
data feeds remains, then this effect is likely to be small.\1112\ If 
instead these potential new entrants were to become self-aggregators, 
then this limitation would be reduced, because the Commission 
preliminarily believes that there is unlikely to be a significant 
latency differential between being a self-aggregator and using 
proprietary data feeds. However, if self-aggregation is required to be 
a new entrant in these businesses, the number of potential new entrants 
could be small, since using a competing consolidator may be more 
convenient or less costly than self-aggregating.\1113\ It is also 
possible that potential participants in the sophisticated SOR, 
automated market making, and other latency sensitive trading businesses 
find that they cannot compete effectively without using the data that 
would remain exclusive to proprietary feeds. To the extent this is the 
case, the effects discussed above would be further limited.
---------------------------------------------------------------------------

    \1112\ See supra Section VI.B.2(b).
    \1113\ For related discussion on latency advantages, see supra 
note 1110.
---------------------------------------------------------------------------

(c) Effects From the Interaction With the Consolidated Audit Trail
(i) CAT Baseline
    Rule 613 of Regulation NMS requires the national securities 
exchanges and national securities associations (``self-regulatory 
organizations'') to jointly develop and submit to the Commission a 
national market system plan to create, implement and maintain a 
consolidated audit trail (``CAT'').\1114\ At the time of adoption, and 
even today, trading data was and is inconsistent across the self-
regulatory organizations and certain market activity is difficult to 
compile because it is not aggregated in one, directly accessible 
consolidated audit trail system. The goal of Rule 613 was to create a 
system that provides regulators with more timely access to a 
sufficiently comprehensive set of trading data, enabling regulators to 
more efficiently and effectively reconstruct market events, monitor 
market behavior, and identify and investigate misconduct. Rule 613 thus 
aims to modernize a reporting infrastructure to oversee the trading 
activity generated across numerous markets in today's national market 
system.
---------------------------------------------------------------------------

    \1114\ See supra note 624.
---------------------------------------------------------------------------

    On November 15, 2016, the Commission approved the national market 
system plan required by Rule 613 (``CAT NMS Plan'' or ``Plan'') that 
was submitted by the self-regulatory organizations.\1115\ In the CAT 
NMS Plan, the Participants described the numerous elements they 
proposed to include in the CAT, including, (1) requirements for the 
plan processor responsible for building, operating and maintaining the 
Central Repository,\1116\ (2) requirements for the creation and 
functioning of the Central Repository, (3) requirements applicable to 
the reporting of CAT Data by plan participants and their members. ``CAT 
Data'' is defined in the CAT NMS Plan as ``data derived from 
Participant Data, Industry Member Data, SIP Data, and such other data 
as the Operating Committee may designate as `CAT Data' from time to 
time.'' \1117\
---------------------------------------------------------------------------

    \1115\ See id.
    \1116\ The Central Repository is the repository responsible for 
the receipt, consolidation, and retention of all information 
reported to the CAT. See CAT NMS Plan, supra note 624, at Section 
1.1.
    \1117\ See id. The Operating Committee is the governing body of 
the CAT NMS Plan.
---------------------------------------------------------------------------

    The CAT NMS Plan requires plan participants and their members to 
record and report various data regarding orders by 8:00 a.m. the day 
following an order event.\1118\ The Plan requires industry members to 
record timestamps for order events in millisecond or finer increments 
with a clock synchronization standard of within 50 milliseconds.\1119\ 
The CAT NMS Plan Processor, FINRA CAT, is then required to process the 
order data into a uniform format, link the entire lifecycle of each 
order, and combine it with other CAT

[[Page 16855]]

Data such as SIP Data.\1120\ The Plan Processor is also required to 
store the CAT Data to allow the ability to return results of queries on 
the status of order books at varying time intervals.\1121\ Regulators, 
such as the Commission and SROs will use the resulting CAT Data only 
for regulatory purposes such as reconstructing market events, 
monitoring market behavior, and identifying and investigating 
misconduct.\1122\ At this time, the Commission has little information 
about what specific data, in addition to CAT Data, such as proprietary 
depth of book and auction data, the SROs currently intend to include in 
their enhanced surveillance systems.\1123\
---------------------------------------------------------------------------

    \1118\ See id. at Sections 6.3 and 6.4.
    \1119\ See id. at Section 6.8.
    \1120\ See id. at Section 6.5.
    \1121\ See id. at Section 6.5(c)(ii).
    \1122\ See id. at Section 6.5(g); CAT NMS Plan Approval Order, 
supra note 624, at 84833-4.
    \1123\ See Rule 613(f) of Regulation NMS.
---------------------------------------------------------------------------

(ii) Economic Effects on CAT
    The Commission recognizes that the proposal could affect the 
Consolidated Audit Trail, resulting in benefits to investors from 
improved regulatory oversight, costs to CAT from potentially switching 
from a current SIP to a competing consolidator, costs to CAT from 
integrating consolidated market data into the CAT Data model, and costs 
to SROs of updating their enhanced surveillance systems to use 
consolidated market data provided by the CAT.\1124\ Specifically, the 
Plan Processor for the Consolidated Audit Trail, FINRA CAT, is required 
to incorporate all data from SIPs or pursuant to an NMS plan into the 
Consolidated Audit Trail. If the Commission were to approve these 
amendments, the CAT NMS Plan Operating Committee could choose to 
purchase such data from a different entity and would be required to 
purchase the expanded consolidated data.
---------------------------------------------------------------------------

    \1124\ See supra Section IV.B.5 for a more detailed discussion 
of how the proposal would alter the requirements of the Consolidated 
Audit Trail NMS Plan.
---------------------------------------------------------------------------

    The Commission believes that the incorporation of the expanded data 
into CAT would improve regulatory oversight to the benefit of 
investors. As explained in the Approval order for the Consolidated 
Audit Trail, the expected benefits of the CAT include ``improvements in 
regulatory activities such as the analysis and reconstruction of market 
events, in addition to market analysis and research . . ., as well as 
market surveillance, examinations, investigations, and other 
enforcement functions,'' and derive from improvements in four data 
qualities: Accuracy, completeness, accessibility, and timeliness.\1125\ 
Accuracy refers to whether the data about a particular order or trade 
is correct and reliable. Completeness refers to whether a data source 
represents all market activity of interest to regulators, and whether 
the data is sufficiently detailed to provide the information regulators 
require. Accessibility refers to how the data is stored, how practical 
it is to assemble, aggregate, and process the data, and whether all 
appropriate regulators could acquire the data they need. Timeliness 
refers to when the data is available to regulators and how long it 
would take to process before it could be used for regulatory analysis.
---------------------------------------------------------------------------

    \1125\ See CAT Approval Order, supra note 624, at 84802-3.
---------------------------------------------------------------------------

    The Commission believes that the expanded consolidated data from 
the proposal could improve the completeness and accessibility of CAT 
Data.\1126\ In particular, the proposal would improve the completeness 
of CAT Data because CAT Data would contain quotes smaller than 100 
shares, depth of book information, and auction information. While the 
CAT will contain query functionality capable of recreating limit order 
books, the depth of book information would allow regulators to see the 
displayed order books that others see around the time of the order 
events. While the Commission does not know if SROs plan to incorporate 
depth of book and auction information into their enhanced surveillance 
systems or other regulatory activities using CAT Data, the proposal 
would improve the accessibility of consolidated market data for SRO and 
Commission CAT-related uses because SROs would have access to such data 
in a standardized format through the Consolidated Audit Trail instead 
of through the variety of formats currently used in proprietary data. 
The proposal would also improve accessibility because the SROs and 
Commission would have such data on the same system as CAT Data.
---------------------------------------------------------------------------

    \1126\ The Commission believes the proposal would not affect the 
accuracy or timeliness of CAT Data. The Commission does not believe 
that the proposal would alter the accuracy of timestamps of trades 
and quotes. While some competing consolidators might offer data that 
more accurately represents the data observed by certain market 
participants at the time of an order event, the Commission does not 
expect that all market participants would observe the exact same 
data at that order event, much like the case today. In addition, 
industry member clock synchronization and timestamps on the order 
events in CAT Data are not fine enough for the latency improvements 
to affect the accuracy of assigning an order event to the 
consolidated market data likely observed at the time of the order 
event. Finally, the order data in CAT is not required to be reported 
until 8:00 a.m. the day following an order event. Hence, because 
latency improvements from the proposal would be measured in 
microseconds, the Commission does not believe that the proposal 
would improve the timeliness of CAT Data.
---------------------------------------------------------------------------

    The Commission believes that the potential improvements in 
completeness and accessibility would facilitate more efficient 
regulatory activities using CAT Data that would benefit investors. In 
particular, the proposal could make broad-based market reconstructions 
using CAT Data more efficient by increasing the depth of information 
that could be incorporated into such reconstructions with CAT Data 
alone. The Commission believes that depth of book information, quote 
information in sizes less than 100 shares, and auction information are 
all valuable in a broad-based market reconstruction. Further, the 
improvements would allow for more targeted surveillances and risk-based 
examinations using CAT Data alone. For example, the depth of book 
information would be valuable when building surveillances to detect 
spoofing or in investigating spoofing because spoofing often involves 
creating a false impression of depth at prices outside of the best bid 
or offer. In addition, the auction information would facilitate auction 
market reconstruction to evaluate manipulation concerns and inform 
policy. Quote information in sizes less than 100 shares would 
facilitate analysis by regulators of broker-dealers' best execution 
practices by providing potential execution prices that are better than 
the current NBBO.\1127\
---------------------------------------------------------------------------

    \1127\ See supra Section VI.C.1(b)(i) for data showing that odd-
lot quotes in higher priced securities often improve upon the 
current NBBO.
---------------------------------------------------------------------------

    The Commission recognizes that the interaction between the proposal 
and the Consolidated Audit Trail could also create additional costs. 
Such additional costs are likely to be borne by SROs and their members. 
These costs could include switching costs, additional data costs, and 
data storage and processing costs. The proposal would result in 
switching costs if the CAT Central Repository has to obtain the data 
from a different source. The source of the switching costs could be 
from changing data input formats and technical specifications, which 
would require one-time implementation costs. The Commission recognizes 
that the SIP technical specifications change a few times a year such 
that the switching costs associated with the proposal would be the 
costs in excess of the regular costs incurred when the SIP technical 
specifications change.\1128\ The

[[Page 16856]]

Commission at this time, cannot judge whether switching data providers 
would result in higher or lower on-going data intake costs but data 
intake costs presumably could be factored into the selection of a 
competing consolidator. The Commission recognizes that increasing the 
amount of data managed and analyzed by CAT would increase the costs of 
data storage and processing to integrate the expanded data with other 
CAT Data. However, the Commission does not expect the proposal to 
substantially increase the costs of operating the CAT because any 
marginal increase in cost associated with consolidated market data 
would be dwarfed by the processing costs already incurred by CAT, which 
includes processing for all options quotation activity among other 
order lifecycle events and is significantly larger in size than 
consolidated market data.
---------------------------------------------------------------------------

    \1128\ See CTA, Technical Documents, available at https://www.ctaplan.com/tech-specs (last accessed Jan. 30, 2020) (showing 
the SIP tech specs version history, which identifies the changes 
over the years); UTP Data Feed Services Specification, supra note 
142 (showing the SIP tech specs version history, which identifies 
the changes over the years).
---------------------------------------------------------------------------

    The Commission recognizes that the proposal would result in SROs 
incurring costs to integrate additional CAT Data into their 
surveillances. Even if the SROs would otherwise include depth of book 
and auction information in the CAT-related surveillances, they would 
incur costs in changing their surveillances to use the data in CAT 
rather than using data from proprietary feeds.
    The Commission also considered whether the requirements in CAT 
would impose costs as a result of CAT's effect on the competition among 
competing consolidators. Because the Commission does not believe CAT 
would significantly affect the competition among competing 
consolidators,\1129\ it would not impose additional costs resulting 
from this effect.
---------------------------------------------------------------------------

    \1129\ See infra Section VI.D.2 for a discussion of the 
interaction between the proposal and CAT on competition among 
competing consolidators.
---------------------------------------------------------------------------

    The Commission preliminary believes that CAT implementation 
milestones will not be impacted by the infrastructure proposal given 
that sufficient lead time would be available and integration efforts 
could be scheduled as part of standard release planning. The Commission 
believes that switching market data providers and expanding 
consolidated market data within CAT would require limited resources 
relative to the current implementation activities. Further, any 
resources devoted by SROs to updating their surveillances are separate 
from the efforts to implement CAT.
(d) Effects on Data Vendors
    The Commission preliminarily believes that the proposed amendments 
would have an effect on the broad financial data services industry. To 
the extent that the amendments lead to cheaper (relative to proprietary 
data feeds) and higher content consolidated market data, the Commission 
preliminarily expects that costs to data vendors would go down and the 
ability of such vendors to grow their customer base would increase. It 
is also possible that data vendors may increase the range and quality 
of products they offer using the new expanded core data and that new 
firms enter the data vendor business. To the extent that the risk of 
price increases for core data is realized instead, the Commission 
believes these businesses could potentially face higher costs, which 
when passed on to clients could cause their customer base to shrink. In 
the event that these outcomes are severe, it is possible that some data 
vendors could exit the market. The Commission is uncertain about the 
potential size and scope of these effects because it is unable to 
determine both the role of these costs in producing the products 
supplied by the data services industry and the extent to which the 
enhanced quality of new core data could play a role in the quality of 
their products. The Commission invites comments on the issue.
(e) Request for Comments
    The Commission requests comments on its analysis of the economic 
effects from the interaction of changes to core data and the 
decentralized consolidation model. In particular, the Commission 
solicits comment on the following.
    261. Do you agree with the Commission's analysis of the effect of 
the proposal on the proprietary data business? Why or why not? Please 
explain in detail.
    262. Would exchanges lose proprietary data business as a result of 
the proposed decentralized consolidation model? Why or why not? Please 
explain. Would any market participants still elect to purchase 
proprietary data feeds from exchanges? If so, which market 
participants? Please explain in detail. What would be the net effect of 
any changes in this business?
    263. The Commission invites comment on the role of SIP data revenue 
and proprietary feed revenue in the overall data revenue of exchanges. 
To what extent do exchanges rely on each source of revenue? Please 
explain in detail.
    264. Do you agree with the Commission's analysis of the effects of 
the proposed amendments on the broad financial industry data services 
industry? Why or why not? Please explain in detail. Would the proposal 
lead to new broker-dealers developing SORs, new market makers, or other 
new latency sensitive traders? If so, what would be the economic effect 
of these new players? Please explain in detail.
    265. Do you agree with the Commission's analysis of the effects of 
the interaction between the proposal and the Consolidated Audit Trail? 
Why or why not? Please explain.
    266. Would the proposal result in more complete and/or accessible 
CAT Data? Please explain. How would regulators use the additional CAT 
Data resulting from the proposal and how would investors benefit from 
this usage? Please explain.
    267. To what extent would the proposal alter the SROs enhanced 
surveillances using CAT Data? Please explain. Would the proposal result 
in SROs incorporating more depth of book and auction information into 
their surveillances? What would be the costs and benefits of doing so? 
Please explain.
    268. If the proposal resulted in FINRA CAT switching data 
providers, what would be the switching costs? How would the proposed 
amendments affect the implementation and ongoing costs of CAT? Please 
provide estimates if possible.
    269. Do you agree that the proposal would not affect the 
implementation of CAT? Please explain.
    270. Do you agree with the Commission's analysis of the effects of 
the proposal on data vendors? Why or why not? Please explain.
5. Request for Comments on the Economic Effects of the Proposed Rule
    The Commission requests comment on its analysis of the economic 
effects of the proposed amendments. In particular, the Commission 
solicits comment on the following:
    271. Do you believe the Commission's analysis of the potential 
economic effects of the proposed amendments is reasonable? Why or why 
not? Please explain in detail.
    272. Do you believe the proposed amendments may have unintended 
consequences that are not captured by the Commission's analysis of the 
potential economic effects? Why or why not? Please explain in detail.
    273. Do you agree with the Commission's analysis of the benefits of 
the proposed amendments? Why or why not? Please explain in detail.
    274. Do you agree with the Commission's analysis of the costs of

[[Page 16857]]

the proposed amendments? Why or why not? Please explain in detail.
    275. The Commission requests that commenters provide relevant data 
and analysis to assist us in determining the economic consequences of 
the proposed amendments. In particular, the Commission requests data 
and analysis regarding the costs SROs, exclusive SIPs, and market 
participants may incur, and benefits they may receive, from the 
proposed amendments.

D. Impact on Efficiency, Competition, and Capital Formation

1. Efficiency
    The Commission preliminarily believes that the proposed amendments 
would have a number of different effects on efficiency. In particular, 
the Commission preliminarily believes that the proposed amendments 
would: Lead to more efficient gains from trade, improve the efficiency 
of order execution for some market participants, improve price 
efficiency, and affect how efficiently core data is distributed. The 
rest of this section discusses these different effects of the proposed 
amendments on efficiency in detail. The Commission solicits comments 
whether the proposed amendments might have a significant impact on 
other forms of efficiency.
    As discussed above, the Commission preliminarily believes that the 
expansion of core data under the proposed amendments would increase 
transparency for market participants who do not currently access 
proprietary DOB feeds and allow them to more easily find liquidity that 
they can trade against.\1130\ Currently, some of these market 
participants may not trade because they cannot see the quotes available 
to them, either through a lack of information about odd-lots, depth of 
book, or auction information. The Commission preliminarily believes 
that the proposed amendments would alleviate some of this information 
shortage and would allow traders to more easily find counterparties. 
This may result in more voluntary trades occurring between market 
participants, which could lead to more efficient gains from trade, 
since these are trades which currently do not take place only because 
of a lack of information.\1131\ However, if the inclusion of additional 
odd-lot, depth of book, or auction information does not induce 
additional voluntary trading from market participants who do not 
currently access proprietary DOB feeds, then the proposed amendments 
may not produce more efficient gains from trade.\1132\
---------------------------------------------------------------------------

    \1130\ See supra Section VI.C.1(b).
    \1131\ Id.
    \1132\ Id.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the expansion of core 
data could also improve the efficiency with which some market 
participants, or their broker-dealers, execute orders. As discussed 
above, by adding odd-lot, depth of book, and auction information to 
core data, the proposed amendments would reduce information asymmetry 
between broker-dealers and other market participants who subscribe to 
proprietary data feeds and users of current SIP data. This could 
improve the ability of broker-dealers and other market participants who 
currently do not have access to this information to trade against those 
market participants who do. As a result, this could improve the 
efficiency with which they execute their orders by allowing them to 
select a better trading venue or method of executing their order. 
Furthermore, for market participants who currently rely on exclusive 
SIPs for their order executions, the reduction in latency provided by 
the decentralized consolidation model could reduce the risk that their 
orders are picked off, which could reduce their adverse selection 
costs. This could potentially reduce their transaction costs and allow 
them to more efficiently achieve their investment or trading objectives 
or those of their clients.\1133\
---------------------------------------------------------------------------

    \1133\ Id.
---------------------------------------------------------------------------

    As discussed previously, the Commission preliminarily believes that 
there is some potential for new broker-dealers to become competitive in 
the market for sophisticated order execution as a result of this rule 
because they may be able to use the expanded content and lower latency 
of core data to develop SORs or other tools that allow them to compete 
more effectively with broker-dealers who currently base order execution 
decisions off of proprietary DOB data.\1134\ To the extent that this 
happens, the clients of these broker-dealers could see their orders 
executed more efficiently and their execution costs reduced.
---------------------------------------------------------------------------

    \1134\ See supra Section VI.C.4(b).
---------------------------------------------------------------------------

    The current lack of certain odd-lot quote, depth of book, and 
auction information in SIP data could affect price efficiency. The gap 
in information between data provided by exclusive SIPs and proprietary 
data products may cause prices in some securities to be less efficient, 
i.e., to deviate further from fundamental values, if market 
participants with access to proprietary data products do not 
incorporate this information into prices quickly enough through their 
trading or quoting activity. However, the Commission does not know the 
extent of this possible effect, but it preliminarily believes the 
effect could be larger in less actively traded securities where the gap 
in information between SIP data and proprietary data products is 
larger.
    The Commission preliminarily believes that, to the extent that 
there is information in the new core data elements that is not 
currently reflected in market prices, the proposed amendments may 
improve price efficiency.\1135\ In particular, the proposed 
introduction of odd-lot quote, depth of book, and auction information 
into core data could result in the information becoming impounded in 
prices more rapidly and accurately as a result of the more widespread 
dissemination of this information. As the Commission understands that 
the most sophisticated traders already have access to this information 
and likely already compete to profit from it, the Commission expects 
that the size of this gain in price efficiency would be small because 
this information is already impounded quickly into prices.
---------------------------------------------------------------------------

    \1135\ See supra Section VI.B.2(a).
---------------------------------------------------------------------------

    Finally, under the current rule, the exclusive SIPs operate like 
public utilities in their consolidation and distribution of the NMS 
stock data.\1136\ The proposed changes would unbundle the data fees for 
consolidated market data from the fees for its consolidation and 
distribution.\1137\ The decentralized consolidation model would subject 
the fees charged by competing consolidators for the consolidation and 
distribution of consolidated market data to competition. The Commission 
preliminarily believes that the proposed decentralized consolidation 
model would lead to consolidated market data being distributed in a 
more timely, efficient, and cost-effective manner. The Commission 
preliminarily believes that the proposed changes to the consolidation 
and distribution of consolidated data is economically similar to the 
restructuring of public utilities and may have an impact on the 
efficiency with which the consolidation and distribution is carried 
out. In particular, as discussed above, the proposed decentralized 
consolidation model is anticipated to produce better investment to 
lower costs and improve quality in the consolidation and distribution 
of consolidated market data, as well as promote better price 
competition (all of which translates into a more efficient allocation 
of capital)

[[Page 16858]]

than the bidding process currently in place.\1138\
---------------------------------------------------------------------------

    \1136\ See supra note 390.
    \1137\ See supra Section VI.C.2(c).
    \1138\ See id.
---------------------------------------------------------------------------

    The Commission acknowledges the uncertainty in this conclusion. The 
literature on the economics of restructuring of public utilities does 
not provide clear guidance. Some papers show efficiency gains from 
regulatory restructuring,\1139\ yet others claim no efficiency gains or 
efficiency declines after regulatory restructuring of public 
utilities.\1140\ The likely impact of the proposed changes rests on the 
strengths and weaknesses of the existing exclusive SIP model.
---------------------------------------------------------------------------

    \1139\ See, e.g., Kira R. Fabrizio et al., Do Markets Reduce 
Costs? Assessing the Impact of Regulatory Restructuring on US 
Electric Generation Efficiency, 97 a.m. ECON. REV. 1250 (2007).
    \1140\ See, e.g., Severin Borenstein, The Trouble with 
Electricity Markets: Understanding California's Restructuring 
Disaster, 16 J. ECON. PERSP. 191 (2002).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the existing exclusive 
SIP model has an important weakness: It does not provide sufficient 
competitive incentives.\1141\ SIPs have significant market power in the 
market for core and aggregated market data products and, as a result, 
do not need to compete hard to capture demand for their products. The 
Commission preliminarily believes that the adoption of the 
decentralized consolidation model would open up the consolidation and 
distribution services to data consolidators that would need to 
vigorously compete to capture some demand for the data they provide. 
This need to compete for market share would create incentives to reduce 
costs. As discussed above, the Commission preliminarily believes that 
this competition could incentivize competing consolidators to pass on 
some of those cost savings to customers by charging lower service fees 
in order to capture market share.\1142\ The focus to capture market 
share might also lead to technological improvements for competing 
consolidators to be able to differentiate themselves in the eyes of the 
customers and generate demand.\1143\ The Commission preliminarily 
believes that these improvements in data provision technology and the 
introduction of competitive forces on fees for the consolidation and 
distribution of consolidated market data could result in a more 
efficient allocation of capital.
---------------------------------------------------------------------------

    \1141\ See supra Section VI.B.3(a) (discussing SIPs market 
power).
    \1142\ See supra Section VI.C.2(b). However, the Commission also 
acknowledges the possibility that fees for the consolidation and 
distribution of consolidated market data may remain the same or 
increase, because consolidated market data will contain more 
information and/or there might not be enough competition among 
competing consolidators.
    \1143\ Several studies found evidence of efficiency gains and 
technological improvements from restructuring in the public 
utilities sector. In the electricity industry, for example, the 
introduction of competition to the electricity generation services 
created strong incentives to become more cost efficient and 
technologically advanced to improve operating performance. If a 
plant could not become efficient enough to compete, it would lose 
business and have to exit the market. Craig and Savage (2013) 
establish a 9% increase in efficiency in investor-owned electricity 
plants in response to the restructuring and increasing competition 
in the electricity sector. Similarly, Davis and Wolfram (2012) argue 
that electricity market restructuring is associated with a 10 
percent increase in operating performance for nuclear plants 
generating electricity. The authors state that increasing 
competition led to managers focusing more attention on financial 
costs of outages. See J. Dean Craig and Scott J. Savage, Market 
Restructuring, Competition and the Efficiency of Electricity 
Generation: Plant-level Evidence from the United States 1996 to 
2006, 34 ENERGY J. 1 (2013); Lucas W. Davis and Catherine D. 
Wolfram, Deregulation, Consolidation, and Efficiency: Evidence from 
US Nuclear Power, Am. Econ. J.: Applied Econ. (Oct. 2012), at 194.
---------------------------------------------------------------------------

    Additionally, the decentralized consolidation model could allow 
market participants to receive consolidated market data more 
efficiently. Instead of having to receive separate consolidated market 
data feeds from two exclusive SIP plan processors, UTP and CTA/CQ 
Plans, market participants would have the option to receive all of 
their consolidated market data from one competing consolidator.\1144\ 
This could allow market participants to achieve efficiencies in the 
design and in making modifications to their systems for the intake of 
consolidated market data because they would only have to configure 
their systems to intake consolidated market data from one source.
---------------------------------------------------------------------------

    \1144\ The Commission acknowledges that market participants may 
subscribe to more than one competing consolidator for different core 
data products or as a backup feed.
---------------------------------------------------------------------------

2. Competition
    As discussed previously, the Commission preliminarily believes this 
proposed rule would have a substantial impact on competition. The 
Commission preliminarily identifies seven markets or areas of the 
market for which the proposed rule would have a substantial impact on 
competition. The Commission acknowledges that the seven markets or 
areas may not be a comprehensive list of all markets or areas for which 
the proposed rule might have an impact on competition. However, the 
Commission preliminarily believes that competition in these seven 
markets or areas are most likely to be impacted substantially by the 
proposed rule. The Commission solicits comments regarding whether the 
proposed rule might have a substantial impact on competition in other 
markets or areas of the market.
    First, the proposed rule introduces a competitive marketplace for 
the consolidation and dissemination of consolidated market data to 
replace the centralized consolidation model, which is not currently 
subject to competitive pressures.\1145\ Under the proposed amendments 
multiple competing consolidators would be able to distribute 
consolidated market data to market participants. The Commission 
preliminarily believes that, since market participants could freely 
select the competing consolidator that charged the lowest distribution 
fee or offered better quality (i.e., lower latency, a more reliable 
system, etc.), the competing consolidators would be subject to 
competitive forces and the marketplace for the consolidation and 
dissemination of proposed consolidated market data would be competitive 
if enough competing consolidators enter the market.\1146\ As discussed 
above, the Commission preliminarily believes that this introduction of 
competition could reduce the prices competing consolidators charge for 
the consolidation and distribution of consolidated market data and 
improve the quality of consolidated market access.\1147\ The Commission 
recognizes the risk that there could be too few competing consolidators 
to realize these benefits fully, in which case the proposed competitive 
changes may have a number of costs,\1148\ including higher prices for 
the consolidation and dissemination of consolidated market data, which 
could increase the overall prices market participants pay for 
consolidated market data.\1149\
---------------------------------------------------------------------------

    \1145\ See supra Sections IV.B.2, VI.B.3(a).
    \1146\ The Commission assumes that enough competing 
consolidators will enter the market in order to make it competitive. 
See supra Section VI.C.2(a).
    \1147\ See supra Sections VI.C.2(a), VI.C.2(b), VI.C.2(c).
    \1148\ See supra Sections VI.C.2(a), VI.C.2(d).
    \1149\ See supra Section VI.C.2(a).
---------------------------------------------------------------------------

    The Commission recognizes that the extension of Regulation SCI to 
include competing consolidators could impact competitive dynamics in 
the competing consolidator market. The Commission preliminarily 
believes the costs associated with being an SCI entity could raise the 
barriers to entry for firms seeking to become competing consolidators 
who are not already SCI entities, including market data aggregation 
firms.\1150\ Exclusive SIPs and SROs who seek to become competing 
consolidators could gain a

[[Page 16859]]

competitive advantage over these firms because they would face lower 
barriers to entry since they are currently SCI entities and already 
incur many of these costs.\1151\ Therefore, the extension of Regulation 
SCI to competing consolidators could result in fewer firms seeking to 
become competing consolidators which could lead to less competition in 
the competing consolidator market. Less competition and less innovation 
would reduce the incentives of competing consolidators to reduce the 
costs and improve the speed and quality of their consolidated market 
data aggregation and dissemination services.
---------------------------------------------------------------------------

    \1150\ See supra Sections VI.C.2(a)(i)b., VI.C.2(e)(ii).
    \1151\ See supra Sections V.G.,ViC.2(a)(i)b.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily believes that the public 
disclosure of the information in Form CC and the performance metrics 
and operational information competing consolidators would provide on 
their websites would enhance competition between competing 
consolidators.\1152\ The public disclosure of competing consolidator 
fees and performance metrics would allow market participants to more 
easily compare competing consolidators and select the ones that charged 
the lowest fees or offered the best performance. This could enhance 
competition between competing consolidators. For example, if the public 
disclosures show that certain competing consolidators have higher fees 
or poor performance, it may result in those competing consolidators 
losing subscribers and earning lower revenues. Similarly, competing 
consolidators who display lower prices or superior system performance 
may be able to attract more subscribers and earn more revenue. This in 
turn could enhance competition by incentivizing competing consolidators 
to lower fees and/or innovate and make investments in their systems in 
order to improve system performance in order to attract more 
subscribers. In theory, the Commission acknowledges that the public 
disclosure of Form CC could harm competition by making firms reluctant 
to enter the competing consolidator market and reducing the incentives 
of competing consolidators to innovate if it discloses certain 
information that a competing consolidator might view as a ``trade 
secret'' or giving it a competitive advantage. However, the Commission 
believes that these effects are not likely to occur because it 
preliminarily believes that the disclosures on Form CC are not detailed 
enough to allow other market participants to reproduce a competing 
consolidator's ``trade secret.'' Additionally, the Commission 
preliminarily believes that the delayed public disclosure of material 
amendments to Form CC should prevent another competing consolidator 
from replicating a competing consolidator's innovations before it has a 
chance to implement them.\1153\
---------------------------------------------------------------------------

    \1152\ See supra Section VI.C.3.
    \1153\ See supra Sections IV.B.2(e), VI.C.3.
---------------------------------------------------------------------------

    The Commission recognizes that the registration process for Form CC 
could create uncertainty about whether a Form CC would be declared 
ineffective. This could potentially harm competition in the market for 
competing consolidators by raising the barriers to entry and creating a 
disincentive for entities to become competing consolidators. However, 
the Commission preliminarily believes that these effects will not be 
significant because the Commission would not declare a Form CC 
ineffective without notice and opportunity for hearing. Additionally, 
entities whose Form CC is declared ineffective would still have the 
opportunity to file a new Form CC with the Commission.
    The Commission considered the effect of the interaction between the 
proposal and the CAT NMS Plan on competition among competing 
consolidators, but believes that this interaction would not have a 
significant effect on the competitive landscape. In particular, the 
Commission considered two effects: First, the effect in the event that 
there is a bias toward an exchange-operated competing consolidator over 
other competing consolidators and second, any competitive advantage for 
the competing consolidator selected for the CAT NMS Plan. In relation 
to any bias, the Commission notes that the CAT NMS Plan would be only 
one of many potential customers of the competing consolidator, so this 
bias is not likely to affect the market unless the selection produces a 
competitive advantage. In particular, a competing consolidator could 
enjoy a competitive advantage only if broker-dealers believe that 
market surveillances would be less likely to appear to show violations 
if the broker-dealers made trading decisions using the same data used 
in SRO surveillances. However, the latency differences across the 
competing consolidators are likely to measure in the microseconds while 
the clock synchronization requirements for industry members in the CAT 
NMS Plan is 50 milliseconds for electronic order flow.\1154\ Therefore, 
the Commission does not believe the CAT's choice of competing 
consolidator would confer any regulatory value on the competing 
consolidator or their broker dealer clients.
---------------------------------------------------------------------------

    \1154\ See CAT NMS Plan, supra note 624, at Section 6.8.
---------------------------------------------------------------------------

    Second, the Commission preliminarily believes that the expanded 
content and reduced latency of consolidated market data would make it a 
more viable substitute for proprietary data feeds.\1155\ The Commission 
preliminarily believes that this would increase competition between 
consolidated market data and exchange proprietary data feeds. These 
competitive pressures could lead to lower prices for proprietary data 
feeds and may reduce the data costs that market participants pay, at 
the expense of the SROs who charge the fees.\1156\ The Commission 
recognizes the risk that the extension of Regulation SCI to include 
competing consolidators could lead to less competition in the competing 
consolidator market, which could reduce the incentives of competing 
consolidators to reduce the cost and improve the speed and quality of 
consolidated market data. If this occurs, it could make consolidated 
market data less of a viable substitute for proprietary data feeds, 
which would reduce the competitive pressures consolidated market data 
would impose on proprietary data feeds.
---------------------------------------------------------------------------

    \1155\ However, consolidated market data would not be a perfect 
substitute for the proprietary data feeds because it would not 
contain all the information in proprietary data feeds. For example, 
the expanded core data would not include full depth of book 
information or information on all odd-lots. See supra Section 
VI.C.4.
    \1156\ See supra Section VI.C.4(a).
---------------------------------------------------------------------------

    Third, the Commission preliminarily expects the new decentralized 
consolidation model for proposed consolidated market data to create 
competitors to market data aggregators for two reasons. First, the 
potential revenues from becoming a competing consolidator may cause new 
firms to enter the market for the consolidation and distribution of 
market data. Second, some market participants who currently use market 
data aggregators may switch to getting proposed consolidated market 
data from a competing consolidator. This could have two effects: The 
competition could lead to lower prices and higher quality in the market 
data aggregator business, but it could also lead to fewer market data 
aggregators if the competition from the proposed consolidated market 
data system makes it no longer viable for some market data aggregators 
to offer their services.\1157\

[[Page 16860]]

The latter could lead to higher prices in the market data aggregator 
space.\1158\ In addition, some of these market data aggregators may 
choose to become competing consolidators, which could have two effects: 
It could cause market data aggregators to leave the proprietary feed 
aggregation space thereby reducing the competition in that space, or it 
could cause market data aggregators to use the economies of scale and 
the additional profits they derive from being a competing consolidator 
to improve their offerings as a market data aggregator of proprietary 
feeds. Depending on which effect dominates, competition in the market 
data aggregator space could increase or decrease, which in turn could 
lead to lower or higher prices, respectively. The Commission recognizes 
that the extension of Regulation SCI to include competing consolidators 
could diminish the ability of market data aggregators who become 
competing consolidators to compete in the market data aggregator space. 
If a market data aggregator becomes a competing consolidator, the 
requirements of being an SCI entity could also extend to their 
aggregation of proprietary market data.\1159\ These requirements could 
raise their costs, which could reduce their ability to compete with 
other market data aggregators that are not competing consolidators.
---------------------------------------------------------------------------

    \1157\ The Commission acknowledges that fewer competitors could 
decrease or increase efficiency in the market data aggregator 
business. On the one hand, fewer competitors could reduce the 
incentives for market data aggregators to innovate, which could 
reduce efficiency. On the other hand, fewer competitors could also 
improve efficiency if the firms that exited the market did not 
aggregate market data as efficiently as the firms that remained.
    \1158\ As discussed above, consolidated market data would not be 
a perfect substitute for proprietary data feeds, so there would 
still be demand for proprietary data. Since not all firms aggregate 
proprietary data themselves, there would still be a demand for 
third-party aggregators to perform this function.
    \1159\ See supra Section VI.C.2(e)(ii).
---------------------------------------------------------------------------

    Fourth, the Commission preliminarily expects that the expanded 
content and reduced latency of core market data provided by this 
proposed rule may increase competition in the broker-dealer business by 
improving the ability of some broker-dealers who currently access core 
data to execute orders.\1160\ It is the Commission's understanding that 
some broker-dealers that do not subscribe to all of the current 
proprietary DOB feeds rely solely on the exclusive SIPs today and that 
this makes them uncompetitive in the market for offering execution 
services to the most transaction-cost-sensitive market participants. 
The new decentralized consolidation model with expanded core data would 
reduce the latency and expand the information delivered to broker-
dealers who subscribe to core data, possibly without raising data 
prices. This in turn would allow broker-dealers that subscribe to 
consolidated data to improve their order execution services and compete 
more effectively with broker-dealers who subscribe to proprietary DOB 
feeds. This would lead to greater competition between broker-dealers, 
which could benefit investors by resulting in lower prices for and 
higher quality of broker-dealer execution services.\1161\
---------------------------------------------------------------------------

    \1160\ See supra Section VI.C.4(b).
    \1161\ See supra Sections VI.B.3(e), VI.C.4(b).
---------------------------------------------------------------------------

    Fifth, the Commission preliminarily believes that the proposed rule 
could affect competition between exchanges. As discussed above, the 
proposed enhancements to core data could increase competition between 
proposed consolidated market data and proprietary data feeds, which 
could lead to exchanges charging lower fees for proprietary market 
data.\1162\ If these lower fees do not result in more subscribers to 
proprietary market data, it would lead to a decline in revenues from 
proprietary market data for SROs.\1163\ Additionally, the proposed 
amendments could affect competition in the market for exchange data 
connectivity. If some current subscribers to proprietary market data 
decide to only receive consolidated market data from competing 
consolidators, they could also reduce the exchange connectivity 
services that they currently use. In turn, this could reduce the 
revenue that some exchanges earn from connectivity services. 
Additionally, new connectivity fees may be proposed for core data use 
cases, which could potentially increase or decrease the revenue 
exchanges earn from connectivity.\1164\ It is the Commission's 
understanding that revenues from proprietary market data and 
connectivity services are a substantial portion of overall revenues for 
many exchanges.\1165\ The Commission recognizes that it is possible 
that an exchange group could close some or all of its exchanges if the 
revenues from proposed consolidated market data did not increase and 
revenues from proprietary market data and connectivity services were to 
decline to a level that a given exchange or exchange group is no longer 
able to cover operating expenses. The Commission is unable to quantify 
the likelihood that an exchange will cease operating because it would 
depend on the fees and revenue allocation for consolidated market data. 
However, the Commission preliminarily believes that it is unlikely 
exchanges will be forced to leave the market.
---------------------------------------------------------------------------

    \1162\ See supra Section VI.C.4(a).
    \1163\ In addition to adjusting fees, SROs could also redesign 
their proprietary market data product lines to try and increase 
revenue. However, it is possible that demand for these new products 
would not be sufficient to offset the decline in revenues from 
proprietary market data.
    \1164\ See supra Section VI.C.4(a).
    \1165\ See supra Section VI.B.3(b).
---------------------------------------------------------------------------

    Even if an exchange were to exit, the Commission does not believe 
this would significantly impact competition in the market for trading 
services because the market is served by multiple competitors, 
including off-exchange trading venues. Consequently, if an exchange 
were to exit the market, demand is likely to be swiftly met by existing 
competitors. The Commission recognizes that small exchanges may have 
unique business models that are not currently offered by competitors, 
but the Commission preliminarily believes a competitor could create 
similar business models if demand were adequate, and if they did not do 
so, it seems likely new entrants would do so if demand were sufficient.
    Sixth, the Commission preliminarily believes that the proposed rule 
would affect competition between traders.\1166\ The Commission 
preliminarily believes that traders will be affected differently based 
on the type of market data they use when making trading decisions. 
Traders who subscribe to different types of market data can broadly be 
grouped into three categories: (1) Traders who use proprietary DOB 
feeds received directly from the SROs and self-aggregate, (2) traders 
who use market data aggregators to aggregate proprietary DOB feeds, and 
(3) traders who use core data (currently from the exclusive SIPs and, 
under the proposed rule, competing consolidators).\1167\ The Commission 
preliminarily believes that under the proposed rule the core data would 
be of higher quality, and thus the value to traders from acquiring 
proprietary DOB data would decrease.\1168\ As a result, it would be 
harder for traders who use proprietary DOB feeds (both self-aggregators 
and traders who use market data aggregators) to generate profits and 
the competition between those traders would increase. For traders who 
use core data, the Commission believes that the

[[Page 16861]]

competition between those traders would increase because the proposed 
amendments would reduce the latency and expand the information included 
in core data, which would allow those traders to devise better trading 
strategies with bigger profit potential. The Commission preliminarily 
believes that the most substantial change in competition would occur 
between traders who use proprietary DOB feeds (both self-aggregators 
and traders who use market data aggregators) and traders who use core 
data. As described, the proposed rule expands the information and 
reduces the latency of core data, thereby closing the gap between core 
data and proprietary DOB feeds. This would allow traders who use core 
data to compete on a more level playing field with traders who use 
proprietary DOB feeds. The Commission preliminarily believes that this 
would lead to a transfer of profits from traders who use proprietary 
DOB feeds to traders who use proposed consolidated market data.
---------------------------------------------------------------------------

    \1166\ In this context the term traders could refer to either 
proprietary traders executing orders on their own behalf or broker-
dealers executing orders on behalf of their clients.
    \1167\ Traders who currently subscribe to proprietary DOB feeds 
may also subscribe to the exclusive SIPs as part of their backup 
systems. However, the Commission preliminarily believes that these 
traders primarily rely on proprietary DOB feeds when making trading 
decisions because proprietary DOB feeds contain more information and 
have lower latency than the exclusive SIPs.
    \1168\ See supra Section VI.C.4(a).
---------------------------------------------------------------------------

    Seventh, the Commission preliminarily believes that the proposed 
rule changes would affect competition between off-exchange trading 
venues and exchanges in the market for trading services. As discussed 
above, the Commission preliminarily believes that the proposed 
amendments would reduce the latency of core data.\1169\ This could 
improve the competitive positions of some off-exchange trading venues 
in the market for trading services. Off-exchange trading venues that 
currently rely on the exclusive SIPs to calculate the NBBO would 
benefit from the latency reductions in the distribution of core data 
provided by the competing consolidators.\1170\ These venues would now 
receive a more timely view of the NBBO, which could improve the 
execution quality of trades that take place on these venues. This could 
make them more attractive venues to trade on and they could attract 
more order flow, from both exchanges and other off-exchange venues. 
Off-exchange trading venues that currently subscribe to proprietary 
data feeds could also see their competitive positions improve. If the 
new core data represents a viable alternative to the proprietary data 
feeds for their order executions, they could substitute core data for 
proprietary data, which could lower their costs. They might be able to 
pass along these cost reductions as reduced fees to subscribers, which 
could improve their competitive position relative to exchanges and 
other off-exchange trading venues. Reductions in the fees charged by 
these off-exchange trading venues could in turn potentially benefit 
investors if broker-dealers who subscribe to these venues passed along 
these cost savings by, in turn, reducing their fees.\1171\
---------------------------------------------------------------------------

    \1169\ See supra Section VI.C.2(c).
    \1170\ Id.
    \1171\ Broker-dealer subscribers could potentially pass along 
the cost savings from the reduction in off-exchange trading venue 
fees to investors either directly, if they reduced fees for 
investors who were clients of the broker-dealer, or indirectly, if 
they reduced fees for institutional clients, such as mutual funds, 
who, in turn, passed along the cost savings to their end investors.
---------------------------------------------------------------------------

3. Capital Formation
    The Commission preliminarily believes the proposed amendments would 
have only a modest impact on capital formation. However, the Commission 
is unable to quantify the effects on capital formation because, as 
discussed above, it is unable to quantify the additional gains from 
trade and the effects of improvements in order routing that may be 
realized from the proposed amendments.\1172\ However, in the section 
below the Commission provides a qualitative description of the effects 
it preliminarily believes the proposed amendments would have on capital 
formation and invites comments on the subject.
---------------------------------------------------------------------------

    \1172\ See supra Sections VI.C.1(b), VI.D.1.
---------------------------------------------------------------------------

    As discussed above, the Commission preliminarily believes that the 
addition of information about odd-lot quotes, depth of book, and 
auction information to core data may result in more voluntary trades 
occurring between market participants, which could lead to more 
efficient gains from trade.\1173\ Improved gains from trade may result 
in a more efficient allocation of capital, which would improve capital 
formation.
---------------------------------------------------------------------------

    \1173\ See supra Section VI.D.1.
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily believes that the 
proposed amendments would improve order execution for market 
participants who currently rely upon SIP data, which may lower their 
transaction costs.\1174\ Lower transaction costs could reduce firms' 
cost of raising capital.\1175\ This, in turn could improve capital 
formation.
---------------------------------------------------------------------------

    \1174\ See supra Sections VI.C.1(b), VI.D.1.
    \1175\ See Yakov Amihud and Haim Mendelson, Asset Pricing and 
the Bid--Ask Spread, 17 J. Fin. Econ. 223 (1986).
---------------------------------------------------------------------------

4. Request for Comments on Impact on Efficiency, Competition, and 
Capital Formation
    The Commission requests comments on its analysis of the impact of 
the proposed amendments on efficiency, competition, and capital 
formation. In particular, the Commission solicits comment on the 
following:
    276. Do you agree with the Commission's analysis of the effects the 
proposed amendments might have on efficiency, competition and capital 
formation? Why or why not? Please explain in detail.
    277. Do you believe the proposed amendments may have unintended 
consequences that are not captured by the Commission's analysis of the 
effects the proposed amendments may have on efficiency, competition and 
capital formation? Why or why not? Please explain in detail.
    278. Do you agree that the proposed amendments would lead to gains 
from trade? Do you agree that the proposed amendments would improve the 
efficiency or order execution? Do you agree that the proposed 
amendments would improve price efficiency? Do you agree that the 
proposed amendments would improve the efficiency of how core data is 
distributed? Please explain.
    279. To what extent does the gap in information between SIP data 
and proprietary DOB products affect price efficiency? Are these effects 
larger in less actively traded securities where the gap in information 
between SIP data and proprietary DOB products is larger? Please explain 
in detail.
    280. Do you believe the proposed amendments would have effects on 
efficiency that the Commission has not recognized? Please explain in 
detail.
    281. Do you agree with the Commission's analysis that the proposal 
will have a substantial impact on competition in several markets? In 
particular, do you agree that the decentralized consolidation model 
improves the competition in the market to distribute consolidated 
market data? Do you agree that the decentralized consolidation model 
creates more viable substitutes for proprietary exchange data? Do you 
agree that the proposal increases competition to provide smart order 
routing? Do you agree that the proposal could affect competition among 
exchanges to provide transaction services? Do you agree that the 
proposal could affect competition among traders? Do you agree that the 
proposal could affect competition among exchanges and off-exchange 
trading venues? Please explain in detail.
    282. Do you agree that the public disclosure of Form CC and the 
performance metrics promote competition more than if such information 
were not disclosed? Please explain.
    283. Do you agree that the extension of Regulation SCI to include 
competing consolidators could raise the barriers to entry for competing 
consolidators and reduce competition in the competing

[[Page 16862]]

consolidator market? Why or why not? Please explain in detail.
    284. Do you agree that the purchase of consolidated market data 
from a competing consolidator by the CAT would not have a significant 
effect on competition among competing consolidators? Why or why not? 
Please explain in detail.
    285. Would the public disclosure of Form CC or the performance 
metrics risk revealing any trade secrets that could harm competition? 
Please explain.
    286. Do you believe the proposed amendments would have effects on 
competition that the Commission has not recognized? Please explain in 
detail.
    287. Do you agree that the proposal would only have a modest impact 
on capital formation? Why or why not? Please explain in detail.
    288. Do you believe the proposed amendments would have effects on 
capital formation that the Commission has not recognized? Please 
explain in detail.

E. Alternatives

    The Commission considered potential alternatives to the proposed 
amendments that broadly fall into two categories: Introduce the 
decentralized consolidation model and make alternative changes to the 
core data definition, and make changes in the core data definition as 
proposed in the amendments and consider alternative models of SIP 
competition.
1. Introduce Decentralized Consolidation Model With Additional Changes 
in Core Data Definition
    The Commission considered an alternative that would introduce the 
decentralized consolidation model and expand core data more than the 
proposal does. For example, the Commission considered expanding core 
data to include information on quotations and aggregate size at all 
prices in the limit order book (``full depth of book'') in addition to 
the depth of book information contained in the proposal, i.e., five 
price levels from the protected quotes.\1176\ Alternatively, the 
Commission considered expanding core data to include information on all 
odd-lot sized quotes instead of only information on quotes at or above 
the proposed round lot size.\1177\ Under both alternatives, the 
definition of a round lot for the purposes of determining the NBBO and 
a protected quote would remain the same as in the proposed amendments, 
which means the costs and benefits associated with the changes in the 
definition of the NBBO and protected quotes would be similar to the 
proposal.\1178\
---------------------------------------------------------------------------

    \1176\ See supra Section III.C.2.
    \1177\ See supra Section III.C.1.
    \1178\ See supra Section VI.C.1(c).
---------------------------------------------------------------------------

    Relative to the proposal, full depth of book information would 
provide market participants who currently do not access proprietary DOB 
feeds, as well as market participants who currently access proprietary 
DOB feeds and would have switched to using consolidated market data 
under the proposal, with additional information on liquidity provision 
across more price levels. To the extent that these market participants 
can utilize full depth of book information, the Commission 
preliminarily believes that this alternative could result in increased 
benefits to such market participants relative to the proposal.\1179\ 
Certain commenters on the Roundtable stated that without full depth of 
book information, broker-dealers may not be able to provide best 
execution to their clients,\1180\ indicating that full depth of book 
information would provide valuable information to market participants. 
However, as discussed above, the Commission preliminarily believes that 
the marginal benefit of including additional information on price 
levels further away from the best quotes may decrease as the price 
level moves away from the best quote because orders at these price 
levels are less likely to execute.\1181\
---------------------------------------------------------------------------

    \1179\ This alternative could increase costs relative to the 
proposal for market participants that access full depth of book 
information and execute trading that earn profits at the expense of 
other market participants who do not access this information. As 
discussed above, this cost would represent a partial transfer from 
traders who currently have access to depth of book to those who do 
not. See supra Section VI.C.1(b)(iv).
    \1180\ See supra notes 284-285.
    \1181\ See supra Sections VI.C.1(b)(ii), III.C.2.
---------------------------------------------------------------------------

    Relative to the proposal, the inclusion of full depth of book 
information in core data would increase the ability of market 
participants to use it as a substitute for proprietary DOB feeds.\1182\ 
Currently, market participants interested in full depth of book data 
rely on proprietary DOB feeds offered by exchanges, which provide 
varying degrees of the depth of book information. To the extent that 
there are market participants who utilize full depth of book 
information via proprietary DOB feeds in trading, this alternative 
could increase the benefits for some of these market participants 
relative to the proposal by potentially reducing their data costs if 
they would switch to using core data under this alternative but would 
not have done so under the proposal. Subscribers of proprietary DOB 
feeds would realize these cost savings if they switched to receiving 
proposed consolidated market data through a competing consolidator or 
if they registered as a self-aggregator.\1183\
---------------------------------------------------------------------------

    \1182\ Including full depth of book information in core data 
would not make it a perfect substitute for all proprietary DOB 
feeds. For example, some proprietary DOB feeds contain more detailed 
information than full depth of information, such as messages on 
individual orders.
    \1183\ See supra Section VI.C.2(b).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the alternative to 
include full depth of the book in core data would result in greater 
costs for exchanges than would the proposal. To the extent that the 
alternative results in fewer market participants subscribing to 
proprietary DOB data or purchasing connectivity services from the 
exchanges than under the proposal, exchanges' business for their 
proprietary feeds and connectivity services could be less 
profitable.\1184\ Additionally, to the extent that not all exchanges 
sell full depth of book, certain exchanges would incur additional costs 
to set up systems and produce full depth of book information to be 
included in the core data. However, the Commission is unable to 
quantify this cost because it lacks information on the modifications 
exchanges would need to make to their systems in order to provide full 
depth of book information, but the Commission invites comments on the 
issue.
---------------------------------------------------------------------------

    \1184\ More broadly, this could have differential effects 
between exchanges who derive significant revenue from proprietary 
data feeds and those who derive significant revenue primarily from 
SIP revenue. These effects would also depend on the NMS plan(s) fees 
for consolidated market data as well as their method for allocating 
revenue received from consolidated market data among the SROs. See 
supra Section VI.C.4(a).
---------------------------------------------------------------------------

    Compared to the proposal, this alternative could result in 
additional costs for competing consolidators to create infrastructure 
and expand capacity to distribute full depth of book information.\1185\ 
The costs are likely to vary substantially according to the existing 
infrastructure of the entity seeking to be a competing consolidator. 
The Commission preliminarily believes that these incremental costs for 
market data aggregators and existing exclusive SIPs will be small, 
because they already work with proprietary DOB data. However, the 
Commission invites comments on the issue.
---------------------------------------------------------------------------

    \1185\ See supra Section VI.C.2(d).
---------------------------------------------------------------------------

    Additionally, including full depth of book information would 
require market participants who subscribed to core data and wished to 
receive the additional depth of book information to make more extensive 
upgrades to their systems than

[[Page 16863]]

under the proposal. However, the Commission is unable to estimate the 
associated costs because it does not have access to information about 
the infrastructure expenses a market participant incurs to process 
market data and because of the likelihood that such costs vary 
substantially according to the existing infrastructure of the market 
participant, but the Commission invites comments on the issue. To the 
extent that some market participants who subscribe to the exclusive 
SIPs do not need full depth of book information, they would not need to 
expand their own proprietary technology or that of a third-party vendor 
to process the full depth of the book data. Therefore, this alternative 
would not result in additional costs for these market participants 
compared to the proposal.
    In addition to the alternative of adding full depth of book 
information, the Commission also considered expanding core data to 
include information on all odd-lot sized quotes instead of only 
information on quotes at or above the proposed round lot size.\1186\ 
The proposed rule is specifically designed to leave out odd-lot quotes 
for low priced stocks. Under this alternative, market participants who 
subscribe to core data would have odd-lot information for low priced 
stocks. Furthermore, compared to the proposal, this alternative would 
provide market participants who subscribe to core data with more 
detailed information about at which prices odd-lot liquidity exists 
(i.e., instead of rolling up odd-lot quotes at different prices to the 
highest price) for higher priced stocks. To the extent that market 
participants who currently do not have access to this information 
utilize the more detailed odd-lot information in order routing and 
execution, this alternative could improve their execution quality 
relative to the proposal.\1187\ However, as discussed above,\1188\ 
Commission and commenter analysis shows that there is a higher 
percentage of odd-lot trades in higher priced stocks. This could imply 
that there are fewer odd-lot quotes present in low priced stocks, which 
could mean that the marginal benefit of including odd-lot information 
in low priced stocks may be smaller than including it in stocks with 
higher prices.
---------------------------------------------------------------------------

    \1186\ See supra Section III.C.1.
    \1187\ This alternative could increase costs relative to the 
proposal for market participants that access all odd-lot quotes and 
execute trading that earn profits at the expense of other market 
participants who do not access this information. As discussed above, 
this cost would represent a partial transfer from traders who 
currently have access to all odd-lot quotes to those who do not. See 
supra Section VI.C.1(b)(iv).
    \1188\ See supra note 178 and accompanying text.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the inclusion of all 
odd-lot data would not significantly change the processing costs for 
competing consolidators relative to the proposal. Under the current 
proposal, competing consolidators would already be processing all odd-
lot data in order to calculate exchange round lot BBOs and the round 
lot NBBO that would be contained in the proposed core market data. 
Competing consolidators may incur some additional infrastructure 
expenses in order to disseminate the additional message volume 
associated with all odd-lot information to market participants. These 
costs are likely to vary according to the existing infrastructure of 
the entity seeking to be a competing consolidator, but the Commission 
preliminarily believes that these additional infrastructure costs are 
likely to be small.\1189\ However, the Commission invites comments on 
the issue.
---------------------------------------------------------------------------

    \1189\ See supra Section VI.C.2(d).
---------------------------------------------------------------------------

    Additionally, the Commission preliminarily estimates that market 
participants and data vendors would need to make additional upgrades to 
their systems beyond the proposal in order to receive the additional 
odd-lot data. However, the Commission does not have access to 
information about the infrastructure expenses a market participant 
incurs to process market data and because of the likelihood that such 
costs vary substantially according to the existing infrastructure of 
market participants, but the Commission invites comments on the issue.
2. Introduce Changes in Core Data and Introduce a Distributed SIP Model
    The Commission considered an alternative that would expand the core 
data as proposed and would introduce a distributed SIP model whereby 
the current exclusive SIP processors would establish multiple instances 
of their systems in multiple data centers.\1190\ As some commenters and 
panelists suggested at the Roundtable,\1191\ this alternative would 
achieve a similar reduction in exclusive SIP geographic latency to the 
proposal by allowing firms to consume data under the current structure 
without making any changes or to consume data at the nearest exclusive 
SIP instance depending on the firms' latency concerns. However, this 
alternative would still provide exclusive rights to one operator to 
provide exclusive SIP services for a given tape.
---------------------------------------------------------------------------

    \1190\ See also a discussion about a single SIP alternative, 
supra Section IV.C.2.
    \1191\ See supra Section IV.C.1(a).
---------------------------------------------------------------------------

    This Commission preliminarily believes that this alternative would 
produce lower benefits compared to the proposed decentralized 
consolidation model.\1192\ Under this alternative, the exclusive SIPs 
would not be subject to the same competitive forces that competing 
consolidators may be subject to under the decentralized consolidation 
model.\1193\ This lack of competition would reduce the incentives to 
innovate and would not improve efficiency or reduce the transmission 
and aggregation latencies of core data as much as the proposal. If core 
data does not achieve the same overall latency reduction as under the 
proposal, then market participants would be less likely to substitute 
using core data for proprietary data than they would be under the 
proposal. This could mean that the decline in profits from exchanges' 
proprietary data fees may not be as large as they would be under the 
proposal.\1194\
---------------------------------------------------------------------------

    \1192\ See supra Sections VI.C.2, IV.C.1.
    \1193\ See supra Sections VI.C.2, VI.D.2.
    \1194\ See supra Section VI.C.4(a).
---------------------------------------------------------------------------

    Under this alternative, the exclusive SIPs would still need to make 
upgrades to their systems to account for the expansion of core data and 
would still need to install systems in multiple data centers. The 
Commission preliminarily believes that the costs of these SIP system 
upgrades would be similar to those under the proposal.\1195\ However, 
under this alternative, market participants may experience higher costs 
to access core data compared to the proposal. Instead of having the 
option to receive all core data from one competing consolidator, as 
they would under the proposal, market participants would still need to 
receive data from both exclusive SIP plan processors.\1196\ This means 
that under this alternative, the total price market participants would 
pay to access core data may be greater than under the proposal because 
it would include the costs of the two plan processors to aggregate and 
transmit the data. Under the proposal, the total price market 
participants would pay to receive core data may only include the costs 
of one processor, because market participants would have the option to 
receive all of their core data from one competing consolidator.\1197\
---------------------------------------------------------------------------

    \1195\ See supra Section VI.C.2(d).
    \1196\ See supra Section VI.B.2.
    \1197\ See supra Section VI.C.2(c).

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

[[Page 16864]]

3. Require Competing Consolidators' Fees B e Subject to the 
Commission's Approval
    The Commission considered an alternative to the decentralized 
consolidation model that would require competing consolidators' fees to 
be subject to the Commission's regulatory approval.
    The Commission preliminarily believes that, relative to the 
proposal, this alternative would potentially reduce the risk and 
uncertainty surrounding the total price of consolidated market data. 
This alternative would provide for Commission review and approval of 
the fees of competing consolidators. Therefore, compared to the 
proposal, this alternative could reduce the risk that market 
participants are exposed to unreasonable fees, which could reduce the 
risk that some market participants or data vendors would no longer 
provide services in the equity market because the price of consolidated 
market data becomes too high.\1198\
---------------------------------------------------------------------------

    \1198\ See supra Section VI.C.2(d).
---------------------------------------------------------------------------

    The Commission preliminarily believes, however, that this 
alternative would impose additional regulatory burdens on the competing 
consolidator business compared to the proposal, and may inhibit 
competing consolidators from being able to respond effectively and 
quickly to free market forces. These burdens would reduce the incentive 
for firms to become competing consolidators and lead to less robust 
competition in the decentralized consolidation model than under the 
proposal.\1199\ With less competitive forces to discipline competing 
consolidators' service fees, competing consolidators' would have less 
incentive to innovate in their consolidating business. Moreover, less 
competing consolidators in the market would reduce the extent to which 
the pricing is based on market forces.
---------------------------------------------------------------------------

    \1199\ See supra Section VI.C.2(a).
---------------------------------------------------------------------------

4. Do Not Extend Regulation SCI To Include Competing Consolidators
    The Commission considered an alternative that would not extend 
Regulation SCI to include competing consolidators. Under this 
alternative, the Commission would have required competing consolidators 
to establish, maintain, and enforce written policies and procedures 
reasonably designed to ensure that its systems involved in the 
collection, consolidation, and dissemination of consolidated market 
data have levels of capacity, integrity, resiliency, availability, and 
security adequate to maintain operational capability and to assure the 
prompt, accurate, and reliable delivery of consolidated market data. 
These policies and procedures could address, among other things, data 
security and integrity; reasonable current and future capacity 
estimates; business continuity and disaster recovery plans; periodic 
capacity stress tests of critical systems; procedures to review and 
keep current system development and testing methodology; periodic 
reviews to assess the vulnerability of its systems and operations to 
internal and external threats, physical hazards, and natural disasters; 
and an annual independent audit to ensure that these requirements are 
satisfied, together with a review by senior management of a report 
containing the commendations and conclusions of the independent review. 
The Commission preliminarily believes that this alternative would 
reduce some of the benefits as well as some of the costs compared to 
extending Regulation SCI to include competing consolidators.\1200\
---------------------------------------------------------------------------

    \1200\ See supra Section VI.C.2(e).
---------------------------------------------------------------------------

    The Commission preliminarily believes that this alternative could 
result in some competing consolidators producing systems that would be 
less secure and resilient than they would be under the proposed 
amendments because they would not be subject to all of the requirements 
of being an SCI entity.\1201\ If competing consolidators produce less 
secure and resilient systems compared to if they were SCI entities, 
then there could be a greater risk of more market disruptions due to 
systems issues in competing consolidators compared to the proposed 
amendments.\1202\ Additionally, if a competing consolidator does 
experience a systems issue, it could result in more severe and longer 
disruptions compared to the proposed amendments. However, the increase 
in competing consolidator systems issues compared to the proposal may 
not be significant. Under this alternative, competing consolidators 
would still have to establish policies and procedures to ensure that 
their systems have levels of capacity, integrity, resiliency, 
availability, and security adequate to maintain operational capability. 
They would also still need to post information on systems issues on 
their websites as well as monthly reports containing statistics on 
their capacity and systems availability.\1203\ This would place 
competitive pressure on competing consolidators to ensure that their 
systems are reliable and resilient. Otherwise, they could lose 
subscribers to competing consolidators that had more reliable and 
resilient systems.
---------------------------------------------------------------------------

    \1201\ See supra Section VI.C.2(e)(i).
    \1202\ Id.
    \1203\ See supra Section VI.C.3(a).
---------------------------------------------------------------------------

    The Commission preliminarily believes that this alternative would 
result in lower costs for some competing consolidators compared to the 
proposed amendments. Under this alternative, competing consolidators 
would not incur the costs that are associated with SCI entities that 
are discussed above.\1204\ Instead, the Commission preliminarily 
estimates that requiring a competing consolidator to establish, 
maintain, and enforce written policies and procedures reasonably 
designed to ensure that its systems involved in the collection, 
consolidation, and dissemination of consolidated market data have 
levels of capacity, integrity, resiliency, availability, and security 
adequate to maintain operational capability and to assure the prompt, 
accurate, and reliable delivery of consolidated market data would 
require an average initial expense of $68,710 per competing 
consolidator.\1205\ The Commission based these estimates upon those it 
used with regards to establishing similar policies and procedures for 
Security-Based Swap Data Repository Registration, Duties and Core 
Principles.\1206\ Once these policies and procedures are established, 
the Commission preliminarily estimates that, on average, a competing 
consolidator will incur an ongoing cost of $21,810 annually to maintain 
these policies and procedures.\1207\
---------------------------------------------------------------------------

    \1204\ See supra Section VI.C.2(e)(ii).
    \1205\ The Commission estimates a total of 210 initial burden 
hours per competing consolidator. The Commission estimates a total 
monetized initial burden of $68,710 per competing consolidator. The 
Commission derived this estimate based on per hour figures from 
SIFMA's Management & Professional Earnings in the Securities 
Industry 2013, modified by Commission staff to account for an 1,800-
hour work-year and inflation, and multiplied by 5.35 to account for 
bonuses, firm size, employee benefits and overhead: [(Compliance 
Manager at $310 for 80 hours) + (Attorney at $417 for 80 hours) + 
(Sr. Systems Analyst at $285 for 25 hours) + (Operations Specialist 
at $137 for 25 hours)] = 210 initial burden hours per competing 
consolidator and $68,710.
    \1206\ See Securities Exchange Act Release No. 74246, supra note 
554, at 14523; 17 CFR 242.13n-6.
    \1207\ The Commission preliminarily estimates that it will take, 
on average, 60 annual hours to maintain these policies and 
procedures per competing consolidator. The Commission estimates the 
monetized burden for this requirement to be $21,810. The Commission 
derived this estimate based on per hour figures from SIFMA's 
Management & Professional Earnings in the Securities Industry 2013, 
modified by Commission staff to account for an 1,800-hour work-year 
and inflation, and multiplied by 5.35 to account for bonuses, firm 
size, employee benefits and overhead: [(Compliance Manager at $310 
for 30 hours) + (Attorney at $417 for 30 hours)] = 60 annual burden 
hours per competing consolidator and $21,810.

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

[[Page 16865]]

    The Commission preliminarily believes that, compared to the 
proposed amendments, this would lower the barriers to entry for new 
competing consolidators who are not currently SCI entities, including 
market data aggregators.\1208\ This could result in more firms becoming 
competing consolidators and could increase competition in the competing 
consolidator market compared to the proposal. Increased competition 
could lower the costs and increase the speed and quality of 
consolidated market data compared to the proposed amendments. This, in 
turn, could make consolidated market data a more viable substitute for 
proprietary data feeds and result in greater competition between 
consolidated market data and proprietary data feeds compared to the 
proposed amendments.
---------------------------------------------------------------------------

    \1208\ See supra Sections VI.C.2(a)(i)b., VI.D.2.
---------------------------------------------------------------------------

5. Require Competing Consolidators To Submit Form CC in the EDGAR 
System Using the Inline XBRL Format
    The Commission considered the alternative of requiring competing 
consolidators to submit Form CC using the Commission's EDGAR system and 
using the Inline XBRL format. Requiring this could create benefits for 
market participants by enabling more efficient retrieval, aggregation 
and analysis of disclosed information and facilitating comparisons 
across competing consolidators. This alternative also could allow a 
competing consolidator to efficiently benchmark key aspects of its 
operations (e.g., operational capabilities or fee structures) against 
the rest of the potential competing consolidator population. However, 
the benefits to market participants of efficient aggregation and 
comparison and the benefits to potential competing consolidators of 
efficient benchmarking depend on the number of competing consolidators 
that ultimately register with the Commission, which we estimate to be 
relatively low at twelve.
    Additionally, many potential competing consolidators may not be 
familiar with Inline XBRL and thus could incur increased costs if they 
need to learn Inline XBRL compared to the proposal's requirement to 
submit Form CC and various exhibits through EFFS--a system with which 
we believe many potential competing consolidators are already familiar. 
However, to the extent that potential competing consolidators already 
have experience filing information in EDGAR in an XML format, costs 
associated with learning a new system and format may be mitigated. We 
request comment on the specific benefits and costs of filing Form CC in 
EDGAR using the Inline XBRL format.
6. Require Competing Consolidators To Submit Monthly Disclosures in the 
EDGAR System Using the Inline XBRL Format
    The Commission considered the alternative of requiring competing 
consolidators to submit their monthly performance metrics and 
operational information using the Commission's EDGAR system and using 
the Inline XBRL format. This alternative could create benefits for 
market participants by having the monthly information of each competing 
consolidator in a centralized location. Additionally, it could allow 
for more efficient retrieval, aggregation and analysis of disclosed 
information and facilitate comparisons across competing consolidators 
and time periods. To the extent there are a small number of potential 
competing consolidators, the magnitude of such benefits would be 
reduced.
    Additionally, competing consolidators would incur increased costs 
to file the information with the Commission compared to the proposal's 
requirement to post the monthly information on the competing 
consolidator's website in any format. The difference in costs would 
likely vary across competing consolidators, depending on the systems 
and processes they currently have in place, such as for internal 
reporting, posting of website updates, and submission of regulatory 
filings, and the manner in which competing consolidators currently 
maintain data required for the additional disclosures.
    In addition, similar to submitting Form CC information on EDGAR 
using the Inline XBRL format, competing consolidators may need to learn 
Inline XBRL. We request comment on the specific benefits and costs of 
filing the monthly disclosures in EDGAR using the Inline XBRL format.
7. Prescribing the Format of NMS Information
    The Commission considered an alternative in which it would 
prescribe a single format that SROs would use to provide NMS 
information to competing consolidators and self-aggregators. Each SRO 
would still be required to make all methods of access available to 
competing consolidators and self-aggregators as such SRO makes 
available to any other person.\1209\ Each SRO would still be able to 
offer proprietary data products in other formats.
---------------------------------------------------------------------------

    \1209\ See supra note 428.
---------------------------------------------------------------------------

    By prescribing the format, the Commission could better ensure 
consistency of the data. Compared to the proposal, a standard format 
could reduce the costs for competing consolidators and self-aggregators 
to aggregate the data to create consolidated market data. However, the 
Commission preliminarily believes that these costs may not be 
significantly reduced. As discussed above, the SROs currently use a 
variety of formats for their proprietary data feeds and some broker-
dealers, market data aggregators, and the SIPs are already adept and 
experienced in aggregating and normalizing the data across different 
formats.\1210\ Therefore, some potential competing consolidators and 
self-aggregators may not experience significant cost reductions 
relative to the proposal if the Commission required that SROs provide 
NMS information in a prescribed format.
---------------------------------------------------------------------------

    \1210\ See supra Section VI.B.2(b).
---------------------------------------------------------------------------

    Requiring a single format for SROs to deliver NMS information to 
competing consolidators and self-aggregators would also increase the 
costs to SRO's compared to the proposal. SROs would incur a greater 
cost to conform their existing data to a format they do not already 
use. It could also increase the costs of exchanges making future 
changes to their data because they may need to make alterations to both 
their proprietary data products and to data in the standard format they 
would supply to competing consolidators and self-aggregators, assuming 
the changes would need to be included in consolidated market data. 
Additionally, compared to the proposal, this increased cost could 
reduce the likelihood that the effective NMS plan(s) for NMS stocks or 
SROs introduce additional elements into consolidated data in the 
future.\1211\
---------------------------------------------------------------------------

    \1211\ See supra Sections III.C, III.D.
---------------------------------------------------------------------------

    Requiring the SROs to deliver data to competing consolidators and 
self-aggregators in a single format could also impact the latency 
between consolidated market data and aggregated proprietary DOB feeds. 
On the one hand, receiving all of the data in a single format should 
expedite the aggregation and normalization process for consolidated 
data. This could potentially reduce the latency differential between 
consolidated market data and aggregated proprietary data feeds compared 
to the proposal. However, it is possible that the format of certain 
proprietary data feeds may allow for faster aggregation initially than 
the single format specified by the Commission because of certain SROs'

[[Page 16866]]

existing familiarity with its format. If this occurred, it could 
increase the latency differential compared to the proposal.
    In addition, if the SROs are required to transform their existing 
data to a different format, it could hinder the timeliness of the data 
competing consolidators receive compared to data delivered via the 
proprietary feeds. Any changes in the timeliness with which the 
competing consolidators receive the data or any difference in latency 
between consolidated core data and proprietary data feeds would affect 
the viability of consolidated core data as a substitute for proprietary 
data feeds and affect many of the benefits of the decentralized 
consolidation model.\1212\ If the latency differential is reduced, more 
market participants may substitute consolidated market data for 
proprietary data feeds and the benefits of the decentralized 
consolidation model could increase compared to the proposal. If 
competing consolidators receive less timely data or the latency 
differential increases, fewer market participants would switch to 
consolidated market data and the benefits would be smaller than under 
the proposal.
---------------------------------------------------------------------------

    \1212\ See supra Section VI.C.2(c).
---------------------------------------------------------------------------

8. Request for Comments on Alternatives
    The Commission requests comments on its analysis of alternatives to 
the proposed amendments. In particular, the Commission solicits comment 
on the following:
    289. Should the Commission adopt an alternative approach? Why or 
why not? What alternatives should the Commission consider? What are the 
benefits and costs of such an approach? Please explain in detail.
    290. Do you agree with the Commission's analysis of the alternative 
to further increase the content of core data to include the full depth 
of book and/or all odd-lot quotes? Would additional depth of book 
information, beyond what is include in the proposal, be valuable? Why 
or why not? How much larger would consolidated market data be if it 
included the full depth of book and/or all odd-lots? How much larger 
than the proposal would the costs of this alternative be for exchanges, 
competing consolidators, and other market participants? Please provide 
estimates, if possible.
    291. Do you agree with the Commission's analysis of the distributed 
SIP alternative? Why or why not? Please explain. How would the 
competitive effects of the distributed SIP alternative compare to the 
competitive effects of the proposed decentralized consolidated model? 
As such, how would the benefits of the distributed SIP model compare to 
the benefits of the decentralized consolidation model? How would the 
costs of the distributed SIP model compare to the costs of the 
decentralized consolidation model? How would the distributed SIP model 
affect aggregate data fees paid by market participants for market data? 
How would the distributed SIP model affect the types of products and 
services available to purchase consolidated data?
    292. Do you agree with the Commission's analysis of the relative 
economic effects of the alternative to not extend Regulation SCI to 
include competing consolidators? Why or why not? Please explain. Would 
this alternative increase the risk of a competing consolidator 
experiencing a system disruption? If so, how economically significant 
would this increase be? Would this alternative lower the barriers to 
entry for competing consolidators compared to the proposed amendments? 
Would this alternative result in more new competing consolidators? 
Would this alternative increase competition among competing 
consolidators? Would this alternative increase innovation in the 
competing consolidator market? Would this alternative increase 
competition between consolidated market data and proprietary depth of 
book feeds? Please explain and provide estimates if possible.
    293. Do you agree with the Commission's analysis of the relative 
economic effects of the alternative to require that competing 
consolidator fees be subject to Commission approval? Why or why not? 
Please explain. Should the Commission be concerned that the proposal 
does not require an approval process for competing consolidators' 
market data fees? What is the risk and how large is that risk? Would 
the alternative reduce this risk? If so, how economically significant 
would this reduction be? How burdensome would it be for competing 
consolidators to have to obtain Commission approval for their fees? 
Please explain and provide cost estimates if possible.
    294. Do commenters agree with the Commission's analysis of the 
alternative to require all disclosures be filed in the EDGAR system 
using the Inline XBRL format? Why or why not? Please explain in detail. 
Would the alternative further help market participants evaluate and 
compare the merits of competing consolidators? Would the alternative 
promote consistency relative to the proposal? Would the disclosures be 
more accessible in EDGAR than if they were on the Commission's website 
or on competing consolidators' websites? Please explain in detail. What 
are the costs of using EDGAR and the Inline XBRL format relative to the 
proposal? Please explain and provide estimates if possible.
    295. Do you agree with the Commission's analysis of the relative 
economic effects of the alternative in which the Commission would 
prescribe a single format that SROs would use to provide NMS 
information to competing consolidators and self-aggregators? Why or why 
not? Please explain. What effects would the Commission prescribing NMS 
information be provided in a single format have on the costs of SROs, 
competing consolidators, and self-aggregators? How economically 
significant would these effects be? What effects would the alternative 
have on the latency of consolidated market data compared to aggregated 
proprietary data feeds? What effects would the alternative have on the 
timeliness of the data competing consolidators and self-aggregators 
would receive? Please explain and provide estimates if possible.
    296. Are there other reasonable alternatives for the proposed 
amendments to Regulation NMS to update the content of the consolidated 
market data and introduce competition into the distribution of that 
consolidated market data? If so, please provide additional alternatives 
and how their costs and benefits, as well as their potential impacts on 
the promotion of efficiency, competition, and capital formation, would 
compare to the impact of the proposed amendments.
    297. Is the competing consolidator approach necessary to achieve 
the economic benefits of the proposal related to expanding consolidated 
market data? Are there alternatives to the decentralized consolidation 
model with competing consolidators that would achieve the Commission's 
objectives at lower cost? If so, how would their costs and benefit 
compare to the proposed decentralized consolidation model? Please 
explain and provide estimates if possible.

F. Request for Comments on the Economic Analysis

    The Commission is sensitive to the potential economic effects, 
including the costs and benefits, of the proposed amendments to 
Regulation NMS to update the content of core data and introduce the 
decentralized consolidation model into the distribution of consolidated 
market data. The Commission has identified

[[Page 16867]]

above certain costs and benefits associated with the proposal and 
requests comment on all aspects of its preliminary economic analysis, 
including with respect to the specific questions posed above. The 
Commission encourages commenters to identify, discuss, analyze, and 
supply relevant data, information, or statistics regarding any such 
costs or benefits.

VII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996 (``SBREFA''),\1213\ the Commission requests comment on the 
potential effect of the proposed amendments on the United States 
economy on an annual basis. The Commission also requests comment on any 
potential increases in costs or prices for consumers or individual 
industries, and any potential effect on competition, investment, or 
innovation. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.
---------------------------------------------------------------------------

    \1213\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C., and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

VIII. Regulatory Flexibility Certification

    The Regulatory Flexibility Act (``RFA'') \1214\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small entities. Section 603(a) \1215\ of the Administrative 
Procedure Act,\1216\ as amended by the RFA, generally requires the 
Commission to undertake a regulatory flexibility analysis of all 
proposed rules, or proposed rule amendments, to determine the impact of 
such rulemaking on ``small entities.'' \1217\ Section 605(b) of the RFA 
states that this requirement shall not apply to any proposed rule or 
proposed rule amendment which, if adopted, would not have a significant 
economic impact on a substantial number of small entities.\1218\
---------------------------------------------------------------------------

    \1214\ 5 U.S.C. 601 et seq.
    \1215\ 5 U.S.C. 603(a).
    \1216\ 5 U.S.C. 551 et seq.
    \1217\ Although Section 601(b) of the RFA defines the term 
``small entity,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
``small entity'' for purposes of Commission rulemaking in accordance 
with the RFA. Those definitions, as relevant to this proposed 
rulemaking, are set forth in Rule 0-10, 17 CFR 240.0-10.
    \1218\ See 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    The proposed rule would apply to national securities exchanges 
registered with the Commission under Section 6 of the Exchange Act, 
national securities associations registered with the Commission under 
Section 15A of the Exchange Act, and competing consolidators. None of 
the exchanges registered under Section 6 that would be subject to the 
proposed amendments are ``small entities'' for purposes of the 
RFA.\1219\ There is only one national securities association, and the 
Commission has previously stated that it is not a small entity as 
defined by 13 CFR 121.201.\1220\ For purposes of the Commission 
rulemaking in connection with the RFA \1221\ as it relates to competing 
consolidators, a small entity includes a SIP that ``(1) Had gross 
revenues of less than $10 million during the preceding fiscal year (or 
in the time it has been in business, if shorter); (2) Provided service 
to fewer than 100 interrogation devices or moving tickers at all times 
during the preceding fiscal year (or in the time that it has been in 
business, if shorter); and (3) Is not affiliated with any person (other 
than a natural person) that is not a small business or small 
organization under this section.'' \1222\ The Commission preliminarily 
believes that no competing consolidators would be ``small entities'' 
for purposes of the RFA.
---------------------------------------------------------------------------

    \1219\ See 17 CFR 240.0-10(e). Paragraph (e) of Rule 0-10 states 
that the term ``small business,'' when referring to an exchange, 
means any exchange that has been exempted from the reporting 
requirements of Rule 601 of Regulation NMS, 17 CFR 242.601, and is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization as defined in Rule 0-10. 
Under this standard, none of the exchanges subject to the proposed 
amendment to Rule 608 is a ``small entity'' for the purposes of the 
RFA. See also Securities Exchange Act Release Nos. 82873 (Mar. 14, 
2018), 83 FR 13008, 13074 (Mar. 26, 2018) (File No. S7-05-18) 
(Transaction Fee Pilot for NMS Stocks Proposed Rule); 55341 (May 8, 
2001), 72 FR 9412, 9419 (May 16, 2007) (File No. S7-06-07) (Proposed 
Rule Changes of Self-Regulatory Organizations Proposing Release).
    \1220\ See, e.g., Securities Exchange Act Release No. 62174 (May 
26, 2010), 75 FR 32556, 32605 n.416 (June 8, 2010) (``FINRA is not a 
small entity as defined by 13 CFR 121.201.'').
    \1221\ See supra note 1217.
    \1222\ 17 CFR 240.0-10(g).
---------------------------------------------------------------------------

    For the above reasons, the Commission certifies that the proposed 
amendments to Rules 600 and 603 and the new Rule 614, if adopted, would 
not have a significant economic impact on a substantial number of small 
entities for purposes of the RFA.
    The Commission invites commenters to address whether the proposed 
rules would have a significant economic impact on a substantial number 
of small entities, and, if so, what would be the nature of any impact 
on small entities. The Commission requests that commenters provide 
empirical data to support the extent of such impact.

IX. Statutory Authority

    Pursuant to the Exchange Act, and particularly Sections 3(b), 5, 6, 
11A, 15, 17, and 23(a) thereof, 15 U.S.C. 78c, 78e, 78f, 78k-1, 78o, 
78q, and 78w(a), the Commission proposes to amend Sections 240.3a51-1, 
240.13h-1, 242.105, 242.201, 242.204, 242.600, 242.602, 242.603, 
242.611, and 242.1000 of Chapter II of Title 17 of the Code of Federal 
Regulations and proposes Rule 614, as set forth below.

List of Subjects

17 CFR Part 240

    Brokers, Dealers, Registration, Securities.

17 CFR Part 242 and 249

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons stated in the preamble, the Commission is proposing 
to amend title 17, Chapter II of the Code of Federal Regulations as 
follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The authority citation for part 240 continues to read in part as 
follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78ll, 78mm, 80a-20, 
80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, 7201 et seq., and 
8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; 
Pub. L. 111-203, 939A, 124 Stat. 1376, (2010); and Pub. L. 112-106, 
sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *


Sec.  240.3a51-1  [Amended].

0
2. In Sec.  240.3a51-1, amend paragraph (a) by removing the text 
``Sec.  242.600(b)(48)'' and adding in its place ``Sec.  
242.600(b)(55)''.


Sec.  240.13h-1  [Amended].

0
3. In Sec.  240.13h-1, amend paragraph (a)(5) by removing the text 
``Sec.  242.600(b)(47)'' and adding in its place ``Sec.  
242.600(b)(54)''.

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER 
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
4. The authority citation for part 242 continues to read as follows:

    Authority:  15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 
78q(a),

[[Page 16868]]

78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and 80a-37.


Sec.  242.105  [Amended].

0
5. Amend Sec.  242.105 by:
0
a. In paragraph (b)(1)(i)(C) removing the text ``Sec.  242.600(b)(23)'' 
and adding in its place ``Sec.  242.600(b)(29)'' and
0
b. In paragraph (b)(1)(ii) removing the text ``Sec.  242.600(b)(68)'' 
and adding in its place ``Sec.  242.600(b)(76)''.


Sec.  242.201  [Amended].

0
6. Amend Sec.  242.201 by:
0
a. In paragraph (a)(1) removing the text ``Sec.  242.600(b)(48)'' and 
adding in its place ``Sec.  242.600(b)(55)'';
0
b. In paragraph (a)(2) removing the text ``Sec.  242.600(b)(23)'' and 
adding in its place ``Sec.  242.600(b)(29)'';
0
c. Amending paragraph (a)(3) by removing the text ``the term ``listing 
market'' as defined in the effective transaction reporting plan for the 
covered security'' and adding in its place ``the term ``primary listing 
exchange'' as defined in Sec.  242.600(b)(67)'';
0
d. In paragraph (a)(4) removing the text ``Sec.  242.600(b)(43)'' and 
adding in its place ``Sec.  242.600(b)(50)'';
0
e. In paragraph (a)(5) removing the text ``Sec.  242.600(b)(51)'' and 
adding in its place ``Sec.  242.600(b)(58)'';
0
f. In paragraph (a)(6) removing the text ``Sec.  242.600(b)(59)'' and 
adding in its place ``Sec.  242.600(b)(66)'';
0
g In paragraph (a)(7) removing the text ``Sec.  242.600(b)(68)'' and 
adding in its place ``Sec.  242.600(b)(76)''; and
0
h. In paragraph (a)(9) removing the text ``Sec.  242.600(b)(82)'' and 
adding in its place ``Sec.  242.600(b)(93)''.
0
i. Amending paragraph (b)(1)(ii) by removing the text ``by a plan 
processor'';
0
j. Amending paragraph (b)(3) by removing the text ``notify the single 
plan processor responsible for consolidation of information for the 
covered security pursuant to Sec.  242.603(b). The single plan 
processor must then disseminate this information'' and adding in its 
place ``make such information available as provided in Sec.  
242.603(b)''.


Sec.  242.204  [Amended].

0
7. In Sec.  242.204, paragraph (g)(2) is amended by removing the text 
``Sec.  600(b)(68) of Regulation NMS (17 CFR 242.600(b)(68))'' and 
adding in its place ``Sec.  600(b)(76) of Regulation NMS (17 CFR 
242.600(b)(76))''.
0
8. Amend Sec.  242.600 by:
0
a. Redesignating paragraphs (b)(72) through (87) as paragraphs (b)(83) 
through (98);
0
b. Adding new paragraphs (b)(81) and (82);
0
c. Redesignating paragraphs (b)(69) through (71) as paragraphs (b)(78) 
through (80);
0
d. Adding new paragraph (b)(77);
0
e. Redesignating paragraphs (b)(60) through (68) as paragraphs (b)(68) 
through (76);
0
f. Adding new paragraph (b)(67);
0
g. Redesignating paragraphs (b)(26) through (59) as paragraphs (b)(33) 
through (66);
0
h. Adding new paragraph (b)(32);
0
i. Redesignating paragraphs (b)(20) through (25) as paragraphs (b)(26) 
through (31);
0
j. Adding new paragraph (b)(25);
0
k. Redesignating paragraphs (b)(16) through (19) as paragraphs (b)(21) 
through (24);
0
l. Adding new paragraphs (b)(19) and (20);
0
m. Redesignating paragraphs (b)(14) and (15) as paragraphs (b)(17) and 
(18);
0
n. Adding new paragraph (b)(16);
0
o. Redesignating paragraphs (b)(4) through (13) as paragraphs (b)(6) 
through (15);
0
p. Adding new paragraph (b)(5);
0
q. Redesignating paragraphs (b)(2) and (3) as paragraphs (b)(3) through 
(4);
0
r. Adding new paragraph (b)(2); and
0
s. Revising newly redesignated paragraphs (b)(50) and (69).
    The additions and revisions read as follows:


Sec.  242.600  NMS security designation and definitions.

    (b) * * *
    (2) Administrative data means administrative, control, and other 
technical messages made available by national securities exchanges and 
national securities associations pursuant to the effective national 
market system plan or plans required under Sec.  242.603(b) or the 
technical specifications thereto as of [date of Commission approval of 
this proposal].
* * * * *
    (5) Auction information means all information specified by national 
securities exchange rules or effective national market system plans 
that is generated by a national securities exchange leading up to and 
during an auction, including opening, reopening, and closing auctions, 
and disseminated during the time periods and at the time intervals 
provided in such rules and plans.
* * * * *
    (16) Competing consolidator means a securities information 
processor required to be registered pursuant to Rule 614 or a national 
securities exchange or national securities association that receives 
information with respect to quotations for and transactions in NMS 
stocks and generates consolidated market data for dissemination to any 
person.
* * * * *
    (19) Consolidated market data means the following data, 
consolidated across all national securities exchanges and national 
securities associations:
    (i) Core data;
    (ii) Regulatory data;
    (iii) Administrative data;
    (iv) Exchange-specific program data; and
    (v) Additional regulatory, administrative, or exchange-specific 
program data elements defined as such pursuant to the effective 
national market system plan or plans required under Sec.  242.603(b).
    (20) Core data means the following information with respect to 
quotations for, and transactions in, NMS stocks. For purposes of the 
calculation and dissemination of core data by competing consolidators, 
and the calculation of core data by self-aggregators, the best bid and 
best offer, national best bid and national best offer, and depth of 
book data shall include odd-lots that when aggregated are equal to or 
greater than a round lot; such aggregation shall occur across multiple 
prices and shall be disseminated at the least aggressive price of all 
such aggregated odd-lots. For purposes of the calculation and 
dissemination of core data by competing consolidators, and the 
calculation of core data by self-aggregators, protected quotations 
shall include odd-lots at a single price that when aggregated are equal 
to or greater than 100 shares:
    (i) Quotation sizes;
    (ii) Aggregate quotation sizes;
    (iii) Best bid and best offer;
    (iv) National best bid and national best offer;
    (v) Protected bid and protected offer;
    (vi) Transaction reports;
    (vii) Last sale data;
    (viii) Odd-lot transaction data disseminated pursuant to the 
effective national market system plan or plans required under Sec.  
242.603(b) as of [date of Commission approval of this proposal].
    (ix) Depth of book data; and
    (x) Auction information.
* * * * *
    (25) Depth of book data means all quotation sizes at each national 
securities exchange, aggregated at each price at which there is a bid 
or offer that is lower than the best bid down to the protected bid and 
higher than the best offer up to the protected offer; and all quotation 
sizes at each national securities exchange, aggregated at each of the 
next 5 prices at which there is a bid that is lower than the protected 
bid and offer that is higher than the protected offer.
* * * * *

[[Page 16869]]

    (32) Exchange-specific program data means: (i) Information related 
to retail liquidity programs specified by the rules of national 
securities exchanges and disseminated pursuant to the effective 
national market system plan or plans required under Sec.  242.603(b) as 
of [date of Commission approval of this proposal]; and
    (ii) Other exchange-specific information with respect to quotations 
for or transactions in NMS stocks as specified by the effective 
national market system plan or plans required under Sec.  242.603(b).
* * * * *
    (50) National best bid and national best offer means, with respect 
to quotations for an NMS stock, the best bid and best offer for such 
stock that are calculated and disseminated on a current and continuing 
basis by a competing consolidator or calculated by a self-aggregator 
and, for NMS securities other than NMS stocks, the best bid and best 
offer for such security that are calculated and disseminated on a 
current and continuing basis by a plan processor pursuant to an 
effective national market system plan; provided, that in the event two 
or more market centers transmit to the plan processor, a competing 
consolidator or self-aggregator identical bids or offers for an NMS 
security, the best bid or best offer (as the case may be) shall be 
determined by ranking all such identical bids or offers (as the case 
may be) first by size (giving the highest ranking to the bid or offer 
associated with the largest size), and then by time (giving the highest 
ranking to the bid or offer received first in time).
* * * * *
    (67) Primary listing exchange means, for each NMS stock, the 
national securities exchange identified as the primary listing exchange 
in the effective national market system plan or plans required under 
Sec.  242.603(b).
* * * * *
    (69) Protected bid or protected offer means a quotation in an NMS 
stock that:
    (i) Is displayed by an automated trading center;
    (ii) Is disseminated pursuant to an effective national market 
system plan; and
    (iii) Is an automated quotation that is the best bid or best offer 
of at least 100 shares of a national securities exchange, or the best 
bid or best offer of at least 100 shares of a national securities 
association.
* * * * *
    (77) Regulatory data means:
    (i) Information required to be collected or calculated by the 
primary listing exchange for an NMS stock and provided to competing 
consolidators and self-aggregators pursuant to the effective national 
market system plan or plans required under Sec.  242.603(b), including, 
at a minimum:
    (A) Information regarding Short Sale Circuit Breakers pursuant to 
Sec.  242.201;
    (B) Information regarding Price Bands required pursuant to the Plan 
to Address Extraordinary Market Volatility (LULD Plan);
    (C) Information relating to regulatory halts or trading pauses 
(news dissemination/pending, LULD, Market-Wide Circuit Breakers) and 
reopenings or resumptions;
    (D) The official opening and closing prices of the primary listing 
exchange; and
    (E) An indicator of the applicable round lot size.
    (ii) Information required to be collected or calculated by the 
national securities exchange or national securities association on 
which an NMS stock is traded and provided to competing consolidators 
and self-aggregators pursuant to the effective national market system 
plan or plans required under Sec.  242.603(b), including, at a minimum:
    (A) Whenever such national securities exchange or national 
securities association receives a bid (offer) below (above) an NMS 
stock's lower (upper) LULD price band, an appropriate regulatory data 
flag identifying the bid (offer) as non-executable; and
    (B) Other regulatory messages including subpenny execution and 
trade-though exempt indicators.
    (iii) For purposes of paragraph (i)(C) of this definition, the 
primary listing exchange that has the largest proportion of companies 
included in the S&P 500 Index shall monitor the S&P 500 Index 
throughout the trading day, determine whether a Level 1, Level 2, or 
Level 3 decline, as defined in self-regulatory organization rules 
related to Market-Wide Circuit Breakers, has occurred, and immediately 
inform the other primary listing exchanges of all such declines.
* * * * *
    (81) Round lot means:
    (i) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange (or the IPO price if the 
prior month's average closing price is not available) was $50.00 or 
less per share, an order for the purchase or sale of an NMS stock of 
100 shares;
    (ii) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange (or the IPO price if the 
prior month's average closing price is not available) was $50.01 to 
$100.00 per share, an order for the purchase or sale of an NMS stock of 
20 shares;
    (iii) For any NMS stock for which the prior calendar month's 
average closing price on the primary listing exchange (or the IPO price 
if the prior month's average closing price is not available) was 
$100.01 to $500.00 per share, an order for the purchase or sale of an 
NMS stock of 10 shares;
    (iv) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange (or the IPO price if the 
prior month's average closing price is not available) was $500.01 to 
$1,000.00 per share, an order for the purchase or sale of an NMS stock 
of 2 shares; and
    (v) For any NMS stock for which the prior calendar month's average 
closing price on the primary listing exchange (or the IPO price if the 
prior month's average closing price is not available) was $1,000.01 or 
more per share, an order for the purchase or sale of an NMS stock of 1 
share.
    (82) Self-aggregator means a broker or dealer that receives 
information with respect to quotations for and transactions in NMS 
stocks, including all data necessary to generate consolidated market 
data, and generates consolidated market data solely for internal use. A 
self-aggregator may not make consolidated market data, or any subset of 
consolidated market data, available to any other person.
* * * * *


Sec.  242.602  [Amended].

0
9. Amend Sec.  242.602 by:
0
a. In paragraph (a)(5)(i) removing the text ``Sec.  242.600(b)(77)'' 
and adding in its place ``Sec.  242.600(b)(88)'' and
0
b. In paragraph (a)(5)(ii) removing the text ``Sec.  242.600(b)(77)'' 
and adding in its place ``Sec.  242.600(b)(88)''.
0
10. Amend Sec.  242.603 by revising paragraph (b) to read as follows:


Sec.  242.603  Distribution, consolidation, and display of information 
with respect to quotations for and transactions in NMS stocks.

* * * * *
    (b) Dissemination of information. Every national securities 
exchange on which an NMS stock is traded and national securities 
association shall act jointly pursuant to one or more effective 
national market system plans for the dissemination of consolidated 
market data. Every national securities exchange on which an NMS stock 
is traded and national securities association shall make available to 
all competing

[[Page 16870]]

consolidators and self-aggregators its information with respect to 
quotations for and transactions in NMS stocks, including all data 
necessary to generate consolidated market data, in the same manner and 
using the same methods, including all methods of access and the same 
format, as such national securities exchange or national securities 
association makes available any information with respect to quotations 
for and transactions in NMS stocks to any person.
* * * * *


Sec.  242.611  [Amended].

0
11. In Sec.  242.611, amend paragraph (c) by removing the text ``Sec.  
242.600(b)(31)'' and adding in its place ``Sec.  242.600(b)(38)''.
0
12. Add Sec.  242.614 to read as follows:


Sec.  242.614  Registration and responsibilities of competing 
consolidators.

    (a) Competing consolidator registration. (1) Initial Form CC. (i) 
Filing and effectiveness requirement. No person, other than a national 
securities exchange or a national securities association,
    (A) May receive directly from a national securities exchange or 
national securities association information with respect to quotations 
for and transactions in NMS stocks; and
    (B) Generate consolidated market data for dissemination to any 
person unless the person files with the Commission an initial Form CC 
and the initial Form CC has become effective pursuant to paragraph 
(a)(1)(v) of this section.
    (ii) Electronic filing and submission. Any reports to the 
Commission required under this Rule 614 shall be filed electronically 
on Form CC (17 CFR 249.1002), include all information as prescribed in 
Form CC and the instructions thereto, and contain an electronic 
signature as defined in Sec.  240.19b-4(j).
    (iii) Commission review period. The Commission may, by order, as 
provided in paragraph (a)(1)(v)(B) of this section, declare an initial 
Form CC filed by a competing consolidator ineffective no later than 90 
calendar days from the date of filing with the Commission.
    (iv) Withdrawal of initial Form CC due to inaccurate or incomplete 
disclosures. During the review by the Commission of the initial Form 
CC, if any information disclosed in the initial Form CC is or becomes 
inaccurate or incomplete, the competing consolidator shall promptly 
withdraw the initial Form CC and may refile an initial Form CC pursuant 
to paragraph (a)(1).
    (v) Effectiveness; Ineffectiveness determination. (A) An initial 
Form CC filed by a competing consolidator will become effective, unless 
declared ineffective, no later than the expiration of the review period 
provided in paragraph (a)(1)(iii) of this section and publication 
pursuant to paragraph (b)(2)(i) of this section.
    (B) The Commission shall, by order, declare an initial Form CC 
ineffective if it finds, after notice and opportunity for hearing, that 
such action is necessary or appropriate in the public interest, and is 
consistent with the protection of investors. If the Commission declares 
an initial Form CC ineffective, the competing consolidator shall be 
prohibited from operating as a competing consolidator. An initial Form 
CC declared ineffective does not prevent the competing consolidator 
from subsequently filing a new Form CC.
    (2) Form CC Amendments. A competing consolidator shall amend a Form 
CC:
    (i) Prior to the implementation of a material change to the 
pricing, connectivity, or products offered (``Material Amendment''); 
and
    (ii) No later than 30 calendar days after the end of each calendar 
year to correct information that has become inaccurate or incomplete 
for any reason and to provide an Annual Report as required under Form 
CC (each a ``Form CC Amendment'').
    (3) Notice of cessation. A competing consolidator shall notice its 
cessation of operations on Form CC at least 30 business days prior to 
the date the competing consolidator will cease to operate as a 
competing consolidator. The notice of cessation shall cause the Form CC 
to become ineffective on the date designated by the competing 
consolidator.
    (4) Date of filing. For purposes of filings made pursuant to this 
section:
    (i) The term business day shall have the same meaning as defined in 
Sec.  240.19b-4(b)(2).
    (ii) If the conditions of this section and Form CC are otherwise 
satisfied, all filings submitted electronically on or before 5:30 p.m. 
Eastern Standard Time or Eastern Daylight Saving Time, whichever is 
currently in effect, on a business day, shall be deemed filed on that 
business day, and all filings submitted after 5:30 p.m. Eastern 
Standard Time or Eastern Daylight Saving Time, whichever is currently 
in effect, shall be deemed filed on the next business day.
    (b) Public disclosures. (1) Every Form CC filed pursuant to this 
section shall constitute a ``report'' within the meaning of sections 
11A, 17(a), 18(a), and 32(a) of the Act (15 U.S.C. 78k-1, 78q(a), 
78r(a), and 78ff(a)), and any other applicable provisions of the Act.
    (2) The Commission will make public via posting on the Commission's 
website, each:
    (i) Effective initial Form CC, as amended;
    (ii) Order of ineffective initial Form CC;
    (iii) Form CC Amendment. The Commission will make public the 
entirety of any Form CC Amendment no later than 30 calendar days from 
the date of filing thereof with the Commission; and
    (iv) Notice of cessation.
    (c) Posting of hyperlink to the Commission's website. Each 
competing consolidator shall make public via posting on its website a 
direct URL hyperlink to the Commission's website that contains the 
documents enumerated in paragraph (b)(2) of this section.
    (d) Responsibilities of competing consolidators. Each competing 
consolidator shall:
    (1) Collect from each national securities exchange and national 
securities association, either directly or indirectly, the information 
with respect to quotations for and transactions in NMS stocks as 
provided in Rule 603(b).
    (2) Calculate and generate consolidated market data as defined in 
Rule 600(b)(19) from the information collected pursuant to paragraph 
(d)(1) of this section.
    (3) Make consolidated market data, as defined in Rule 600(b)(19), 
as timestamped as required by paragraph (d)(4) of this section and 
including the national securities exchange and national securities 
association data generation timestamp required to be provided by the 
national securities exchange and national securities association 
participants by paragraph (e)(1)(ii) of this section, available to 
subscribers on a consolidated basis on terms that are not unreasonably 
discriminatory.
    (4) Timestamp the information collected pursuant to paragraph 
(d)(1) of this section (i) upon receipt from each national securities 
exchange and national securities association; (ii) upon receipt of such 
information at its aggregation mechanism; and (iii) upon dissemination 
of consolidated market data to subscribers.
    (5) Within fifteen [15] calendar days after the end of each month, 
publish prominently on its website monthly performance metrics, as 
defined by the effective national market system plan(s) for NMS stocks, 
that shall include at least the following. All information must be 
publicly posted in

[[Page 16871]]

downloadable files and must remain free and accessible (without any 
encumbrances or restrictions) by the general public on the website for 
a period of not less than three years from the initial date of posting.
    (i) Capacity statistics;
    (ii) Message rate and total statistics;
    (iii) System availability;
    (iv) Network delay statistics; and
    (v) Latency statistics for the following, with distribution 
statistics up to the 99.99th percentile:
    (A) When a national securities exchange or national securities 
association sends an inbound message to a competing consolidator 
network and when the competing consolidator network receives the 
inbound message;
    (B) When the competing consolidator network receives the inbound 
message and when the competing consolidator network sends the 
corresponding consolidated message to a subscriber; and
    (C) When a national securities exchange or national securities 
association sends an inbound message to a competing consolidator 
network and when the competing consolidator network sends the 
corresponding consolidated message to a subscriber.
    (6) Within fifteen [15] calendar days after the end of each month, 
publish prominently on its website the following information. All 
information must be publicly posted and must remain free and accessible 
(without any encumbrances or restrictions) by the general public on the 
website for a period of not less than three years from the initial date 
of posting.
    (i) Data quality issues;
    (ii) System issues;
    (iii) Any clock synchronization protocol utilized;
    (iv) For the clocks used to generate the timestamps described in 
paragraph (d)(4) of this section, the clock drift averages and peaks, 
and the number of instances of clock drift greater than 100 
microseconds; and
    (v) Vendor alerts.
    (7) Keep and preserve at least one copy of all documents, including 
all correspondence, memoranda, papers, books, notices, accounts and 
such other records as shall be made or received by it in the course of 
its business as such and in the conduct of its business. Competing 
consolidators shall keep all such documents for a period of no less 
than five years, the first two years in an easily accessible place;
    (8) Upon request of any representative of the Commission, promptly 
furnish to the possession of such representative copies of any 
documents required to be kept and preserved by it.
    (e) Amendment of the effective national market system plan(s) for 
NMS stocks. (1) The participants to the effective national market 
system plan(s) for NMS stocks shall file with the Commission, pursuant 
to Rule 608, an amendment that includes the following provisions within 
60 calendar days from the effective date of Rule 614:
    (i) Conforming the effective national market system plan(s) for NMS 
stocks to reflect provision of information with respect to quotations 
for and transactions in NMS stocks that is necessary to generate 
consolidated market data by the national securities exchange and 
national securities association participants to competing consolidators 
and self-aggregators;
    (ii) The application of timestamps by the national securities 
exchange and national securities association participants on all 
consolidated market data, including the time that consolidated market 
data was generated as applicable by the national securities exchange or 
national securities association and the time the national securities 
exchange or national securities association made the consolidated 
market data available to competing consolidators and self-aggregators;
    (iii) Assessments of competing consolidator performance, including 
speed, reliability, and cost of data provision and the provision of an 
annual report of such assessment to the Commission;
    (iv) A list that identifies the primary listing exchange for each 
NMS stock.
0
13. Amend Sec.  242.1000 by:
0
a. In the definition of ``Critical SCI systems,'' removing the text 
``consolidated market data'' in paragraph (1)(v) and adding in its 
place ``market data by a plan processor'';
0
b. Adding in alphabetical order the definition of ``Competing 
consolidator'';
0
c. In the definition of ``Plan processor'' removing the text ``Sec.  
242.600(b)(59)'' and adding in its place ``Sec.  242.600(b)(66)''.
0
d. In the definition``SCI entity'' removing the period and adding at 
the end of the definition ``, or competing consolidator.''
    The addition to read as follows:


Sec.  242.1000  Definitions.

* * * * *
    Competing consolidator has the meaning set forth in Sec.  
242.600(b)(16).
* * * * *

PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934

0
14. The general authority citation for part 249 continues to read in 
part as follows:

    Authority:  15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); 
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, 
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
0
15. Add Sec.  249.1002 to Subpart K to read as follows:


Sec.  249.1002  Form CC, for application for registration as a 
competing consolidator or to amend such an application or registration.

    This form shall be used for application for registration as a 
competing consolidator, pursuant to section 11A of the Securities 
Exchange Act of 1934 (15 U.S.C. 78k-1) and Sec.  242.614 of this 
chapter, or to amend such an application or registration.

    Note:  The text of Form CC does not, and the amendments will 
not, appear in the Code of Federal Regulations.

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BILLING CODE 8011-01-C

Form CC General Instructions

A. Use of the Form

    Form CC is the form a competing consolidator must file to notify 
the Securities and Exchange Commission (``SEC'' or ``Commission'') of 
its activities pursuant to Rule 614 of Regulation NMS, Sec.  242.614 et 
seq. Filings submitted pursuant to Rule 614 shall be filed in an 
electronic format through an electronic form filing system (``EFFS''), 
a secure website operated by the Commission. Documents attached as 
exhibits filed through the EFFS system must be in a text-searchable 
format without the use of optical character recognition. If, however, a 
portion of a Form CC submission (e.g., an image or diagram) cannot be 
made available in a text-searchable format, such portion may be 
submitted in a non-text searchable format.

B. Need for Careful Preparation of the Completed Form, Including 
Exhibits

    A competing consolidator must provide all of the information 
required by Form CC, including the exhibits, and must provide 
disclosure information that is accurate, current, and complete. The 
information in the exhibits must be provided in a clear and 
comprehensible manner. A filing that is incomplete or similarly 
deficient may be returned to the competing consolidator. Any filing so 
returned shall for all purposes be deemed not to have been filed with 
the Commission. See also Rule 0-3 under the Securities Exchange Act of 
1934 (17 CFR 240.0-3).

C. When To Use the FORM CC

    Form CC is comprised of 4 types of submissions to the Commission 
required pursuant to Rule 614 of Regulation NMS. In filling out the 
Form CC, a competing consolidator shall select the type of filing and 
provide all information required by Rule 614 of Regulation NMS. The 
types of submissions are:
    (1) Rule 614(a)(1) Initial Form CC: Prior to commencing operations, 
a competing consolidator shall file an initial Form CC and the initial 
Form CC must become effective.
    (2) Rule 614(a)(2)(i) Material Amendment: The competing 
consolidator shall file an amendment on Form CC prior to implementing a 
material change to the pricing, connectivity, or products offered of 
the competing consolidator.
    (3) Rule 614(a)(2)(ii) Annual Report: The competing consolidator 
shall file an Annual Report on Form CC correcting any information 
contained in the initial Form CC or in any previously filed amendment 
that has been rendered inaccurate or incomplete for any reason, and 
that has not previously been reported to the SEC, no later than 30 
calendar days after the end of each calendar year in which the 
competing consolidator has operated. Competing consolidators filing the 
Annual Report must file a complete form, including all pages and 
answers to all items, together with all exhibits. The competing 
consolidator must indicate which items have been amended since the last 
Annual Report.
    (4) Rule 614(a)(3) Notice of Cessation: The competing consolidator 
shall file a notice of cessation of operations at least 30 business 
days prior to the date upon ceasing to operate as a competing 
consolidator.

D. Documents Comprising the Completed Form

    The completed form filed with the Commission shall consist of Form 
CC, responses to all applicable items, and any exhibits required in 
connection with the filing. Each filing shall be marked on Form CC with 
the initials of the competing consolidator, the four-digit year, and 
the number of the filing for the year (e.g., FormCC-acronym-YYYY-XXX).

E. Contact Information; Signature; and Filing of Completed Form

    Each time a competing consolidator submits a filing to the 
Commission on Form CC, the competing consolidator must provide the 
contact information required by Section VI of Form CC. The contact 
employee must be authorized to receive all contact information, 
communications and mailings and must be responsible for disseminating 
that information within the competing consolidator's organization.
    In order to file Form CC through the EFFS, a competing consolidator 
must request access to the Commission's External Application Server. 
Initial requests will be received by contacting the Division of Trading 
& Markets at (202) 551-5777. An email will be sent to the requestor 
that will provide a link to a secure website where basic profile 
information will be requested.
    A duly authorized individual of the competing consolidator shall 
electronically sign the completed Form CC as indicated in Section VII 
of the form.

F. Paperwork Reduction Act Disclosure

    Form CC requires a competing consolidator subject to Rule 614 of 
Regulation NMS to provide the Commission with certain information 
regarding the operation of the competing consolidator, material and 
other changes to the operation of the competing consolidator, and 
notice upon ceasing operation of the competing consolidator.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid control number. Sections 3(b), 11A(a), 11A(c), 15(c), 
17(a), 23(a) and 36(a) authorize the Commission to collect information 
on this Form CC from competing consolidators that are subject to Rule 
614. See 15 U.S.C. 78c(b), 78k-1(a), 78k-1(c), 78o(c), 78q(a), 78w(a) 
and 78mm(a).
    It is estimated that a competing consolidator will spend 
approximately 200.3 hours completing the initial operation report on 
Form CC, approximately 6.15 hours preparing each amendment to Form CC, 
and approximately two (2) hours preparing a cessation of operations 
report on Form CC. Any member of the public may direct to the 
Commission any comments concerning the accuracy of the burden estimate 
on the facing page of Form CC and any suggestions for reducing this 
burden.
    Form CC is designed to enable the Commission to determine whether a 
competing consolidator subject to Rule 614 of Regulation NMS is in 
compliance with Rule 614 and other federal securities laws. It is 
mandatory that a competing consolidator subject to Rule 614 file an 
initial Form CC, file an amendment to Form CC prior to making a 
material change, file Annual Reports

[[Page 16879]]

to Form CC to reflect changes not previously reported, and file notice 
on Form CC upon ceasing operation of the competing consolidator.
    All reports provided to the Commission on Form CC are subject to 
the provisions of the Freedom of Information Act, 5 U.S.C. 522 
(``FOIA'') and the Commission's rules thereunder (17 CFR 
200.80(b)(4)(iii)).
    This collection of information has been reviewed by the Office of 
Management and Budget (``OMB'') in accordance with the clearance 
requirements of 44 U.S.C. 3507. The applicable Privacy Act system of 
records is SEC-2 and the routine uses of the records are set forth at 
40 FR 39255 (August 27, 1975) and 41 FR 5318 (February 5, 1976).

G. Definitions

    Unless the context requires otherwise, all terms used in this form 
have the same meaning as in the Securities Exchange Act of 1934, as 
amended, and in the rules and regulations of the Commission thereunder.
0
16. Revise subpart T, consisting of Sec.  249.1900 to read as follows:

Subpart T--Form SCI, for filing notices and reports as required by 
Regulation SCI.


Sec.  249.1900.  Form SCI, for filing notices and reports as required 
by Regulation SCI.

    Form SCI shall be used to file notices and reports as required by 
Regulation SCI (Sec. Sec.  242.1000 through 242.1007).

    Note:  The text of Form SCI does not, and the amendments will 
not, appear in the Code of Federal Regulations.

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BILLING CODE 8011-01-C

General Instructions for Form SCI

A. Use of the Form

    Except with respect to notifications to the Commission made 
pursuant to Rule 1002(b)(1) or updates to the Commission made pursuant 
to Rule 1002(b)(3), any notification, review, description, analysis, or 
report required to be submitted pursuant to Regulation SCI under the 
Securities Exchange Act of 1934 (``Act'') shall be filed in an 
electronic format through an electronic form filing system (``EFFS''), 
a secure website operated by the Securities and Exchange Commission 
(``Commission''). Documents attached as exhibits filed through the EFFS 
system must be in a text-searchable format without the use of optical 
character recognition. If,

[[Page 16884]]

however, a portion of a Form SCI submission (e.g., an image or diagram) 
cannot be made available in a text-searchable format, such portion may 
be submitted in a non-text searchable format.

B. Need for Careful Preparation of the Completed Form, Including 
Exhibits

    This form, including the exhibits, is intended to elicit 
information necessary for Commission staff to work with SCI self-
regulatory organizations, SCI alternative trading systems, plan 
processors, exempt clearing agencies subject to ARP, and competing 
consolidators (collectively, ``SCI entities'') to ensure the capacity, 
integrity, resiliency, availability, security, and compliance of their 
automated systems. An SCI entity must provide all the information 
required by the form, including the exhibits, and must present the 
information in a clear and comprehensible manner. A filing that is 
incomplete or similarly deficient may be returned to the SCI entity. 
Any filing so returned shall for all purposes be deemed not to have 
been filed with the Commission. See also Rule 0-3 under the Act (17 CFR 
240.0-3).

C. When to Use the Form

    Form SCI is comprised of six types of required submissions to the 
Commission pursuant to Rules 1002 and 1003. In addition, Form SCI 
permits SCI entities to submit to the Commission two additional types 
of submissions pursuant to Rules 1002(b)(1) and 1002(b)(3); however, 
SCI entities are not required to use Form SCI for these two types of 
submissions to the Commission. In filling out Form SCI, an SCI entity 
shall select the type of filing and provide all information required by 
Regulation SCI specific to that type of filing.
    The first two types of required submissions relate to Commission 
notification of certain SCI events:
    (1) ``Rule 1002(b)(2) Notification of SCI Event'' submissions for 
notifications regarding systems disruptions, systems compliance issues, 
or systems intrusions (collectively, ``SCI events''), other than any 
systems disruption or systems intrusion that has had, or the SCI entity 
reasonably estimates would have, no or a de minimis impact on the SCI 
entity's operations or on market participants; and
    (2) ``Rule 1002(b)(4) Final or Interim Report of SCI Event'' 
submissions, of which there are two kinds (a final report under Rule 
1002(b)(4)(i)(A) or Rule 1002(b)(4)(i)(B)(2); or an interim status 
report under Rule 1002(b)(4)(i)(B)(1)).
    The other four types of required submissions are periodic reports, 
and include:
    (1) ``Rule 1002(b)(5)(ii)'' submissions for quarterly reports of 
systems disruptions and systems intrusions which have had, or the SCI 
entity reasonably estimates would have, no or a de minimis impact on 
the SCI entity's operations or on market participants (``de minimis SCI 
events'');
    (2) ``Rule 1003(a)(1)'' submissions for quarterly reports of 
material systems changes;
    (3) ``Rule 1003(a)(2)'' submissions for supplemental reports of 
material systems changes; and
    (4) ``Rule 1003(b)(3)'' submissions for reports of SCI reviews.
Required Submissions for SCI Events
    For 1002(b)(2) submissions, an SCI entity must notify the 
Commission using Form SCI by selecting the appropriate box in Section I 
and filling out all information required by the form, including Exhibit 
1. 1002(b)(2) submissions must be submitted within 24 hours of any 
responsible SCI personnel having a reasonable basis to conclude that an 
SCI event has occurred.
    For 1002(b)(4) submissions, if an SCI event is resolved and the SCI 
entity's investigation of the SCI event is closed within 30 calendar 
days of the occurrence of the SCI event, an SCI entity must file a 
final report under Rule 1002(b)(4)(i)(A) within five business days 
after the resolution of the SCI event and closure of the investigation 
regarding the SCI event. However, if an SCI event is not resolved or 
the SCI entity's investigation of the SCI event is not closed within 30 
calendar days of the occurrence of the SCI event, an SCI entity must 
file an interim status report under Rule 1002(b)(4)(i)(B)(1) within 30 
calendar days after the occurrence of the SCI event. For SCI events in 
which an interim status report is required to be filed, an SCI entity 
must file a final report under Rule 1002(b)(4)(i)(B)(2) within five 
business days after the resolution of the SCI event and closure of the 
investigation regarding the SCI event. For 1002(b)(4) submissions, an 
SCI entity must notify the Commission using Form SCI by selecting the 
appropriate box in Section I and filling out all information required 
by the form, including Exhibit 2.
Required Submissions for Periodic Reporting
    For 1002(b)(5)(ii) submissions, an SCI entity must submit quarterly 
reports of systems disruptions and systems intrusions which have had, 
or the SCI entity reasonably estimates would have, no or a de minimis 
impact on the SCI entity's operations or on market participants. The 
SCI entity must select the appropriate box in Section II and fill out 
all information required by the form, including Exhibit 3.
    For 1003(a)(1) submissions, an SCI entity must submit its quarterly 
report of material systems changes to the Commission using Form SCI. 
The SCI entity must select the appropriate box in Section II and fill 
out all information required by the form, including Exhibit 4.
    Filings made pursuant to Rule 1002(b)(5)(ii) and Rule 1003(a)(1) 
must be submitted to the Commission within 30 calendar days after the 
end of each calendar quarter (i.e., March 31st, June 30th, September 
30th and December 31st) of each year.
    For 1003(a)(2) submissions, an SCI entity must submit a 
supplemental report notifying the Commission of a material error in or 
material omission from a report previously submitted under Rule 
1003(a). The SCI entity must select the appropriate box in Section II 
and fill out all information required by the form, including Exhibit 4.
    For 1003(b)(3) submissions, an SCI entity must submit its report of 
its SCI review, together with any response by senior management, to the 
Commission using Form SCI. A 1003(b)(3) submission is required within 
60 calendar days after the report of the SCI review has been submitted 
to senior management of the SCI entity. The SCI entity must select the 
appropriate box in Section II and fill out all information required by 
the form, including Exhibit 5.
Optional Submissions
    An SCI entity may, but is not required to, use Form SCI to submit a 
notification pursuant to Rule 1002(b)(1). If the SCI entity uses Form 
SCI to submit a notification pursuant to Rule 1002(b)(1), it must 
select the appropriate box in Section I and provide a short description 
of the SCI event. Documents may also be attached as Exhibit 6 if the 
SCI entity chooses to do so. An SCI entity may, but is not required to, 
use Form SCI to submit an update pursuant to Rule 1002(b)(3). Rule 
1002(b)(3) requires an SCI entity to, until such time as the SCI event 
is resolved and the SCI entity's investigation of the SCI event is 
closed, provide updates pertaining to such SCI event to the Commission 
on a regular basis, or at such frequency as reasonably requested by a 
representative of the Commission, to correct any materially incorrect 
information previously provided, or when new

[[Page 16885]]

material information is discovered, including but not limited to, any 
of the information listed in Rule 1002(b)(2)(ii). If the SCI entity 
uses Form SCI to submit an update pursuant to Rule 1002(b)(3), it must 
select the appropriate box in Section I and provide a short description 
of the SCI event. Documents may also be attached as Exhibit 6 if the 
SCI entity chooses to do so.

D. Documents Comprising the Completed Form

    The completed form filed with the Commission shall consist of Form 
SCI, responses to all applicable items, and any exhibits required in 
connection with the filing. Each filing shall be marked on Form SCI 
with the initials of the SCI entity, the four-digit year, and the 
number of the filing for the year (e.g., SCI Name-YYYY-XXX).

E. Contact Information; Signature; and Filing of the Completed Form

    Each time an SCI entity submits a filing to the Commission on Form 
SCI, the SCI entity must provide the contact information required by 
Section III of Form SCI. Space for additional contact information, if 
appropriate, is also provided.
    All notifications and reports required to be submitted through Form 
SCI shall be filed through the EFFS. In order to file Form SCI through 
the EFFS, SCI entities must request access to the Commission's External 
Application Server by completing a request for an external account user 
ID and password. Initial requests will be received by contacting (202) 
551-5777. An email will be sent to the requestor that will provide a 
link to a secure website where basic profile information will be 
requested. A duly authorized individual of the SCI entity shall 
electronically sign the completed Form SCI as indicated in Section IV 
of the form. In addition, a duly authorized individual of the SCI 
entity shall manually sign one copy of the completed Form SCI, and the 
manually signed signature page shall be preserved pursuant to the 
requirements of Rule 1005.

F. Withdrawals of Commission Notifications and Periodic Reports

    If an SCI entity determines to withdraw a Form SCI, it must 
complete Page 1 of the Form SCI and indicate by selecting the 
appropriate check box to withdraw the submission.

G. Paperwork Reduction Act Disclosure

    This collection of information will be reviewed by the Office of 
Management and Budget in accordance with the clearance requirements of 
44 U.S.C. 3507. An agency may not conduct or sponsor, and a person is 
not required to respond to, a collection of information unless it 
displays a currently valid control number. The Commission estimates 
that the average burden to respond to Form SCI will be between one and 
125 hours, depending upon the purpose for which the form is being 
filed. Any member of the public may direct to the Commission any 
comments concerning the accuracy of this burden estimate and any 
suggestions for reducing this burden.
    Except with respect to notifications to the Commission made 
pursuant to Rule 1002(b)(1) or updates to the Commission made pursuant 
to Rule 1002(b)(3), it is mandatory that an SCI entity file all 
notifications, reviews, descriptions, analyses, and reports required by 
Regulation SCI using Form SCI. The Commission will keep the information 
collected pursuant to Form SCI confidential to the extent permitted by 
law. Subject to the provisions of the Freedom of Information Act, 5 
U.S.C. 522 (``FOIA''), and the Commission's rules thereunder (17 CFR 
200.80(b)(4)(iii)), the Commission does not generally publish or make 
available information contained in any reports, summaries, analyses, 
letters, or memoranda arising out of, in anticipation of, or in 
connection with an examination or inspection of the books and records 
of any person or any other investigation.

H. Exhibits

    List of exhibits to be filed, as applicable:
    Exhibit 1: Rule 1002(b)(2)--Notification of SCI Event. Within 24 
hours of any responsible SCI personnel having a reasonable basis to 
conclude that the SCI event has occurred, the SCI entity shall submit a 
written notification pertaining to such SCI event to the Commission, 
which shall be made on a good faith, best efforts basis and include: 
(a) A description of the SCI event, including the system(s) affected; 
and (b) to the extent available as of the time of the notification: The 
SCI entity's current assessment of the types and number of market 
participants potentially affected by the SCI event; the potential 
impact of the SCI event on the market; a description of the steps the 
SCI entity has taken, is taking, or plans to take, with respect to the 
SCI event; the time the SCI event was resolved or timeframe within 
which the SCI event is expected to be resolved; and any other pertinent 
information known by the SCI entity about the SCI event.
    Exhibit 2: Rule 1002(b)(4)--Final or Interim Report of SCI Event. 
When submitting a final report pursuant to either Rule 1002(b)(4)(i)(A) 
or Rule 1002(b)(4)(i)(B)(2), the SCI entity shall include: (a) A 
detailed description of: The SCI entity's assessment of the types and 
number of market participants affected by the SCI event; the SCI 
entity's assessment of the impact of the SCI event on the market; the 
steps the SCI entity has taken, is taking, or plans to take, with 
respect to the SCI event; the time the SCI event was resolved; the SCI 
entity's rule(s) and/or governing document(s), as applicable, that 
relate to the SCI event; and any other pertinent information known by 
the SCI entity about the SCI event; (b) a copy of any information 
disseminated pursuant to Rule 1002(c) by the SCI entity to date 
regarding the SCI event to any of its members or participants; and (c) 
an analysis of parties that may have experienced a loss, whether 
monetary or otherwise, due to the SCI event, the number of such 
parties, and an estimate of the aggregate amount of such loss. When 
submitting an interim report pursuant to Rule 1002(b)(4)(i)(B)(1), the 
SCI entity shall include such information to the extent known at the 
time.
    Exhibit 3: Rule 1002(b)(5)(ii)--Quarterly Report of De Minimis SCI 
Events. The SCI entity shall submit a report, within 30 calendar days 
after the end of each calendar quarter, containing a summary 
description of systems disruptions and systems intrusions that have 
had, or the SCI entity reasonably estimates would have, no or a de 
minimis impact on the SCI entity's operations or on market 
participants, including the SCI systems and, for systems intrusions, 
indirect SCI systems, affected by such SCI events during the applicable 
calendar quarter.
    Exhibit 4: Rule 1003(a)--Quarterly Report of Systems Changes. When 
submitting a report pursuant to Rule 1003(a)(1), the SCI entity shall 
provide a report, within 30 calendar days after the end of each 
calendar quarter, describing completed, ongoing, and planned material 
changes to its SCI systems and the security of indirect SCI systems, 
during the prior, current, and subsequent calendar quarters, including 
the dates or expected dates of commencement and completion. An SCI 
entity shall establish reasonable written criteria for identifying a 
change to its SCI systems and the security of indirect SCI systems as 
material and report such changes in accordance with such criteria. When 
submitting a report pursuant to Rule 1003(a)(2), the SCI entity shall 
provide a supplemental report of a material error in or material 
omission from a report previously

[[Page 16886]]

submitted under Rule 1003(a); provided, however, that a supplemental 
report is not required if information regarding a material systems 
change is or will be provided as part of a notification made pursuant 
to Rule 1002(b).
    Exhibit 5: Rule 1003(b)(3)--Report of SCI Review. The SCI entity 
shall provide a report of the SCI review, together with any response by 
senior management, within 60 calendar days after its submission to 
senior management of the SCI entity.
    Exhibit 6: Optional Attachments. This exhibit may be used in order 
to attach other documents that the SCI entity may wish to submit as 
part of a Rule 1002(b)(1) initial notification submission or Rule 
1002(b)(3) update submission.

I. Explanation of Terms

    Critical SCI systems means any SCI systems of, or operated by or on 
behalf of, an SCI entity that: (a) Directly support functionality 
relating to: (1) Clearance and settlement systems of clearing agencies; 
(2) openings, reopenings, and closings on the primary listing market; 
(3) trading halts; (4) initial public offerings; (5) the provision of 
market data by a plan processor; or (6) exclusively-listed securities; 
or (b) provide functionality to the securities markets for which the 
availability of alternatives is significantly limited or nonexistent 
and without which there would be a material impact on fair and orderly 
markets.
    Indirect SCI systems means any systems of, or operated by or on 
behalf of, an SCI entity that, if breached, would be reasonably likely 
to pose a security threat to SCI systems.
    Major SCI event means an SCI event that has had, or the SCI entity 
reasonably estimates would have: (a) Any impact on a critical SCI 
system; or (b) a significant impact on the SCI entity's operations or 
on market participants.
    Responsible SCI personnel means, for a particular SCI system or 
indirect SCI system impacted by an SCI event, such senior manager(s) of 
the SCI entity having responsibility for such system, and their 
designee(s).
    SCI entity means an SCI self-regulatory organization, SCI 
alternative trading system, plan processor, or exempt clearing agency 
subject to ARP, or competing consolidator.
    SCI event means an event at an SCI entity that constitutes: (a) A 
systems disruption; (b) a systems compliance issue; or (c) a systems 
intrusion.
    SCI review means a review, following established procedures and 
standards, that is performed by objective personnel having appropriate 
experience to conduct reviews of SCI systems and indirect SCI systems, 
and which review contains: (a) A risk assessment with respect to such 
systems of an SCI entity; and (b) an assessment of internal control 
design and effectiveness of its SCI systems and indirect SCI systems to 
include logical and physical security controls, development processes, 
and information technology governance, consistent with industry 
standards.
    SCI systems means all computer, network, electronic, technical, 
automated, or similar systems of, or operated by or on behalf of, an 
SCI entity that, with respect to securities, directly support trading, 
clearance and settlement, order routing, market data, market 
regulation, or market surveillance.
    Systems Compliance Issue means an event at an SCI entity that has 
caused any SCI system of such entity to operate in a manner that does 
not comply with the Act and the rules and regulations thereunder or the 
entity's rules or governing documents, as applicable.
    Systems Disruption means an event in an SCI entity's SCI systems 
that disrupts, or significantly degrades, the normal operation of an 
SCI system.
    Systems Intrusion means any unauthorized entry into the SCI systems 
or indirect SCI systems of an SCI entity.

    By the Commission.

    Dated: February 14, 2020.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2020-03760 Filed 3-23-20; 8:45 am]
BILLING CODE 8011-01-P

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