Market Data Infrastructure, 18596-18838 [2020-28370]

Download as PDF 18596 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 240, 242, and 249 [Release No. 34–90610, File No. S7–03–20] RIN 3235–AM61 Market Data Infrastructure Securities and Exchange Commission. ACTION: Final rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) is amending Regulation National Market System (‘‘Regulation NMS’’) under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) to modernize 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 is SUMMARY: expanding 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 is amending the method by which such NMS information is collected, calculated, and disseminated by fostering a competitive environment for the dissemination of NMS information via a decentralized consolidation model with competing consolidators. DATES: Effective date: The final rules are effective June 8, 2021. Compliance dates: The applicable compliance dates are discussed in Section III.H, titled ‘‘Transition Period and Compliance Dates.’’ 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. For further information on Regulation SCI: Heidi Pilpel, Senior Special Counsel at (202) 551–5666; David Liu, Special Counsel at (312) 353–6265 or Sara Hawkins, Special Counsel, at (202) 551–5523, Division of Trading and Markets, Commission, 100 F Street NE, Washington, DC 20549. The Commission is adopting 17 CFR 242.614 (new Rule 614) under the Exchange Act, Form CC to require registration of competing consolidators, and a requirement that the participants to the effective national market system plan(s) for NMS stocks amend such plan(s) to reflect the new role and functions of the plan(s). The Commission is also adopting amendments to the following rules: SUPPLEMENTARY INFORMATION: CFR citation (17 CFR) Commission reference Exchange Act: Rule 3a51–1 ...................................................................................... Rule 13h–1 ........................................................................................ Regulation NMS: ...................................................................................... Rule 600(b)(2) ................................................................................... Rule 600(b)(5) ................................................................................... Rule 600(b)(16) ................................................................................. Rule 600(b)(19) ................................................................................. Rule 600(b)(20) ................................................................................. Rule 600(b)(21) ................................................................................. Rule 600(b)(26) ................................................................................. Rule 600(b)(50) ................................................................................. Rule 600(b)(59) ................................................................................. Rule 600(b)(68) ................................................................................. Rule 600(b)(70) ................................................................................. Rule 600(b)(78) ................................................................................. Rule 600(b)(82) ................................................................................. Rule 600(b)(83) ................................................................................. Rule 600(b)(85) ................................................................................. Rule 602 ............................................................................................ Rule 603 ............................................................................................ Rule 611 ............................................................................................ Regulation SCI: ........................................................................................ Rule 1000 .......................................................................................... Forms, Exchange Act: .............................................................................. Form CC ............................................................................................ Form SCI ........................................................................................... § 240.3a51–1. § 240.13h–1. §§ 242.600 through 242.613. § 242.600(b)(2). § 242.600(b)(5). § 242.600(b)(16). § 242.600(b)(19). § 242.600(b)(20). § 242.600(b)(21). § 242.600(b)(26). § 242.600(b)(50). § 242.600(b)(59). § 242.600(b)(68). § 242.600(b)(70). § 242.600(b)(78). § 242.600(b)(82). § 242.600(b)(83). § 242.600(b)(85). § 242.602. § 242.603. § 242.611. §§ 242.1000 through 242.1007. § 242.1000. Part 249. § 249.1002. § 249.1900. Finally, the Commission is adopting conforming changes and updates to cross-references in: CFR citation (17 CFR) Commission reference Exchange Act: Rule 105(b)(1)(i)(C) ........................................................................... Rule 105(b)(1)(ii) ............................................................................... Rule 201(a)(1) ................................................................................... Rule 201(a)(2) ................................................................................... VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 PO 00000 Frm 00002 Fmt 4701 § 242.105(b)(1)(i)(C). § 242.105(b)(1)(ii). § 242.201(a)(1). § 242.201(a)(2). Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations CFR citation (17 CFR) Commission reference Rule Rule Rule Rule Rule Rule Rule Rule Rule Rule Rule Rule 201(a)(3) ................................................................................... 201(a)(4) ................................................................................... 201(a)(5) ................................................................................... 201(a)(6) ................................................................................... 201(a)(7) ................................................................................... 201(a)(9) ................................................................................... 201(b)(1)(ii) ............................................................................... 201(b)(3) ................................................................................... 204(g)(2) ................................................................................... 600 ............................................................................................ 602 ............................................................................................ 611(c) ........................................................................................ Table of Contents I. Introduction and Background A. Current Market Data Content and Dissemination Model Under Regulation NMS B. National Market System Initiatives and the Market Data Infrastructure Proposing Release C. Enhancements to the Content of NMS Information D. Enhancements to the Provision of Consolidated Market Data E. Implications for Best Execution II. Enhancements to NMS Information A. Introduction B. Definition of ‘‘Consolidated Market Data’’ Under Rule 600(b)(19) 1. Proposal 2. Final Rule and Response to Comments 3. The Fifth Amendment’s Takings Clause C. Definition of ‘‘Core Data’’ Under Rule 600(b)(21) 1. Proposal 2. Final Rule and Response to Comments D. Definition of ‘‘Round Lot’’ Under Rule 600(b)(82) 1. Proposal 2. Final Rule and Response to Comments E. Definition of ‘‘Protected Bid or Protected Offer’’ Under Rule 600(b)(70) 1. Proposal 2. Final Rule and Response to Comments F. Definition of ‘‘Depth of Book Data’’ Under Rule 600(b)(26) 1. Proposal 2. Final Rule and Response to Comments G. Definition of ‘‘Auction Information’’ Under Rule 600(b)(5) 1. Proposal 2. Final Rule and Response to Comments H. Definition of ‘‘Regulatory Data’’ Under Rule 600(b)(78) 1. Proposal 2. Final Rule and Response to Comments I. Regulation SHO: Conforming Amendments to Rule 201 1. Proposal 2. Final Rule and Response to Comments J. Definition of ‘‘Administrative Data’’ Under Rule 600(b)(2) 1. Proposal 2. Final Rule and Response to Comments K. Definition of ‘‘Self-Regulatory Organization-Specific Program Data’’ Under Rule 600(b)(85) 1. Proposal 2. Final Rule and Response to Comments VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 18597 § 242.201(a)(3). § 242.201(a)(4). § 242.201(a)(5). § 242.201(a)(6). § 242.201(a)(7). § 242.201(a)(9). § 242.201(b)(1)(ii). § 242.201(b)(3). § 242.204(g)(2). § 242.600. § 242.602. § 242.611(c). III. Enhancements to the Provision of Consolidated Market Data A. Introduction B. Proposed Decentralized Consolidation Model 1. Comments on the Decentralized Consolidation Model 2. Comments on the Effectiveness of the Proposal 3. Comments on the Viability of the Decentralized Consolidation Model 4. Comments on Conflicts of Interest 5. Comments on Latency 6. Comments on the Potential Impact on Costs for Consolidated Market Data 7. Comments on Complexity of the Decentralized Consolidation Model 8. Comments on Surveillance and Regulation in the Decentralized Consolidation Model 9. Access to Data: Rule 603(b) 10. Calculation of the National Best Bid and National Best Offer Under Rule 600(b)(50) C. Competing Consolidators 1. Definition of ‘‘Competing Consolidator’’ Under Rule 600(b)(16) 2. Comments on Resiliency 3. Comments on Data Quality 4. Comments on Competing Consolidator Products 5. Comments on Selection of a Competing Consolidator 6. Comments on a Standardized Consolidation Process 7. Registration and Responsibilities of Competing Consolidators: Rule 614 8. Responsibilities of a Competing Consolidator D. Self-Aggregators 1. Proposal 2. Final Rule and Response to Comments E. Amendment to the Effective National Market System Plan(s) for NMS Stocks Under Rule 614(e) 1. Proposal 2. Final Rule and Response to Comments F. Systems Capability: Amendment to Rule 1000 of Regulation SCI To Expand ‘‘SCI Entities’’ Definition To Include ‘‘SCI Competing Consolidator’’; Adoption of Rule 614(d)(9): Systems Integrity G. Effects on the National Market System Plan Governing the Consolidated Audit Trail H. Transition Period and Compliance Dates 1. Proposal 2. Final Rule and Response to Comments PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 I. Alternatives to the Centralized Consolidation Model 1. Distributed SIP Alternative 2. Single SIP Alternative 3. Other Alternatives IV. Paperwork Reduction Act A. Summary of Collection of Information 1. Registration Requirements and Form CC 2. Competing Consolidators’ Public Posting of Form CC 3. Competing Consolidator Duties and Data Collection 4. Recordkeeping 5. Reports and Reviews 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks 7. 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 Consolidators’ Public Posting of Form CC 3. Competing Consolidator Duties and Data Collection 4. Recordkeeping 5. Reports and Reviews 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks 7. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations C. Respondents 1. Initial Estimate D. Total Initial and Annual Reporting and Recordkeeping Burden 1. Registration Requirements and Form CC 2. Competing Consolidators’ Public Posting of Form CC 3. Competing Consolidator Duties and Data Collection 4. Recordkeeping 5. Reports and Reviews 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks 7. 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. Competing Consolidators’ Public Posting of Form CC 4. Recordkeeping E:\FR\FM\09APR2.SGM 09APR2 18598 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations 5. Reports and Reviews 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks 7. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations G. Revisions to Current Regulation SCI Burden Estimates and Adoption of Rule 614(d)(9) 1. Proposed Estimates—Burden and Costs 2. Comments/Responses on Burden and Costs 3. Adopted Estimates—Burden and Costs V. 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 C. Economic Effects of the Rule 1. 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 D. Impact on Efficiency, Competition, and Capital Formation 1. Efficiency 2. Competition 3. Capital Formation E. Alternatives 1. Introduce Decentralized Consolidation Model With Addition of Full Depth of Book to 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 VI. Regulatory Flexibility Certification VII. Other Matters VIII. Statutory Authority I. Introduction and Background The widespread availability of timely NMS information is critical to the ability of market participants to participate effectively in the U.S. securities markets. NMS information is made widely available to investors through the national market system, a system set forth by Congress in Section 11A of the Exchange Act 1 and facilitated by the Commission in Regulation NMS. The current national market system for NMS information was 1 15 U.S.C. 78k–1. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 developed in the late 1970s, and the Commission is adopting changes that will modernize the national market system for NMS information for the benefit of investors. Section 11A of the Exchange Act directs the Commission to facilitate the establishment of a national market system for the trading of securities in accordance with the Congressional findings and objectives set forth in Section 11A(a)(1) of the Exchange Act.2 Among the findings and objectives of Section 11A(a)(1) are that new data processing and communications techniques create the opportunity for more efficient and effective market operations,3 and that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to ensure the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities.4 Section 11A of the Exchange Act also authorizes the Commission to prescribe rules 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.’’ 5 In furtherance of these purposes, the Commission has sought through its rules and regulations to help ensure that certain ‘‘core data’’ 6 is widely available for reasonable fees.7 The Commission has recognized that investors must have certain core data ‘‘to participate in the U.S. equity markets.’’ 8 On February 14, 2020, the Commission proposed to amend Regulation NMS to better achieve the goal of Section 11A of the Exchange Act of assuring ‘‘the availability to brokers, dealers, and investors of information with respect to quotations for and transactions in securities’’ that is 2 15 U.S.C. 78k–1(a)(1). 15 U.S.C. 78k–1(a)(1)(B). See also S. Rep. No. 94–75, 94th Cong., 1st Sess. (1975) (noting that the systems for collecting and distributing consolidated market data would ‘‘form the heart of the national market system’’). 4 See 15 U.S.C. 78k–1(a)(1)(C). 5 15 U.S.C. 78k–1(c)(1)(B). 6 See infra note 17 and accompanying text (defining ‘‘core data’’). 7 See Rule 603 of Regulation NMS; see also, e.g., Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37560 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’) (‘‘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.’’). 8 Regulation NMS Adopting Release, supra note 7, at 37560. 3 See PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 prompt, accurate, reliable, and fair.9 The amendments as adopted endeavor to fulfill this goal of Section 11A of the Exchange Act by updating the content of ‘‘core data’’ and the manner in which it is provided to investors in the national market system. A. Current Market Data Content and Dissemination Model Under Regulation NMS The Commission established many of the current requirements of the national market system under Regulation NMS and approved the three effective national market system plans shortly after Congress enacted Section 11A in the 1975 amendments to the Exchange Act (‘‘1975 Amendments’’).10 Under Regulation NMS and the Equity Data Plans,11 the self-regulatory organizations (‘‘SROs’’) are required to provide certain quotation12 and transaction information13 for each NMS stock to an exclusive plan processor (‘‘exclusive SIP’’),14 which consolidates 9 See Securities Exchange Act Release No. 88216 (Feb. 14, 2020), 85 FR 16726, 27 (Mar. 24, 2020) (‘‘Market Data Infrastructure Proposing Release’’ or ‘‘Proposing Release’’). 10 The three effective national market system plans that govern the collection, consolidation, processing, and dissemination of certain NMS information are: (1) The Consolidated Tape Association Plan (‘‘CTA Plan’’); (2) the Consolidated Quotation Plan (‘‘CQ Plan’’); and (3) the Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation, and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileges Basis (‘‘UTP Plan’’) (together, the ‘‘Equity Data Plans’’). Each of the Equity Data Plans is an effective national market system plan under 17 CFR 242.608 (Rule 608) of Regulation NMS. See also Securities Exchange Act Release Nos. 10787 (May 10, 1974), 39 FR 17799 (order approving CTA Plan); 15009 (July 28, 1978), 43 FR 34851 (Aug. 7, 1978) (order temporarily approving CQ Plan); 16518 (Jan. 22, 1980), 45 FR 6521 (Jan. 28, 1980) (order permanently approving CQ Plan); 28146 (June 26, 1990), 55 FR 27917 (July 6, 1990) (order approving UTP Plan). The options exchanges are participants in the Limited Liability Company Agreement of Options Price Reporting Authority, LLC (‘‘OPRA Plan’’), a plan under Rule 608 of Regulation NMS, which governs the collection, consolidation, processing, and dissemination of last sale and quotation information for listed options. See Securities Exchange Act Release Nos. 17638 (Mar. 18, 1981), 22 SEC. Docket 484 (Mar. 31, 1981); 61367 (Jan. 15, 2010), 75 FR 3765 (Jan. 22, 2010). 11 Rule 603(b) of Regulation NMS, 17 CFR 242.603(b), requires that every national securities exchange on which an NMS stock is traded and national securities association act jointly pursuant to one or more effective national market system plans to disseminate consolidated information on quotations for and transactions in NMS stocks, and that such plan or plans provide for the dissemination of all consolidated information for an individual NMS stock through a single plan processor. 12 See Rule 602 of Regulation NMS. 13 See 17 CFR 242.601 (Rule 601 of Regulation NMS). 14 See Rule 600(b)(67) of Regulation NMS, 17 CFR 242.600(b)(67) (defining plan processor). See also E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations this information and makes it available to market participants on the consolidated tapes.15 For each NMS stock, the Equity Data Plans currently provide for the dissemination of top-ofbook (‘‘TOB’’) data and transaction information, generally defining consolidated market information (or ‘‘core data’’) as consisting of: (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 national best offer (‘‘NBBO’’) 16 (i.e., the highest bid and lowest offer currently available on any exchange).17 In addition to disseminating core data, the exclusive SIPs collect, calculate, and disseminate certain regulatory data— including information required by the National Market System Plan to Address Extraordinary Market Volatility (‘‘LULD Plan’’),18 information relating to regulatory halts and market-wide circuit breakers, and information regarding the short-sale price test pursuant to Rule 201 of Regulation SHO.19 They also collect and disseminate other NMS information and disseminate certain administrative messages.20 Together with core data, the Commission refers to this broader set of data for purposes of this release as ‘‘SIP data.’’ The purpose of the Equity Data Plans, approved under Regulation NMS, is to facilitate the collection and dissemination of SIP data so that the Section 3(a)(22)(B) of the Exchange Act, 15 U.S.C. 78c(22)(B) (defining exclusive processor). 15 The Equity Data Plans disseminate SIP data over three separate networks: (1) Tape A for securities listed on the New York Stock Exchange (‘‘NYSE’’); (2) Tape B for securities listed on exchanges other than NYSE and Nasdaq; and (3) Tape C for securities listed on Nasdaq. These tapes are referred to as the ‘‘consolidated tapes.’’ The CTA Plan governs the collection, consolidation, processing, and dissemination of last sale information for Tape A and Tape B securities. The CQ Plan governs the collection, consolidation, processing, and dissemination of quotation information for Tape A and Tape B securities. Finally, the UTP Plan governs the collection, consolidation, processing, and dissemination of last sale and quotation information for Tape C securities. 16 See Rule 600(b)(50) of Regulation NMS for the definition of NBBO. 17 See Bloomberg Order, infra note 22, at 3; see also Rescission of Effective-Upon-Filing Procedures for NMS Plan Fee Amendments, Securities Exchange Act Release No. 89618 (Aug. 19, 2020), 85 FR 65470 (Oct. 15, 2020) (‘‘Effective-Upon-Filing Adopting Release’’). 18 See Limit Up Limit Down Plan, available at http://www.luldplan.com (last accessed Sept. 24, 2020). 19 Rule 201(b)(3). 20 For example, messages regarding cancelled and erroneous trades are included in the data disseminated by the exclusive SIPs. See, e.g., Consolidated Tape System, Multicast Output Binary Specification, 36, 47 (October 2, 2020), available at https://www.ctaplan.com/publicdocs/ctaplan/CTS_ Pillar_Output_Specification.pdf. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 public has ready access to a ‘‘comprehensive, accurate, and reliable source of information for the prices and volume of any NMS stock at any time during the trading day.’’21 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.22 Many of the requirements under Regulation NMS and the Equity Data Plans that establish the national market system have not been updated since their adoption despite dramatic changes in the operation of the market and market participants’ information needs.23 In addition to the SIP data provided via the Equity Data Plans, most exchanges have developed many proprietary TOB products that contain the quotation and transaction data that they provide to the exclusive SIPs as well as proprietary depth-of-book (‘‘DOB’’) products that contain more extensive information that is not provided by the exclusive SIPs, such as complete order-by-order information, full depth of book information, auction information, and odd-lot quotation information.24 The exchanges provide individual exchange proprietary data products directly to market participants and sometimes consolidate them with their affiliated exchanges’ proprietary data feeds. The exchanges make these proprietary data products available with different connectivity and transmission options, many of which are faster than those available for the consolidated tapes. Market participants that purchase proprietary DOB data feeds directly 21 Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3593 (Jan. 21, 2010). 22 See In the Matter of the Application of Bloomberg L.P., Securities Exchange Act Release No. 83755 at 3 (July 31, 2018), available at https:// www.sec.gov/litigation/opinions/2018/34-83755.pdf (‘‘Bloomberg Order’’); SEC Concept Release: Regulation of Market Information Fees and Revenues, Securities Exchange Act Release No. 42208 (Dec. 9, 1999), 64 FR 70613, 70615 (Dec. 17, 1999) (‘‘Market Information Concept Release’’) (stating that the distribution of core data ‘‘is the principal tool for enhancing the transparency of the buying and selling interest in a security, for addressing the fragmentation of buying and selling interest among different market centers, and for facilitating the best execution of customers’ orders by their broker-dealers’’). 23 See Proposing Release, 85 FR at 16728, n. 13 and accompanying text. 24 While the pre-Regulation NMS rules permitted the independent distribution of quotes by individual SROs, Rule 603(a) of Regulation NMS, 17 CFR 242.603(a), was adopted to impose ‘‘uniform standards’’ on such distribution (i.e., the ‘‘fair and reasonable’’ and ‘‘not unreasonably discriminatory’’ standards). See Regulation NMS Adopting Release, supra note 7, at 37569. Prior to Regulation NMS, however, SROs and their members were prohibited from disseminating their trade reports independently. Id. at 37589. PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 18599 generally aggregate the information in a decentralized manner in an effort to create a consolidated view of the market that is both more timely and more complete than the exclusive SIP data feeds provided by the Equity Data Plans. As discussed further below, Regulation NMS and the Equity Data Plans have not kept pace with the business demands of market participants.25 While the exchanges have developed individual proprietary data products to meet the needs of some market participants, the Commission believes that there should be improvement to, and modernization of, the national market system to fulfill the goals of Section 11A of the Exchange Act and to meet the current core data demands of market participants.26 Over 25 See infra Section III.A. generally expressed concern that SIP data provided by the Equity Data Plans was not sufficient for some market participants. See, e.g., letters to Vanessa Countryman, Secretary, Commission, from Mehmet Kinak, Vice President and Global Head of Systematic Trading and Market Structure, and Jonathan D. Siegel, Vice President and Senior Legal Counsel, Legislative and Regulatory Affairs, T. Rowe Price, dated June 3, 2020, (‘‘T. Rowe Price Letter’’) at 1 (‘‘Unfortunately, as the SIPs have not kept pace with the dramatic technological and market developments over the past decade, they are no longer satisfying the needs of a broad cross-section of market participants. Due to its limited content and higher latency, the usage of SIP data is adequate only for investors that visually consume NMS information (e.g., humans looking at quotes on a screen’’); Thomas M. Merritt, Deputy General Counsel, Virtu Financial, Inc., dated May 26, 2020, (‘‘Virtu Letter’’) at 2 (‘‘the ‘core data’ offered through the SIPs is no longer sufficient for most market participants to trade competitively in today’s market place.’’), 5; Michael Blasi, Vice President, Enterprise Infrastructure, and Krista Ryan, Vice President and Associate General Counsel, Fidelity Investments, dated May 26, 2020, (‘‘Fidelity Letter’’) at 2 (‘‘the SIPs have not kept pace with the U.S. equity markets which, through technological and market developments, now offer more products, faster, and at a lower cost.’’); Joseph J. Barry, Senior Vice President and Global Head of Regulatory, Industry, and Government Affairs, State Street Corporation, dated May 26, 2020, (‘‘State Street Letter’’) at 2 (‘‘. . . regulatory obligations and customer expectations related to best execution, transaction cost analysis, transparency and market competition generated further need for data that is unavailable on the SIPs. As a result, market participants have become increasingly dependent on proprietary data feeds marketed by the exchanges outside of the SIPs.’’); Hubert De Jesus, Managing Director, Global Head of Market Structure and Electronic Trading, and Samantha DeZur, Director, Global Public Policy, BlackRock, Inc., dated May 26, 2020, (‘‘BlackRock Letter’’) at 1 (‘‘However, the current model for and content of NMS market data has not kept pace with the evolution in equity markets and correspondingly the quality of the Securities Information Processors (‘‘SIPs’’) has declined, lowering public confidence in the market.’’); Jennifer W. Han, Associate General Counsel, Managed Funds Association, dated May 29, 2020, (‘‘MFA Letter’’) at 2 (‘‘Today, the current exclusive SIP model and content of core data does not serve the needs of investors, many of whom must subscribe to the exchanges’ proprietary market data feeds at considerable additional cost to trade 26 Commenters E:\FR\FM\09APR2.SGM Continued 09APR2 18600 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations the last 15 years, the exchanges have moved from largely manual, floor-based models to predominantly electronic trading systems and market participants have likewise largely incorporated sophisticated, latency-sensitive, and data dependent electronic trading technologies for their trading needs. This has contributed to some market participants stating that they require additional, and more timely, information for their best execution analysis.27 The Commission agrees that more comprehensive and latencysensitive NMS information can be significantly beneficial in facilitating informed trading decisions, and the Commission believes that such information should be more widely distributed and more readily accessible. Further, while the proprietary DOB products provided by exchanges contain the data elements included within expanded core data, commenters have stated that the cost of these proprietary market data products inhibits the purchase of, and the widespread dissemination of, this data to market participants that may need it to participate effectively in the markets.28 effectively, while others are forced to rely on inferior information and outdated technology.’’); Peter D. Stutsman, Global Equity Trading Manager, The Capital Group Companies, Inc., dated June 2, 2020, (‘‘Capital Group Letter’’) at 2 (‘‘Over the last 15 years, the discrepancy in data elements and latency between proprietary feeds and the consolidated tape has expanded such that the SIP is no longer a realistic tool for institutional investors or broker-dealers in meeting their respective best execution obligations when routing orders.’’); Makan Delrahim, Assistant Attorney General, U.S. Department of Justice, Antitrust Division, Rene L. Augustine, Deputy Assistant Attorney General, Michael F. Murray, Deputy Assistant Attorney General, David B. Lawrence, Chief, Karina B. Lubell, Assistant Chief, Charles J. Ramsey, Attorney, Antitrust Division Competition Policy and Advocacy Section, and Ihan Kim, Attorney, Technology and Financial Services Section, dated May 26, 2020, (‘‘DOJ Letter’’); Mark Garabedian, Manager, Trading Data and Analytics, and Lisa Mahon Lynch, Associate Director, Global Trading, Wellington Management Company LLP, dated May 27, 2020, (‘‘Wellington Letter’’). 27 See, e.g., letters to Vanessa Countryman, Secretary, Commission, from Lev Bagramian, Senior Securities Policy Advisor, Better Markets, Inc., dated May 26, 2020, (‘‘Better Markets Letter’’) at 1– 2; Joe Wald and Ray Ross, Managing Directors, BMO Capital Markets Group and Co-Heads of Electronic Trading, Clearpool, dated June 2, 2020, (‘‘Clearpool Letter’’) at 1, 11; John Ramsay, Chief Market Policy Officer, Investors Exchange LLC, dated May 28, 2020, (‘‘IEX Letter’’) at 5; Jim Considine, Chief Financial Officer, McKay Brothers LLC, dated May 31, 2020, (‘‘McKay Letter’’) at 1; Rich Steiner, Head of Client Advocacy and Market Innovation, RBC Capital Markets, LLC, dated May 27, 2020, (‘‘RBC Letter’’) at 4; Ellen Greene, Managing Director, Equity and Options Market Structure, SIFMA, dated May 26, 2020, (‘‘SIFMA Letter’’) at 3–4; Capital Group Letter at 2; DOJ Letter at 2, 4; State Street Letter at 2; T. Rowe Price Letter at 1; Virtu Letter at 2. 28 See, e.g., Virtu Letter at 5 (‘‘[I]ncluding depth of book information in the SIP will allow investors VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission is concerned that the two different methods of data dissemination—SIP data provided pursuant to Regulation NMS and the Equity Data Plans and proprietary data products provided by the exchanges— have contributed to the development of a two-tiered data market that raises fundamental concerns about the ability of the national market system to continue to ensure that the goals of Section 11A of the Exchange Act are being met, including: (i) Fair competition among brokers and dealers; 29 (ii) the availability to brokers, dealers, and investors of NMS information; 30 and (iii) the practicability of brokers executing investors’ orders at the best available prices.31 Section 11A of the Exchange Act directs the Commission to facilitate the establishment of a national market system in accordance with these, and other, Congressional findings. Therefore, the Commission believes that Regulation NMS should be amended to update the national market system in accordance with the findings and to carry out the objectives set forth in who cannot afford to pay for costly Exchange proprietary feeds to trade more competitively in the marketplace . . . .’’); SIFMA Letter at 2 (‘‘[W]e do not believe that the SIPs currently provide the necessary data to market participants at the requisite speed to efficiently trade in today’s high speed and automated marketplace. As a result, many broker-dealers, asset managers and other market participants are forced to purchase proprietary data feeds from individual exchanges to create a consolidated and robust view of the market, while additionally bearing the economic burden of having to purchase consolidated data from the SIPs. This results in an enormous cost burden on the marketplace and creates a two-tiered market for market data by limiting access to critical market data at the fastest speeds to those who can afford to pay the exorbitant fees charged for it by the exchanges.’’); MFA Letter at 2 (‘‘Today, the current exclusive SIP model and content of core data does not serve the needs of investors, many of whom must subscribe to the exchanges’ proprietary market data feeds at considerable additional cost to trade effectively, while others are forced to rely on inferior information and outdated technology.’’); Clearpool Letter at 2 (‘‘As we have stated on a number of previous occasions, of all the issues relating to the costs of trading, the trend toward higher market data fees has had the most negative impact on the securities markets. It remains increasingly difficult for many broker-dealers to compete in the current market environment due, in part, to issues related to the costs associated with trading.’’); Dorothy Donohue, Deputy General Counsel, Securities Regulation, Investment Company Institute, dated May 26, 2020, (‘‘ICI Letter’’) at 9–10 (‘‘Including auction information in the consolidated feed would enhance transparency into market activity. Doing so also would eliminate proprietary data costs as a barrier to auction trading and encourage a broader range of market participants to submit trading interest.’’). 29 Section 11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C)(ii). 30 Section 11A(a)(1)(C)(iii) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C)(iii). 31 Section 11A(a)(1)(C)(iv) of the Exchange Act, 15 U.S.C. 78k–1(a)(1)(C)(iv). PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 Section 11A and to ‘‘assure the prompt, accurate, reliable, and fair collection, processing, distribution, and publication’’ of NMS information and ‘‘the fairness and usefulness of the form and content of such information.’’ 32 B. National Market System Initiatives and the Market Data Infrastructure Proposing Release The Commission has monitored the national market system and its operation in light of changes in the markets and, over the years, has observed increased concerns about the usefulness, fairness, and promptness of the consolidated tapes. The Division of Trading and Markets held a Roundtable on Market Data in October of 2018,33 at which some market participants discussed their views about the shortcomings of the existing centralized consolidation model and the need for updates to the national market system to reflect the now widespread use of electronic trading and the need for more, faster NMS information.34 Further, the Commission has considered how the provision of the current consolidated tapes and proprietary data feeds has affected investors’ access to NMS information. The Commission understands that different types of investors have different information needs. However, as stated above, the Commission is concerned that a two-tiered system has developed in which certain market participants who are able to afford, and choose to pay for, the exchanges’ proprietary DOB data feeds and associated connectivity and transmission offerings receive more content-rich data faster than those who do not receive these data feeds, such as market participants that face higher barriers to entry from data and other exchange fees.35 Market participants that do not receive proprietary DOB feeds may be affected in their efforts to seek best execution and otherwise effectively compete with market participants that receive proprietary DOB data feeds because they do not obtain access to the additional content 32 Section 11A(c)(1)(B) of the Exchange Act, 15 U.S.C. 78k–1(c)(1)(B). 33 See Equity Market Structure Roundtables, Oct. 25–26, 2018: Roundtable on Market Data and Market Access, SEC, available at https:// www.sec.gov/spotlight/equity-market-structureroundtables (‘‘Market Data Roundtable’’). 34 See Proposing Release, 85 FR at 16765, n. 393 and accompanying text. 35 See Proposing Release, 85 FR at 16768. See also infra Section V.B.3(b). Proprietary data fees have increased over the last decade, and are generally more expensive relative to SIP data fees, and there are indicia that exchanges may not be subject to robust competition with respect to market data. See infra notes 1780–1788 and accompanying text. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and may be receiving data in a slower manner. On the other hand, the exchanges’ proprietary TOB products, which are typically cheaper than the SIP data, may be purchased instead of SIP data for certain use cases in certain market segments (e.g., retail investors).36 These proprietary TOB products have decreased many market participants’ utilization of SIP data even though they do not contain all ‘‘core data’’ and do not reflect TOB quotations and transactions from all markets and, therefore, do not display the NBBO. Market participants that solely use proprietary TOB products do not see all quotations in the market, including at times superior quotations, or all executed transactions and instead see only a subset of consolidated data.37 Accordingly, the Commission has undertaken three initiatives related to the provision of NMS information in the national market system. These initiatives work together to address specific, significant, separate but overlapping, issues in the national market system and are aimed at improving discrete areas in the national market system. First, the Commission amended the process so that, instead of becoming effective upon filing, changes to fees proposed by the Equity Data Plans would be published for public comment and approved by the Commission.38 These procedures enhance the efficiency and transparency of the process of assessing new NMS plan fees. Second, the Commission ordered the participants to the Equity Data Plans to submit a new, single effective national market system plan, i.e., the New Consolidated Data Plan, for Commission consideration under Rule 608 of Regulation NMS.39 The New Consolidated Data Plan includes specific governance provisions that the Commission believes will help to address concerns that have been raised about the existing Equity Data Plans, 36 See supra note 17 and accompanying text. Commission notes that the number of Professional subscribers to the SIP feeds decreased 23.5 percent between the first quarter of 2010, which is the first quarter for which Professional subscriber data for the SIP Plans was available after the introduction of the first proprietary TOB product in 2009, and the end of 2019. See CTA Plan, Metrics, available at https:// www.ctaplan.com/sip-metrics (last accessed Nov. 20, 2020); UTP Plan, Metrics, available at http:// www.utpplan.com/metrics (last accessed Nov. 25, 2020). For context, the number of registered representatives reported by FINRA during this time period decreased by only 1.0 percent. See FINRA, Statistics, available at https://www.finra.org/ newsroom/statistics (last accessed Nov. 19, 2020). 38 See Effective-Upon-Filing Adopting Release, supra note 17. 39 17 CFR 242.608. 37 The VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 including conflicts of interest stemming from the sale of competing proprietary data products by the exchanges that currently have majority voting power on the Operating Committee(s) of the Equity Data Plans.40 These committees are, among other things, responsible for proposing fees for SIP data. Finally, in this release, the Commission is adopting amendments to update and modernize the infrastructure of the national market system by adding data content to NMS information as defined under Regulation NMS and by amending the manner in which such NMS information is collected, consolidated, and disseminated. The Commission published the Proposing Release on its website on February 14, 2020. The comment period of 60 days from Federal Register publication ended on May 26, 2020. Many commenters asked the Commission to extend the comment period,41 particularly in light of the COVID–19 pandemic. The Commission has considered all comment letters received to date, including comments that were submitted after the comment deadline had passed. The last comment letter was received on October 13, 2020. Accordingly, the Commission believes that the time during which comments have been accepted is reasonable. C. Enhancements to the Content of NMS Information The Commission is adopting amendments to increase the content of NMS information that is required to be made available under Regulation NMS and to introduce a competitive 40 See Joint Industry Plan; Notice of Filing of a National Market System Plan Regarding Consolidated Equity Market Data, Securities Exchange Act Release No. 34–90096 (Oct. 6, 2020), 85 FR 64565 (Oct. 13, 2020) (‘‘New Consolidated Data Plan Notice’’). See also infra Section III.E for a discussion on the Governance Order. 41 See, e.g., letter from John A. Zecca, Executive Vice President, Chief Legal Officer, and Chief Regulatory Officer, Nasdaq, to Jay Clayton, Chairman, Commission, dated Apr. 7, 2020 (‘‘Nasdaq Letter II’’); letters to Vanessa Countryman, Secretary, Commission, from Elizabeth K. King, Chief Regulatory Officer, ICE, and General Counsel and Corporate Secretary, NYSE, dated May 15, 2020 (‘‘NYSE Letter I’’); Linda Moore, President and Chief Executive Officer, TechNet, dated Apr. 29, 2020 (‘‘TechNet Letter I’’); Christopher A. Iacovella, Chief Executive Officer, American Securities Association, dated Apr. 23, 2020; Kimberly Unger, Chief Executive Officer and Executive Director, Securities Traders Association of New York, Inc. (‘‘STANY’’), dated May 14, 2020 (‘‘STANY Letter I’’); Institutional Traders Advisory Council to Nasdaq, dated May 15, 2020; Gary A. LaBranche, President and Chief Executive Officer, National Investor Relations Institute, dated May 22, 2020; R T Leuchtkafer, dated May 20, 2020; Patrick J. Healy, Founder and CEO, Issuer Network, dated May 20, 2020 (going further by suggesting the Commission ‘‘table this proposal’’). PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 18601 decentralized consolidation model to disseminate the information. The content of NMS information that is made available under the rules of the national market system has not been adequately updated to reflect the needs of market participants trading in the U.S. market. As the U.S. market has evolved, market participants’ information needs have changed; many market participants need additional information to trade efficiently and competitively. Today, the only means for market participants to receive a wider array of information than what is provided under the national market system is through proprietary data offerings from exchanges (and their affiliates). The Commission is concerned that the national market system, including the content of SIP data and the way such data is disseminated, significantly lags behind these proprietary data offerings and delivery methods established by the exchanges and their affiliates. Therefore, as discussed further below, the Commission believes that the content of NMS information under the rules of the national market system needs to be enhanced to address the needs of market participants. The adopted definitions will expand and modernize the content of NMS information that is made available in the U.S. market in a manner that the Commission believes will better facilitate competition; help to ensure the prompt, accurate, reliable, and fair collection of such information; and help to ensure the usefulness of NMS information. The Commission is adopting a new model for the provision of consolidated market data as discussed in Section III below, but the Commission believes that market participants and investors will benefit from enhanced NMS information regardless of the method by which they receive it. In particular, as a result of the new round lot definition and the inclusion of odd-lot quotations in core data, retail investors will be able to see, and more readily access, better-priced quotations. Further, through the addition of depth of book data and auction information in core data, the scope of NMS information will, to a greater extent, allow some market participants to trade in a more informed, competitive, and efficient manner. The Commission believes that even investors that do not consume that data directly will benefit because their brokers will be able to use the enhanced NMS information to trade more efficiently E:\FR\FM\09APR2.SGM 09APR2 18602 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and competitively and to achieve best execution for their customer orders.42 To expand and enhance the data that is required to be made available for collection, consolidation, and dissemination under Regulation NMS, the Commission is adopting several new defined terms in Rule 600 of Regulation NMS, including ‘‘consolidated market data,’’ ‘‘consolidated market data product,’’ ‘‘core data,’’ ‘‘round lot,’’ ‘‘auction information,’’ ‘‘depth-of-book data,’’ ‘‘odd-lot information,’’ ‘‘regulatory data,’’ ‘‘administrative data,’’ and ‘‘self-regulatory organizationspecific program data.’’ Two of the new definitions in Regulation NMS— consolidated market data 43 and core data 44—specify the components of NMS information that must be made available for collection, consolidation, and dissemination under the national market system.45 The other new defined terms establish the scope of information included within the definitions of consolidated market data and core data. The definitions are designed to ensure that NMS information that is made available to market participants meets the goals set forth in Section 11A of the Exchange Act.46 The Commission is defining three new data elements as ‘‘core data:’’ (1) Information about better priced quotations in higher priced stocks (implemented through a new definition of ‘‘round lot’’ and the inclusion of certain odd-lot information), (2) information about quotations that are outside of the best-priced quotations (implemented through a new ‘‘depth of book data’’ definition), and (3) information about orders that are participating in auctions (implemented through a new definition of ‘‘auction information’’). Round Lot Definition. To provide investors with information about better 42 See infra Section II.C.2(a). market data’’ is defined in Rule 600(b)(19) as the following data, consolidated across all national securities exchanges and national securities associations: (i) Core data; (ii) regulatory data; (iii) administrative data; (iv) selfregulatory organization-specific program data; and (v) additional regulatory, administrative, or selfregulatory organization-specific program data elements defined as such pursuant to the effective national market system plan or plans required under § 242.603(b). 44 ‘‘Core data’’ is defined in Rule 600(b)(21) of Regulation NMS. 45 See supra Section I.A for a discussion of the regulatory requirements for NMS information. ‘‘Consolidated market data product’’ is defined as any data product developed by a competing consolidator that contains consolidated market data or any of the elements or subcomponents thereof. See Rule 600(b)(20); infra Section II.B.2. 46 See infra note 151 and accompanying text with respect to certain information that is not included in the definition of core data. 43 ‘‘Consolidated VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 priced orders in high-priced stocks, the Commission proposed a five-tier definition of ‘‘round lot’’ based on the share price of an NMS stock.47 The Commission also proposed to amend the definition of protected quotation to require that protected quotes be of at least 100 shares.48 These two changes would have established a NBBO 49 that could differ from the best protected bid and best protected offer (‘‘PBBO’’). Commenters responded by expressing support and raising several issues and concerns.50 For the reasons set forth below,51 the Commission has modified the round lot definition so that it has fewer tiers and is based on a higher notional value. Specifically, the adopted round lot definition is 100 shares for stocks priced at $250 or less, 40 shares for stocks priced at $250.01 to $1,000, 10 shares for stocks priced at $1,000.01 to $10,000, and 1 share for stocks priced at $10,000.01 or more. Further, the Commission has decided not to adopt the proposed amendment to the definition of protected quotation. A protected quotation will remain a round lot; however, the protected quotation will change only insomuch as the round lot definition is changing. The Commission also has decided to further increase the availability of information about better priced orders by adopting an additional element of ‘‘core data’’ for aggregated odd-lot quotations on each exchange that are priced at or better than the NBBO.52 The Commission believes that the new definition of round lot and the increased availability of better priced odd-lot information will provide investors with valuable information about the best prices available and help to facilitate more informed order routing decisions and the best execution of investor orders. Depth of Book Data Definition. The Commission proposed a definition of depth of book data to include information about orders outside of the NBBO and PBBO because information about the depth of book on each exchange helps market participants decide where to place orders and provides information about order book imbalances and potential future price moves in a NMS stock.53 The Commission, for the reasons set forth below, is adopting the definition of 47 See infra Section II.D.1. infra Section II.E.1. 49 See Rule 600(b)(50). 50 See infra Sections II.D.2(a); II.E.2. 51 Id. 52 See infra Section II.C.2(b). 53 See infra Section II.F.1. 48 See PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 depth of book data with a few modifications.54 First, the definition has been modified to reflect the fact that the definition of protected quotation is not changing, so it is not necessary to identify depth of book between the NBBO and PBBO. Second, the definition has been modified to specify that the five price levels included in the definition of depth of book data are measured from the NBBO. Third, the definition has been modified to specify that the aggregate size at each of the included price levels shall be attributed to each exchange so that market participants know where liquidity resides. Lastly, depth of book data will include all quotation sizes on a facility of a national securities association, instead of only on exchanges, as proposed. Adoption of the depth of book data definition with these modifications will provide useful information to market participants and support efficient order handling and execution. Auction Information Definition. Finally, the Commission proposed a definition of auction information to include information about orders that participate in auctions.55 Auctions have become increasingly significant liquidity events. Information about the orders participating in an auction can help market participants decide whether and how to submit orders in and around an auction and understand the potential price moves upon completion of the auction. For the reasons set forth below, the Commission is adopting the definition of auction information as proposed except for a modification to specify that the definition only includes auction information that an exchange publicly disseminates on its proprietary feeds. D. Enhancements to the Provision of Consolidated Market Data The Commission is adopting a new model for the provision of consolidated market data under Regulation NMS to foster a competitive environment for the dissemination of market data. Under the new decentralized consolidation model, competing consolidators will collect, consolidate, and disseminate consolidated market data products, and self-aggregators will collect and consolidate such data for their own internal use. By fostering a competitive environment for the provision and dissemination of critical market data to investors and other market participants, this new model will better achieve the goals of Section 11A of the Exchange 54 See 55 See E:\FR\FM\09APR2.SGM infra Section II.F. infra Section II.G.1. 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Act and help to ensure broad availability to brokers, dealers, and investors of information with respect to quotations for and transactions in NMS stocks that is prompt, accurate, reliable, and fair. To implement this model, the Commission is amending Regulation NMS rules and adopting a new rule and a new form for entities seeking to register as competing consolidators. Since Congress adopted the 1975 Amendments, the Commission has not substantially updated the distribution of NMS information in the national market system to reflect how the markets operate and investors’ trade. Today, markets rely on highly sophisticated electronic trading systems that can consume many points of data at speeds measured in sub-second increments. The data delivery mechanisms and data feeds established under the national market system have not kept up with the current needs of market participants. To fulfill the data needs of market participants, the exchanges have developed proprietary low-latency market data products that are designed for automated trading systems. These data products, which include data such as depth of book and order imbalance information for opening and closing auctions, are faster and more contentrich than the delivery mechanisms and content that the SROs provide pursuant to Regulation NMS and the Equity Data Plans. Because of this disparity, many market participants use the exchanges’ proprietary market data products for their competitive electronic trading systems.56 In addition, the exchanges have developed proprietary TOB data products for market participants that are less expensive and less content-rich than the data products that the SROs provide via the exclusive SIPs pursuant to Regulation NMS and the Equity Data Plans.57 Retail investors use these proprietary TOB products, which are specific to an individual exchange or affiliated exchanges. Because they are cheaper and faster, proprietary TOB products—despite their more limited content—decrease the demand for data delivered under the Equity Data Plans.58 The Commission is concerned that market participants who solely use individual exchange proprietary TOB 56 See infra Section III.B.2; note 588 and accompanying text. 57 The SROs are required to provide NMS information to the national market system plan(s) disseminated to market participants under Regulation NMS. See supra Section I.A. 58 Proprietary TOB products, like proprietary DOB products, are provided directly to market participants and are not centrally consolidated before dissemination as is required of SIP data under the national market system. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 products are not getting the full consolidated view of the market, may be missing better priced quotes on other exchanges, and may only have a partial view of the trades that were executed in the market. The Commission believes that proprietary DOB and TOB data products that decrease the utilization of SIP data highlight fundamental issues regarding the fairness, usefulness, and efficiency of NMS information and how it is distributed today. Therefore, as discussed further below, the Commission is adopting a new dissemination model for the national market system—a decentralized consolidation model that will foster a competitive environment in the provision of consolidated market data. To effect this change, the Commission is amending Rule 603 under Regulation NMS to: (1) Remove the requirement that all consolidated information for an individual NMS stock be disseminated through a single, exclusive plan processor; and (2) require each national securities exchange and national securities association to make available to competing consolidators and selfaggregators 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.59 Commenters who responded to this proposal expressed support and raised several issues and concerns.60 For the reasons set forth below, the Commission is adopting the decentralized consolidation model largely as proposed. The new decentralized consolidation model, with its fostering of a competitive environment, will modernize the provision of consolidated market data in the U.S. markets. Today, the national market system comprises two exclusive SIPs that consolidate and disseminate certain NMS information on a noncompetitive basis.61 The noncompetitive structure, as required under Regulation NMS, no longer adequately ensures the timely dissemination of NMS information. The Commission believes the fostering of a competitive environment and enabling the introduction of new market forces into the collection, consolidation, and dissemination process through a 59 See also infra Section III.B.9(f) discussing the applicability of Rule 603(a). 60 See infra Section III.B. 61 The exclusive SIPs are operated by the exchanges, which also develop proprietary data products using the same data that they provide to the exclusive SIPs. See supra Section I.A. PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 18603 decentralized consolidation model will help to deliver consolidated market data to market participants in a more timely, efficient, and cost-effective manner than the current centralized consolidation model. The Commission is adopting Rule 603(b) as proposed.62 As part of establishing the decentralized consolidation model, the Commission is amending the definition of NBBO to remove references to the plan processors and replace them with competing consolidators and selfaggregators.63 Competing consolidators will be responsible for calculating the NBBO for their subscribers and selfaggregators will be responsible for calculating their own NBBO.64 Given market participants’ widespread usage of proprietary market data feeds and the array of issues these participants have raised with respect to NMS information currently provided by the exclusive SIPs, many of these market participants calculate their own NBBOs from different exchange proprietary data feeds in varying locations for their own internal use rather than rely on the exclusive SIPs. These current practices, as well as existing regulatory approaches to independent data aggregation,65 will help to ensure market participants are able to operate with different NBBOs calculated by different consolidators under this new model. Under the new decentralized consolidation model, competing consolidators will be responsible for collecting, consolidating, and disseminating consolidated market data products to subscribers. New Rule 614 and new Form CC will govern the registration and responsibilities of competing consolidators.66 Informed by comments and upon further consideration, the Commission, for the reasons set forth below, is adopting Rule 614 and Form CC largely as proposed but with certain modifications to address points raised during the comment process.67 Market participants need timely consolidated market data to route and execute orders. The Commission believes entities will be incentivized to register as competing consolidators to satisfy the expected robust demand for consolidated market data products. The Commission is also modifying the requirements of Rule 614 so that competing consolidators are not required, as proposed, to offer a product 62 See 63 See infra Section III.B.9(b). infra Section III.B.10. 64 Id. 65 See infra Section III.B.8. infra Section III.C.7. 67 See infra Section III.B.3. 66 See E:\FR\FM\09APR2.SGM 09APR2 18604 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations containing all elements of consolidated market data. Competing consolidators will be able to develop the consolidated market data products 68 that their subscribers demand.69 Rule 614 requires, among other things, that competing consolidators generate consolidated market data products in a manner that is consistent with the definitions in Regulation NMS and provide monthly performance metrics. Together with the Commission’s oversight of competing consolidators, these requirements will help to ensure that the dissemination of consolidated market data products by competing consolidators is prompt, accurate, reliable, and fair. Also, under the new decentralized consolidation model, self-aggregators will be able to collect and consolidate NMS information for their own internal use. As defined, a self-aggregator will be a broker-dealer, exchange, national securities association, or investment adviser registered with the Commission (‘‘RIA’’) that receives the NMS information that is necessary to generate consolidated market data from the SROs pursuant to Rule 603(b). A selfaggregator may only generate consolidated market data for its internal use. Market participants—including broker-dealers, exchanges, and RIAs— self-aggregate proprietary market data today. The Commission is adopting this provision to allow these market participants to aggregate consolidated market data for their own internal uses. Notwithstanding the adopted improvements to the collection, consolidation, and dissemination of consolidated market data with the decentralized consolidation model, some market participants will continue to need to aggregate data themselves for their own internal purposes, for a variety of business reasons.70 Specifically, we are adopting a definition of self-aggregator that will permit the exchanges, the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’), and RIAs to self-aggregate for their own internal purposes, including for the purpose of sharing consolidated market data across affiliated entities that are registered with the Commission.71 In general, self-aggregators will not be permitted to disseminate or otherwise make available such data to any person, including customers or clients, because the Commission believes the 68 See Rule 600(b)(20), which defines ‘‘consolidated market data product.’’ 69 See infra Sections II.B.2; III.C.8(a). 70 See infra Section III.D. 71 Id. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 widespread dissemination of consolidated market data must be subject to Commission oversight and, accordingly, must be performed by competing consolidators. As discussed below, competing consolidators will be subject to the registration, disclosure, and other regulatory requirements in Rule 614 and Form CC.72 The competing consolidator regulatory regime should help to ensure that non-registered persons receive market data that is consolidated and delivered in a reliable and accurate manner. Although selfaggregators will not be permitted to widely disseminate consolidated market data, they will be able to share consolidated market data with their affiliated entities that are registered with the Commission. The Commission has the authority to examine registered affiliated entities and would be able to determine how a self-aggregator provides consolidated market data to a registered affiliate and how the registered affiliate uses that data, whereas the Commission does not have the authority to examine a selfaggregator’s affiliated entities that are not registered with the Commission. Under the decentralized consolidation model, the effective national market system plan(s) for NMS stocks will continue to play an important role.73 The plan(s) will continue, for example, to develop and propose fees for the data content underlying consolidated market data, collect and allocate revenues collected for such data, develop the monthly performance metrics for competing consolidators, and provide an annual assessment of the competing consolidator model. Therefore, as discussed further below, the Commission is directing the effective national market system plan(s) participants to file an amendment to the plan(s) pursuant to Rule 608 of Regulation NMS to reflect the new functions of the plan(s). The Commission believes that the effective national market system plan structure provides a useful mechanism to gather consensus views from a wide variety of market participants on the operation of the national market system. The provisions requiring amendment to the 72 See infra Section III.C.7(a)(iv). there are three effective national market system plans for the collection, consolidation, and dissemination of certain NMS information. See supra note 10 and accompanying text. The Commission has ordered the Operating Committees of these three effective national market system plans to file a single new plan. See infra note 1128; see also Section III.E.2(a). On August 11, 2020, the participants filed a proposed plan, which the Commission published for comment on October 6, 2020. See New Consolidated Data Plan Notice, supra note 40. 73 Currently, PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 effective national market system plan(s) are adopted largely as proposed with a few modifications.74 Finally, the Commission is amending Regulation SCI to expand the definition of ‘‘SCI entities’’ to include ‘‘SCI competing consolidators’’ that are subject to the requirements of Regulation SCI after an initial transition period if they meet a threshold based on a share of gross consolidated market data revenues, as described below. The Commission believes that the threshold as adopted is appropriate to identify those competing consolidators whose market share is large enough that they have the potential to significantly impact investors, the overall market, or the trading of securities should the competing consolidator have a systems or cybersecurity issue occur. As discussed below, based on the threshold being adopted for SCI competing consolidators, the Commission estimates that most competing consolidators will meet this definition.75 In addition, after consideration of commenters’ concerns regarding potential barriers to entry, the Commission is adopting a tailored set of operational capability and resiliency obligations that will apply during an initial transition period and thereafter to competing consolidators that do not meet the threshold in the definition of SCI competing consolidator.76 The amendments will significantly enhance and modernize the content of NMS information and the means by which it is disseminated to market participants. These changes will address meaningful shortcomings that have developed in the national market system relating to the consolidation and dissemination of NMS information.77 The centralized consolidation model is an outdated model that was initially developed for an entirely different, manual market structure, and it is no longer suitable for trading in today’s high-speed electronic markets. Further, the exclusive SIP model was developed when the exchanges were not selling competing proprietary data products that are superior in both content and delivery to the SIP data products. Therefore, as discussed further below, the Commission is amending Regulation NMS to modernize the national market system consistent with its mandate under the Exchange Act so that ‘‘[n]ew data processing and communications techniques [can be used] to create the 74 See infra Section III.E. infra Section III.F. 76 See id. 77 See Proposing Release, 85 FR at 16728, n. 17 and accompanying text. 75 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations opportunity for more efficient and effective market operations’’ 78 and to ensure fair competition, the availability of NMS information, and ‘‘the practicability of brokers executing investors’ orders in the best market.’’ 79 E. Implications for Best Execution The Commission has stated that the duty of best execution requires brokerdealers to ‘‘execute customers’ trades at the most favorable terms reasonably available under the circumstances, i.e., at the best reasonably available price.’’ 80 The Commission stated that certain other factors that are relevant to best execution include ‘‘order size, trading characteristics of the security, speed of execution, clearing costs, and the cost and difficulty of executing an order in a particular market.’’ 81 Commenters questioned the implications of the proposed changes to the content and provision of NMS information on the duty of best execution.82 In the Proposing Release, the Commission stated that the proposed additional data content in consolidated market data and the method by which such data was disseminated would facilitate the best execution of investor orders and enhance best execution analyses.83 The Commission also stated that it was not ‘‘specifying minimum data elements needed to achieve best execution’’ or ‘‘mandating the consumption’’ of the expanded data content and, more broadly, acknowledged that different market participants and different trading applications have different market data needs.84 A broker-dealer has a legal duty to seek best execution of customer orders.85 The duty of best execution derives from common law agency 78 Section 11A(a)(1)(B) of the Exchange Act. Sections 11A(a)(1)(C)(ii) through (iv) of the Exchange Act. 80 Regulation NMS Adopting Release at 37538. See also Geman v. SEC, 334 F.3d 1183, 1186 (10th Cir. 2003) (‘‘[T]he 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))); 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’’). 81 Regulation NMS Adopting Release at 37538. 82 See, e.g., infra Sections II.F.2(h) (discussing comments received on best execution related to depth of book data); III.B.10(c) (discussing comments received on best execution related to ‘‘multiple NBBOs’’ and the selection of a competing consolidator). 83 Proposing Release, 85 FR at 16729, 52, 69. 84 Id. at 16734, 55. 85 Regulation NMS Adopting Release at 37537. 79 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 principles and fiduciary obligations.86 It is incorporated in SRO rules 87 and has been incorporated into the antifraud provisions of the Federal securities laws through judicial decisions.88 In addition to the best price reasonably available, speed of execution and available liquidity,89 the Commission has articulated a non-exhaustive list of factors that may be relevant to brokerdealers’ best execution analysis: (1) The size of the order; (2) the trading characteristics of the security involved; (3) the availability of accurate information affecting choices as to the most favorable market center for execution and the availability of technological aids to process such information; and (4) the cost and difficulty associated with achieving an execution in a particular market center.90 While these amendments do not change a broker-dealer’s duty of best execution,91 the Commission recognizes that the changes to consolidated market data resulting from the amendments may be relevant to a broker-dealer’s best execution analysis.92 Broker-dealers must execute customers’ trades at the most favorable terms reasonably available under the circumstances and must examine their procedures for seeking to obtain best execution in light of market and technology changes and modify those practices if necessary.93 Both the additional data content and the new method by which such data will be 86 Id. at 37538. has codified a duty of best execution in its rules, requiring a broker-dealer to ‘‘use reasonable diligence to ascertain the best market for the subject security and buy or sell in such market so that the resultant price to the customer is as favorable as possible under prevailing market conditions.’’ FINRA Rule 5310, ‘‘Best Execution and Interpositioning.’’ 88 See Regulation NMS Adopting Release at 37538. 89 Kurz v. Fidelity, supra note 80, 556 F.3d at 640. 90 Securities Exchange Act Release No. 43590 (Nov. 17, 2000), 65 FR 75414, 18 (Dec. 1, 2000). The Commission has recognized that the scope of the duty of best execution must evolve as changes occur in the market that give rise to improved executions for customer orders. Order Execution Obligations, Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996). 91 Similarly, these amendments do not change investment advisers’ duty of best execution. See generally Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Release No. IA–5248 (June 5, 2019). 92 The Commission will monitor the impact of these amendments on broker-dealer best execution policies and procedures and will consider whether additional steps, such as further best execution guidance, are necessary or appropriate. 93 See Regulation NMS Adopting Release at 37538 (‘‘Broker-dealers must examine their procedures for seeking to obtain best execution in light of market and technology changes and modify those practices if necessary to enable their customers to obtain the best reasonably available prices.’’). 87 FINRA PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 18605 disseminated represent market and technology changes that should be considered by broker-dealers in connection with their best execution obligations.94 Specifically, the availability of more data content in consolidated market data, including odd-lot information, depth of book data, and auction information, may be relevant to a broker-dealer’s ability to achieve and analyze best execution because it can provide information that, in many circumstances, may be useful in making trading and order placement decisions.95 In addition, the availability of more timely consolidated market data may be relevant to a broker-dealer’s ability to achieve and analyze best execution because it can bear upon the accuracy of the information about the most favorable market center for executing customer orders. Therefore, broker-dealers should consider the availability of consolidated market data, including the various elements of data content and the timeliness, accuracy, and reliability of the data provided by competing consolidators, in developing and maintaining their best execution policies and procedures. Further, because richer, more timely consolidated market data may enhance the ability of broker-dealers to obtain the most favorable terms reasonably available under the circumstances, including the best reasonably available price and other factors,96 for their customer orders, broker-dealers should consider the availability of consolidated market data for purposes of evaluating best execution. However, while the additional data content may be relevant to brokerdealers’ best execution analyses and, in many cases, will facilitate the ability of broker-dealers to achieve best execution for their customer orders, the Commission, consistent with the approach taken in the Proposing Release, is not setting forth minimum data elements needed to achieve best execution and does not expect that all market participants will need to 94 Best execution considerations may also be relevant to the selection of a market data provider and the choice to consume different data elements today. See FINRA, Regulatory Notice 15–46, 1, 3 n. 12 (2015) (‘‘The exercise of reasonable diligence to ascertain the best market under prevailing market conditions can be affected by the market data, including specific data feeds, used by a firm. For example, a firm that regularly accesses proprietary data feeds, in addition to the consolidated SIP feed, for its proprietary trading, would be expected to also be using these data feeds to determine the best market under prevailing market conditions when handling customer orders to meet its best execution obligations.’’). 95 See Proposing Release, 85 FR at 16741, 54. 96 See supra notes 80–81 and accompanying text. E:\FR\FM\09APR2.SGM 09APR2 18606 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations purchase the most comprehensive or fastest consolidated market data product available. The legal requirements that establish minimum data standards for certain purposes are not changing. Specifically, Rule 603(c) of Regulation NMS,97 the Vendor Display Rule, requires SIPs and broker-dealers to provide a consolidated display, as defined in Rule 600(b)(17) of Regulation NMS,98 in a context in which a trading or order routing decision can be implemented. In addition, in order to comply with Rule 611 of Regulation NMS, the Order Protection Rule, trading centers, as defined in Rule 600(b)(95) of Regulation NMS,99 must have access to the protected bid and protected offer. While these rules are impacted by the new definition of round lot, and the data that must be processed and displayed will change as the definition of round lot changes, the minimum data requirements associated with these rules are not changing.100 Additionally, market participants will need to obtain regulatory data to meet regulatory obligations and to be informed of trading halts, price bands, or other market conditions that may affect their trading activity.101 Best execution analysis varies depending upon the characteristics of customers and orders handled. For example, the data requirements for an institutional broker’s smart order router (‘‘SOR’’) executing large algorithmic orders are likely different than for a small retail broker’s visual display for non-professional individual investors. Given the large array of potential scenarios, the Commission cannot specify the data elements that may be relevant to every specific situation. Rather, broker-dealers must perform a best execution analysis to determine what data is relevant to obtaining best execution of customer orders, in a manner that is similar to decisions they must make today regarding whether to obtain data content that is available on a proprietary basis. In addition, the decentralized consolidation model will change the method by which market data is disseminated by introducing competing consolidators, who will offer consolidated market data products, which broker-dealers may choose as a source of market data. The speed of execution, the availability of accurate information affecting choices as to the 97 17 CFR 242.603(c). CFR 242.600(b)(17). 99 17 CFR 242.600(b)(95). 100 See Proposing Release, 85 FR at 16743–46; infra Section II.D.2(b). 101 See Proposing Release, 85 FR at 16760; infra Section II.H. 98 17 VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 most favorable market center for execution, and the availability of technological aids to process such information may be relevant factors in conducting a best execution analysis.102 While all competing consolidators will offer consolidated market data products, they may do so at different prices or at different latencies or with different amounts of data content.103 Therefore, the selection of a competing consolidator may also be relevant to a broker-dealer’s ability to achieve and analyze best execution. Competing consolidators will be required to disclose information about their consolidated market data products, including the services they will offer, the prices for such services as well as performance metrics.104 These disclosures should help to facilitate a broker-dealer’s ability to achieve and analyze best execution because they provide information regarding the timeliness, completeness, and accuracy of the market data offered by competing consolidators.105 These disclosures also provide statistics on capacity, network delay, and latency, offering additional insight into the technical capabilities and expected performance of a competing consolidator. This information will assist a broker-dealer in selecting an appropriate competing consolidator, which will affect the broker-dealer’s ability to obtain ‘‘the most favorable terms reasonably available under the circumstances’’ for its customer orders. The Commission believes that a broker-dealer that uses low-latency or content-rich consolidated market data, whether self-aggregated or received from a competing consolidator, for its proprietary trading, would also be expected to use those data products when pursuing the best execution of customer orders, particularly those handled within the same aggregation unit that conducts proprietary trading. For example, a broker-dealer should not use a separate, less performant data source for its customer orders than the data source used for proprietary orders that may interact with those customer orders in a manner disadvantageous to those customer orders.106 102 See supra notes 89 and 90 and accompanying text. 103 See infra notes 897, 907–908 and accompanying text. 104 See infra Section III.C.8(c). 105 See supra note 90 and accompanying text. 106 Cf. FINRA, Regulatory Notice 15–46, supra note 94. See also letter from Tyler Gellasch, Executive Director, Healthy Markets Association, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Healthy Markets Letter I’’) at 4–5; letter from Marcia E. Asquith, Executive Vice President, Board and External Relations, Financial Industry Regulatory Authority, Inc., to Vanessa PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 II. Enhancements to NMS Information A. Introduction Today, most market participants utilize electronic trading systems to execute orders for themselves and for their customers. These electronic trading systems, which consume many pieces of data in an effort to trade competitively and efficiently in today’s markets, are designed to analyze more information than is provided by the exclusive SIPs. Given that the current market is vastly different from when the national market system was established in the 1970s, the Commission believes that a broad cross-section of market participants would benefit from information that goes beyond SIP data to trade competitively and efficiently and that the information that is provided within the national market system needs to be augmented with new information elements. As discussed in detail below, the Commission is adopting new rules and amending certain existing rules under Regulation NMS to add new elements to the information that is collected, consolidated, and disseminated under the national market system. By way of example, in the 1970s, trading volume in any given stock was concentrated on its listing exchange and trading largely occurred manually with individuals representing orders on exchange floors.107 Since then, technology has fundamentally altered market operations and trading today largely occurs electronically with little human intervention.108 Numerous other changes have also impacted how trading occurs. For example, in 2001, decimalization reduced the increment of trading from fractions to pennies and resulted in a reduction in the size of liquidity at the best prices, commonly referred to as the ‘‘top of book.’’ 109 The reduction in displayed order interest at the best bid or offer means liquidity is layered across multiple price levels, which makes depth of book information necessary for many market participants and trading systems to trade in an informed and effective manner. In addition, individual odd-lot quotations, especially in high share price stocks, have become more prevalent 110 and important to market participants as individual share prices Countryman, Secretary, Commission, dated May 26, 2020, (‘‘FINRA Letter’’) at 6. 107 See Proposing Release, 85 FR at 16728. 108 See id. 109 See id. at 16751. 110 See infra note 240. See also Proposing Release, 85 FR at 16739. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations have increased.111 Finally, an increasing proportion of total trading volume is executed during opening and closing auctions, which has made information about orders participating in auctions increasingly important to many market participants. These changes have led market participants to call for additional information to be included in consolidated market data so that market participants can participate more fully and competitively.112 However, very few adjustments 113 have been made to NMS information to account for these changes since the adoption of the 1975 Amendments. The Commission believes that the content of current SIP data and the mechanism by which SIP data is collected, consolidated, and disseminated has not kept pace with market developments. Therefore, the Commission is adopting these amendments to specify additional information that must be made available pursuant to the effective national market system plan(s).114 Information about better priced orders in smaller sizes can improve investors’ ability to trade at the best prices available. Further, certain market participants can more efficiently place larger sized orders that may not be fully executed at top of book prices using information about the prices of orders outside of the best bids and best offers, and they can more effectively participate in exchange auctions using relevant information about the trading interest in such auctions. Finally, market participants also need to have, and will continue to receive, regulatory information, administrative data, and other important information to participate effectively in the markets. The Commission received comments on each of these issues. 111 See Proposing Release, 85 FR at 16739 (stating that between 2004 and 2019, the average price of a stock in the Dow Jones Industrial Average nearly quadrupled). 112 See id. at 16740 (noting multiple Roundtable panelists and commenters supported the addition of odd-lot information to SIP data), 16751–52 (noting multiple Roundtable panelists and commenters supported the addition of depth of book data to SIP data), 16758 (noting multiple Roundtable panelists and commenters supported the addition of auction information to SIP data). 113 See, e.g., 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). 114 Section 11A(c)(1)(B) of the Exchange Act provides the Commission with the authority to, among other things, assure the fairness and usefulness of the form and content of quotation and transaction information. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 As discussed more fully below, some commenters, stating that the information is not necessary for all investors, questioned the need to add new information elements.115 While the Commission recognizes that different market participants need differing amounts of information to meet different trading objectives, the Commission believes that the availability of the new information will enhance the ability of market participants to trade competitively and efficiently and will indirectly benefit investors who place orders in the national market system even if they do not directly consume all of the new data elements by facilitating executing broker-dealers’ access to information.116 In today’s market, information about odd-lot quotations, depth of book quotations, and auction information has become highly relevant. Together, these pieces of information can be significantly beneficial in facilitating informed trading decisions, and the Commission believes that they should be more widely distributed and more readily accessible. The Commission anticipates that a variety of consolidated market data products will be developed to meet the various needs investors have for data.117 The Commission believes that the amendments will enhance the usefulness of NMS information and thus better inform trading and investment decisions for all investors, which in turn will help maintain fair and efficient markets as well as facilitate best execution of customer orders.118 Accordingly, as discussed in more detail below, the Commission is adopting several new defined terms under Rule 600 of Regulation NMS to specify, and as a result expand and enhance, the data that Regulation NMS requires to be collected, consolidated, and disseminated. Importantly, the Commission is adopting two new definitions under Regulation NMS— ‘‘consolidated market data’’ and ‘‘core data’’—to specify the components of NMS information that are required to be 115 See, e.g., letter from John A. Zecca, Executive Vice President, Chief Legal Officer, and Chief Regulatory Officer, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Nasdaq Letter IV’’) at 31–34; letter from Elizabeth K. King, Chief Regulatory Officer, ICE, and General Counsel and Corporate Secretary, NYSE, to Vanessa Countryman, Secretary, Commission, dated June 1, 2020, (‘‘NYSE Letter II’’) at 3–8; letter from Joseph Kinahan Managing Director, Client Advocacy and Market Structure, TD Ameritrade, to Vanessa A. Countryman, Secretary, Commission, dated June 1, 2020, (‘‘TD Ameritrade Letter’’) at 4. 116 See infra Section II.C.2(a). 117 See infra Section III.E.2(e). 118 See supra Section I.E (discussing the implications for best execution). PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 18607 collected, consolidated, and disseminated under the national market system. ‘‘Consolidated market data product’’ is defined as any data product developed by a competing consolidator that contains consolidated market data or any of the elements or subcomponents thereof. The Commission is also adopting additional defined terms to further set forth the scope of information included within the definitions of consolidated market data and core data. The definitions include information that is currently provided by the exclusive SIPs as well as new information designed to ensure that brokers, dealers, and investors have available information with respect to quotations for and transactions in securities that is prompt, accurate, reliable, and fair.119 B. Definition of ‘‘Consolidated Market Data’’ Under Rule 600(b)(19) 1. Proposal The Commission proposed 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 through the proposed definition of ‘‘consolidated market data.’’ Specifically, the Commission proposed that consolidated market data would include 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).120 In addition, the proposed definition of consolidated market data would be used to delineate the responsibilities and obligations of the SROs under Rule 603(b) and competing consolidators under Rule 614. These rules implement the decentralized consolidation model, which is discussed in more detail in Section III below. 2. Final Rule and Response to Comments The Commission received a number of comments on the proposed expansion of NMS information related to the specific elements that make up 119 See supra Section I.A. discussed below, the Commission also proposed and is adopting definitions for ‘‘core data,’’ ‘‘regulatory data,’’ ‘‘administrative data,’’ and ‘‘self-regulatory organization-specific program data.’’ See infra Sections II.C, II.H, II.J, II.K, respectively. 120 As E:\FR\FM\09APR2.SGM 09APR2 18608 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidated market data,121 and the Commission also received some comments on the proposed definition of consolidated market data. One commenter supported the expansion of NMS information to include the proposed elements of consolidated market data.122 Another commenter agreed with the proposed definition, stating that these data elements need to be clearly defined and categorized and that ‘‘tight definitions would assist to ‘preserve the integrity and affordability of the consolidated data stream.’ ’’ 123 Other commenters, however, stated that the Commission should allow additional core data elements to be included in consolidated market data through a process other than Commission rulemaking.124 A different commenter stated that the proposed changes to consolidated market data are ‘‘not appropriately tailored to the needs of the market’’ and ‘‘are overly broad and unnecessarily complex.’’ 125 Another commenter, while agreeing that the definition of consolidated market data should be defined as proposed, suggested that it should only include depth-of-book data, certain odd-lot information, and three options for including auction data.126 The Commission is adopting the definition of consolidated market data largely as proposed.127 As discussed in detail below,128 the Commission continues to believe that expanding the NMS information that is required to be provided under the rules of the national market system, as set forth in the 121 See infra Sections II.C through II.K. Capital Group Letter at 2. 123 TD Ameritrade Letter at 3 (quoting Regulation NMS Adopting Release). 124 See Clearpool Letter at 11 (stating that the Commission should provide flexibility in the definition of core data or the process by which the elements of core data are determined); RBC Letter at 4 (stating that the proposed definition of core data should serve as a ‘‘floor’’ that the Operating Committee should be permitted to expand upon (but not reduce) pursuant to Plan amendments); letter from Emil R. Framnes, Global Head of Trading, and Simon Emrich, Market Structure and Trading Research, Norges Bank Investment Management Letter, to Vanessa Countryman, Secretary, Commission (‘‘NBIM Letter’’) at 5 (‘‘[I]t might be prudent to allow for further modification of the definition of core data as market structure evolves.’’). 125 NYSE Letter II at 3. 126 See letter from Kelvin To, Founder and President, Data Boiler Technologies, LLC, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Data Boiler Letter I’’) at 19–20. However, this commenter also stated that administrative data should be included in the proposed definition of consolidated market data. See id. at 34. 127 The Commission is modifying the definition of exchange-specific program data to be self-regulatory organization-specific program data. See infra Section II.K. 128 See infra Sections II.C through II.K. 122 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 definition of consolidated market data, would 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 brokerdealers.129 As reflected in comments received from a variety of market participants, each of the elements of consolidated market data—and in particular the expansion of core data to include quotation interest in smaller orders of higher-priced stocks, depth of book data, and auction information— would provide significant, useful information to market participants.130 Consistent with the views of market participants—many of whom will be the users of consolidated market data—that this data would be useful to them to improve investment decisions and facilitate the best execution of customer orders, the Commission believes that the definition of consolidated market data is ‘‘appropriately tailored’’ to market participants’ needs, that it is not overly broad, and that it does not entail unnecessary complexity.131 In addition, the proposed decentralized consolidation model permits competing consolidators to offer, and market participants to consume, customized market data products that suit their particular needs. This flexibility addresses concerns that consolidated market data is overly broad or unnecessarily complex because it allows competing consolidators and their subscribers to adjust the breadth and complexity of the market data products they offer and consume, respectively.132 On the other hand, limiting consolidated market data to only depth of book data, certain odd-lot information, and auction data, as one commenter suggested, would not include regulatory data—such as information regarding trading halts and price bands—that the Commission believes is necessary to trade effectively and efficiently.133 In response to comments recommending a more streamlined or flexible process to include additional data elements in core data,134 the Commission agrees that the definition of consolidated market data should permit additional data elements to be added pursuant to effective national market 129 See Proposing Release, 85 FR at 16735. See also infra Section II.C.2(a); supra Section I.E. 130 See infra Sections II.C through II.K. 131 See NYSE Letter II at 3. 132 See infra Section III. See also infra notes 139 and 140 and accompanying text (discussing the Commission’s adoption of the new defined term ‘‘consolidated market data product’’). 133 See infra Section II.H. 134 See Clearpool Letter at 11. PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 system plan amendments. However, the Commission continues to believe that this process should be limited to future regulatory, administrative, or selfregulatory organization-specific program information.135 As discussed below,136 the transaction and quotation information reflected in the definition of core data—including best bids and offers, the NBBO, protected quotations, last sale data, depth of book data, and auction information—is specified in the rule.137 The rule as proposed and adopted is designed to account appropriately for additional regulatory, administrative, and self-regulatory organization-specific program information data elements that may emerge periodically through the approval of new SRO rules or the development and refinement of technical specifications to be included in consolidated market data through the effective national market system plan amendment process.138 The Commission is defining a new term, ‘‘consolidated market data product’’ to mean any data product developed by a competing consolidator that contains consolidated market data or components of consolidated market data. The definition of consolidated market data product also specifies that components of consolidated market data include the enumerated elements, and any subcomponent of the elements, of consolidated market data in § 242.600(b)(19) and that all consolidated market data products must reflect data consolidated across all national securities exchanges and national securities associations.139 As discussed further below, Rule 614 will require competing consolidators to offer one or more consolidated market data products to their subscribers, and will not, as proposed, require them to offer a product that contains all elements of consolidated market data.140 In addition, the Commission recognizes that some market participants will not want or need a consolidated market data 135 See Proposing Release, 85 FR at 16734. infra Sections II.C through II.G. 137 The Commission will continue to monitor the usefulness of these core data elements to market participants and consider whether any modifications to the definition of core data are necessary or appropriate as the markets evolve. Interested persons also may petition the Commission to amend such definition if they believe particular changes are warranted. 138 See infra Sections II.H, II.J, and II.K. Both SRO rule changes and effective national market system plan amendments are subject to the public notice and comment process, as well as Commission review. See Exchange Act Section 19(b)(1), 15 U.S.C. 78s(b)(1); 17 CFR 240.19b–4 (Rule 19b–4); Rule 608(b) of Regulation NMS, 17 CFR 242.608(b). 139 See infra Section VIII. 140 See infra Section III.C.8(a). 136 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations product that contains all elements of consolidated market data. 3. The Fifth Amendment’s Takings Clause The Constitution’s Takings Clause prevents the taking of private property for public use without just compensation.141 One commenter stated that the proposal to expand the data that would be required to be provided under Regulation NMS would violate the Takings Clause by ‘‘effecting a physical taking . . . without just compensation.’’ 142 The commenter asserted that the proposal would require it to ‘‘turn over vast amounts of their proprietary market data—valuable property that Nasdaq currently sells to market participants at a reasonable rate of return—to competing consolidators and self-aggregators at prices set by the operating committee of the consolidated NMS plan.’’ 143 The commenter stated that the government would ‘‘expropriate property belonging to Nasdaq and redistribute it to Nasdaq’s competitors at prices set, in part, by the non-SRO members of the consolidated NMS plan’s operating committee’’ that would be ‘‘laboring under a conflict-of-interest and would have no incentive to pay ‘just compensation’ for the property taken from Nasdaq.’’ 144 Neither the expansion of NMS information pursuant to the definition of consolidated market data nor the requirement that national securities exchanges and associations make the data necessary to generate consolidated market data available to competing consolidators and self-aggregators constitutes a taking for the following reasons. The Commission’s action does not encroach on or appropriate any property. The exchanges developed their proprietary data within a highly regulated statutory and regulatory structure that provides the Commission with ample authority to decide—and revise—which types of information the exchanges must provide to market participants to fulfill their responsibilities under the Exchange 141 U.S. Const. amend. 5 (‘‘No person shall be held to answer for a capital, or otherwise infamous crime, unless on a presentment or indictment of a grand jury, except in cases arising in the land or naval forces, or in the militia, when in actual service in time of war or public danger; nor shall any person be subject for the same offense to be twice put in jeopardy of life or limb; nor shall be compelled in any criminal case to be a witness against himself, nor be deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.’’). 142 Nasdaq Letter IV at 50. 143 Id. 144 Id. at 50–51. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Act.145 Moreover, the SROs will be compensated for making the data necessary to generate consolidated market data available to competing consolidators and self-aggregators pursuant to fees established by the effective national market system plan(s). Even if non-SRO members of plan Operating Committees have a degree of authority to influence proposed consolidated market data fees, the Commission retains authority to ensure that those fees are ‘‘fair and reasonable’’ and ‘‘not unreasonably discriminatory.’’ The exchanges thus had no reasonable basis to expect that the current regulatory structure would remain in place in perpetuity in this highly regulated field, and, in any event, they will not be deprived of the economic benefits of the information they will provide to market participants.146 C. Definition of ‘‘Core Data’’ Under Rule 600(b)(21) 1. Proposal As stated in the Proposing Release,147 Regulation NMS does not contain a definition of ‘‘core data,’’ although various Regulation NMS rules describe the information that is required to be collected, consolidated, and disseminated under Regulation NMS.148 The Commission proposed defining ‘‘core data’’ to include the information currently referred to as core data—last sale data, each SRO’s best bid and best offer (‘‘BBO’’), and the NBBO 149—along with new information that is not currently required to be provided under Regulation NMS or by the exclusive SIPs. The proposed new information included quotation data for smallersized orders in higher-priced stocks (pursuant to a new definition of ‘‘round lot’’), information on certain quotations below the best bid or above the best offer (pursuant to a new definition of ‘‘depth of book data’’), and information about orders participating in auctions 145 See supra note 5. Ruckleshaus v. Monsanto Co., 467 U.S. 986, 1005–07 (1984) (noting that the reasonableness of an investment-backed expectation depends in part on whether the regulated activity has been in an area ‘‘that has long been the source of public concern and the subject of government regulation’’); District Intown Properties Ltd. P’ship v. District of Columbia, 198 F.3d 874, 884 (D.C. Cir. 1999) (‘‘Businesses that operate in an industry with a history of regulation have no reasonable expectation that regulation will not be strengthened to achieve established legislative ends.’’); Me. Educ. Ass’n Benefits Tr. v. Cioppa, 695 F.3d 145, 154 (1st Cir. 2012) (the plaintiff’s ‘‘expectations are substantially diminished by the highly regulated nature of the industry in which it operates’’). 147 See Proposing Release, 85 FR at 16730. 148 See, e.g., Rules 601, 602, and 603 of Regulation NMS. 149 See supra note 16. 146 See PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 18609 (pursuant to a new definition of ‘‘auction information’’). Specifically, the proposed definition of core data included: (A) Quotation sizes; (B) aggregate quotation sizes; (C) best bid and best offer; (D) national best bid and national best offer; (E) protected bid and protected offer; (F) transaction reports; (G) last sale data; (H) 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 Adopting Release]; (I) depth of book data; and (J) auction information. Additionally, the proposed definition of core data specified how odd-lots are to be aggregated for purposes of certain data elements included within the definition of core data. Specifically, the proposed definition stated that 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, and that such aggregation shall occur across multiple prices and shall be disseminated at the least aggressive price of all such aggregated odd-lots.150 Finally, the proposed definition of core data did not include certain information—specifically, OTC Bulletin Board (‘‘OTCBB’’) data, and corporate bond and index data—that is currently provided by the exclusive SIPs.151 2. Final Rule and Response to Comments (a) Expansion of Core Data, Generally Multiple commenters supported the expansion of NMS information generally 152 and of core data 153 in 150 As discussed below, the proposed definition of core data also specified an odd-lot aggregation methodology for protected quotations. See infra Section II.E.2(b). 151 See Proposing Release, 85 FR at 16736. 152 See T. Rowe Price Letter at 1–2 (‘‘Expanding the content of NMS information would improve its utility when consumed electronically (e.g., by algorithmic trading systems or smart order routers).’’); BlackRock Letter at 2 (‘‘BlackRock is supportive of expanding and revamping the content of NMS information. We agree that this would help to reduce information asymmetries between market participants who rely upon SIP data and those who purchase proprietary data feeds from the national securities exchanges.’’). 153 See Clearpool Letter at 11 (supporting ‘‘the inclusion of this additional information in core data, which can reduce the reliance on exchanges’ proprietary data feeds and provide market participants with additional information to make informed order routing and execution decisions,’’ while also ‘‘recommend[ing] that the Commission require a ‘retail interest indicator’ to be added to quotes to assist market participants in defining what portion of the quote is attributable to retail interest’’); RBC Letter at 4 (stating that RBC ‘‘generally support[s] the Proposal’s definition of Core Data’’); letter from Tim Lang, Chief Executive E:\FR\FM\09APR2.SGM Continued 09APR2 18610 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations particular.154 One commenter, ‘‘agree[ing] that the proposed information to be included in core data has become much more important to broker-dealers in recent years . . .,’’ ‘‘strongly support[ed] expanding core data to include additional information of significance to investors.’’ 155 Another commenter stated that ‘‘add[ing] more pricing information to the consolidated tape . . . would be a fundamental improvement that would expand data access to Main Street investors in a very meaningful way.’’ 156 A different commenter said that ‘‘all data is ‘core data.’ ’’ 157 Some commenters opposed the expansion of core data, however. One commenter, though agreeing that Regulation NMS should define core data, stated that the new proposed core data elements are not necessary or useful for all market participants but will raise the costs of core data for all market participants by requiring them to receive and process core data to meet their regulatory obligations. 158 Similarly, another commenter, though supportive of the Commission formally defining core data in its regulations, argued that the proposed definition was ‘‘poorly designed’’ because it ‘‘only consider[s] the requirements of market participants that need, and are able to consume, a richer data set’’ and that the proposed definition ‘‘would require non-professional investors who do not need such rich data to purchase and consume even more unnecessary data elements (e.g., depth of book data) than the current SIP product provides.’’ 159 Another commenter argued that the Commission falsely assumed that the decision by some market participants to supplement current core data with proprietary data means that this Officer, ACS Execution Services, LLC, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘ACS Execution Services Letter’’) at 2; IEX Letter at 2 (‘‘We support the Market Infrastructure Proposal because it will update the content of ‘core data’ to better reflect the information needed to participate in today’s markets . . . .’’); ICI Letter at 4 (‘‘We support the Commission expanding the scope of core data, which will benefit funds and their shareholders.’’). 154 As discussed below, many commenters also expressed views on the specific elements of the definition of core data. See infra Sections II.D; II.E; II.F; II.G. 155 ACS Execution Services Letter at 2. 156 Letter from Jeffrey T. Brown, Senior Vice President Legislative and Regulatory Affairs, Charles Schwab & Co., Inc., to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Schwab Letter’’) at 2–3. 157 Virtu Letter at 2, 5 (‘‘[T]he ‘core data’ offered through the SIPs is no longer sufficient for most market participants to trade competitively in today’s marketplace.’’). 158 See TD Ameritrade Letter at 3. 159 NYSE Letter II at 3–4. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 additional data is necessary to all market participants and investors, and that the expanded set of information included in the proposed definition of core data ‘‘is neither necessary nor relevant to the business models and trading or investment strategies of many, if not most, ordinary investors and market participants.’’ 160 Additionally, the commenter stated that the Commission ‘‘failed to collect data regarding whether any meaningful number of market participants that desire access to non-core data are actually unable to obtain it, either directly from exchanges or indirectly (and often free of charge) from their brokers.’’ 161 The Commission is adopting the definition of core data largely as proposed, as discussed further below.162 In the Proposing Release, the Commission stated its preliminary belief that the content of core data has not kept pace with market developments and that the proposed expansion of core data would enhance its usefulness to address the needs of a broad crosssection of market participants.163 Comments received from a variety of market participants—including exchanges, buy-side firms, and sell-side firms—have borne this out. Numerous commenters expressed support for the proposed definition of core data, stating that the specific subcomponents of core data, such as five levels of depth of book data, would help market participants to trade more effectively.164 Several commenters also pointed out that 160 Nasdaq Letter IV at 7–8. at 8 (footnote removed). See also NYSE Letter II at 3–8; TD Ameritrade Letter at 4. 162 The Commission is revising the proposed definition of core data to include odd-lots priced at or better than the NBBO, to specify how quotation sizes are to be displayed in core data, and to require SRO attribution of core data elements. The Commission is also modifying the proposed definitions of depth of book data and auction information and is not adopting the proposed amendments to the definition of protected bid or protected offer, which definitions are embedded in the definition of core data. The particular elements of the definition of core data are discussed below. See infra Sections II.C.2(b); II.D; II.E; II.F; II.G. 163 See Proposing Release, 85 FR at 16735–76. 164 See, e.g., T. Rowe Price Letter at 2 (‘‘We believe the addition of depth of book data (specifically, the five price levels above the protected offer and below the protected bid) and auction imbalance information, including opening, reopening, and closing auctions, will make SIP data a much more viable alternative to proprietary market data. . . . This additional data will help reduce the information asymmetries that currently exist between SIP data and proprietary data.’’); ACS Execution Services Letter at 2 (‘‘ACS strongly supports expanding core data to include additional information of significance to investors. As the proposal notes, through the provision of such additional information, market participants may have access to data to make better routing and trading decisions.’’). 161 Id. PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 expanding core data would promote a wider dissemination of this data, including to market participants who cannot afford expensive proprietary feeds.165 For the reasons discussed in the Proposing Release and as set forth in detail below with respect to the specific elements of core data,166 the Commission believes that the expanded definition of core data will be useful to market participants and will help fulfill needs that are not currently being met by SIP data. Additionally, and for the same reasons, the Commission disagrees with comments suggesting that proposed core data would not be useful to many market participants, that proprietary market data products are adequately meeting the needs of all market participants, and that all market participants that have a need to access 165 See, e.g., Virtu Letter at 5 (‘‘[I]ncluding depth of book information in the SIP will allow investors who cannot afford to pay for costly Exchange proprietary feeds to trade more competitively in the marketplace, and we believe five levels of depth of book is a reasonable and appropriate place to land.’’); Clearpool Letter at 11 (‘‘[C]urrently, the ‘core data’ provided through the SIP only includes the NBBO and top-of-book data. For this reason, there continues to be no viable alternatives for broker-dealers to paying exchanges for their proprietary market data, both to provide competitive execution services to clients and, equally important, to meet best execution obligations. Clearpool therefore strongly supports the inclusion of this additional information in core data, which can reduce the reliance on exchanges’ proprietary data feeds and provide market participants with additional information to make informed order routing and execution decisions.’’); IEX Letter at 5–6 (‘‘For these reasons, the NBBO no longer encompasses the ‘core data’ that market participants need to stay competitive and satisfy best execution responsibilities. The fact that depth of book data can only be obtained through exchange proprietary data feeds allows exchanges to charge extraordinarily high prices completely disproportionate to any reasonable estimation of the cost of producing that data. . . . Importantly, however, to the extent that a significant subset of market participants could rely on this data as a viable alternative to purchasing proprietary data, or could viably choose to purchase less proprietary data than they need today, it could help to harness market competition to restrain data fee increases that today are largely unrestrained.’’); letter from James J. Angel, Associate Professor of Finance, Georgetown University, to the Commission, dated June 12, 2020, (‘‘Angel Letter’’) at 7–8 (‘‘Providing data on a visibly level playing field will increase public trust in the integrity of the markets. . . . Freely available information about the entire market, including orders inside the spread and the depth of book, will reduce the asymmetry of information in the market between small retail investors and larger players. This added transparency will reduce the notion that markets are ‘rigged’ in favor of larger players.’’). 166 See Proposing Release, 85 FR at 16735–59 (discussing market developments such as rising stock prices and increased odd-lot trading, decimalization, and the growth of auctions and the need to expand core data to include smaller-sized orders in higher priced stocks, depth of book data, and auction information to help market participants use core data to trade in a more informed and effective manner in light of these developments); infra Sections II.D through II.G. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations these products are able to do so. Rather, the definition of core data specifies important information that would be useful to a wide variety of market participants—including those who do not obtain it through proprietary market data products today—and facilitates a broader dissemination of this information.167 In addition, the Commission disagrees with comments that the definition of core data would require market participants, including non-professional investors, to purchase or consume all data that would be defined as core data, and thereby increase the cost of core data for all.168 Competing consolidators are not required to offer a data product that includes all consolidated market data,169 and the Commission has explicitly stated that the proposed definitions of core data and consolidated market data do not ‘‘mandat[e] the consumption’’ of particular data elements.170 Thus, the Commission believes it has considered and addressed the needs of market participants that do not directly need all elements of core data. The purpose of expanding core data is to promote wider dissemination of data that will be useful in meeting the needs of a broad array of market participants. As explained below, the enhanced core data content will benefit all investors, regardless of whether they directly consume it.171 Furthermore, the Operating Committee of the effective national market system plan(s) could develop fees for data content underlying consolidated market data offerings for different subsets of consolidated market data to suit the needs of various market participants, as one member of the Operating Committee has already suggested.172 Within this 167 See supra note 114 (describing the authority under Section 11A of the Exchange Act to specify additional information that must be made available within the national market system); Section I.A (explaining the need to improve and modernize the national market system to fulfill the goals of Section 11A of the Exchange Act and to meet the current core data needs of all market participants). As stated below, some market participants stated that those who do not buy the exchange proprietary DOB feeds and associated connectivity and transmission offerings are at a competitive disadvantage relative to market participants who purchase these feeds. See infra note 1620 and accompanying text. See also infra Sections III.E.2(c); V.C.2(b)(i)a (discussing how the amendments will affect data content fees). 168 See TD Ameritrade Letter at 3; NYSE Letter II at 3–4; Nasdaq Letter IV at 7–8. 169 See infra Section III.C.8(a). 170 Proposing Release, 85 FR at 16775. 171 See infra notes 174–176 and accompanying text. 172 See letter from Elizabeth K. King, Chief Regulatory Officer, ICE, General Counsel and Corporate Secretary, NYSE to Vanessa Countryman, Secretary, Commission, dated Feb. 5, 2020, (‘‘Feb. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 framework, the Commission believes that the market would develop to enable market participants to consume and pay for the market data that best suits their needs and that there would be downward pressure on data content fees.173 Moreover, the Commission believes that all investors will benefit, directly or indirectly, from the expanded definition of core data. Even if only a subset of market participants may choose to acquire directly a data product that includes the full set of data elements included within the definition of core data, the Commission believes that there will be ample demand for expanded core data 174 and a corresponding incentive for competing consolidators to offer more content-rich products. The Commission expects that direct purchasers of such products likely will include many broker-dealers that are electronically routing orders for execution or executing orders internally. As discussed below, the additional data elements included within the definition of core data are useful to efficiently and effectively route and execute orders in today’s dispersed electronic markets,175 and their widespread availability should facilitate broker-dealers’ ability to achieve best execution for customers.176 Thus, broker-dealers will be incentivized to acquire products containing the expanded core data elements to compete effectively for customer business. In addition, by including these additional, important market data elements as part of expanded core data, this rulemaking should help facilitate executing brokerdealers’ access to information, to the benefit of all investors. Accordingly, while the Commission expects only some market participants to choose to purchase a data product that includes the full set of core data, any market participant that submits an order in an NMS stock should benefit indirectly from their doing so because more executing broker-dealers will receive the NYSE Letter’’) (recommending that the Commission expand SIP content and ‘‘create products designed for modern use cases, including a SIP product with depth-of-book quotes for institutional traders and a National Best Bid and Offer (‘NBBO’) only version for retail customers, with fees based on content entitlements (or levels) instead of user type’’). See also infra notes 1201–1208 and accompanying text. 173 See supra note 28 (describing comments received by the Commission regarding the high cost of proprietary data products that contain data needed for effective participation in the markets); infra Sections III.E.2(c); V.C.2(b)(i)a (discussing how the amendments will affect data content fees). 174 See infra notes 878–880; supra notes 163–167 and accompanying text. 175 See infra notes 878–880 and accompanying text. 176 See supra Section I.E. PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 18611 data elements that will help them place customer orders in a more informed and effective manner. Finally, in response to the comment recommending that a ‘‘retail interest indicator’’ be added to quotes,177 the definition of self-regulatory organization-specific program information already incorporates retail interest indicators disseminated in current SIP data and established pursuant to exchange retail liquidity programs in the definition of consolidated market data.178 (b) Odd-Lot Quotations In the Proposing Release, the Commission solicited comment on whether core data should include oddlot quotations, but did not include oddlot quotes in the definition of core data other than by incorporating them through the proposed definition of round lot.179 Several commenters recommended directly including oddlots in core data rather than doing so through the mechanism of the proposed definition of round lot.180 Specifically, one commenter suggested including odd-lots priced better than the PBBO in core data,181 and another suggested including the best-priced odd-lot quotation from each exchange.182 Another commenter supported the Commission’s aim of increasing odd-lot transparency for higher priced securities but questioned doing so through the proposed definition of round lot.183 One commenter recommended adding unprotected odd-lots to core data, combined with best execution guidance on broker-dealer obligations with respect to odd-lot quotations, rather than redefining round lot.184 Similarly, another commenter recommended including odd-lot quotations in core data while leaving the definition of round lot as it currently stands.185 A 177 See Clearpool Letter at 6. infra Section II.K. 179 See Proposing Release, 85 FR at 16746. 180 See letter from Patrick Sexton, Executive Vice President, General Counsel, and Corporate Secretary, Cboe, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Cboe Letter’’) at 15; NYSE Letter II at 5; Nasdaq Letter IV at 14; RBC Letter at 5; letters to Vanessa Countryman, Secretary, Commission, from Kimberly Unger, Chief Executive Officer and Executive Director, STANY, dated June 11, 2020, (‘‘STANY Letter II’’) at 3; Anders Franzon, General Counsel, MEMX LLC, dated May 26, 2020, (‘‘MEMX Letter’’) at 2 (‘‘[A]ll data currently made available through proprietary data feeds should be available through NMS data feeds. This includes complete depth-of-book data (and thus all odd lot data). . . .’’). 181 See CBOE Letter at 15. 182 See NYSE Letter II at 5. 183 See Nasdaq Letter IV at 14. 184 See RBC Letter at 5. 185 See STANY Letter II at 3. 178 See E:\FR\FM\09APR2.SGM 09APR2 18612 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations different commenter recommended delaying odd-lots to mitigate the impact on processing times.186 On the other hand, one commenter expressed concerns that adding odd-lot quotations to core data would harm investor confidence in the markets resulting from confusion over protected and unprotected quotes and increased costs and latency for core data by adding more information that needs to be disseminated.187 A different commenter presented data showing that, for a significant percent of orders in each of the Commission’s proposed round lot tiers, there would still be a contra-side odd-lot quote better than the NBBO.188 The Commission continues to be concerned that the availability of odd- lot order information solely to market participants who have purchased proprietary market data products creates a potentially significant information asymmetry relative to market participants who purchase only SIP data.189 For the reasons discussed below, the Commission is also modifying the definition of round lot.190 While the proposed definition of round lot, as modified, would incorporate a substantial proportion of odd-lot quotations that occur at a price better than the NBBO for certain higher-priced stocks, the Commission is concerned that a significant amount of liquidity that could be available at better prices would be excluded from core data.191 After considering comments, and given that the adopted round lot definition, on its own, would have resulted in less odd-lot information being included in core data, the Commission is adopting a definition of core data that includes all odd-lots that are priced at or better than the NBBO, aggregated at each price level at each national securities exchange and national securities association. As summarized in Tables 1 and 2 below, staff analyzed data on the portion of all corporate stock and ETF volume executed on an exchange, 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 both the adopted and proposed definitions of round lot. TABLE 1 Adopted round lot tier Adopted round lot definition $0–$250.00 ......................................................... $250.01–$1,000 .................................................. $1,000.01–$10,000.00 ........................................ $10,000.01 or more ............................................ 100 Shares ....................................................... 40 Shares ......................................................... 10 Shares ......................................................... 1 share ............................................................. Portion of all corporate stock and ETF volume executed on an exchange, 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 adopted definition of round lot 0%. 65.35%. 88.28%. 100.00%. Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS (May 2020); NYSE Daily TAQ. TABLE 2 Proposed round lot tier Proposed round lot definition $0–$50 ................................................................ $50.01–$100 ....................................................... $100.01–$500 ..................................................... $500.01–$1,000 .................................................. $1,000.01 or more .............................................. 100 shares ....................................................... 20 shares ......................................................... 10 shares ......................................................... 2 shares ........................................................... 1 share ............................................................. Portion of all corporate stock and ETF volume executed on an exchange, 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 proposed definition of round lot 0%. 86.32%. 93.57%. 98.85%. 100%. Source: Equity consolidated data feeds (CTS and UTDF), as collected by MIDAS (May 2020); NYSE Daily TAQ. In comparison to the proposed tiers, the round lot tiers in the final rule would have excluded a significant proportion of better-priced odd-lot liquidity, particularly for stocks priced between $50.01 and $250.00, and thus would not have included this liquidity in core data absent the Commission also including certain odd-lots in the definition of core data. 186 See Data Boiler Letter I at 19. TD Ameritrade Letter at 4–5. 188 Memorandum from the Division of Trading and Markets regarding a June 19, 2020, meeting with representatives of JP Morgan (‘‘JP Morgan Memo to File’’) at 2 (‘‘Under today’s rules: 11.6% of orders contain a contra-side oddlot [sic] quote better than the NBBO. Under SEC’s proposed round lot parameters: (i) Bucket A ($50.00 and less)¥100 share round lot¥6.3% of orders would still contain 187 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission believes that this better-priced odd-lot liquidity needs to be reflected in core data because it will help investors and other market participants to trade in a more informed and effective manner and to achieve better executions and reduce the information asymmetries that currently exist between subscribers to SIP data and subscribers to proprietary data. However, the Commission continues to be concerned that adding all odd-lot quotations, particularly those at less aggressive price levels, could ‘‘burden systems, increase complexity, and degrade the usefulness of information in a manner that may not be warranted by the relative benefit of the additional information to investors and market participants’’ and that the inclusion of a contra-side oddlot [sic] quote better than the NBBO; (ii) Bucket B (between $50.01 and $100.00)¥20 share round lot¥10.9% of orders would still contain a contra-side oddlot [sic] quote better than the NBBO; (iii) Bucket C (between $100.01 and $500.00)¥10 share round lot¥11.6% of orders would still contain a contra-side oddlot [sic] quote better than the NBBO; (iv) Bucket D (between $500.01 and $1,000.00)¥2 share round lot¥23% of orders would still contain a contra-side oddlot [sic] quote better than the NBBO; (v) Bucket E ($1,000.01 and higher)¥1 share round lot¥all quotes are at round lot levels.’’). 189 Proposing Release, 85 FR at 16741. 190 See infra Section II.D (explaining that the Commission is adopting a four-tiered definition of round lot rather than the five-tiered definition that was proposed). 191 See JP Morgan Memo to File at 2. PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations odd-lot quotations in proposed core data should be ‘‘reasonably calibrated.’’ 192 Therefore, the Commission is modifying the proposed definition of core data to include odd-lots that are priced at or more aggressively than the NBBO.193 Specifically, pursuant to the revised definition of core data that the Commission is adopting, core data will include odd-lot quotations priced greater than or equal to the national best bid and less than or equal to the national best offer, aggregated at each price level at each national securities exchange and national securities association, in addition to odd-lot transaction data.194 Making the best priced quotations available in core data is consistent with the Commission’s goals in expanding the content of NMS information: Enhancing the availability and usefulness of the information, reducing information asymmetries, and facilitating best execution. In addition, this modification is reasonably calibrated to include the odd-lot quotation data that would be of the most interest to investors and other market participants—namely, quotations that offer pricing at or superior to the NBBO—thus limiting complexity and systems burdens, and therefore costs, 192 Proposing Release, 85 FR at 16741. discussed below, the Commission is adopting a standard odd-lot aggregation methodology for all elements of core data, including the NBBO, wherein odd-lots across multiple price levels would be aggregated and disseminated at the least aggressive price. See infra Section II.C.2(d). As a result, odd-lots priced at or better than the NBBO could be both included in the NBBO and displayed in the aggregate at each price level by exchange. The Commission believes that this is appropriate, since the NBBO and odd-lot interest at or better than the NBBO provide independently valuable information to market participants. For example, odd-lots priced at or better than the NBBO are beneficial for order routing and achieving best execution, while the NBBO is protected under Rule 611 and must be provided in certain contexts pursuant to the Vendor Display Rule (Rule 603(c)). Additionally, as discussed below, competing consolidators will have the ability to customize data products for their customers, allowing investors to receive only the information they are able to process, so the Commission does not believe that including better-priced odd-lots both at each price level at each exchange and as part of an aggregated round lot would confuse investors. 194 The Commission is adding odd-lots priced at or better than the NBBO through a new definition, ‘‘odd-lot information,’’ that is included in the definition of core data. The definition of odd-lot information will include both odd-lots priced at or better than the NBBO and odd-lot transaction data. Odd-lot transaction data, which was added to SIP data by the national market system plans in 2013 (see Proposing Release, 85 FR at 16739), was proposed to be included in core data as a separate element, but the Commission believes it will simplify the definition of core data to include in a single defined term as ‘‘odd-lot information’’ oddlots priced at or better than the NBBO and odd-lot transaction data. See infra Section VIII. 193 As VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 relative to alternatives such as including all odd-lot quotations.195 The Commission is also adopting the proposed inclusion of odd-lot transaction data in the definition of core data, through the definition of odd-lot information.196 Odd-lot transaction data is included in SIP data today, and it constitutes part of the baseline information that provides the foundation of transparency and price discovery in the U.S. securities markets.197 The Commission therefore believes that it should be included in the definition of core data so that investors and other market participants who consume core data can continue to use it to make informed trading and investment decisions.198 To further limit the cost and complexity of the inclusion of odd-lots priced at or better than the NBBO in core data, the definition of core data requires these odd-lots to be represented in the aggregate at each price level at each national securities exchange or national securities association rather than on an order-by-order basis.199 Finally, as discussed below, the Commission is modifying the proposed definition of round lot, which, relative to the proposal, will reduce the number of round lot tiers and eliminate certain better priced quotation information from the NBBO.200 However, the inclusion of odd-lot quotes priced at or better than the NBBO will make available additional quotation information market participants can use to trade in a more informed and effective manner, which 195 As discussed below, odd-lots priced less aggressively than the NBBO are not included in core data unless they aggregate to a round lot and are within the first five price levels after the NBBO. See infra Section II.F.2(e) (discussing odd-lot aggregation in the depth of book context). 196 See supra note 194. 197 See Proposing Release, 85 FR at 16736, 16739. 198 See also infra Section II.C.2(c) (discussing why certain other data that is included in SIP data today is not included in core data but will be available through other means). 199 This would not reintroduce a single-price-only odd-lot aggregation methodology in the same sense that prompted concerns from some commenters. See infra note 232 and accompanying text; Section II.C.2(d). Aggregating better-priced odd-lots at each price level at each exchange is not the same as aggregating odd-lots into round lots. Rather, it simply means that better-priced odd-lot orders will be represented in core data in terms of the total number of shares available at each price level at each exchange rather than on an order-by-order basis. For example, if the NBB for XYZ, Inc. is 100 shares at $25.00, and there are three orders of five shares and two orders of ten shares at $25.01 on Exchange A, a competing consolidator’s core data product would show 35 shares at $25.01 on Exchange A. 200 See infra Section II.D (stating that increasing the minimum stock price for the first sub-100 share round lot tier from $50 to $250 will not improve odd-lot transparency for stocks priced between $50 and $250). See also supra Tables 1 and 2. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 18613 counterbalances this reduction in information. The Commission believes that including only the best-priced odd-lot quote from each exchange, as one commenter suggested,201 would not include sufficient information about better-priced odd-lot liquidity in core data. Because for many securities there are odd-lot quotes priced better than the NBBO at multiple price levels,202 the Commission believes that including only the best-priced odd-lot quote from each exchange in core data would perpetuate some of the critical information asymmetries between SIP data and proprietary data and could impair the usability of core data for many market participants. Furthermore, the Commission does not share the view of some commenters that its adoption of a modified definition of core data that incorporates odd-lots priced at or better than the NBBO is an alternative to redefining round lot sizes. Defining smaller-sized orders in higher-priced stocks as round lots, in addition to providing transparency into such quotations, ensures that these smaller-sized orders can establish the NBBO, receive order protection, and invoke the applicability of several other rules under Regulation NMS. The Commission does not agree that including quotation information about odd-lot orders priced at or better than the NBBO in core data, and enabling more investors to see and access this information, will undermine investor confidence in the markets resulting from potential confusion over protected versus unprotected quotes.203 As is the case today, Rule 611 will not protect these odd-lot orders except to the extent that they are aggregated into round lots. Investors and other market participants who do not believe they need to consume information on odd-lots priced at or better than the NBBO may choose not to do so, and therefore the 201 See NYSE Letter II at 5. response to the comment suggesting only including the best-priced odd-lot quote from each exchange, staff supplemented the analysis above (see, e.g., Tables 1 and 2) that evaluated the volume of trades occurring in a quantity that would be defined as a round lot under the adopted definition, by also considering the volume of quotation data for the week of May 22–29, 2020, for stocks priced from $250.01 to $1000.00, which will have a round lot size of 40 shares pursuant to the modified definition of round lot that the Commission is adopting herein. Staff found that there is odd-lot interest priced better than the new round lot NBBO 28.49% of the time, and, in 48.49% of those cases, there are better priced odd-lots at multiple price levels, confirming the view that only including the best-priced odd-lot quote from each exchange would not include sufficient information about better-priced odd-lot liquidity in core data. 203 See TD Ameritrade Letter at 4–5. 202 In E:\FR\FM\09APR2.SGM 09APR2 18614 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Commission does not believe the inclusion of this information in core data will confuse investors.204 Moreover, odd-lots are subject to best execution requirements,205 so investors have the assurance that their brokerdealers are required to seek the most favorable terms reasonably available under the circumstances for such orders despite the fact that the odd-lot quotes are not protected quotations pursuant to Rule 611.206 Furthermore, the Commission does not believe adding odd-lot quotations priced at or better than the NBBO to core data would materially increase latency for core data. Market participants are not required to consume and process this additional odd-lot data, and could choose a consolidated market data product offered by a competing consolidator that does not contain such information, reducing concerns about the latency effects of additional odd-lot information on core data more broadly. In addition, the Commission believes that the decentralized consolidation model will result in lower latencies for the delivery of all consolidated market data.207 The Commission does not believe that including a subset of odd-lot quotes in core data is, as one commenter suggested, likely to ‘‘drag the processing time of SIP[s] and CC[s].’’ 208 The Commission believes that the most sophisticated, latency-sensitive market participants rely on proprietary market data feeds that include all odd-lots simultaneously with all other market data, which suggests that the inclusion of odd-lots, particularly the subset of odd-lots that will be included as part of core data, will not materially slow data dissemination. Therefore, the Commission does not believe it is necessary to consider new rulemaking that would ‘‘make odd-lots become true ‘outliers’ ’’ and/or require the publication of ‘‘ ‘delayed’ odd-lot trades and quotations statistics.’’ 209 (c) OTC Equity, Corporate Bond, Index, and Other Information In the Proposing Release, the Commission solicited comment regarding the exclusion of information related to OTC equities,210 certain 204 See infra Section III.B. Order Execution Obligations, supra note 90, at 48305 (‘‘The market maker still will have best execution obligations with respect to the remaining odd-lot portion of the customer limit order.’’). 206 See supra note 95 and accompanying text. See also supra Section I.E. 207 See supra note 199; infra Section III.B.5. 208 Data Boiler Letter I at 19. 209 Id. 210 ‘‘OTC Equity Security’’ is defined in FINRA Rule 6420(f) to mean ‘‘any equity security that is 205 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 corporate bonds, and indices from the definition of core data.211 Commenters had mixed views about whether to include such information in the definition. One commenter favored the exclusion of this information on the grounds that core data should be kept ‘‘light,’’ 212 while others agreed with the Commission that this information does not relate to ‘‘NMS securities’’ and that it should not be included on that basis.213 One of those commenters, however, suggested the Commission ensure the information remain available to retail investors.214 On the other hand, FINRA highlighted that excluding such data ‘‘would reduce investor access to [such data] and raise investor costs.’’ 215 FINRA argued that because OTC equities may become listed and become NMS stocks and vice versa, providing that information in the same data feed ‘‘facilitates more orderly markets and transparency continuity in relation to transitioning issuers.’’ 216 Excluding such data would also, FINRA argued, increase costs for both FINRA and market participants.217 Given that OTC equities, corporate bonds, and indices are not NMS stocks,218 the Commission is not revising the proposed definition of core data to include this information, even though this information is currently disseminated by the SIPs. Nothing in these amendments prohibits SROs from independently providing this kind of market data. As discussed below,219 under the decentralized consolidation model, competing consolidators would be permitted to purchase data from the SROs and offer data products to subscribers that go beyond core data or consolidated market data.220 Therefore, not an ‘NMS stock’ as that term is defined in Rule 600(b)(47) of SEC Regulation NMS; provided, however, that the term ‘OTC Equity Security’ shall not include any Restricted Equity Security.’’ In its comment letter, FINRA notes that the Proposing Release refers to ‘‘OTCBB’’ data to describe the quotation and transaction data for OTC equities, which includes both transaction data from the FINRA OTC Reporting Facility (‘‘ORF’’) and quotation data from the OTCBB. See FINRA Letter at 9. 211 Currently, Nasdaq UTP Plan Level 1 subscribers can obtain OTC equity quotation and transaction feeds for unlisted stocks. Similarly, the CTA Plan permits the dissemination of ‘‘concurrent use’’ data relating to NYSE-listed corporate bonds and indexes. See Proposing Release, 85 FR at 16736. 212 Data Boiler Letter I at 21. 213 See TD Ameritrade Letter at 4; MEMX Letter at 6. 214 See TD Ameritrade Letter at 4. 215 FINRA Letter at 9. 216 Id. at 11. 217 Id. 218 See Proposing Release, 85 FR at 16736–37. 219 See infra Section III.B. 220 As discussed below, the fees for such additional data would be proposed and filed by an PO 00000 Frm 00020 Fmt 4701 Sfmt 4700 the exclusion of these types of data from the definitions of core data and consolidated market data does not preclude the provision of this data to market participants who wish to receive it.221 Additionally, as trades in OTC equities are reported to only one SRO (i.e., FINRA) while NMS stocks are traded on multiple SROs, there is less need to consolidate OTC data pursuant to an effective national market system plan, which functions primarily to consolidate data across market centers. Furthermore, FINRA makes information on OTC trades widely available to market participants through its ORF.222 In addition, FINRA’s rules related to the reporting of OTC equity transaction data remain in effect, and any change to FINRA’s rules would require Commission review.223 Finally, pursuant to Exchange Act Sections 15A(b)(5), (b)(6), and (b)(9), FINRA could recoup the costs of providing OTC quotation and transaction data by individual SRO pursuant to Section 19(b), 15 U.S.C. 78s(b), and Rule 19b–4, rather than by the effective national market system plan(s). See infra Section III.B. 221 In addition, one commenter suggested including exchange-traded product (‘‘ETP’’) intraday indicative values (‘‘IIVs’’) in core data and standardizing symbology across equity data feeds. See Angel Letter at 1, 11. The Commission is not including IIVs in core data because IIVs are not NMS stock quote or trade information and are therefore outside the scope of this proposal. In addition, the Commission did not require exchangetraded funds (‘‘ETFs’’) to disseminate IIVs in adopting Investment Company Act Rule 6c-11. See Securities Act Release Nos. 33–10695; IC–33646 (Sept. 25, 2019), 84 FR 57162, 57179–80 (Oct. 24, 2019) (describing various shortcomings of IIV and stating that the Commission ‘‘do[es] not believe that IIV will provide a reliable metric for retail investors . . .’’). The commenter also argued that the different suffixes for various securities—including preferred shares, rights, and warrants—cause ‘‘confusion for investors and increases the risk of costly trading mistakes.’’ Id. at 11. This comment is unrelated to the dissemination of NMS stock quote or trade information and is therefore outside the scope of this proposal. 222 See supra note 210. On September 24, 2020, FINRA filed a proposed rule change to eliminate its OTCBB. Historically, FINRA operated the OTCBB to provide an electronic quotation medium for OTC equity securities. However, FINRA represents that quoting on the OTCBB has declined and that the OTCBB does not currently display or widely disseminate quotation information on any OTC equity securities. FINRA represents that all quotation activity in OTC equity securities now occurs on member-operated interdealer quotation systems. As a result, in place of the OTCBB, FINRA is proposing to adopt enhanced requirements governing member interdealer quotation systems that provide real-time quotations in OTC equity securities. Among other things, the proposed rules would require such systems to maintain and enforce written policies and procedures relating to the collection and dissemination of quotation information in OTC equity securities on or through their systems. See Securities Exchange Act Release No. 99067 (Oct. 1, 2020), 85 FR 63314 (Oct. 7, 2020) (SR–FINRA–2020–031). 223 See FINRA Rule 6600. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations charging fees that are fair, equitable, and do not impose an unnecessary burden on competition.224 The Commission will monitor, during the transition period and thereafter,225 the impact of these amendments on the provision of OTC quotation and transaction data, including its cost and availability, and consider whether additional steps are necessary or appropriate. (d) Odd-Lot Aggregation The Commission proposed that 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, and that such aggregation shall occur across multiple prices and shall be disseminated at the least aggressive price of all such aggregated odd-lots.226 Several commenters supported odd-lot aggregation across multiple price levels for purposes of determining these elements of core data.227 One commenter argued that this method would ‘‘provide market participants with a reasonably complete view of the best bids and offers for each security.’’ 228 Another commenter stated that ‘‘a common odd-lot aggregation logic should be employed by all exchanges for the purpose of displaying meaningful size.’’ 229 However, a different commenter recommended that odd-lot quotes not be aggregated across multiple price levels because it ‘‘would cause unnecessary confusion.’’ 230 The Commission is adopting the definition of core data with odd-lot aggregation across multiple price levels and specifying that such aggregation is for each market.231 Specifically, 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, and such aggregation shall occur across multiple prices and shall 224 15 U.S.C. 78o–3(b)(5), (b)(6), and (b)(9). infra Section III.H. 226 For example, if Market A had 25 shares offered at $1.98, 25 shares offered at $1.99, and 50 shares offered at $2.00, the round lot offer would be displayed as 100 shares offered at $2.00. As discussed below, the Commission proposed a single-price odd-lot aggregation methodology for purposes of protected quotations. See infra Section II.E.1. 227 See Fidelity Letter at 4; IEX Letter at 4. 228 IEX Letter at 4–5. 229 TD Ameritrade Letter at 2. See also IEX Letter at 5 (‘‘[I]t is important that this method be specified in SEC rules so as to ensure a common understanding of the NBBO by all market participants.’’). 230 Data Boiler Letter I at 24. 231 The Commission is specifying that the definition of core data does not require cross-market odd-lot aggregation. 225 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 be disseminated at the least aggressive price of all such aggregated odd-lots.232 The Commission does not believe that this would cause unnecessary confusion 233 because many exchanges currently aggregate odd-lot prices in this manner. Setting forth this cross-price aggregation methodology in Commission rules will promote consistency in the calculation and display of core data. Additionally, this method of odd-lot aggregation will enable market participants to obtain a more reasonably complete view of the best bids and best offers of each security than they would if odd-lots were not aggregated or aggregated at only a single price level because the aggregation methodology the Commission is adopting captures liquidity dispersed across multiple prices. Furthermore, this odd-lot aggregation methodology would benefit market participants by promoting tighter spreads in all stocks, especially high priced ones.234 (e) Quotation Sizes and SRO Attribution in Core Data Currently, the size of the NBBO is represented in core data in terms of the number of round lots. For example, if a 200 share bid at $25.00 establishes the national best bid, the SIP feed shows ‘‘2’’ at $25.00. One commenter, believing that this practice might be confusing given the new round lot sizes, particularly to retail investors, recommended requiring size to be represented in actual shares rather than round lots.235 The Commission agrees that continuing the current size representation convention—i.e., the number of round lots—could be confusing. Accordingly, the Commission is modifying the proposed definition of core data to require quotation sizes for core data elements— including the NBBO, each SRO’s best and protected quotes, depth of book data, and auction information—to be disseminated in share sizes, rounded down to the nearest round lot multiple. For example, a 275 share buy order at $25.00 for a stock with a 100 share round lot would be disseminated as ‘‘200.’’ 236 232 As explained below, the Commission is also extending the multiple-price odd-lot aggregation methodology to protected quotations. See infra Section II.E. 233 See Data Boiler Letter I at 24. 234 See infra Section II.E.2(b). 235 See CBOE Letter at 13–14. For example, an investor would have to know that, for a $300 stock, ‘‘2’’ means 80 shares pursuant to the adopted round lot sizes. 236 The Commission has considered whether the entire size should be displayed including any oddlot portion rather than rounding down to the PO 00000 Frm 00021 Fmt 4701 Sfmt 4700 18615 The Commission is also modifying the proposed definition of core data to specify that core data elements— specifically, the best bid and best offer, NBBO, protected bid and protected offer, transaction reports, last sale data, odd-lot information, depth of book data, and auction information—to the extent that they are disseminated in a consolidated market data product, must be attributed to the national securities exchange or national securities association that is the source of each such element.237 The Commission believes that SRO attribution is critical to the utility of these core data elements so that market participants know where to access a displayed quotation.238 This requirement is consistent with the inclusion of exchange information in current SIP data.239 D. Definition of ‘‘Round Lot’’ Under Rule 600(b)(82) 1. Proposal To better ensure the display and accessibility of significant liquidity for higher-priced stocks, the Commission proposed a definition of round lot that would assign different round lot sizes to individual NMS stocks depending upon their stock price. Specifically, the Commission proposed to define round lot as: (1) For any NMS stock for which the prior calendar month’s average closing price on the primary listing exchange 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 nearest round lot multiple. The purpose of rounding down to the nearest round lot multiple is to ensure that the enumerated elements of core data reflect orders of meaningful size. Specifically with respect to the NBBO, rounding down also helps to ensure that the protected portion of the order is clearly represented, which addresses concerns about impacts on investor confidence and confusion that could result from showing unprotected size at the NBBO. In addition, as discussed above, odd-lots priced at or better than the NBBO, including the odd-lot portion of a mixed lot order at the NBBO, will be included in core data. 237 See infra Section VIII. 238 See also Section II.F.2(b). 239 See supra note 17 and accompanying text (stating that core data currently includes the price, size, and exchange of the last sale; each exchange’s current highest bid and lowest offer, and the shares available at those prices; and the NBBO). E:\FR\FM\09APR2.SGM 09APR2 18616 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations 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 for the purchase or sale of an NMS stock of 1 share. The Commission proposed using the IPO price if the prior month’s average closing price is not available. As explained in the Proposing Release, a significant proportion of quotation and trading activity occurs in odd-lots, particularly for frequently traded, high-priced stocks.240 The proposed definition of round lot would incorporate information about meaningfully sized orders, including many odd-lot quotations in higherpriced stocks that are priced more favorably than the current round lot NBBO, into core data.241 This would 240 Staff, using the week of June 8–12, 2020, instead of the week of September 10–14, 2018, repeated the analysis from the Proposing Release of odd-lot trade and message volume, duration on the inside, order-book distribution, and quoted spreads for the top 500 securities by dollar volume included in the Proposing Release (see Proposing Release, 85 FR at 16739–40). The results were very similar and confirmed observations discussed in the Proposing Release. Bid-ask spreads widened significantly when calculated using only round lots relative to the odd-lot quotations displayed on proprietary feeds, and as average stock share prices rose, bidask spreads based only on round lots generally widened by a greater amount than did spreads based on round lots and odd-lots. Specifically, 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 $0.19839 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 $0.00093. Moreover, frequently traded, high priced securities were more likely to have executions occur in odd-lot sizes (about 34% of the share volume of the 50 securities with the highest share prices) than lower priced securities (about 3.4% of the share volume of the 50 securities with the lowest share prices). Finally, around 91% of the trades that occurred in the two largest securities by market capitalization that have share prices greater than $1,000 occurred in oddlot share amounts. 241 Staff, using data from May 2020 instead of September 2019, repeated the analysis from the Proposing Release of the proportion of odd-lot trades that occurred at prices that are better than the prevailing NBBO included in the Proposing Release (see Proposing Release, 85 FR at 16740). The results were very similar and confirmed observations discussed in the Proposing Release. During May 2020, a substantial proportion of odd-lot trades occurred at prices that were better than the prevailing NBBO. Specifically, approximately 45% of all trades executed on exchange and approximately 10% of all volume executed on exchange in corporate stocks and ETFs (6,926 unique symbols) occurred in odd-lot sizes (i.e., less than 100 shares), and 40% of those odd-lot transactions (representing approximately 35% of all VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Generally: Several commenters expressed general support for a revised definition of round lot for higher-priced securities, but some suggested certain modifications to the proposed definition or otherwise qualified their support.242 Some commenters agreed with the Commission’s proposed tiers of round lot sizes,243 while others agreed with the tier-based approach, but suggested fewer tiers.244 One commenter, stating that a one-share round lot for stocks over $1,000 could have ‘‘unintended negative impacts’’ on price discovery and routing complexity, suggested that the Commission ‘‘defer action’’ on defining round lots (and including them in core data) until the Commission receives further public input.245 Some commenters recommended the Commission eliminate the concepts of round lots and odd-lots in favor of displaying the exact number of shares of every order, arguing that the concepts are ‘‘obsolete’’ because ‘‘[m]odern computer processing power is up to the task’’ of calculating ‘‘in real time the cost to buy or sell a given number of shares at the displayed prices.’’ 246 Several commenters suggested that the proposed five tiers would increase complexity, add confusion, compound costs, create execution-quality challenges, and undermine the usefulness of the proposal, although these commenters offered different suggestions to improve the proposal.247 One commenter, however, stated that odd-lot volume) occurred at a price better than the NBBO. 242 See, e.g., BlackRock Letter at 3 (stating that the proposed round lot definition is ‘‘an elegant solution for increasing odd-lot transparency which innately extends the inclusion of odd-lots to complementary rules and mechanisms such as the determination of the national best bid and offer (‘NBBO’), the behavior of order types, and the disclosure of execution statistics’’ and strikes an appropriate balance between including every oddlot order and enhancing the quality of market data by establishing a threshold notional amount, but cautioning that round lots should be judiciously calibrated into groups to minimize complexity); Fidelity Letter at 6 (supporting a revised definition of round lot for higher priced securities but urging the Commission to undertake an investor education campaign and to provide sufficient implementation time); Schwab Letter at 4; letter from Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated July 22, 2020, (‘‘Nasdaq Letter V’’) at 3 (‘‘Of 31 total comments on the proposed introduction of round lot tiers, fewer than half (14) supported the actual proposal; 11 comments supported a definition different from what the Commission proposed, and 6 opposed it.’’); letter from Luc Burgun, President and CEO, NovaSparks S.A., to Vanessa Countryman, Secretary, Commission, dated Aug. 7, 2020, (‘‘NovaSparks Letter’’) at 1; letter from Christopher Solgan, VP, Senior Counsel, MIAX Exchange Group, to Vanessa Countryman, Secretary, Commission, dated Aug. 18, 2020, (‘‘MIAX Letter’’) at 5–6 (recommending that the Commission periodically review the definition of round lot). 243 See, e.g., IEX Letter at 3–4 (stating that the proposed round lot definition would make round lots ‘‘less arbitrary and more comparable across securities . . . [because] [e]ach round lot tier above the $50 price level would represent a minimum notional value of $1,000, resulting in relatively comparable treatment across securities, regardless of per share price’’); letter from Hitesh Mittal, Founder and Chief Executive Officer, BestEx Research, to Vanessa A. Countryman, Secretary, Commission, dated May 21, 2020, (‘‘BestEx Research Letter’’) at 2; Data Boiler Letter I at 24. 244 See, e.g., T. Rowe Price Letter at 4; Capital Group Letter at 3. 245 See State Street Letter at 3. 246 Angel Letter at 15. See also Nasdaq Letter V at 17–19 (suggesting adding intelligent ticks, in which the standard one cent tick that applies to all NMS stocks would be replaced with tick sizes that vary depending upon the trading characteristics of each such stock, while eliminating round lots). 247 See, e.g., Clearpool Letter at 11–12; STANY Letter II at 3 (‘‘A more prudent and nonetheless effective approach to addressing the increased trading in odd-lots, would be to include odd-lot quotations in core data while leaving the definition of round-lot as it currently stands.’’); Capital Group Letter at 3; Letter from Gerald D. O’Connell, SIG Compliance Coordinator, Susquehanna International Group, to Vanessa Countryman, Secretary, Commission, dated July 27, 2020, (‘‘Susquehanna Letter’’) at 2 (stating that any benefits of the proposing release ‘‘will be impacted by . . . quoting congestion; . . . customer confusion; and . . . gaming strategies.’’); Nasdaq Letter IV at 10; STANY Letter II at 3–4 (recommending that the Commission conduct a derivative market impact analysis because ‘‘STANY is concerned the Commission has not considered the impact and potential for investor confusion when trading options on securities with round-lots quotes in sizes less than the 100-share option contract convention’’); TD Ameritrade Letter at 10 (‘‘In the current Proposal for round lot tiers at five different increments, the Firm is also concerned for the potential confusion that may also be posed to investors trading options when contracts remain at 100 shares and the NBBO is quoted in lesser sizes.’’); letter from Robert W. Holthausen, Professor of Accounting and Finance, and Robert Zarazowski, Managing Director, Wharton Research Data Services, The Wharton School, University of Pennsylvania, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Wharton Letter’’) at 4 (‘‘A top of book replacement product for TAQ, despite possible cheaper costs from competing consolidators, even if it did not consist of more consolidated market data, would incur significantly greater storage costs than TAQ due to changes in the definition of ‘round lot.’ ’’) (footnotes removed). improve the comprehensiveness and usability of core data, facilitate the best execution of customer orders, and reduce information asymmetries. 2. Final Rule and Response to Comments The Commission received multiple comments on the definition of round lot. Commenters offered suggestions on various ways the proposed round lot tiers should be adjusted and opined on the proposed methodology for determining a stock’s price for purposes of assigning a round lot size to a stock. (a) Round Lot Tiers PO 00000 Frm 00022 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations adding tiers would not significantly increase complexity.248 Notional Value: Some commenters stated that the definition of core data should include all quotes over a certain notional value.249 Another commenter recommended basing round lots on the notional value of an order, rather than the number of shares, and suggested that the Commission ensure that anything over a minimum threshold qualifies as a round lot, eliminating mixed lots.250 Different Threshold: Some commenters suggested increasing the $1,000 price-based threshold but did not suggest a specific number.251 One commenter suggested, as an alternative to including all quotes above a notional level in core data (as noted above), increasing the price-based threshold to $2,000, stating that ‘‘the notional value of the median trade today is about $2,000.’’ 252 Different Tiers: Multiple commenters offered recommendations to recalibrate the tiers in the proposed round lot definition, ranging from two to four tiers.253 One commenter, who opposed changing the definition of round lot,254 suggested that, if the Commission is committed to changing the definition of round lot, it should use two tiers: 100 shares for stocks priced under $500 and 50 shares for stocks priced over $500.255 Another commenter suggested a 248 See MEMX Letter at 4. Clearpool Letter at 11–12 (recommending, in the alternative, reducing the number of tiers to three with round lot sizes of 100, 50, and 20); letter from Roman Ginis, Founder, Intelligent Cross, to Vanessa Countryman, Secretary, Commission, dated June 1, 2020, (‘‘IntelligentCross Letter’’) at 3; ACS Execution Services Letter at 3. 250 See letter from Alec Hanson, Founder, AHSAT LLC, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘AHSAT Letter’’) at 3–5. A mixed lot is an order for a number of shares greater than a round lot that is not a multiple of a round lot (for example, an order for 107 shares). See, e.g., Cboe BZX Rule 11.10. 251 See ICI Letter at 7–8; letter from Stephen John Berger, Managing Director, Global Head of Government and Regulatory Policy, Citadel Securities, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Citadel Letter’’) at 2; ACS Execution Services Letter at 3; STANY Letter II at 3. 252 See IntelligentCross Letter at 3. 253 See, e.g., TD Ameritrade Letter at 6–7; T. Rowe Price Letter at 4; Capital Group Letter at 3. 254 See TD Ameritrade Letter at 6–7 (‘‘The Proposal for changing the nearly universal 100 share round lot to a price-tiered model appears to be based on some misconceptions. Odd lot trade frequency, which is cited as the justification for the price-tiered model, is not a valid proxy for passive order interest. In reality, trade size is more often dictated by the liquidity-taker than the liquidityprovider and is often a result of algorithmic ‘pinging’ behavior. TD Ameritrade performed a review in 2019 showing that the increase in odd lot trades was largely due to small liquidity-taking orders, not small passive orders.’’) (footnotes removed). 255 See id. at 10–11. 249 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 different definition using two tiers: 100 shares for stocks priced less than $250 and 10 shares for stocks at or greater than $250, where the 10 share round lot would remain unprotected.256 Another commenter suggested three tiers: 100 shares for stocks priced under $100, 10 shares for stocks priced between $100.01 and $1,000, and 1 share for stocks priced over $1,000.01.257 Some commenters suggested a different threetiered definition: 100 shares for stocks priced under $500, 10 shares for stocks priced from $500.01 to $1,000, and 1 share for stocks priced $1,000.01 or more.258 One of these commenters stated that their ‘‘recommended round lot sizes of 1, 10 and 100 shares are ones that are used today and that market participants are accustomed to seeing.’’ 259 Another commenter suggested another three-tiered definition: 100 shares for securities priced up to $50, 20 shares for securities priced between $50.01 and $500, 2 shares for securities priced from $500.01 and higher.260 Another commenter suggested reducing the proposed five tiers to four by collapsing the two-share and one-share highest-priced tiers because there are so few stocks in each of those tiers.261 Inadequate Justification for the Proposed Tiers: One commenter stated the Commission failed to explain adequately its rationale for choosing the tiers it chose, suggesting the levels are arbitrary.262 That commenter also 256 See T. Rowe Price Letter at 4. Capital Group Letter at 3. Virtu Letter at 3; SIFMA Letter at 9; MFA Letter at 10; Susquehanna Letter at 2–4 (stating that the proposal would be likely to increase significantly, for many high-priced securities, ‘‘growth in quote changes, order routes, missed executions, and reroutes from missed executions,’’ but acknowledging that these consequences would be reduced to the extent that fewer tiers are adopted); STANY Letter II at 3 (stating that ‘‘[a]mong those members who support a change in the definition of round-lots, there is a decided preference for’’ this particular three-tiered definition). 259 SIFMA Letter at 9. 260 See Schwab Letter at 4. In a subsequent letter, this commenter provided further support for its suggestion of these three tiers. See letter from Jeffrey T. Brown, Senior Vice President, Legislative and Regulatory Affairs, Charles Schwab & Co., Inc., to Vanessa Countryman, Secretary, Commission, dated Oct. 13, 2020, (‘‘Schwab Letter II’’) at 1 (‘‘An analysis of orders filled for Schwab clients in the first quarter of 2020 shows that just 5 percent of all odd lot orders are placed for stocks priced greater than $500. Of these orders, roughly the same number of orders are placed for stocks priced from $500 to $1000 and stocks priced greater than $1000. With such a low proportion of orders at prices greater than $500, Schwab believes the additional data provided by the SEC’s proposed highest tier would not justify the operational complexity it would create or potential to confuse investors.’’). 261 See BlackRock Letter at 3. 262 See Nasdaq Letter IV at 14–15. See also Angel Letter at 14 (‘‘The Commission appears to have 257 See 258 See PO 00000 Frm 00023 Fmt 4701 Sfmt 4700 18617 argued that the tiers are ‘‘clunky’’ and could result in large shifts in a round lot size in response to a small change in a stock’s price.263 The commenter further stated that the Commission failed to consider alternatives to the round lot definition, including the commenter’s ‘‘intelligent tick’’ proposal, which would vary tick size based upon the trading characteristics of each NMS stock.264 Additionally, that commenter argued that the tiers would complicate the national market system and ‘‘upend longstanding conventions’’ for market participants and their systems as to how they view and process quotes, especially the convention that one order of a security is generally thought of as 100 shares of that security.265 Similarly, in a subsequent letter, this commenter stated that the Commission did not undertake ‘‘data driven analysis’’ of the proposed round lot definition, that commenters raised concerns about the complexity of the proposal, and that therefore the Commission cannot determine whether the benefits of the proposal outweigh the costs.266 The Commission is adopting a modified definition of round lot (and, as discussed above, is including odd-lots that are priced at or more aggressively than the NBBO in core data).267 Specifically, the Commission is adopting a four-tiered definition of round lot: 100 shares for stocks priced $250.00 or less per share, 40 shares for stocks priced $250.01 to $1,000.00 per share, 10 shares for stocks priced $1,000.01 to $10,000.00 per share, and 1 share for stocks priced $10,000.01 or more per share. These adjustments are responsive to comments that the proposed five-tiered approach is unnecessarily complex and that the new tiers should be based on a higher done little in the way of substantive economic analysis to determine the optimal round lot size as a dollar value. If it had, the proposed dollar value would not be oscillating between $100 and $5,000.’’). 263 See Nasdaq Letter IV at 14. 264 See id. at 18. 265 See id. at 17. 266 See Nasdaq Letter V at 4–5. 267 See supra Section II.C.2(b). One commenter suggested an ‘‘intelligent tick’’ regime as an alternative to new round lots. However, the commenter’s intelligent tick proposal states that the proposal ‘‘attempts to address a discrete set of challenges in the national market system’’ and that policy makers also need to consider ‘‘other, related challenges,’’ including round lots. See Nasdaq, Intelligent Ticks: A Blueprint for a Better Tomorrow (Dec. 2019) at 8, available at https:// www.nasdaq.com/docs/2019/12/16/IntelligentTicks.pdf. Therefore, the commenter’s intelligent tick proposal is not presented as an alternative to adopting new round lot sizes. Changes to the tick size of stocks are outside the scope of the rulemaking and the market data issues the Commission is addressing herein. E:\FR\FM\09APR2.SGM 09APR2 18618 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations notional value threshold. The Commission agrees that the number of round lot tiers should be decreased to reduce cost and complexity, avoid potential confusion among market participants, and promote a smoother transition to the new price-based round lot structure. In addition, the Commission believes that the objective of including additional information regarding orders currently defined as odd-lots in core data to enhance the usefulness of this data to market participants, reduce information asymmetries, and facilitate best execution would still be achieved with the simplified definition that the Commission is adopting.268 Moreover, under the modified approach, the new round lot tiers would still be normalized at a particular notional value threshold, albeit higher than the $1,000 notional value reflected in the proposed definition, promoting more consistent treatment of securities of varying prices than the 100-share definition that predominates today irrespective of how much a stock is worth. Commenters submitted data suggesting that average trade and order sizes are significantly higher than $1,000.269 To confirm those comments, staff evaluated all trades that occurred in 2019 and observed that the average number of shares for all trades was about 193 shares, with an average trade size of $8,842 (excluding auctions, the average number of shares per trade was 178 shares, with an average trade size of $8,068). As a round lot is a trading unit that reflects an order of meaningful size to market participants, and since average trade or order sizes are a reasonable proxy for what market participants consider to be a meaningfully sized order, the Commission believes it is appropriate to adjust the notional value threshold of the new tiers upward to $10,000 in response to these comments. The Commission believes that using a round figure that is in line with data provided by commenters and internal staff 268 See supra Table 1 (showing that under the four-tiered round lot approach that the Commission is adopting, 0%, 65.35%, 88.28%, and 100% of all corporate stock and ETF volume transacted in a quantity less than 100 shares and at a price better than the prevailing NBBO would be captured in the $0–$250.00, $250.01–$1,000.00, $1,000.01– $10,000.00, and $10,000.01 or more tiers, respectively). 269 See IntelligentCross Letter at 3 (‘‘[T]he notional value of the median trade today is about $2,000’’); Virtu Letter at 3–4 (estimating that ‘‘average retail trade size between 2007 and the present is around 436 shares or $14,581’’ but also stating that data from 2019 to present show that the vast majority (over 75%) of all trades are still for less than $10,000); Angel Letter at 17 (‘‘[T]he median trade size is roughly $10,000.’’). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 analysis (i.e., $10,000) will reduce potential investor confusion and implementation cost and complexity. In addition, as discussed in more detail below, commenters overwhelmingly favored protecting orders in the new, smaller round lot sizes, and the Commission is not adopting its proposal to require protected quotations to be of at least 100 shares.270 In a market environment where the new round lots are protected, adjusting the notional value threshold upward is appropriate so that order protection under Rule 611, and the applicability of other rules under Regulation NMS, are limited to meaningfully sized orders. Similarly, a higher notional value threshold for the new round lot tiers will prevent orders of a smaller notional value from establishing a new NBBO, which could have added significant cost and complexity to the national market system. The Commission acknowledges that increasing the minimum stock price for the first sub-100 share round lot tier from $50 to $250 will not improve oddlot transparency for stocks priced between $50 and $250.271 However, as discussed above,272 the Commission is including information about all odd-lots priced at or better than the NBBO in core data, which will counterbalance this loss of odd-lot transparency. In making these choices, the Commission has balanced the competing objectives of: (a) Improving the display and accessibility of orders that are of significant notional size; (b) reducing quoted spreads; and (c) reducing an excessive amount of complexity that comes with having too many tiers. The Commission is also not revising the proposed definition of round lot to reflect a ‘‘pure’’ notional value approach—whereby all quotes over a certain notional amount, regardless of the number of shares, would constitute a round lot—as some commenters suggested.273 The new 40-, 10-, and 1share tiers effectively require orders to be over a certain notional value to be assigned to those round lot sizes, but the Commission is reluctant to disrupt the longstanding practice of defining a round lot in terms of a number of shares. Doing so could substantially increase complexity and require significant additional systems reprogramming costs.274 270 See infra Section II.E.2(a). supra Tables 1 and 2. supra Section II.C.2(b). 273 See supra notes 249–250 and accompanying text. 274 Similarly, the Commission does not believe that the concept of a round lot should be eliminated 271 See 272 See PO 00000 Frm 00024 Fmt 4701 Sfmt 4700 While 100, 10, and 1 are the round lot sizes in use today, the Commission does not believe that the round lot sizes of 100, 40, 10, and 1 that the Commission is adopting will materially increase the difficulty of transitioning to the new round lot sizes. Only a few, infrequently traded stocks have round lot sizes other than 100 today, so market participants are not accustomed to 10 or 1 share round lot sizes on a significant scale. Additionally, the thresholds of the new round lot tiers that the Commission is adopting are set at a consistent notional value of $10,000, which, as one commenter observed, results in a more consistent treatment of securities regardless of per-share price 275 and helps to ensure that orders of meaningful size across securities of various prices are defined as round lots. The Commission believes that this structure will facilitate the transition to the new round lot sizes. Moreover, regulatory data includes an indicator of the applicable round lot size,276 and the Commission is requiring the representation of quotation sizes in terms of the number of shares rather than the number of round lots. These requirements should alleviate concerns regarding potential confusion caused by the switch to different round lot sizes because the size of each quotation and the round lot of each stock will be included in consolidated market data. Finally, only 134 stocks currently have share prices above $250.00, further limiting the cost and complexity of the introduction of the new round lot sizes.277 For these reasons, the Commission does not believe that the price-based definition of round lot will be confusing to investors. Additionally, the Commission does not believe that a one-share round lot for stocks priced at or above $10,000.01 would have ‘‘unintended negative impacts’’ on price discovery and routing as ‘‘obsolete’’ because round lot orders continue to play an important role in the national market system by delineating orders of meaningful size and focusing regulatory requirements and protections— such as those set forth in Rules 602 and 603, 17 CFR 242.604, 242.605, 242.606, and 242.610 (Rules 604, 605, 606, and 610), and Rule 611 of Regulation NMS—on such orders as opposed to less significant orders. See Proposing Release, 85 FR at 16743–46. Rather, the Commission believes that eliminating the concept of a round lot could cause investor confusion and other unintended consequences. 275 IEX Letter at 4. 276 See infra Section II.H. 277 According to data analyzed by staff for September 2020, 9,023 stocks would be included in the 100-share tier, while only 117 stocks would be included in the 40-share tier, 16 stocks would be included in the 10-share tier, and 1 stock would be included in the one-share tier. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations complexity 278 because, based on current pricing, only one stock would be included in the one-share tier, and that stock already has a round lot size of one. Furthermore, the Commission does not believe it should defer action on defining round lot until it receives further public input, as one commenter recommended,279 because the Commission received substantial comment on this issue from a wide range of market participants during this rulemaking process and in connection with the Market Data Roundtable.280 Moreover, the definition of round lot is based on data-driven analysis. The Proposing Release included, among other things, data on the increasing prevalence of odd-lot trades, particularly among higher-priced stocks, the proportion of odd-lot trades occurring at prices better than the NBBO, and the proportion of these better-priced odd-lots that would be captured by the proposed definition of round lot.281 As discussed above, staff has updated these data analyses and has performed similar data analyses.282 The adopted definition is consistent with and supported by these analyses. Finally, in response to the comment on the impact of the definition of round lot on options markets and on the standard convention that an options contract represents 100 shares of the underlying equity, the Commission does not believe that any such impact will be substantial or disruptive. As stated above, only a limited number of stocks will experience a change in their round lot sizes as a result of the amended definition of round lot.283 Moreover, options on at least one stock that currently has a sub-100 round lot size are traded in standard units of 100 shares, so there is some precedent for deviation between the standard number of shares for an options contract and the standard unit of trading for the underlying stock. Similarly, corporate actions, such as rights offerings, stock dividends, and mergers can result in adjusted contracts representing something other than 100 shares of stock.284 For these reasons, the Commission believes that options 278 See State Street Letter at 3 (suggesting there could be such impacts for a one-share round lot for stocks over $1,000). 279 See State Street Letter at 3. 280 See Market Data Roundtable, supra note 33. 281 See Proposing Release, 85 FR at 16739–43. 282 See supra Table 1 and Table 2; notes 240 and 241. 283 See supra note 277 and accompanying text. 284 See Options Clearing Corporation, Equity Options, available at https://www.theocc.com/ Clearance-and-Settlement/Clearing/Equity-OptionsProduct-Specifications (last accessed Sept. 17, 2020). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 markets will be able to adjust without undue cost to the new round lot sizes that will apply to some NMS stocks. The Commission will monitor the impact of these amendments on options markets going forward, including during the transition period.285 Monthly Round Lot Calculation: Some commenters disagreed with using the prior calendar month’s average closing price on the primary listing exchange to determine a stock’s price for purposes of assigning a round lot size to a stock, as proposed.286 One commenter stated that the proposed monthly calculation for determining round lot size would be operationally risky and prone to errors and confusion.287 That commenter suggested a monthly calculation might ‘‘cause a stock’s round lot size to become significantly out of step with what it should be, particularly during periods of significant market volatility or when stock splits occur.’’ 288 Another commenter suggested that monthly updates would be ‘‘messier’’ than updating continuously.289 A different commenter suggested ‘‘mak[ing] the referenced price that of the order itself (so each price level has a corresponding round lot size, and a given stock may have multiple round lot sizes at once).’’ 290 Another commenter recommended quarterly recalculations because the proposed monthly process ‘‘will add an administrative burden.’’ 291 On the other hand, some commenters agreed with the proposal, stating that a monthly calculation time period strikes an appropriate balance.292 One commenter noted that the monthly calculation ‘‘should not be too much hassle as long as the requirements are . . . clear.’’ 293 Selecting an appropriate stock price metric for the round lot size determination involves striking an appropriate balance between using accurate, up-to-date pricing information and avoiding the cost and complexity of over-frequent computation and potential round lot reassignment. The Commission continues to believe the proposed monthly approach strikes an appropriate balance.294 The 285 See infra Section III.H. Nasdaq Letter IV at 17; Angel Letter at 17; AHSAT Letter at 4; NovaSparks Letter at 1. 287 See Nasdaq Letter IV at 17. 288 Id. 289 Angel Letter at 17. 290 AHSAT Letter at 4. 291 NovaSparks Letter at 1. 292 See MFA Letter at 10; Data Boiler I at 25. 293 Data Boiler I at 25. 294 See Proposing Release, 85 FR at 16743. One commenter ‘‘suspect[ed]’’ that calculating round lot sizes automatically in real time might be operationally simpler and urged the Commission to 286 See PO 00000 Frm 00025 Fmt 4701 Sfmt 4700 18619 Commission believes continuous updating of round lot size or an orderbased calculation would be too complex and would be subject to short-term price fluctuations, while quarterly updating could result in severely out-of-date tier assignments. Additionally, market participants are accustomed to other kinds of monthly updates, including for SRO fees, so monitoring for round lot size changes resulting from price moves and making corresponding systems adjustments would not be overly burdensome or costly.295 Therefore, the Commission is adopting a stock price calculation methodology based on the prior calendar month’s average closing price on the primary listing exchange, as proposed. Additionally, to alleviate concerns that a stock’s round lot size changing as its stock price changes could be confusing to market participants, the new definition of regulatory data, as discussed below, includes an indicator of the applicable round lot. The Commission believes that including this information about the applicable round lot size in consolidated market data will reduce confusion as market participants adjust to the new round lot sizes.296 As stated above,297 the proposed definition of round lot provided that the IPO price would be used to determine an NMS stock’s round lot size if the prior calendar month’s average closing price is not available, and the Commission solicited comment regarding the stock price calculation methodology that should be utilized in this situation.298 The Commission received one comment in response.299 The Commission recognizes that there are other scenarios aside from IPOs— such as listings of securities traded in the OTC market or direct listings— where there may not be a full prior ‘‘listen carefully to the brokerage ops people’’ with respect to this issue. See Angel Letter at 17. However, the Commission did not receive any comments from brokerage operations professionals or other commenters that provided a reasoned explanation for a different approach. 295 See infra Section V.C.1(b)(v). 296 Moreover, the Commission does not believe the round lot tiers will be ‘‘clunky,’’ as one commenter suggested. Nasdaq Letter IV at 14. The Commission appreciates the commenter’s concern that a small price shift around certain thresholds could cause large changes in round lot size, but the monthly methodology would address this concern by requiring a more sustained or extensive price shift to cause a stock to switch tiers. 297 See supra Section II.D.1. 298 See Proposing Release, 85 FR at 16743, 47. 299 Data Boiler Letter I at 25 (‘‘We tend to think: no round lot size information until there is a prior full calendar month’s average closing price on the primary listing exchange was [sic] $500.01 or greater. Yet, we remain flexible to accommodate whatever minimum number of trading days as [sic] required by the industry and the SEC.’’). E:\FR\FM\09APR2.SGM 09APR2 18620 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations month of closing prices on the primary listing exchange that can be averaged to ascertain the stock’s price. Therefore, the Commission is modifying the proposed definition of round lot to delete references to the IPO price and to add a new provision that for any NMS stock for which the prior calendar month’s average closing price is not available, that stock’s round lot shall be 100 shares.300 This more general formulation will capture IPOs as well as other types of initial stock listings. In addition, assigning an initial, default round lot size of 100 shares to newly listed stocks will provide certainty and consistency and avoid the need to make last minute computations. Finally, the default assignment of a 100-share round lot size should be accurate for almost all new listings, since their prices tend to be well below $250 per share.301 (b) Impact on Other Rules in Regulation NMS The Commission received multiple comments regarding how the proposed definition of round lot would impact Rules 602, 603, 604, 605, and 610.302 Rule 602 Comments: One commenter suggested that having multiple NBBOs would make the concept of locked and crossed markets and execution quality ‘‘depend on your data provider and location. That in turn makes ‘fair access’ of exchange data (Rule 602) a little redundant. The SEC hopes there are around a dozen consolidators, so it’s likely some will be faster than others.’’ 303 On the other hand, another commenter agreed with the Commission ‘‘that the bids and offers collected and made available under Rule 602(a) 300 See infra Section VIII. analysis found that for U.S. equity IPOs traded on U.S. exchanges and issued over the last year (as of November 12, 2020), the average share price was $13.75 and the highest share price was $120. 302 See Proposing Release, 85 FR at 16743–45 (explaining the requirements of Rules 602, 603, 604, 605, and 610 of Regulation NMS and the impact of the proposed round lot definition upon these rules). Rule 602 governs the dissemination of quotations in NMS securities. Rule 603 governs the distribution, consolidation, and display of information with respect to quotations for and transactions in NMS stocks. Rule 604 governs the display of customer limit orders for NMS stocks. Rule 605 governs the disclosure of order execution quality information. Rule 610(d), 17 CFR 242.610(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. 303 Letter from Phil Mackintosh, Chief Economist, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated May 26, 2020, (‘‘Nasdaq Letter III’’) at 24–25. 301 Staff VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 should be in the proposed round lot sizes, and the proposed round lot definition should apply to the obligations of responsible brokers or dealers under Rule 602(b).’’ 304 The amendments to the definition of NBBO to accommodate the decentralized consolidation model and the notion of ‘‘multiple NBBOs,’’ which already exist today,305 do not have any direct bearing on the requirements of Rule 602, which relate to the collection and provision of certain quotation data to vendors. Rule 603 Comments: A number of commenters addressed the impact of the definition of round lot on Rule 603(c), the Vendor Display Rule. One commenter argued that the Commission did not consider the ‘‘indirect impact’’ of ‘‘the NBBO reflecting smaller-sized orders’’ on the Vendor Display Rule.306 That same commenter stated, ‘‘[t]he Commission also fails to consider whether the costs associated with retaining the Vendor Display Rule outweigh its benefits if the Commission adopts its proposed changes to the definition of ‘round lot.’ ’’ 307 Another commenter argued that the round lot change would mean a ‘‘SIP, broker, or dealer would be required to provide a consolidated display reflecting smallersized orders in higher-priced stocks.’’ 308 A different commenter suggested that the protected quotation definition would increase complexity because the Vendor Display Rule ‘‘generally requires a ‘consolidated display,’ which would include an NBBO based on the revised round-lot sizes, in a context in which a trading or order routing decision can be implemented but would not require the display of valuable information about the protected quotation.’’ 309 The Commission continues to believe that providing a consolidated display that includes the new round lot NBBO is appropriate to help ensure that market participants receive basic quotation information, in a context in which a trading or order routing decision can be implemented. This information should reflect orders of meaningful size, including smaller-sized orders in higher-priced stocks.310 Moreover, the commenter did not describe any specific costs, including any indirect costs, that it believed the Commission had not considered.311 304 Data Boiler Letter I at 26. infra Section III.B.10. 306 NYSE Letter II at 6–7. 307 Id. 308 Fidelity Letter at 6. 309 Cboe Letter at 8. 310 Proposing Release, 85 FR at 16744. 311 See NYSE Letter II at 6–7. In addition, the comment related to additional complexity in the 305 See PO 00000 Frm 00026 Fmt 4701 Sfmt 4700 Rule 604 Comments: One commenter suggested the round lot definition would create a burden on market participants to engage in ‘‘careful monitoring and changes to the programming of market makers[’] systems . . . each month’’ in order to remain compliant with Rule 604, given the potential for month-to-month changes in round lot sizes for individual securities.312 That commenter recommended a three-tiered structure to reduce such a burden.313 Another commenter suggested that the round lot definition’s narrowing of the Rule 604 odd-lot exception, resulting in the display of customer limit orders at the NBBO but less than 100 shares, in combination with the proposed amendment to the definition of protected quotation, would ‘‘separate[ ] brokers’ Rule 604 requirements from their best execution obligations . . . [and] create[ ] challenges for a broker-dealer to meet its best execution obligations because under the proposed amendments, a customer limit order that is less than 100 shares would not be protected under Rule 611.’’ 314 The Commission continues to believe that Rule 604 should use round lots, as defined and adopted herein, as the measure for customer limit orders that must be reflected in a specialist or OTC market maker’s published bid or offer because customer limit orders of meaningful size should be displayed. The Commission believes this will further the objective of Rule 604: ensuring that customers have the ability to effectively seek price improvement through the dissemination of their limit orders by specialists or OTC market makers.315 Moreover, the concerns raised regarding Rule 604 complexities that would arise as a result of the proposed five-tier round lot definition and the proposed amendments to the definition of protected quotation are diminished significantly since the Commission is adopting a four-tiered definition of round lot with a higher notional value size and is not adopting the proposed amendments to the definition of protected quotation.316 Rule 605 Comments: Many commenters discussed the effects of the definition of round lot on the execution Vendor Display Rule as a result of the proposed amendment to the definition of protected quotation is no longer applicable, as the Commission is not adopting the proposed amendment to that definition. See infra Section II.E.2. 312 MFA Letter at 12–13. 313 Id. 314 Nasdaq Letter IV at 20–21 (footnotes removed). 315 See Proposing Release, 85 FR at 16744. 316 See supra Section II.D; infra Section II.E. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations quality statistics under Rule 605. One commenter argued that ‘‘Rule 605 reports would no longer . . . provid[e] uniform comparisons because the NBBO that each market center will use will be different,’’ and some suggested changes to Rule 605 in response.317 Another commenter argued that the monthly round lot calculation could create investor confusion if a stock is near a different tier threshold regarding whether ‘‘the execution information about such stocks needs to be added to Rule 605 reports,’’ leading ‘‘investors to be misled by execution quality statistics.’’ 318 However, other commenters suggested the proposal would improve the accuracy of Rule 605 reports.319 Some commenters argued for ‘‘moderniz[ing]’’ Rule 605.320 One suggested ‘‘(a) creating a ‘marketable benchmark’ statistic that reflects the size of the quote at the NBBO, (b) adding notional buckets as an additional method of categorization, and (c) incorporating all customer orders regardless of size.’’ 321 Another commenter provided an example of how the exclusion of odd-lot quotes from the SIP feeds can skew Rule 605 price improvement statistics.322 Additionally, a different commenter suggested measuring Rule 605 price improvement statistics using an ‘‘Effective Best Bid or Offer’’ calculated using the average fill price of an order at a given time.323 The Commission continues to believe that the order execution disclosures 317 STANY Letter II at 4, 6. See also Nasdaq Letter IV at 19–20 (stating that the proposed definition of round lot will render Rule 605 execution quality statistics less accurate, that 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, that an increase in the frequency or length of crossed markets resulting from the proposed definitions of round lot and protected quote could cause more orders to be excluded from Rule 605 execution quality statistics, rendering those statistics less accurate, and that the creation of multiple NBBOs would undermine the comparability of Rule 605 statistics across different market centers). 318 Nasdaq Letter IV at 17. 319 ICI Letter at 6–7. See also T. Rowe Price Letter at 2 (stating that one objective of the Commission’s rulemaking was to improve the accuracy of Rule 605 reports). 320 See, e.g., Virtu Letter at 4 (‘‘many of the Rule 605 execution quality share buckets now bear little relation to the average trade sizes sent by the majority of investors. . . . [F]or stocks with prices over $50, about 70% of trades are odd-lot orders which would not be captured by the current Rule 605. . . . [A] significant overhaul of Rule 605 would be necessary, including possibly expanding measurement of execution quality to include depth of book’’). 321 Citadel Letter at 4. 322 Healthy Markets Letter I at 1. 323 See Angel Letter at 16. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 required under Rule 605 should be based on an NBBO that reflects orders in the new round lot sizes.324 The definition of round lot will allow additional orders of meaningful size to determine the NBBO, and, therefore, the execution quality and price improvement statistics required under Rule 605 would be based upon an NBBO that the Commission believes is a more meaningful benchmark for these statistics.325 As explained below, the Commission does not believe that the amendments to the definition of NBBO to accommodate the decentralized consolidation model or the notion of ‘‘multiple NBBOs,’’ which already exist today, will confuse market participants.326 Similarly, the Commission does not believe the accuracy or comparability of Rule 605 statistics will be impaired. On the contrary, the Commission believes that an NBBO that incorporates orders that often reflect superior pricing by comparison to today’s round lot orders 327 will provide market participants with more accurate information about the true quality of the executions they are receiving, even if this information may show a reduction in the number of shares that received price improvement.328 Finally, while the Commission has reviewed the comments about the need to modernize and update Rule 605, any changes to Rule 605—as opposed to the more limited impact on Rule 605 as a result of the Commission’s adoption of the definition of round lot—are beyond the scope of the present rulemaking. Rule 610 Comments: Commenters discussed the effects of the definition of round lot on 17 CFR 242.610(c) and (d) (Rule 610(c) and (d)). One commenter stated that, with the definition of round lot affecting Rule 610(c), the Commission did ‘‘not consider the harm that an expanded fee limitation would have on competition, or the burdens it would place on market participants, including trading centers that display quotes.’’ 329 The commenter stated that in not expanding order protection to orders in the new round lots, the Commission is eliminating one of the 324 See Proposing Release, 85 FR at 16745. id. 326 See infra Section III.B.10(b). 327 See supra note 241 and accompanying text. 328 Additionally, because the Commission is adopting modified definitions of round lot and protected quotation, one commenter’s concern is no longer applicable—specifically, that an increase in the frequency or length of crossed markets as a result of the proposed definitions of round lot and protected quotation could cause more orders to be excluded from Rule 605 execution quality statistics. See Nasdaq Letter IV at 19–20. 329 NYSE Letter II at 7–8. 325 See PO 00000 Frm 00027 Fmt 4701 Sfmt 4700 18621 bases it used when it first created the fee limitation in Regulation NMS.330 On the other hand, another commenter agreed the Commission should change Rule 610(c) to apply to quotations in the proposed round lot sizes because doing so ‘‘would further that rule’s objectives of ensuring the accuracy of displayed quotations by establishing an outer limit on the cost of accessing them.’’ 331 Multiple commenters raised concerns that the proposed amendment to the definition of protected quotation would limit the restrictions in Rule 610(d) on locked and crossed markets, allowing round lots smaller than 100 shares to be locked and crossed.332 Some commenters recommended ‘‘the locking and crossing requirements . . . be extended to orders reflected in the NBBO.’’ 333 Another commenter stated that the Commission did not ‘‘justify why it is proposing to expand the fee limitation applicable to SROs’ best bids and offers under Rule 610(c), but not proposing to expand the limits in Rule 610(d) on SRO members locking and crossing protected quotations.’’ 334 Furthermore, one commenter argued that the Rule 610(d) effects ‘‘could add significant complexity to broker-dealers’ 330 Id. 331 Data Boiler Letter I at 26. Clearpool Letter at 13–14; TD Ameritrade Letter at 9 (‘‘Because the proposed round lot sizes would allow stepping ahead by economically insignificant amounts, locked and crossed markets may not simply be arbitraged away. At times liquidity-takers may perceive a sophisticated trader has locked or crossed the market for an economically insignificant amount and be reluctant to interact with them. This may lead to occasions of sustained locked and crossed markets, similar to what was observed prior to Reg. NMS Rule 610’s prohibition on locked and crossed markets.’’); ICI Letter at 7, n. 24 (expressing ‘‘concern’’ about this approach); BlackRock Letter at 4 (‘‘This would directly contravene the intent of employing the round lot definition as a mechanism for expanding odd-lot coverage, as the application of other provisions, such as order protection, to round lot orders was a key consideration of this approach. Further, this policy perpetuates an archaic double standard for odd-lot quotations which seem incongruous to the acknowledged economic significance and prevalence of odd-lot activity in the market.’’) (footnotes removed); SIFMA Letter at 1–2 (arguing the Commission should make any changes to Rule 610(d) of Regulation NMS in a separate proposal after ‘‘further industry dialogue and consideration’’); Nasdaq Letter IV at 18 (‘‘Many of the same concerns that Nasdaq has with respect to the Commission’s round lot and trade-through protection proposals also apply to the Commission’s proposal to allow orders to lock or cross unprotected round lot displayed quotes of less than 100 shares.’’). 333 Clearpool Letter at 13–14; BlackRock Letter at 5. 334 NYSE Letter II at 8. See also Nasdaq Letter IV at 19 (‘‘[E]ven if the Commission is correct that protection against locked and crossed markets is no longer warranted, the Commission fails to explain why it is reasonable, and not arbitrary, for it to roll back Rule 610(d) only for quotes of under 100 shares, rather than for all quotes in NMS stocks.’’). 332 See E:\FR\FM\09APR2.SGM 09APR2 18622 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations best execution analyses and could create confusion and uncertainty regarding the quotations that a broker-dealer should rely upon to provide best execution for its customers.’’ 335 The Commission continues to believe 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 the rule’s objectives of ensuring the accuracy of displayed quotations by establishing an outer limit on the cost of accessing them and would help ensure that the rule applies consistently to orders of meaningful size.336 Further, the Commission does not believe that an expanded fee limitation would harm competition or unduly burden market participants, as one commenter stated.337 The national securities exchanges do not distinguish between protected or best quotations and other quotations for purposes of their transaction fees,338 so the extension of the requirements of Rule 610(c) to orders in the new round lot sizes will not affect an area of exchange pricing that has been subject to competition or differentiation among exchanges. In addition, as a result of the amended definition of round lot, a relatively small number of NMS stocks will have their round lot size change,339 so the impact on exchanges and other trading centers and market participants should be small.340 E. Definition of ‘‘Protected Bid or Protected Offer’’ Under Rule 600(b)(70) 1. Proposal In connection with the proposed round lot definition, the Commission 335 FINRA Letter at 7. concern expressed by one commenter suggesting that the Commission is eliminating one of the bases for the fee limitation in Rule 610(c) of Regulation NMS is no longer applicable in light of the Commission’s decision not to adopt the proposed amendments to the definition of protected bid or protected offer. See infra Section II.E. Similarly, the concerns relating to Rule 610(d) of Regulation NMS expressed by several commenters that the proposed amendments to the definition of protected bid or protected offer would allow quotations in the new round lot sizes to be locked or crossed are no longer applicable. Id. 337 See NYSE Letter II at 7–8. 338 See, e.g., Cboe U.S. Equities Fee Schedules, BZX Equities, Transaction Fees; NYSE Price List 2020 (last updated Nov. 2, 2020), available at https://www.nyse.com/publicdocs/nyse/markets/ nyse/NYSE_Price_List.pdf; Nasdaq, Price List— Trading Connectivity, available at http:// nasdaqtrader.com/Trader.aspx?id= PriceListTrading2 (last accessed Nov. 25, 2020). 339 See infra notes 364 and 365 and accompanying text. 340 See infra Section V.C.1(b)(vii) (stating that the impact of these amendments on 610(c) of Regulation NMS might not result in economic effects). 336 The VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 proposed to amend the definition of protected bid or protected offer in 17 CFR 242.700(b)(70) (Rule 600(b)(70)) 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 Commission proposed this change to maintain the status quo with regard to protected quotes, which are currently required to be round lots, and to avoid expanding to the proposed smaller round lots the order protection requirements of Rule 611 and the requirements of Rule 610(d) to prevent locked/crossed markets.341 Additionally, the Commission proposed that protected quotations would only include odd-lots at a single price (rather than multiple price levels) that, when aggregated, are equal to or greater than 100 shares.342 2. Final Rule and Response to Comments The Commission received multiple comments on the definition of protected bid or protected offer. Many commenters opposed the proposal to amend the definition and argued that round lots, which determine the NBBO, should be protected quotations. These commenters stated that not protecting the round lot NBBO would result in unnecessary complexity, investor confusion, more trade-throughs, additional locked and crossed markets, and harm to retail investors. Other commenters also discussed odd-lot aggregation for the purposes of the definition of protected bid or protected offer. Commenters also addressed the effects of withdrawing the protected status of the 12 stocks that currently have round lots smaller than 100 shares. Additional commenters discussed the effects of a different PBBO and NBBO on best execution. (a) Expanding Protection to New Round Lots Most commenters that mentioned order protection suggested that the definition of protected quotation should 341 See Proposing Release, 85 FR at 16747–50. Rule 611 of Regulation NMS 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. Rule 600(b)(94) of Regulation NMS 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.’’ Rule 600(b)(94) of Regulation NMS, 17 CFR 242.600(b)(94). 342 See Proposing Release, 85 FR at 16737. PO 00000 Frm 00028 Fmt 4701 Sfmt 4700 reflect the new round lot NBBO and not be limited to those quotations that are of at least 100 shares.343 One commenter supported the proposal not to protect the new round lots of less than 100 shares,344 and two were neutral.345 In support, one commenter stated that the order protection rule would continue to function similarly to the way it does today and that extending order protection to the new round lots would have significant negative trading implications, such as encouraging the posting of quotes in insignificant sizes, which would cause asset managers to break down large orders to avoid signaling their full trading intent.346 Complexity and Confusion: Multiple commenters suggested that the amendment to the definition of protected quote would add complexity, including by requiring market participants to monitor an NBBO and a PBBO throughout the trading day.347 One commenter noted that the ‘‘confusion and complexity of a NBBO that deviates from the PBBO outweighs concerns about protecting quotes that otherwise may not be ‘meaningful.’ ’’ 348 Similarly, another commenter argued that the round lot definition, in combination with the definition of protected bid or protected offer, would create a bifurcated system of displayed orders where better priced displayed orders are not protected against tradethroughs.349 343 See Submitted Comments, Comments on Proposed Rule: Market Data Infrastructure, Commission, available at https://www.sec.gov/ comments/s7-03-20/s70320.htm; Nasdaq Letter V at 3 (‘‘Just five commenters supported the Commission’s proposed treatment of the Order Protection Rule; 24 others opposed it outright.’’). See, e.g., Cboe Letter at 8; MIAX Letter at 6; Fidelity Letter at 7; Citadel Letter at 2; BestEx Research Letter at 6–9. 344 See T. Rowe Price Letter at 2. 345 See IEX Letter at 7; Data Boiler Letter I at 21. 346 See T. Rowe Price Letter at 3. In addition, one commenter highlighted that extending order protection to the new round lots would create complexity and confusion: ‘‘Protecting the new round lots could also significantly alter the behavior of market makers like Virtu, impacting their approach to internalization and affecting their capacity to provide price improvement to retail investors. It could also dramatically alter the flow of orders to the exchanges and other trading venues. And, of course, it would impose unknown, but surely significant, implementation costs on market participants.’’ Virtu Letter at 5. 347 See, e.g., Cboe Letter at 8; MEMX Letter at 4; NYSE Letter II at 6; Nasdaq Letter IV at 13–17; Fidelity Letter at 7; Citadel Letter at 2; FINRA Letter at 6–7; Healthy Markets Letter I at 5. 348 STANY Letter II at 4. See also Schwab Letter II at 2 (stating that protecting only transactions of 100 shares or more ‘‘would create [an NBBO] that is distinct from the [PBBO] and would leave brokerdealers with uncertainty over order routing and data display decisions. Schwab believes this would confuse investors.’’). 349 See Fidelity Letter at 7. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Additionally, one commenter suggested that amending the definition of protected quote would de-couple the order protection rule and the duty of best execution, creating confusion where brokers have access to a wide swath of required core data but may, or may not, be obligated to use that data to benefit customers.350 Locked and Crossed Markets: Some commenters argued that the proposal to limit the definition of protected quotation to orders of 100 shares or more partially rescinds the rule against locked or crossed markets, allowing some orders to lock or cross the market depending on the price of the stock, the size of the order, and the state of the NBBO.351 Best Execution: 352 Some commenters argued that a bifurcated approach to protected and unprotected round lots would add complexity regarding best execution obligations, including routing and execution decisions.353 Others suggested that if the Commission were to adopt the proposed bifurcated approach, the Commission should ‘‘promulgate clear guidance’’ surrounding market participants’ best execution obligations.354 However, one commenter stated that it was ‘‘not convinced by criticisms that the Proposal would alter asset managers’ best execution obligations as a result of potentially different reference prices (i.e., NBBO vs. PBBO).’’ 355 Effects on Retail Investors: Some commenters suggested that limiting protected quotations to those of 100 shares would harm retail orders/ investors because displayed retail orders in the new round lot sizes would be traded-through.356 Furthermore, a commenter argued that the Commission provided no reasonable basis for the proposal to treat round lots differently and that the proposal would unfairly discriminate against retail investors.357 One commenter suggested that the order protection rule fosters retail investor confidence and that not protecting the new round lots could erode trust in the markets.358 Another commenter 350 See Nasdaq Letter IV at 21. 351 See id. at 16. 352 See supra Section I.E. 353 See, e.g., Fidelity Letter at 7; BlackRock Letter at 4; MFA Letter at 10–12. 354 Nasdaq Letter IV at 21. See also SIFMA Letter at 10, 13; FINRA Letter at 7. 355 T. Rowe Price Letter at 2. 356 See Cboe Letter at 6–7; Nasdaq Letter IV at 13– 17. See also BlackRock Letter at 4 (‘‘[A] recent academic study has identified that ‘trade-throughs of non-protected odd-lot orders are frequent’ such that this ‘limitation in the National Market System . . . results in a hidden cost to equity traders.’ ’’). 357 See Nasdaq Letter IV at 16. 358 See TD Ameritrade Letter at 10. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 suggested that market makers may not protect round lot orders that are not within the scope of the order protection rule and stated that limiting order protection to transactions of 100 shares or more would ‘‘discourage limit orders—a valuable driver of price discovery—as investors would be less likely to receive execution without price protection.’’ 359 Separate Rulemaking: Some commenters stated that they disagreed with the proposal to separate order protection from the NBBO, and if the Commission were to make such a change, it should do so in a separate rulemaking.360 The Commission is not adopting the proposed amendment to the definition of protected bid or protected offer.361 A wide range of commenters expressed significant concerns regarding this aspect of the proposal, including concerns about complexity and ambiguity that could stem from the best execution, routing, and order handling ramifications of introducing round lot quotes that are unprotected, a potential increase in trade-throughs and locked and crossed markets, and possible erosion of confidence among retail investors that their orders are being treated fairly. The Commission recognizes these concerns and does not believe that adopting the proposed amendments to the definition, at this time, would appropriately advance the broader objectives of the proposal, particularly enhancing the utility and availability of consolidated market data. In support of its preliminary belief that Rules 611 and 610(d) should not be extended to the smaller-sized quotations reflected in the proposed definition of round lot, the Commission cited concerns expressed by various market participants about the existing scope of these rules.362 However, given the concerns expressed in comments on the proposal, the Commission believes that not extending Rules 611 and 610(d) to the new round lot sizes could create unnecessary complexity and confusion. For example, the Commission continues to believe that improvements in trading and order routing technology since 2005 and the applicability of best execution requirements to orders of all sizes 359 Schwab 360 See Letter II at 2. SIFMA Letter at 14; Nasdaq Letter IV at 14–15. 361 However, the Commission is still making the technical change to delete the references to ‘‘The Nasdaq Stock Market, Inc.’’ in the definition. The Commission did not receive comments on this piece of the proposal and continues to believe the language is redundant because the Nasdaq Stock Market is now a national securities exchange. See Proposing Release, 85 FR at 16749. 362 See Proposing Release, 85 FR at 16747–49. PO 00000 Frm 00029 Fmt 4701 Sfmt 4700 18623 would incentivize market participants to engage with orders in the new round lot sizes even if they were not protected, and that these technological improvements and market forces would also help mitigate excessive locking or crossing of quotations in the new round lot sizes. However, the Commission also agrees with commenters that consistently applying Rules 611 and 610(d) to all round lot sizes would promote confidence among investors and other market participants that market participants will engage with orders in the new round lot sizes and that orders in the new round lot sizes will not be excessively locked or crossed. Furthermore, other modifications to the proposal that the Commission is adopting herein mitigate the Commission’s concerns, as expressed in the Proposing Release, about the expansion of the order protection requirements in Rule 611 and the prohibitions on locked and crossed markets in Rule 610(d). Specifically, as discussed above, the Commission is: (a) Modifying the proposed definition of round lot so that only stocks priced over $250.00 will be assigned to a round lot size less than 100; and (b) increasing the notional size thresholds of the new round lot sizes so that protected order interest at the new round lot sizes is more meaningful.363 Further, since currently only 134 stocks are priced over $250.00,364 the scope of the extension of Rules 611 and 610(d) would be fairly limited, extending to a much smaller number of stocks than under the proposed amendments.365 Furthermore, of this number, six NMS stocks already have a round lot size of less than 100 today.366 Therefore, only 128 NMS stocks would receive tradethrough protection for smaller-sized orders. Additionally, with the larger notional size of $10,000 adopted for the definition of round lot,367 the extension of order protection to round lots would apply only to orders of a more substantial size. (b) Odd-Lot Aggregation for Protected Quotations A number of commenters discussed odd-lot aggregation with respect to protected quotes, and most stated that 363 See supra Section II.D. information is based on data analyzed by staff for September 2020. 365 By comparison, under the proposed definition of round lot, Rules 611 and 610(d) of Regulation NMS would have extended to over 1,600 stocks in the absence of the proposed amendment to the definition of protected bid or offer. 366 See infra Section II.E.2(c). 367 See supra Section II.D. 364 This E:\FR\FM\09APR2.SGM 09APR2 18624 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations the Commission should allow aggregation across multiple price levels, instead of at just one level.368 Some commenters stated that preventing oddlot orders from being aggregated across different price levels to create protected quotes, as proposed, would cause spreads to widen, with one commenter providing empirical data, based on quoting activity during the month of April 2020, showing that average spreads would widen by over $0.50 for shares with prices of $500.01 to $1,000.00 and nearly $1.50 for shares with prices of $1,000.01 or more.369 One commenter suggested this restriction would hurt retail investors because it would result in their orders being executed at inferior prices.370 Another commenter suggested that only allowing odd-lot aggregation at one price level, instead of across price levels, would lead to fewer protected quotes.371 One commenter suggested that different odd-lot aggregation methodologies between the NBBO and the PBBO would create confusion among market participants.372 That commenter also suggested that different methodologies could raise confusion from a best execution perspective.373 Similarly, one commenter suggested only allowing odd-lot aggregation at one price level, combined with the proposal to provide all levels of depth up to the PBBO, would ‘‘create[] implementation difficulties.’’ 374 Another commenter suggested that, given the proposal’s intent to maintain the status quo with respect to the scope of orders that are subject to Rule 611, the Commission should consider continuing the existing market practice, as codified in exchange rules, to aggregate quotes at multiple price levels.375 One commenter stated that if order protection were extended to all round lots, the commenter would ‘‘support aggregating odd lots in the manner currently described for the PBBO.’’ 376 368 See, e.g., AHSAT Letter at 4. Cboe Letter at 9–12; IEX Letter at 7; Nasdaq Letter IV at 16–17; Virtu Letter at 5. 370 See Cboe Letter at 10–11. 371 See TD Ameritrade Letter at 11. 372 See BlackRock Letter at 4; SIFMA Letter at 7– 8 (suggesting different odd-lot aggregation methodologies would ‘‘rais[e] additional technical issues’’ and recommending that the Commission should provide clarification as to how depth-ofbook data is determined, ‘‘particularly because the aggregation process appears to work differently for the PBBO versus the NBBO, BBO and depth-of-book determinations’’). 373 See BlackRock Letter at 4. 374 MEMX Letter at 4. 375 IEX Letter at 7. 376 Capital Group Letter at 4. 369 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 In light of these comments, the Commission is modifying the proposed definition of core data to require odd-lot aggregation across multiple prices for purposes of the NBBO and protected quotations.377 The Commission believes that this approach will: (a) Provide a consistent odd-lot aggregation methodology for all elements of core data; (b) be consistent with existing practices, as some commenters pointed out,378 and would avoid potential costs associated with changing these practices; and (c) avoid unintended consequences that could adversely affect investors, such as widening spreads or reducing the number of protected quotes. As stated in the Proposing Release,379 this methodology effectively extends order protection to the aggregated odd-lot orders. However, as discussed above,380 a majority of commenters who opined on odd-lot aggregation for protected quotations preferred a cross-price methodology. Lastly, the comment raised regarding the need for a consistent odd-lot aggregation methodology for the NBBO and protected quotations is less relevant in light of changes the Commission is adopting herein—namely, that the new round lot NBBO will be protected. (c) Removing Protected Status From Certain NMS Stocks Some commenters stated that removing protected status for those NMS stocks that currently have a protected quotation size of under 100 shares would potentially increase the number of locked and crossed markets for the twelve current NMS stocks that have protected quotations of under 100 shares.381 One commenter stated that the Commission did not analyze the effects of removing order protection from those twelve stocks.382 The Commission understands these concerns regarding the possible reduction of order protection and locked/crossed markets restrictions for these 12 stocks in their current round lot sizes. However, as discussed above,383 the Commission is not adopting the proposed amendments to the definition of protected bid or offer, so all NMS stocks—including the 12 377 For example, if there is one 50-share bid at $25.10, one 50-share bid at $25.09, and two 50share bids at $25.08, the adopted cross-price oddlot aggregation method would show a protected 100-share bid at $25.09, while the proposed singleprice odd-lot aggregation method would show a protected 100-share bid at $25.08. 378 See, e.g., BlackRock Letter at 4. 379 See Proposing Release, 85 FR at 16747–50. 380 See supra notes 368 through 376. 381 See SIFMA Letter at 13–14. 382 See NYSE Letter II at 6. 383 See supra Section II.E.2(a). PO 00000 Frm 00030 Fmt 4701 Sfmt 4700 that currently have non-100 round lot sizes—would be assigned to round lot sizes based on their per share price, and all round lot orders in these stocks would be protected quotations subject to the trade-through prevention requirements of Rule 611 and the locked and crossed markets restrictions of Rule 610(d). In addition, the Commission acknowledges that, based on staff analysis of stock prices as of September 2020, one stock will have its round lot size increased from 10 to 40, one will have its round lot size increased from 1 to 10, and six will have their round lot size increased from 10 to 100. As a result, order protection pursuant to Rule 611 and the locked/crossed markets prohibitions of Rule 610(d) will no longer apply to some smaller orders in these stocks.384 However, the Commission continues to believe that determining the round lot sizes of all stocks based upon price, without special exceptions for certain stocks that currently have non-standard round lot sizes, will reduce complexity and implementation costs, set consistent expectations regarding round lot sizes among market participants, facilitate the transition to price-based round lots, and justify any potential costs of increasing the round lot sizes of a limited number of stocks.385 F. Definition of ‘‘Depth of Book Data’’ Under Rule 600(b)(26) 1. Proposal The Commission proposed to include ‘‘depth of book data,’’ defined as follows, as an element of core data: 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 five prices at which there is a bid that is lower than the protected bid and offer that is higher than the protected offer. The Commission solicited comment on various aspects of the proposed definition of depth of book data, including whether the definition captures the appropriate level of depth data and whether the Commission should include more or fewer levels of 384 In addition, for four of the twelve stocks that currently have non-100 share round lot sizes, the round lot size would not change, and these stocks would not experience a change in terms of the applicability of Rules 611 or 610(d) of Regulation NMS. 385 See Proposing Release, 85 FR at 16749. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations depth or otherwise revise the definition to capture the key depth information that would be useful to market participants. 2. Final Rule and Response to Comments The Commission received comments expressing support for the proposed definition of depth of book data and comments raising various concerns, recommendations, and requests for clarification. As discussed in more detail below, the Commission is adopting a modified definition of depth of book data in response to comments. (a) Support for Five Levels of Depth Several commenters expressed general support for including depth of book data in core data 386 or specifically agreed with the Commission’s proposed five levels of depth,387 with some explaining that five levels of depth is suitable for certain market participants or trading practices.388 One commenter 386 See Angel Letter at 1–9 (stating that including depth of book in core data is a ‘‘great idea’’ and emphasizing the importance of depth of book data, particularly to retail investors trading in illiquid stocks of smaller companies and using liquidityproviding limit orders); letter from Allison Bishop, President, Proof Trading, to Vanessa Countryman, Secretary, Commission, dated May 1, 2020, (‘‘Proof Trading Letter’’) at 1; Healthy Markets Letter at 3; DOJ Letter at 2–4; NovaSparks Letter at 1. 387 See IEX Letter at 5; Capital Group Letter at 2– 3; Fidelity Letter at 4–5; Schwab Letter at 4; T. Rowe Price Letter at 2; Wellington Letter at 1; Virtu Letter at 5; SIFMA Letter at 7; STANY Letter II at 4; IntelligentCross Letter at 4. In addition, staff conducted the same analysis of book depth that was included in the Proposing Release but evaluated proprietary market data from a more recent time period (the week of May 4, 2020) than was included in the Proposing Release (July 19, 2019). The results were very similar and confirmed the Commission’s view that there is a substantial amount of quotation volume several levels below the best bid. Staff observed substantial quotation volume several levels below the best bid (the offer side was not examined). On average, 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. 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. 388 See State Street Letter at 2–3 (stating that institutional firms generally use up to five levels of depth for order routing); ICI Letter at 8–9 (stating that depth of book data ‘‘should consist of at least five price levels, based on the typical trading needs of funds’’); Clearpool Letter at 14 (stating that five levels of depth of book data is sufficient to improve the usefulness of core data for most market participants and that ‘‘five price levels typically tend to be a sufficient level of depth for Clearpool for sweeping multiple levels of the book in executing an order’’); SIFMA Letter at 7 (‘‘[A] review of our institutional member firms found that while some used less than five levels and others used more, five levels of depth strikes an appropriate balance for the order routing purposes of most.’’). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 expressed general support for the expansion of core data, including depth of book data, provided that it does not materially increase overall latency.389 The Commission agrees that including depth of book data in core data will be useful for and beneficial to a variety of market participants and is adopting the definition of depth of book data largely as proposed, with certain modifications.390 The Commission does not believe that including depth of book data in core data will materially increase the overall latency of core data for several reasons. First, only five levels of depth are included, limiting the number of quotes necessary to be processed.391 Moreover, the decentralized consolidation model will result in consolidated market data, including depth of book data, being delivered to market participants with lower latencies.392 In addition, the Commission believes that market participants that choose to receive the full set of consolidated market data, including depth of book data, will either leverage the existing technology that they currently use to receive depth of book data on a proprietary basis or make the investments in technology to receive the data so that the additional content will not add significant latency.393 (b) Proposed Definition Would Include More Than Five Levels of Depth Some commenters stated that the proposed definition would include five levels of depth on each exchange, which could be confusing and costly and could add latency by increasing actual quote traffic and information to be processed significantly beyond five levels.394 Some commenters also stated that the proposal to include price levels between the best and protected quotes could similarly include a large number of additional data points.395 Some commenters recommended that the 389 See Citadel Letter at 1. infra Sections II.F.2(b) through II.F.2(c). 391 See infra Section II.F.2(d) (discussing comments suggesting that full, order by order depth of book should be included in core data and the potential latency ramifications thereof). 392 See infra Section III.B.5. 393 See infra Section V.C.1(c)(iv). 394 See STANY Letter II at 4; TD Ameritrade Letter at 5 (‘‘[T]he proposal to include five levels of depth would add ten quotes per security for every exchange, which today amounts to 130 new data points per security.’’). 395 See STANY Letter II at 4; TD Ameritrade Letter at 5 (‘‘[T]the Proposal includes all price levels between the BBO and the protected quote, which for higher priced securities could add hundreds more data points.’’); NYSE Letter II at 5 (stating that the number of price levels between the best and protected quotes, as proposed, could be more than five levels and could fluctuate intra-day as quotes update). 390 See PO 00000 Frm 00031 Fmt 4701 Sfmt 4700 18625 Commission clarify how depth of book data will be determined and made available on an individual exchange basis, particularly with respect to how odd-lots would be aggregated at depth of book price levels.396 The Commission believes that these comments highlight the need to more clearly articulate the scope of data that the definition of depth of book data includes and how this data will be attributed to individual SROs 397 in the consolidated market data products made available by competing consolidators. The Commission is therefore adopting a modified version of the definition of ‘‘depth of book data.’’ First, the revised definition of depth of book data will not include the first clause of the proposed definition, which referred to ‘‘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.’’ As discussed above, the Commission is not adopting the proposed amendments to the definition of protected bid or protected offer, which would have required such quotations to be ‘‘of at least 100 shares.’’ 398 As a result, as is the case today, in the vast majority of cases the best quotes and the protected quotes will be the same.399 Therefore, the definition of depth of book data does not need to include quotation interest between the best and protected quotes. This modification also addresses commenters’ concerns that this aspect of the proposed definition would have 396 See SIFMA Letter at 7. discussed below, an indicator of the national securities exchange or national securities association on which the liquidity at a depth of book price level resides will be included in the adopted definition of depth of book data. 398 See supra Section II.E.2. 399 Among other things, a protected bid or offer must be an ‘‘automated quotation,’’ which means a quotation displayed by a trading center that: (1) Permits an incoming order to be marked as immediate-or-cancel; (2) Immediately and automatically executes an order marked as immediate-or-cancel against the displayed quotation up to its full size; (3) Immediately and automatically cancels any unexecuted portion of an order marked as immediate-or-cancel without routing the order elsewhere; (4) Immediately and automatically transmits a response to the sender of an order marked as immediate-or-cancel indicating the action taken with respect to such order; and (5) Immediately and automatically displays information that updates the displayed quotation to reflect any change to its material terms. Rules 600(b)(6), (70) of Regulation NMS, 17 CFR 242.600(b)(6), (70). Therefore, a ‘‘manual quotation’’ that is not automated—also known as a ‘‘slow quote’’—can sometimes be the best quotation without being a protected quotation. Rule 600(b)(45) of Regulation NMS, 17 CFR 242.600(b)(45). 397 As E:\FR\FM\09APR2.SGM 09APR2 18626 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations included an excessive amount of information in core data that would be difficult to calculate and consume as prices fluctuate throughout the trading day. Second, in response to comments suggesting that the proposed definition of depth of book data would require five price levels from each exchange to be included in core data, the Commission is modifying the second clause of the proposed definition so that it refers to the next five prices at which there is a bid (offer) that is lower (higher) than the national best bid (offer) rather than five price levels from the protected bid or offer. These changes specify that the starting points for the ‘‘next 5 prices’’ are the highest priced bid and lowest priced offer on any exchange (i.e., the national best bid and national best offer) rather than on each exchange. Thus, the modified definition specifies that depth of book data includes five levels of aggregated quotation sizes; it does not include more than five levels to account for differences in the highest priced bid or lowest priced offer on each exchange. The following example illustrates the price levels that are included in the definition of depth of book data. Example 1: Bids for XYZ, Inc. on Three Exchanges Exchange A Exchange B Exchange C Best bid 100 shares at $25.02 100 shares at $25.01 100 shares at $25.00 DOB 1 100 shares at $25.01 100 shares at $25.00 100 shares at $24.99 DOB2 100 shares at $25.00 100 shares at $24.99 100 shares at $24.97 DOB3 100 shares at $24.99 100 shares at $24.98 DOB4 100 shares at $24.98 DOB5 100 shares at $24.97 Note: Prices in shaded areas would not be included in core data pursuant to the definition of depth of book data as amended. 400 The Commission notes that, in this example, the interest at $25.02 would also be included in core data because the NBBO is one of the elements of core data. 401 As explained below, Rule 614(d) requires competing consolidators to calculate, generate, and make available to subscribers a consolidated market data product, which can contain all elements of consolidated market data or a subset thereof, but VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission believes that revising the definition of depth of book data so that the included price levels are the five prices below the national best bid and above the national best offer, rather than the five prices above and below the best quotes on each exchange, is appropriate because it limits the amount of information that competing consolidators will process and display,402 which mitigates concerns raised by some commenters about adverse consequences—such as unnecessary complexity or increased processing demands and latency—that could result from a broader interpretation of the proposed competing consolidators are permitted to offer custom products containing more information as well. Competing consolidators would compensate SROs for the data necessary to generate consolidated market data through fees established by the effective national market system plan(s) and would compensate SROs for data that goes beyond consolidated market data on a proprietary basis pursuant to individual SRO fee schedules. See infra note 1132. 402 See id. PO 00000 Frm 00032 Fmt 4701 Sfmt 4700 definition.403 In addition, the Commission believes, consistent with the views expressed by various commenters, that a broad array of market participants could use five levels of depth of book data away from the national best bid and national best offer to trade in an informed and effective manner.404 Third, the Commission is modifying the definition of depth of book data to specify that, in addition to quotation sizes at the first five price levels from the NBBO, the aggregate size at each 403 See Proposing Release, 85 FR at 16753 (stating that defining depth of book data to include a finite number of price levels would limit ‘‘processing demand on systems’’ and avoid ‘‘excessive message traffic or complexity’’). 404 See Proposing Release, 85 FR at 16753 (stating that depth of book data should ‘‘enhance[ ] the utility of proposed core data for a wide range of market participants’’ rather than ‘‘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’’). Market participants in need of more depth than included in the definition of depth of book data could purchase a custom depth product separately from exchanges or through a competing consolidator. E:\FR\FM\09APR2.SGM 09APR2 ER09AP21.000</GPH> In this example, depth of book data would include aggregate quotation sizes at each price level at and between $25.01 400 and $24.97 because the starting point for the ‘‘next five prices’’ is $25.02 (the best bid on Exchange A and the national best bid) rather than $25.01 (the best bid on Exchange B) or $25.00 (the best bid on Exchange C). Depth of book data would not include the interest at or below $24.96, even if that interest is within the top five levels of any given exchange, because it is not within the first five price levels from the national best bid. A competing consolidator could provide interest beyond the first five levels of depth across exchanges but would have to acquire such data on a proprietary basis from the exchanges.401 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations included price level shall be attributed to each exchange on which the interest is available. Although the proposed definition of depth of book data referred to quotation sizes ‘‘at each national securities exchange’’ in order to require the price and size information in depth of book data to be associated with the source exchange, the Commission believes that specifying that depth of book data includes the aggregate 405 quotation size available at each price at each national securities exchange and national securities association would clarify where the liquidity resides.406 For instance, with respect to Example 1, depth of book data would include: $25.01 (100 on Exchange A, 100 on Exchange B) $25.00 (100 on Exchange A, 100 on Exchange B, 100 on Exchange C) $24.99 (100 on Exchange A, 100 on Exchange B, 100 on Exchange C) $24.98 (100 on Exchange A, 100 on Exchange B) $24.97 (100 on Exchange A, 100 on Exchange C) The Commission believes that attributing the quotation size at each price to its source national securities exchange or association can, in many circumstances, be essential to achieving the benefits of including depth of book data in consolidated market data. Improved placement of liquidity-taking and liquidity providing orders, for example,407 requires knowledge of the exchange at which the liquidity resides so that market participants can direct orders to that exchange. (c) Expand Definition to FINRA’s Alternative Display Facility The proposed definition of depth of book data referred to quotations only on national securities exchanges, but the Commission solicited comment on whether to include the depth of book quotations of national securities associations to account for the possibility of quotes being reported to FINRA’s Alternative Display Facility 405 For example, if the national best bid is $25.10, Exchanges A and B have 100-share bids at $25.09, and Exchange C has two 100 share bids at $25.09, the competing consolidator would disseminate: 100 shares at Exchange A, 100 shares at Exchange B, 200 shares at Exchange C. The Commission believes that aggregating quotation sizes at each price level at each exchange will limit the number of messages included in depth of book data as compared to an order by order approach, reducing potential concerns about processing demands on systems, latency, and operational costs. See infra Section II.F.2(d). 406 See infra Section II.F.2(c) for an explanation of why the Commission is revising the definition of depth of book data to include quotations on a facility of a national securities association. 407 Proposing Release, 85 FR at 16754. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 (‘‘ADF’’) in the future.408 One commenter stated that while the ADF does not currently have quoting participants, it is an actively maintained FINRA facility and could readily add quoting participants in the future.409 This commenter recommended including future potential ADF quotations by modifying the definition of depth of book data to refer to all quotation sizes at each national securities exchange and ‘‘on a facility of a national securities association.’’ 410 The Commission agrees and is modifying the proposed definition of depth of book data so that it refers to quotation sizes on a facility of a national securities association as well as quotation sizes on a national securities exchange. The Commission agrees with the commenter that any depth of book quotation activity displayed through the ADF or similar facilities is comparable to the exchange depth of book data that would be included as core data under the proposal and that it should be made available on the same terms as exchange depth of book data. To provide market participants with a more complete view of the liquidity that may be available at depth of book price levels, the Commission is modifying the proposed depth of book data definition so that any future ADF depth of book quotation data—or data from similar national securities association facilities that may be developed—would be included in core data without the need for additional Commission rulemaking. In addition, by modifying the definition to refer generally to a facility of a national securities association, rather than specifically to FINRA’s ADF, the definition will include any potential national securities association depth of book quotations. (d) Include Full Depth of Book and Order by Order Data Some commenters suggested including full depth of book data in core data rather than five levels of depth of data.411 One commenter stated that the proposal could be ‘‘counterproductive and confusing’’ and recommended adding full depth of book data, including order-by-order data across all price levels.412 Another commenter recommended including complete, order-by-order depth of book data in 408 Proposing Release, 85 FR at 16756. Letter at 12–13. 410 Id. The commenter recommended this particular formulation, rather than a direct reference to the ADF, ‘‘to account for the possibility that other quotation facilities may be developed in the future.’’ Id. at 13. 411 See MEMX Letter at 5; BlackRock Letter at 2. 412 See MEMX Letter at 5. 409 FINRA PO 00000 Frm 00033 Fmt 4701 Sfmt 4700 18627 core data, explaining that ‘‘the existence of proprietary data feeds alongside a public tape creates incentives which are incompatible with promoting fair and orderly markets.’’ 413 One commenter agreed with the proposed five-levels of depth of book data but stated that, while not necessary for all market participants, providing full depth of book would not tax systems much more than providing five levels, since ninety percent of ‘‘quote changes’’ occur at the top five price levels.414 However, another commenter stated that providing complete depth of book data is not necessary at this time, explaining that additional data results in increased data processing, latency, and complexity that could impair the usability of the data.415 Finally, one commenter suggested that the Commission should replicate the full depth of book curve to help subscribers of consolidated data better understand the supply and demand imbalance of liquidity in real time.416 The Commission does not believe that the definition of depth of book data should be expanded to include complete, order-by-order depth of book at all price levels. As explained in the Proposing Release, the expansion of NMS information generally, and the inclusion of depth of book data in core data specifically, was intended to provide additional information that would be useful to a broad cross-section of market participants and to reduce information asymmetries between users of proprietary data and users of SIP data.417 However, the Commission explained that these objectives must be balanced against the risk of excessive complexity, message traffic, processing demand on systems, and associated operational costs that might result from the inclusion of more complete depth of book information.418 The Commission recognized that some market participants may need more granular and expansive data, such as the proprietary depth of book products offered by many exchanges, for certain use cases.419 Including complete depth of book data in core data would go beyond the needs of a wide array of market participants or standard use cases for depth of book data in trading, and could result in additional operational costs and latency because of increased message traffic with order by 413 See BlackRock Letter at 2. IntelligentCross Letter at 4. 415 See Clearpool Letter at 14. 416 See Data Boiler Letter I at 19. 417 Proposing Release, 85 FR at 16734, 53. 418 Id. at 16753. 419 Id. 414 See E:\FR\FM\09APR2.SGM 09APR2 18628 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations order data at all price levels. Therefore, consistent with the views of several commenters,420 the Commission continues to believe that while five levels of depth of book data would significantly enhance the usability of core data for many market participants, including complete depth of book data in core data could impair the usability of core data for many subscribers. Moreover, while the Commission has considered the view expressed by one commenter that providing depth of book data at all price levels would not be overly burdensome and would not tax systems much more than providing five levels, this commenter also acknowledged that full depth of book data is not necessary at this time for all market participants.421 The Commission shares some commenters’ concern about the processing and latency ramifications of including complete depth of book data and therefore is not adopting a definition of depth of book data that goes beyond five levels.422 (e) Odd-Lots at Depth and Determination of Five Price Levels One commenter recommended that ‘‘depth-of-book quotations aggregated at each of the first five price levels where a displayed order is available to trade . . . regardless of the associated size displayed at those prices’’ be disseminated.423 This commenter requested that the Commission clarify, preferably with an example, how oddlots would be aggregated at depth of book price levels, stating that the proposed definition of core data requires odd-lots to be aggregated across prices and disseminated at the least aggressive price for purposes of depth of book data, while the proposed definition of depth of book data provides that the required five price levels are determined by the presence of a ‘‘bid’’ or ‘‘offer,’’ which by definition, implies a round lot.424 The Commission does not agree that all odd-lots within the first five price levels of the NBBO should be displayed in core data or that the five price levels included in depth of book data should be determined by the presence of an odd-lot quotation at those price levels. First, as explained in detail above, the inclusion of odd-lot quotations in core data must be reasonably calibrated to include the information that is most relevant to investors and other market participants.425 While the Commission believes that information on the most attractively priced individual odd-lots— namely, those priced at or better than the NBBO—should be included in core data, the inclusion of information regarding individual odd-lots at inferior prices is not warranted because these quotations do not represent direct and immediate opportunities for price improvement.426 Second, the magnitude of the quotation size available at a particular price level should factor in to whether that price level counts as one of the five price levels that are included in core data. Otherwise, particularly in cases where liquidity is widely dispersed over a number of price levels, as is the case with many illiquid stocks, orders of insignificant notional value could ‘‘take up’’ price levels and prevent the dissemination of more significant interest at price levels further away. For example, if the NBB for stock A is $25.15, and there are 1 share bids at $25.14–$25.10 and a 100 share bid at $25.09, the five bids of relatively insignificant notional value at $25.14– $25.10 would prevent the bid of relatively significant notional value at $25.09 from being captured by the definition of depth of book data. For this reason, the proposed definition of depth of book data included a ‘‘minimum size requirement’’ for depth price levels— namely, the presence of a ‘‘bid or offer,’’ which incorporates the concept of a ‘‘round lot.’’ 427 That said, in response to the commenter’s request, the Commission is clarifying that the requirement for the presence of a bid or offer in determining the five price levels does not require a ‘‘pure’’ or ‘‘unitary’’ round lot consisting of only one order to be present at a price level. Rather, odd-lots that aggregate into a round lot pursuant to the prescribed method could also establish a price level, as long as there is at least one round lot of interest—unitary or aggregated—on at least one SRO. As a round lot reflects trading interest of meaningful size to market participants, the Commission believes that odd-lots that in the aggregate reflect size equivalent to a round lot also represent trading interest of meaningful size and should be included in depth of book data. The following example illustrates how odd-lot aggregation would operate in the depth of book context. Example 2: Odd-Lot Aggregation at Depth Number of shares bid for stock X Price Exchange A $25.50 .......................................................................................................................................... 25.49 ............................................................................................................................................ 25.48 ............................................................................................................................................ 25.47 ............................................................................................................................................ 25.46 ............................................................................................................................................ 25.45 ............................................................................................................................................ 25.44 ............................................................................................................................................ 25.43 ............................................................................................................................................ 25.42 ............................................................................................................................................ 25.41 ............................................................................................................................................ 25.40 ............................................................................................................................................ 25.39 ............................................................................................................................................ 420 See, e.g., supra note 388. IntelligentCross Letter at 4. 422 Similarly, in response to the comment regarding the full depth of book curve, see supra note 416 and accompanying text, while full order book shape patterns may contain valuable information for certain sophisticated computerized models, the Commission, as discussed above, is 421 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 100 (NBB) ...... 0 ..................... 0 ..................... 60 ................... 0 ..................... 60 ................... 0 ..................... 0 ..................... 100 ................. 0 ..................... 0 ..................... 0 ..................... concerned that mandating the inclusion of the entire depth of book across all national securities exchanges would have significant processing, latency, and cost ramifications. 423 See Cboe Letter at 15. 424 See id. at 16–17; see also SIFMA Letter at 7 (requesting clarification regarding how odd-lots will be aggregated at depth of book price levels). PO 00000 Frm 00034 Fmt 4701 Sfmt 4700 425 See Exchange B 0 100 0 0 0 0 25 75 0 0 5 0 Exchange C 0 0 50 50 0 0 0 0 0 2 0 100 supra Section II.C.2(b). also infra Section II.F.2(h) (explaining the relevance of depth of book data to best execution analyses); Proposing Release, 85 FR at 16754 (explaining how depth of book data can enable market participants to trade in a more informed and effective manner). 427 Proposing Release, 85 FR at 16754. 426 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Here, the first five prices at which there is a bid that is lower than the NBB—measured in terms of the presence of at least one singular or aggregated round lot on at least one SRO—are $25.49 (100 shares on Exchange B), $25.47 (50 shares at $25.48 and 50 shares at $25.47 on Exchange C, aggregated and displayed at the less aggressive price), $25.45 (60 shares at $25.47 and 60 shares at $25.45 on Exchange A, aggregated and displayed at the less aggressive price), $25.43 (25 shares at $25.44 and 75 shares at $25.43 on Exchange B, aggregated and displayed at the less aggressive price), and $25.42 (100 shares on Exchange A). Hence, in Example 2, depth of book data would include: 100 shares at $25.49, $25.47, $25.45, $25.43, and $25.42 (with attribution to the relevant SRO, as explained above). One commenter argued that allowing aggregation across multiple price levels to determine whether there is a round lot bid or offer at a particular depth of book price level could create significant computational issues, particularly when orders are cancelled and the five price levels would have to be redetermined, possibly resulting in diminished competing consolidator performance and higher capacity requirements for downstream users of the data. This commenter also argued that displaying depth of book price levels in this manner could potentially lead to a deceptive view of market activity at prices that are nowhere near current market prices, raising concerning issues related to investor protection.428 The Commission acknowledges that aggregating odd-lots to determine depth of book price levels will require computation by competing consolidators and that new orders or order cancelations and modifications could require the five levels to be redetermined. However, alternatives such as the inclusion of all odd-lots at inferior prices would require more outbound message traffic from competing consolidators to subscribers and would therefore raise similar concerns about system performance and the capability of subscribers to consume the data.429 In addition, as explained below and in the Proposing Release, the decentralized consolidation model will foster a competitive environment for the provision of consolidated market data, and the Commission believes that this 428 CBOE Letter at 19. discussed above, other alternatives presented by commenters, such as including five price levels of depth of book information without regard to whether those price levels are round lots, have other drawbacks. See supra notes 423–427 and accompanying text. 429 As VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 will lead to improvements in the use of more competitive, low-latency aggregation and transmission technologies, mitigating concerns about computational and performance issues related to the generation and dissemination of depth of book data.430 Competing consolidator subscribers also have the option of consuming varying levels of depth of book data, depending on their needs, and could determine that the latency costs of consuming several levels of depth exceed the benefits. Furthermore, the Commission does not believe that aggregating oddlots across prices will lead to a deceptive view of market activity or mislead investors because exchanges currently aggregate odd-lots across price levels to form round lots and provide their best bids and offers to the exclusive SIPs at the least aggressive price of all such odd-lots. In addition, Commission rules, which will include this methodology, will provide transparency to market participants regarding the inclusion in core data of odd-lots at depth of book price levels aggregated pursuant to this methodology, which addresses the concern that cross-price odd-lot aggregation would lead to a deceptive view of market activity or mislead investors. (f) Insufficient Justification for Inclusion of Depth of Book Data in Core Data Some commenters questioned whether there is sufficient need among market participants for depth of book data to be included in core data.431 One commenter stated that depth of book data is for ‘‘serious traders’’ and is already available on a proprietary basis for anyone who needs it, and that it is not clear whether there would be demand for the ‘‘truncated’’ set of information reflected in the proposed definition of depth of book from any particular set of market participants.432 In a subsequent letter, this commenter stated that the Commission’s depth of book data proposal ‘‘lacks data driven analysis’’ and that the Commission ‘‘released no independent studies or research analyzing the impact of this proposal or addressing the five price level demarcation.’’ 433 Similarly, another commenter stated that depth of book data is not ‘‘necessary or helpful for all investors’’ and that its inclusion in core data would increase core data 430 See Proposing Release, 85 FR at 16768; infra Section III.B.5. 431 See Nasdaq Letter IV at 33; TD Ameritrade Letter at 5; NYSE Letter II at 3–4. 432 See Nasdaq Letter IV at 33. 433 See Nasdaq Letter V at 5. PO 00000 Frm 00035 Fmt 4701 Sfmt 4700 18629 costs unnecessarily and create confusion as to what is necessary for regulatory compliance.434 The Commission disagrees with these comments. As evidenced by the support for including five levels of depth of book data expressed by a wide range of commenters—including exchange, buyside, and sell-side market participants, many of whom explained with specificity why five levels of depth of book would meet their needs 435—the Commission believes there is demand for core data that includes depth of book data, including the definition of depth of book data, as modified and adopted herein. The Commission also believes that including depth of book data in core data would promote a broader distribution of this data among market participants, particularly those who do not currently subscribe to the proprietary depth of book products offered by the exchanges.436 Nevertheless, the Commission acknowledges that depth of book data may not be ‘‘necessary or helpful for all investors’’ 437 in a direct sense, but even investors who do not directly consume depth of book data will benefit from it indirectly,438 since many of their broker-dealer intermediaries would likely use depth of book data for improved order placement,439 which ultimately will improve the execution quality of customer orders.440 Furthermore, the Commission has explained the implications of these amendments on best execution obligations in detail.441 Therefore, the inclusion of depth of book data in core data should not ‘‘cause confusion as to what may be required for regulatory compliance.’’ 442 Finally, the Commission disagrees that the definition of depth of book data is unsupported by ‘‘data driven analysis’’ because the Commission considered staff analyses of depth of book data in both proposing 443 and adopting 444 the definition. 434 See TD Ameritrade Letter at 5. supra note 388. 436 See infra note 1974 and accompanying text. 437 See TD Ameritrade Letter at 5. 438 See supra Section II.C.2(a). 439 See infra note 879 and accompanying text. 440 These indirect benefits would accrue to customer orders executed by broker-dealers that do not currently use proprietary depth of book data but that would use the depth of book data as adopted and as included in core data. 441 See supra Section I.E (discussing the implications of these amendments generally for best execution obligations); infra Section II.F.2(h) (discussing best execution obligations in the context of depth of book data). 442 See TD Ameritrade Letter at 5. 443 See Proposing Release, 85 FR at 16754. 444 See supra note 387. 435 See E:\FR\FM\09APR2.SGM 09APR2 18630 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations (g) Need for Competing Consolidators To Offer Depth of Book or the top of book quotes of exchanges.448 G. Definition of ‘‘Auction Information’’ Under Rule 600(b)(5) Some commenters supported requiring SROs to provide depth of book information to competing consolidators but opposed requiring competing consolidators to include depth of book in the products offered to their subscribers 445 or emphasized that competing consolidators should be provided with enough raw data to be competitive with proprietary offerings but permitted to offer a range of products due to investors’ diverse market data needs.446 The Commission agrees that competing consolidators should be permitted to offer customers a range of products, including customized depth of book products that include more or less depth of book information than set forth in the definition of depth of book data. Modifying the requirements of Rule 614 so that competing consolidators will only be required to generate and offer one or more consolidated market data products, which can contain some or all of the elements of consolidated market data, will enable competing consolidators to specialize in different products to address their subscribers’ market data needs.447 Competing consolidators that receive proprietary data products from SROs to create products that go beyond consolidated market data (e.g., full depth of book data), would compensate SROs for this use pursuant to individual SRO fee schedules, while competing consolidators that limit their use of SRO data to the creation of products that include consolidated market data or a subset thereof would be charged pursuant to the effective national market system plan(s) fee schedules. If the effective national market system plan(s) establishes fees for data content underlying consolidated market data offerings that use subsets of consolidated market data, the competing consolidator would have the option of providing customized products that do not, for example, include all five levels of depth of book data, including products providing only the NBBO and/ (h) Best Execution Obligations Regarding Depth of Book Data 1. Proposal The Commission proposed to define ‘‘auction information’’ as an element of core data. Specifically, ‘‘auction information’’ would be defined as 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. Auctions have become increasingly important liquidity events in recent years and have come to represent a significant proportion of overall trading volume. The Commission proposed to include auction information in core data to promote more informed and effective trading in auctions, which could also facilitate price formation and improve execution quality for more traders and investors.457 The Commission solicited comment on the proposed definition of auction information, including the scope of auction-related information that should be included in the definition.458 445 See BestEx Research Letter at 2, 5 (‘‘Given that exchanges have zero competition in providing their own market data feeds, we welcome the Commission’s proposed mandate that exchanges provide depth of book information and auction information to competing SIP vendors, thus reducing information asymmetry among market participants. However, we believe that SIP providers should not be required to include that information in their products.’’). 446 See BlackRock Letter at 2–3. 447 See infra Sections III.C.1(b); III.C.8(a). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Some commenters discussed market participants’ duty of best execution in light of the inclusion of depth of book data in core data. Some commenters noted that including depth of book data in core data would assist market participants in fulfilling their best execution requirements.449 Others went further and stated that depth of book data is currently necessary to fulfill their best execution obligations.450 However, one commenter stated that ‘‘[s]upplementing core market data with depth-of-book data would confound market participants in fulfilling their best execution obligations.’’ 451 As explained above, these amendments do not change the duty of best execution.452 Rather, the availability of additional data content as core data—including depth of book data—may be relevant to a brokerdealer’s ability to achieve and analyze best execution, and broker-dealers should consider the availability of this information in connection with their best execution obligations.453 However, for the reasons stated above, the Commission is not setting forth minimum data elements needed to achieve best execution or specifying the data elements that may be relevant to any specific situation or customer.454 In addition, the Commission has explained the implications of these amendments on best execution obligations in detail,455 and does not agree that market participants will be ‘‘confounded’’ in fulfilling their best execution obligations by the addition of depth of book data to core data.456 448 See infra Section III.E.2(e). e.g., RBC Letter at 4; SIFMA Letter at 3– 4; T. Rowe Price Letter at 1; Clearpool Letter at 1, 11 (stating that data content currently available only in proprietary feeds is necessary for best execution); Capital Group Letter at 2; McKay Letter at 1; Better Markets Letter at 1–2; DOJ Letter at 4. 450 See State Street Letter at 2; IEX Letter at 5. 451 Nasdaq Letter IV at 7. See also FINRA Letter at 7 (stating generally that the proposed changes to the content of consolidated market data and the manner in which it would be disseminated raise questions regarding best execution requirements and that the Commission should consider providing best execution guidance for broker-dealers). 452 See supra Section I.E. 453 See id. 454 See id. 455 See id. 456 See supra note 451 and accompanying text. See also supra note 92. 449 See, PO 00000 Frm 00036 Fmt 4701 Sfmt 4700 2. Final Rule and Response to Comments Many commenters favored including auction information in core data, but some opposed doing so. The Commission is adopting the definition of auction information, as proposed, with one modification.459 Specifically, the Commission is adding the word ‘‘publicly’’ before ‘‘disseminated’’ to specify that only auction information that is publicly disseminated on an exchange’s proprietary feeds is included in the definition of auction information and hence as an element of core data. The Commission believes that this modification will help ensure that all auction information that an exchange includes in its proprietary feeds will be included in core data, addressing the information asymmetries that currently exist between users of SIP data and proprietary data and facilitating the ability of core data subscribers to participate in auctions in an informed 457 See Proposing Release, 85 FR at 16759. id. 459 The adopted definition of auction information also includes one technical change from the proposed definition—using the plural ‘‘auctions’’ rather than the singular ‘‘an auction’’ in the phrase ‘‘generated by a national securities exchange leading up to and during auctions.’’ The plural form is more consistent with the use of ‘‘auctions’’ in the next clause of the definition. See infra Section VIII. 458 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and effective manner.460 This modification would also clarify that auction information does not include auction-related information that is made available to a limited group of market participants under certain exchange models, but not made publicly available.461 (a) Support for Inclusion of Auction Information in Core Data Many commenters supported the inclusion of auction information in core data, emphasizing the importance of this information in light of the increasing proportion of transaction volume that takes place during opening and closing auctions.462 One commenter stated that including auction information in core data would eliminate proprietary data costs as a barrier to auction trading and encourage a broader range of market participants to submit trading interest into auctions, enhancing market liquidity and price discovery.463 Another commenter cited recent market wide circuit breaker halts and the consequent re-opening auctions as reasons for its support of including auction information in core data.464 Another commenter stated that retail investors should be properly informed with appropriate information about the indicative auction price and the trading imbalance.465 The Commission agrees with these comments on the growing significance of auctions and auction information to investors and other market participants. As the Commission stated in the Proposing Release, opening and closing auctions conducted by the exchanges have become increasingly important liquidity events and represent a significant proportion of overall trading 460 See Proposing Release, 85 FR at 16758–59. NYSE Rule 123C(6)(b) (relating to the dissemination of certain auction-related information to floor brokers). 462 See IEX Letter at 6; MEMX Letter at 5–6; Cboe Letter at 21; BlackRock Letter at 2; Fidelity Letter at 5; Schwab Letter at 5; State Street Letter at 2– 3; T. Rowe Price Letter at 2; Capital Group Letter at 2; ICI Letter at 9–10; SIFMA Letter at 7; Citadel Letter at 1 (supporting the inclusion of auction information in core data as long as it does not materially increase latency); Virtu Letter at 5; IntelligentCross Letter at 4; STANY Letter II at 4; BestEx Research Letter at 5 (stating that competing consolidators should be able to determine whether or not to include auction information in the products offered to subscribers); Healthy Markets Letter at 3; Clearpool Letter at 15; Wellington Letter at 1; Proof Trading Letter at 1 (stating that auction information could be useful for agency trading); NovaSparks Letter at 1. 463 See ICI Letter at 9–10 (‘‘Doing so also would eliminate proprietary data costs as a barrier to auction trading and encourage a broader range of market participants to submit trading interest.’’); see also SIFMA Letter at 7. 464 See RBC Letter at 5. 465 See Angel Letter at 8. 461 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 volume.466 The growth of passive, index-tracking investment strategies through mutual funds, ETFs, and similar products has contributed to the higher concentration of trading in closing auctions.467 For these reasons, the Commission believes that auction information should be included in core data to promote more informed and effective participation in auctions by market participants and to potentially broaden the range of market participants who participate in auctions, enhancing auction liquidity and price discovery. Specifically, the Commission believes that auction information, such as order imbalances and indicative prices, helps market participants determine whether to participate in auctions, how to trade leading up to an auction, and how to best place their trading interest into an auction.468 Finally, the Commission agrees that recent market wide circuit breaker halts, which occurred after the Commission’s issuance of the Proposing Release, further underscore the need for auction information to be included in core data so that information related to the reopening auctions that occur after such halts is broadly disseminated to market participants, promoting more informed participation in these auctions. (b) Asserted Violation of Intellectual Property Rights One commenter stated that it ‘‘possesses copyright rights in its auction data as a compilation . . .’’ and the proposal would require that it ‘‘forfeit these copyrights rights.’’ 469 The commenter noted that there have been ‘‘auctions of financial instruments for hundreds of years,’’ and that it ‘‘has developed a unique approach to auctions that includes a creative selection and arrangement of auction data.’’ 470 The commenter stated that it 466 See Proposing Release, 85 FR at 16756 (stating that auctions account for approximately 7% of daily equity trading volume based on data available on Cboe’s website from November 2019). Staff conducted the same analysis of auction data that was included in the Proposing Release but for a more recent time period (the month of June 2020) and observed that auctions account for approximately 7% of daily equity trading volume. Staff also observed that auctions accounted for more than 20% of total volume on two days (June 19 and June 26). See Cboe: U.S. Equities Market Volume Summary, available at https://markets.cboe.com/ us/equities/market_share/ (last accessed Aug. 30, 2020). 467 See Proposing Release, 85 FR at 16756–57. 468 See id. at 16826–27. 469 Nasdaq Letter IV at 51. 470 See id. (‘‘When performing an opening or closing auction, Nasdaq receives orders and disseminates (via NOII messages) the results of those simulations. The frequency at which the NOII is disseminated changes over the course of an PO 00000 Frm 00037 Fmt 4701 Sfmt 4700 18631 ‘‘has the exclusive right to reproduce its compilation in copies, to prepare derivative works based on the compilation, and to distribute copies of the compilation.’’ 471 The commenter further stated that the proposal would ‘‘force Nasdaq to surrender these rights, robbing Nasdaq of its ability as copyright owner to obtain fair market value of licenses for its intellectual property.’’ 472 Some commenters disagreed.473 One commenter stated that viewing auction information (or depth of book data) as the intellectual property of the exchanges would ignore the fact that the broker-dealers who submit the orders and the investors who generate the orders are the source of this data and would contravene broker-dealers and investors’ ownership rights in the underlying data.474 The Commission does not agree that the definition of auction information or its inclusion in core data would violate any copyright interests of the commenter. The Commission has the authority to determine the content of the quotation and transaction information made available under the national market system rules, including information related to exchange auctions.475 In addition, other Commission rules require the public disclosure or provision of information that must be compiled, such as Rules 601 (transaction reports), 602 (quotations), 605 (order execution auction; for example, in the closing auction, the NOII is disseminated every ten seconds for the first five minutes of the auction, and then every second for the final five minutes of the auction. The NOII includes a number of data fields, including: Symbol (indicating the security to which the NOII relates); Near Indicative Price (which is based on orders in both the closing and continuous books); Far Indicative Price (which is based on orders solely in the closing book); Current Reference Price (which is based solely on orders in the continuous book); Paired Shares (indicating how many shares would execute at the Current Reference Price); Imbalance Shares (indicating the number of shares that would remain after execution at the Current Reference Price); and Imbalance Side (indicating whether the Imbalance Shares relate to buy orders or sell orders). The three prices in the NOII are not simply based on executed transactions, but rather they are simulations of what the price ‘‘would be’’ if the auction were to execute at that moment, based on different inputs. Each day, Nasdaq generates over 400 simulations of these three prices for each security. As there are over 3000 securities traded on Nasdaq each day, this means that Nasdaq compiles more than 1.2 million NOII records each day. The selection and arrangement of the NOII data fields are original and reflect Nasdaq’s creative judgment; Nasdaq did not copy this selection of auction data, and there is no precedent for this unique and creative assembly of auction data fields. . . .’’). 471 Id. 472 Id. 473 See Fidelity Letter at 5; SIFMA Letter at 7. 474 See SIFMA Letter at 7. 475 See supra note 114. E:\FR\FM\09APR2.SGM 09APR2 18632 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations information), and 606 (order routing information) of Regulation NMS and 17 CFR 240.15c2–12 (Exchange Act Rule 15c2–12) (credit rating and audit information related to municipal securities).476 Moreover, auction information, such as order imbalances and indicative pricing, pertains to certain outputs of an exchange’s auction process. Such auction information does not require the disclosure of any details about the process of the auction or require the exchanges to ‘‘reproduce’’ their compilations. Rather, the exchanges can comply with the requirement to make information related to their auctions available to competing consolidators and self-aggregators without using their existing compilation systems; they are free to collect and publish the factual information required by the amendments to be made public by any means they choose in a manner that does not utilize any copyrightable format or collection methodology. Therefore, to the extent that any intellectual property rights attach to exchange auction processes themselves, these amendments do not violate those rights.477 Furthermore, exchanges will continue to be compensated for making auction information available to competing consolidators and self-aggregators through fees established by the effective national market system plan(s). The Operating Committee of the effective national market system plan(s) will propose fees for the data content underlying consolidated market data, including auction information, as well as updates to the formula for allocating revenues from this data among the SROs.478 In so doing, the Commission 476 See also Securities Exchange Act Release No. 74244 (Feb. 11, 2015), 80 FR 14564, 14669–70 (Mar. 19, 2015) (Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information Adopting Release) (‘‘Under the federal securities laws, the Commission imposes a number of requirements that compel the provision of information to the Commission itself or to the public. . . . Businesses that operate in an industry with a history of regulation have no reasonable expectation that regulation will not be strengthened to achieve established legislative ends.’’). 477 For example, the dissemination of auction information as required by these amendments does not violate any patents that the commenter has identified, as these amendments do not compel the disclosure of the process of how the auction prices are derived. See Rule 600(b)(5) of Regulation NMS (defining ‘‘auction information,’’ by reference to information specified in exchange rules, which do not disclose how auction prices are derived). Rather, these amendments require exchanges to make auction information available to competing consolidators and self-aggregators so that market participants may submit trading interest into auctions in a more informed manner. 478 Auction data for a particular NMS stock will likely be generated by a single exchange, namely VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 expects the Operating Committee to assess the impact of the inclusion of auction information in consolidated market data on the fees to be charged for the data content underlying consolidated market data, as well as how exchanges that contribute auction information should be compensated for this data through the allocation formula. (c) Assertion of Insufficient Justification for Inclusion of Auction Information in Core Data One commenter characterized auction information as ‘‘esoteric’’ and ‘‘designed to assist sophisticated market participants,’’ arguing that anyone who needs this information can buy it now, that it is likely to be ‘‘useless’’ to anyone who does not currently buy it, and that including it in core data will not make it ‘‘any more or less available.’’ 479 Similarly, another commenter stated that auction information is not ‘‘necessary or helpful for all investors’’ and that its inclusion in core data would increase core data costs unnecessarily and create confusion as to what is necessary for regulatory compliance.480 A variety of commenters—including exchange, buy-side, and sell-side market participants—stated, and the Commission agrees, that auction information is not ‘‘esoteric’’ information that would be of use only to some small subset of ‘‘sophisticated’’ market participants.481 Rather, the Commission continues to believe that auction information would be useful or beneficial to a broad cross-section of market participants—including retail investors, according to one commenter 482—and would enable these market participants to participate in auctions, and to trade leading up to auctions, in a more informed manner.483 Furthermore, as explained above, even market participants that do not directly acquire all elements of core data, including auction information, will still indirectly benefit from the inclusion of auction information in core data. The inclusion of auction information in core the primary listing exchange for that stock. However, all data elements that make up consolidated market data, such as individual quotes and trades or regulatory data, originate from a single SRO, and, as explained below, the Operating Committees of the effective national market system plans historically have determined how best to allocate consolidated market data revenues among the SROs to fairly reflect their individual contributions. See infra Sections III.E.2(b), III.E.2(f). In addition, certain NYSE auction data is currently included in Tape A. See Proposing Release, 85 FR at 16757. 479 See Nasdaq Letter IV at 33. 480 See TD Ameritrade Letter at 5. 481 See supra note 462. 482 See Angel Letter at 8. 483 See supra note 468. PO 00000 Frm 00038 Fmt 4701 Sfmt 4700 data will facilitate greater access to this information among a broader group of executing broker-dealers and will enable them to place orders into auctions more effectively and to achieve better executions for their customer orders.484 As commenters stated, proprietary data costs may discourage some market participants from participating in auctions.485 The Commission is sensitive to these concerns and believes that including auction information in core data would help facilitate its broader dissemination.486 Finally, the Commission is not mandating the consumption of auction information and has explained the implications of these amendments on best execution obligations above.487 The Commission believes the inclusion of auction information in core data will not create confusion as to regulatory requirements, as one commenter stated might happen.488 (d) Include Competing Crosses in Auction Information One commenter recommended expanding the proposed definition of auction information to include data on competing crosses offered by national securities exchanges other than the listing market, such as one of the commenter’s products (the Cboe Market Close product), so that investors have a full view of exchange trading in other mechanisms through which investors can seek to have their orders executed at official opening or closing prices.489 The Commission does not believe that information on competing crosses should be included in core data at this time. Auctions are held pursuant to exchange rules at specified periods during the trading day (e.g., at the open, at the close, or during the day to reopen a stock that has been halted) when continuous trading is not occurring. 484 See supra Section II.C.2(a); infra Sections V.C.1(c)(iii) (discussing how the amendments will affect access to auction information); III.E.2(c); V.C.2(b)(i)a (discussing how the amendments will affect data content fees). 485 See ICI Letter at 9–10 (‘‘Including auction information in the consolidated feed would enhance transparency into market activity. Doing so also would eliminate proprietary data costs as a barrier to auction trading and encourage a broader range of market participants to submit trading interest.’’); SIFMA Letter at 7 (‘‘Adding this [auction] data to the definition of core data would assist with alleviating some of the discrepancies in content between the exchange proprietary feeds and the current SIP feeds and provide market participants with the ability to rely on SIP feeds rather than incurring the substantial costs in being forced to purchase both the proprietary data and the SIP data.’’). 486 See supra note 484. 487 See supra Section I.E. 488 TD Ameritrade Letter at 4. 489 See Cboe Letter at 21. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations During auctions, buy and sell orders generally interact at the single price, within limits, that maximizes the trading volume that can be executed.490 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.491 While the Cboe Market Close process seeks to provide executions on Cboe BZX Exchange at the official closing price published by the primary listing exchange, which is typically determined through an auction, it is not itself an auction process that establishes pricing.492 In proposing to include auction information in core data, the Commission was responding to the growing importance of auctions themselves rather than competing cross processes that leverage auction-based pricing. Because competing cross processes are a derivative of the underlying auctions that establish prices, the Commission does not believe that including information regarding Cboe Market Close or similar competing cross processes would further the objective of promoting more informed participation in auctions. The Commission’s decision does not preclude the dissemination of information related to such processes on a proprietary basis or prevent competing consolidators from acquiring and providing this information to their subscribers. Additionally, selfregulatory organization-specific program information can also be required to be 490 See, e.g., NYSE Rule 123C(8). See also Proposing Release, 85 FR at 16756. 491 See, e.g., NYSE Rule 123C(1)(e). See also Proposing Release, 85 FR at 16756. 492 Securities Exchange Act Release No. 88008 (Jan. 21, 2020), 85 FR 4726 (Jan. 27, 2020). Through Cboe Market Close, buy and sell market on close orders for stocks not listed on Cboe are matched together and executed at the closing price of the stock’s primary listing exchange. Because the Cboe Market Close process is using the primary listing exchange’s closing price as the execution price, the Cboe process is not independently discovering a closing price different than the primary listing exchange. Id. at 4727, 4738 (‘‘The Commission finds that . . . Cboe Market Close should not disrupt the price discovery process in the closing auctions of the primary listing exchanges. Importantly, Cboe Market Close will only accept, match, and execute unpriced MOC orders with other unpriced MOC orders (i.e., paired-off MOC orders). Contrary to some commenters’ assertions that MOC orders contribute to the determination of the official closing price, the Commission believes that pairedoff MOC orders, which do not specify a price but instead seek to be executed at whatever closing price is established via the primary listing exchange’s closing auction, do not directly contribute to setting the official closing price of securities on the primary listing exchanges but, rather, are inherently the recipients of price formation information.’’). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 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.493 (e) Classification of Auction Information One commenter stated that auction information (along with odd-lots and depth of book data) should be part of the consolidated market data, rather than core data, and expressed its doubt that firms would have an option to receive only a portion of core data.494 Another commenter stated that auction information should be further split into three products: (1) Core data that has no auction data but includes Cboe Market Close orders in order not to drag the processing speed of normal data distribution; (2) separate subscription for auction imbalance information (matched quantity, imbalance size, near price, far price, paired shares, and imbalance shares); and (3) integrated auction data in a combined feed, the speed of which may be slower than (1) and (2).495 The Commission believes that auction information should be part of core data. Core data includes elements that the Commission has determined to be useful to inform trading decisions by today’s investors. Auction information is important to investors who wish to participate in the opening, reopening, and closing auctions, which make up an increasing proportion of overall trading volume. However, as discussed above,496 the Commission is not creating any new regulatory obligation to consume auction information.497 Furthermore, the Operating Committee of the effective national market system plan(s) could set separate fees for different data content subsets, and competing consolidators could offer a variety of customized market data products to meet their subscribers’ the diverse needs. This would help ensure that market participants pay for only the data that they consume and addresses the commenter’s recommendation to 493 See supra Section II.B.2; infra Section II.K.2. TD Ameritrade Letter at 6 (‘‘Inclusion under the broader Consolidated Market Data definition would still require for the collection, aggregation, and dissemination of the data to make it available to self-aggregators and competing consolidators but would avoid future confusion about what is required of end users for regulatory purposes in the future.’’). 495 See Data Boiler Letter I at 20. 496 See supra Section II.C.2(a). 497 See supra Section I.E. These amendments do not mandate the consumption of auction information, regardless of whether auction information is defined as core data or consolidated market data, contrary to what one commenter suggested. See supra note 494 and accompanying text. 494 See PO 00000 Frm 00039 Fmt 4701 Sfmt 4700 18633 provide for product differentiation and customer choice with respect to auction data. H. Definition of ‘‘Regulatory Data’’ Under Rule 600(b)(78) 1. Proposal The Commission proposed defining regulatory data as follows: (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 market wide circuit breakers (‘‘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 item (1)(C) of the proposed 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 (so that the primary listing exchange can initiate trading halts, if necessary). 2. Final Rule and Response to Comments The Commission received several comments regarding the definition of E:\FR\FM\09APR2.SGM 09APR2 18634 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations regulatory data.498 Some commenters supported including regulatory data in consolidated market data and did not comment on the substance of the definition of regulatory data.499 Other commenters pointed out difficulties or unintended consequences that they believed would result from the proposed definition.500 The Commission is adopting the definition of regulatory data as proposed. As discussed below, the Commission believes that the information in the definition of regulatory data should help market participants meet their regulatory obligations and be informed of trading halts, price bands, or other market conditions that may affect their trading decisions. (a) Complexity of Shifting Responsibilities to Primary Listing Exchanges One commenter stated that shifting the dissemination of LULD and Short Sale Circuit Breaker information from the exclusive SIPs to multiple primary listing exchanges would lead to these key market functions becoming disaggregated, more expensive, more prone to errors, and more complex due to multiple calculation methodologies and the need to uniformly adapt to change requests that impact the calculations.501 Another commenter stated that the Commission did not consider how a primary listing exchange responsible for calculating and disseminating regulatory data would obtain the information needed to perform these calculations from the other exchanges and failed to account for the financial costs, competitive implications, and latency impacts of this design.502 The Commission does not believe that the proposal would significantly increase the cost, complexity, or error rate of regulatory data such as LULD or Short Sale Circuit Breakers information. With respect to LULD information, just as the primary listing exchanges provide trading pause and reopening auction messages to the two exclusive SIPs today, the primary listing exchanges will provide this same information to 498 See FINRA Letter at 9; NYSE Letter II at 21; MFA Letter at 9; Capital Group Letter at 2; TD Ameritrade Letter at 3. 499 See Capital Group Letter at 2; TD Ameritrade Letter at 3; MFA Letter at 9 (recommending that competing consolidators should be allowed to provide a regulatory data only feed and/or exchanges should be allowed to provide regulatory data on proprietary feeds); Data Boiler Letter I at 33; MEMX Letter at 6. 500 See FINRA Letter at 7; NYSE Letter II at 21. 501 See FINRA Letter at 7. 502 See NYSE Letter II at 21. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 competing consolidators and selfaggregators under the decentralized consolidation model. Similarly, with respect to Rule 201 information, the primary listing exchange currently determines whether a Short Sale Circuit Breaker has been triggered and notifies the exclusive SIPs; under the decentralized consolidation model, the primary listing exchange will notify competing consolidators and selfaggregators. The Commission does not believe the incremental cost of providing this data to additional entities—i.e., competing consolidators and self-aggregators—will be substantial. Further, the Commission does not believe that the competing consolidator model would significantly increase complexity because the primary listing exchanges today already disseminate regulatory messages to the two exclusive SIPs. Finally, the Commission does not believe that shifting the calculation of regulatory data to primary listing exchanges would lead to more errors as the commenter suggested, since primary listing exchanges are capable of generating regulatory messages accurately and already generate many of these messages today. Moreover, the primary listing exchanges, and not only those that oversee the operation of exclusive SIPs, are qualified and capable to calculate LULD price bands, as the exclusive SIPs do today. The Commission does not agree with the commenter that the costs of performing these calculations at the primary listing exchange would be greater than the costs of doing so at the exclusive SIPs because the mechanical nature of these calculations would not introduce variable costs depending upon the entity performing the calculation. Furthermore, the Commission anticipates that the Operating Committee of the effective national market system plan(s) could reimburse these costs from plan revenue prior to allocation. In addition, as discussed below, the Commission believes that various factors would exert a downward pressure on the fees for the data content underlying consolidated market data, including regulatory data.503 Because the primary listing exchanges already calculate ‘‘synthetic’’ LULD price bands after reopening prices are disseminated but before the ‘‘official’’ price bands are sent by the SIPs,504 any costs of requiring them to 503 See infra Sections III.E.2(c); V.C.2(b)(i)a (discussing how the amendments will affect data content fees). 504 See Nasdaq, Equity Trader Alert #2016–79: NASDAQ Announces Improved Protections for PO 00000 Frm 00040 Fmt 4701 Sfmt 4700 do so pursuant to the definition of regulatory data and the decentralized consolidation model should be limited. Finally, with respect to the comment that the Commission did not account for the financial costs of its regulatory data proposal, the Commission provided an estimate of the burdens and costs of providing competing consolidators and self-aggregators with the data necessary to generate consolidated market data, including regulatory data, and solicited comment on this estimate.505 With respect to the comment regarding how primary listing exchanges would obtain the information needed to calculate and disseminate regulatory data from the other exchanges, the Commission observes that many primary listing exchanges already subscribe to the proprietary feeds of many other exchanges and will continue to have this option under the decentralized consolidation model.506 Like many other market participants, the primary listing exchanges do so to calculate their own NBBOs based on data from across the national market system and use the proprietary feeds, rather than the SIP feeds, for their matching engines.507 Furthermore, the Commission is adopting rules to allow the primary listing exchanges the option of obtaining the data from other exchanges necessary to perform these calculations through self-aggregation.508 In addition, the Commission does not believe the proposal will introduce 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). 505 Proposing Release, 85 FR at 16807–09. 506 See, e.g., NYSE Rule 7.37(e) (showing the data feeds for handling, execution, and routing of orders and subscribing to the direct feeds for all national securities exchanges except three exchanges (Investors’ Exchange, LLC, Long-Term Stock Exchange, Inc., and MEMX LLC)); Nasdaq Rule 4759 (showing the data feeds for handling, routing, and execution of orders and subscribing to the direct feeds for all national securities exchanges except six exchanges (NYSE National, MIAX Pearl, Long-Term Stock Exchange, NYSE Chicago, MEMX, and IEX)). 507 Id. 508 See infra Section III.D.2(a). The exchanges today perform with proprietary data many functions that are similar to self-aggregation, such as calculating the best bid and offer to decide where to route routable orders. The Exchanges would continue to have the option to self-aggregate under the adopted rules, allowing the exchanges to perform many of the functions they do today, including, among other things, routing of orders and compliance with the order protection rule. See also supra note 503 (regarding the Commission’s expectations with respect to the fees for data content, including regulatory data). E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations unwarranted complexity or inconsistency in the dissemination of regulatory data. While each primary listing exchange will calculate LULD price bands, the primary listing exchanges are not permitted to apply ‘‘separate calculation methodologies’’ as suggested by the commenter, since the reference price calculation methodology is set forth in the LULD Plan and not subject to deviations.509 The definition of regulatory data that the Commission is adopting assigns a single entity, the primary listing exchange, with the responsibility to calculate regulatory data such as LULD price bands or to monitor the S&P 500 for purposes of sending MWCB alerts in order to avoid the complexity and confusion that could result from having multiple entities— competing consolidators and selfaggregators—performing these functions. Finally, the Commission does not believe these additional requirements would impose any competitive disadvantages on primary listing exchanges. Listing securities already entails significant regulatory obligations, including, as discussed above, the provision of certain regulatory data to the exclusive SIPs, as well as other regulatory functions that are required of a listing SRO to regulate its listed securities and the issuing companies. The Commission estimates that the incremental burdens imposed by the amendments, including the calculations required to disseminate the elements of regulatory data, and costs, if any, necessary to obtain the data underlying those calculations, would be minimal, particularly because the primary listing exchanges already perform many of these functions today.510 (b) Geographic Latency of Regulatory Data One commenter stated that as a result of competing consolidators being positioned at different locations, listing exchanges are likely to experience a delay in identifying the moment a LULD halt or a Regulation SHO restriction is triggered, which may result in executed trades that violate the LULD Plan and Regulation SHO, and that such latency issues will make it difficult for SROs to surveil and determine with certainty 509 LULD Plan Section V(A). 510 In addition, the Operating Committee of the effective national market system plan(s) could consider the costs of providing competing consolidators and self-aggregators with regulatory data in proposing fees for consolidated market data and could propose adjustments to the revenue allocation formula to compensate primary listing exchanges in particular. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 that a market participant intentionally violated a LULD or Regulation SHO rule.511 The Commission acknowledges that competing consolidators would be in different locations, likely co-located at the exchanges’ primary data centers currently in Mahwah, Carteret, Secaucus, and Weehawken, New Jersey. However, the Commission does not believe that the different locations would make it more difficult for SROs to conduct their market surveillance with respect to LULD and Regulation SHO. Currently, the SROs develop surveillance systems using the data sources that allow them to perform their regulatory obligations.512 As discussed below,513 the varying distances between the existing SIPs and the locations of different exchanges ensure that SIPprovided regulatory messages will arrive at different times today, measured in microseconds or finer increments of time. The Commission believes that, in fact, there will be less of a latency differential experienced under the decentralized consolidation model because it eliminates other material geographic latencies in the consolidation and regulatory message generation process.514 One commenter stated that assigning responsibility to the primary listing exchanges to produce regulatory information such as LULD bands, market-wide circuit-breaker information, and Regulation SHO thresholds underscores the importance of the Governance Order 515 and having a single effective national market system plan and a single, independent plan administrator and of ‘‘standing up the governance regime quickly’’ prior to the launch of the competing consolidator model.516 The Commission believes that ascribing the responsibility for calculating and providing regulatory data to primary listing exchanges pursuant to these amendments is not dependent on the changes contemplated in the Governance Order,517 such as the submission of a single consolidated data plan. Independent of issues related to 511 See Letter from Anthony J. Albanese, Chief Regulatory Officer, NYSE, et al. dated June 15, 2020 (‘‘Joint CRO Letter’’) at 3. 512 See infra note 771 and accompanying text. In addition, time stamps will be added to all consolidated market data, including regulatory data, by the SROs as well as competing consolidators. See infra Sections III.C.8(b); III.E.2(h). These timestamps will help identify when LULD halts and Regulation SHO restrictions were triggered and communicated. 513 See infra Section III.B.5. 514 See id. 515 See infra note 1128. 516 RBC Letter at 7. 517 See infra note 1127. PO 00000 Frm 00041 Fmt 4701 Sfmt 4700 18635 the governance of the effective national market system plan(s), the primary listing markets, which are already performing many of these functions, are well-situated to calculate and provide regulatory data under the decentralized consolidation model.518 One commenter recommended that the Commission should require competing consolidators, not the effective national market system plan(s) participants, to make available a regulatory-data-only feed at a fair and reasonable price because this information is a public good, or, alternatively should allow exchanges to provide regulatory market data through their proprietary feeds.519 Regulatory data is essential for the investing public and necessary for market participants to fulfill regulatory obligations. The fees for regulatory data must be fair and reasonable and not unreasonably discriminatory.520 As discussed below, the Commission believes that the introduction of competitive forces and other factors will constrain regulatory data fees. Moreover, these amendments permit the Operating Committee of the effective national market system plan(s) to propose fees for data content underlying different consolidated market data offerings, including consolidated market data offerings that use a subset of consolidated market data, and permit competing consolidators to offer a variety of products—including, potentially, a regulatory-data-only product—suited to the needs of their subscribers. Therefore, the Commission is adopting the proposal without any changes. I. Regulation SHO: Conforming Amendments to Rule 201 1. Proposal Under the definition of regulatory data, the primary listing exchange for an NMS stock would make the determination regarding whether a Short Sale Circuit Breaker has been triggered. The Commission proposed 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 immediately to notify competing consolidators and self-aggregators 518 See Proposing Release, 85 FR at 16759. MFA Letter at 9 (‘‘The Commission should require competing consolidators to provide a regulatory data-only feed at a fair and reasonable price relative to the cost of that subset of consolidated market data. Alternatively, we believe the Commission should explicitly permit exchanges to provide regulatory data through their proprietary market data feeds.’’). 520 See infra Section III.E.2(c). 519 See E:\FR\FM\09APR2.SGM 09APR2 18636 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations (rather than notifying a single plan processor as was previously the case). Competing consolidators would then be required to consolidate and disseminate this information to their subscribers. Specifically, the Commission proposed to amend Rule 201(b)(1)(ii)— which 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’’—by removing the reference to the plan processor to reflect the proposed decentralized consolidation model. Furthermore, the Commission proposed amending Rule 201(b)(3)—which requires listing markets to immediately notify ‘‘the single plan processor responsible for consolidation of information for the covered security pursuant to Rule 603(b)’’ when a Short Sale Circuit Breaker has been triggered—by removing the single plan processor notice requirement and replacing it with the 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). Second, under the proposed decentralized consolidation model with competing consolidators and selfaggregators, the listing market, in order to make determinations as to whether a Short Sale Circuit Breaker has been triggered as required by 17 CFR 242.201(b)(1)(i) (Rule 201(b)(1)(i)), would have the option of obtaining proposed consolidated market data from one or more competing consolidators (rather than from a single plan processor as is currently the case), to aggregate consolidated market data itself, or some combination of the two.521 The Commission also proposed certain conforming amendments in Rule 201 to harmonize that rule with the Proposing Release. Currently, 17 CFR 242.201(a) (Rule 201(a)) defines ‘‘listing market’’ by reference to the listing market as defined in the effective transaction reporting plan for the covered security. Since primary listing exchanges will be required to collect and calculate regulatory data, the Commission proposed to introduce a definition of ‘‘primary listing exchange’’ in Rule 600(b)(68) to provide greater 521 For example, a listing market could selfaggregate for its own listings and obtain consolidated data from a competing consolidator for stocks listed elsewhere. The rules that the Commission is adopting do not require a listing market to purchase consolidated data from a competing consolidator. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 clarity with respect to the responsibilities regarding regulatory data. Specifically, under proposed Rule 600(b)(68), 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).522 The Commission 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 definition would ensure that primary listing exchanges are clearly identified. The Commission also 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 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. 2. Final Rule and Response to Comments The Commission received one letter supporting the amendments to Regulation SHO.523 For the same reasons discussed above with regard to how the proposed amendments would facilitate the decentralized consolidation model, the Commission is adopting the amendments to Regulation SHO as proposed. J. Definition of ‘‘Administrative Data’’ Under Rule 600(b)(2) 1. Proposal The Commission proposed defining ‘‘administrative data’’ 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 § 242.603(b) or the technical specifications thereto as of the date of Commission approval of the proposal. Administrative data would be a component of the definition of ‘‘consolidated market data,’’ which permits additional administrative data elements to be added pursuant to amendments to the effective national market system plan(s). Examples of administrative messages include market center and issue symbol identifiers, and 522 See infra Section III.E.2(j) (discussing the requirement that the effective national market system plan(s) be amended to include a list of the primary listing exchange for each NMS stock). 523 See Data Boiler Letter I at 27. PO 00000 Frm 00042 Fmt 4701 Sfmt 4700 examples of control messages include messages regarding the beginning and end of trading sessions. As the Commission stated in the proposing release, the proposed definition was ‘‘intended to capture administrative information that is currently provided in SIP data.’’ 524 2. Final Rule and Response to Comments The Commission received one comment supporting the proposed definition of administrative data,525 and is adopting the definition as proposed. The Commission continues to believe that including administrative messages in consolidated market data will facilitate market participants’ efficient and accurate use of consolidated market data. Further, the Commission believes that this information is useful to market participants and should continue to be widely available. The Commission believes that SROs would be wellsituated 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. K. Definition of ‘‘Self-Regulatory Organization-Specific Program Data’’ Under Rule 600(b)(85) 1. Proposal The Commission proposed to define exchange-specific program data as: (1) 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 the date of Commission approval of the proposal and (2) other exchange-specific information with respect to quotations for or transactions in NMS stocks as 524 See Proposing Release, 85 FR at 16763. commenter stated that the current administrative data ‘‘provides additional context for market participants to understand, and efficiently and accurately use, the proposed core and regulatory data to support their trading activities.’’ Data Boiler Letter I at 35. The commenter further added that ‘‘there can be streamlining opportunity for [competing consolidators] to eliminate any repetitive information during distribution and recipients should have a choice to opt-out.’’ Id. As stated above, the decentralized consolidation model permits competing consolidators to offer different products to market data end users, allowing end users to decide which data feeds to purchase and utilize. 525 This E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations specified by the effective national market system plan or plans required under § 242.603(b). The Commission stated that existing retail liquidity programs, which offer opportunities for retail orders to receive price improvement, and, in certain cases, other exchange-specific program information should continue to be included in proposed consolidated market data. If (i) an exchange(s) develops new program(s) in the future, 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. 2. Final Rule and Response to Comments The Commission received comments regarding the definition of exchangespecific program data. One commenter supported the inclusion of exchangespecific program data in consolidated market data, stating that this data, which is already carried by the SIPs, is highly relevant and important to all types of market participants.526 Another commenter agreed with the inclusion of information related to existing retail liquidity programs but stated that there should be a ‘‘procedural mechanism to review if there might be other new exchange-specific program information to be included in the future.’’ 527 Some commenters objected to the proposed definition of exchangespecific program data. One commenter stated that the proposal would require changes to exchange-specific programs to become effective through an effective national market system plan amendment even though exchanges are currently free to propose such programs through the SRO rulemaking process provided in Section 19(b) of the Exchange Act and that requiring such changes to be duplicatively filed as proposed plan amendments would serve no policy or regulatory purpose and would improperly give competing exchanges (as members of the plans’ Operating Committee) a vote in whether or not an exchange may change its programs.528 Another commenter characterized exchange-specific program information as ‘‘an essentially unknown category of information that may or may not be useful to particular 526 See IEX Letter at 7. Boiler Letter I at 35–36. 528 See NYSE Letter II at 28. 527 Data VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 categories of investors’’ and stated that the Commission has determined that ‘‘virtually all categories of information— even indeterminate ones—constitute core data.’’ 529 The Commission is adopting the definition of exchange-specific program data largely as proposed, but is modifying the definition to ‘‘selfregulatory organization-specific program data’’ so that it extends to national securities associations in addition to all national securities exchanges.530 The Commission believes that information related to any program developed by a national securities association in the future should also be able to be included in consolidated market data if specified by the effective national market system plan(s).531 Information related to retail liquidity programs is already in the SIP feeds today, and the Commission agrees that this information is relevant to market participants who wish to submit orders to, or otherwise participate in, such programs and should therefore be included in consolidated market data. To the extent other exchange-specific or national securities association-specific programs may be developed in the future, the Commission believes such information would be similarly relevant to market participants who wish to engage with such programs. The Commission also agrees that a procedural mechanism to modulate the inclusion in consolidated market data of information related to future SROspecific programs is needed. The Commission believes that requiring such data to be included by amendment to the effective national market systems plan(s), as proposed, is the appropriate mechanism because, as explained above, it allows for the inclusion of additional SRO-specific program information data elements that may emerge periodically through the approval of new SRO rules.532 The Commission disagrees with the comment that this process would be ‘‘duplicative’’ of the Section 19(b) process or give an exchange’s 529 Nasdaq Letter IV at 33. Commission is also modifying proposed Rule 600(b)(85)(ii) of Regulation NMS so that it refers to ‘‘[o]ther self-regulatory organizationspecific information with respect to quotations for or transactions in NMS stocks . . .’’ rather than ‘‘other exchange-specific information with respect to quotations for or transactions in NMS stocks . . .’’. See infra Section VIII. 531 See also supra Section II.F.2(c) (explaining that the Commission is adopting a modified definition of depth of book data that includes liquidity at depth of book price levels that may be available on FINRA’s ADF or other facilities of a national securities association in the future). 532 See supra Section II.B.2. 530 The PO 00000 Frm 00043 Fmt 4701 Sfmt 4700 18637 competitors a vote in whether an exchange may change its programs. The Section 19(b) process for approval of an SRO’s rules and a plan amendment serve two distinct purposes. An individual SRO could develop a new program on its own initiative pursuant to the Section 19(b) process. The SRO could disseminate information related to any such program to market participants on a proprietary basis only. On the other hand, a plan amendment would only be required in order to include this information in consolidated market data if an SRO decides to pursue the option and the Operating Committee agrees it is appropriate to provide it to market participants under the national market system rules. Finally, the Commission disagrees that exchange-specific program data is an ‘‘essentially unknown category of information’’ that may or may not be useful to market participants. The rules would allow the effective national market system plan(s) to add other SROspecific information if the Operating Committee determines that the information would be useful to market participants. The Commission believes that allowing the Operating Committee(s) some flexibility to add additional SRO-specific information would be in the interest of investors and would strengthen the national market system. The Equity Data Plans have utilized such a mechanism in the past. III. Enhancements to the Provision of Consolidated Market Data A. Introduction The Commission is adopting a decentralized consolidation model in which competing consolidators, rather than the exclusive SIPs, will collect, consolidate, and disseminate consolidated market data. This new model will address the geographic, aggregation, and transmission latencies that characterize the existing centralized consolidation model,533 which has 533 See Proposing Release, 85 FR at 16765–66 (describing the latencies that exist in the current centralized consolidation model). The existing centralized consolidation model system suffers from three sources of latencies: (a) Geographic latency, (b) aggregation latency, and (c) transmission latency. Geographic latency is typically the most significant component of the latencies that the exclusive SIPs experience compared to the proprietary data feeds. 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. 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. Transmission E:\FR\FM\09APR2.SGM Continued 09APR2 18638 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations relied upon the exclusive SIP for each NMS stock to centrally collect, consolidate, and disseminate SIP data from its location, regardless of the location of other exchanges, FINRA, or subscribers. The Commission believes this new model will foster a competitive environment for the dissemination of consolidated market data and will modernize the underlying architecture of the national market system. The centralized consolidation model has largely remained unchanged despite significant market developments since it was developed in the 1970s. Today, the exclusive SIPs are located in disparate locations far from each other and from end users. Each exclusive SIP must collect data from geographically dispersed SRO data centers, consolidate that data, and then disseminate that data as SIP data from the exclusive SIP’s location to end-users, which are often in other locations. The need for market information to travel back and forth across the ‘‘New Jersey triangle’’ 534 prior to reaching subscribers creates significant geographic and other latencies.535 This structure, as well as the limited data content available in SIP data, has led many market participants to relegate SIP data to backup data.536 The national market system for the collection, consolidation, and dissemination of SIP data was established to be the heart of the national market system and is designed to provide broad public access to a consolidated, real-time stream of market 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. 534 The CTA/CQ SIP is located in Mahwah, NJ, and the UTP SIP is located in Carteret, NJ. Other exchanges and broker-dealers are located in Secaucus, NJ. These three main data center locations are typically referred to as the ‘‘New Jersey Triangle.’’ 535 See supra note 533. 536 See, e.g., SIFMA Letter at 3 (‘‘Even if a brokerdealer elects to consolidate market data through proprietary feeds, it must also purchase the core data from the SIPs for a number of reasons, such as to comply with the Vendor Display Rule, receive regulatory messages like trading halts and have a backup source of data in case an exchange experiences issues with its proprietary feeds.’’). But see BestEx Research Letter at 2 (‘‘Despite the claims of many market participants, the SIP is a critical component of the US equity market structure and is widely used by institutional broker-dealers.’’). The commenter, however, also stated that ‘‘the reforms to the SIP proposed by the Commission will make it even more robust and useful.’’ Id. at 1. While SIP data is widely used, market participants, as well as the commenter, acknowledge that the decentralized consolidation model will modernize the national market system and make it more useful for today’s trading. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 information.537 Investors’ need for real time information has been recognized since the adoption of the 1975 Amendments and is reflected in Section 11A of the Exchange Act.538 In the context of market data, the Commission has said that ‘‘real time’’ means that ‘‘there is very little delay between the time a quotation is made or a transaction is effected and the time that this information is made available to investors and others who use the information.’’ 539 Some market participants believe that the latencies inherent in the centralized consolidation model have affected the ability of brokers to trade competitively and to provide best execution to customer orders, especially when compared to proprietary data products that are not encumbered by centralized consolidation.540 Significant technological changes have occurred since the 1970s and the passage of the 1975 Amendments. Electronic trading has all but supplanted manual trading, and electronic trading systems can handle and process data at speeds unheard of when the national market system was established. While the Equity Data Plans have made various investments and systems upgrades over time, they have not kept up with the demands of all market participants. The concurrent existence of the centralized consolidation model for SIP data and the decentralized consolidation model for proprietary data has resulted in a two-tiered market in which certain market participants that can afford and choose to pay for proprietary data feeds receive content-rich data faster than those who do not purchase these feeds, including market participants who may face higher barriers to entry from data and other exchange fees. Market participants that do not receive proprietary DOB feeds may be affected in their efforts to seek best execution and otherwise effectively compete with 537 See Market Information Concept Release, supra note 22, at 70614. 538 Section 11A(c)(1)(B) of the Exchange Act states that the Commission should assure, among other things, the ‘‘prompt’’ collection, processing, distribution, and publication of information. Further, 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.’’ S. Rep. No. 94–75 at 8 (1975) (‘‘Senate Report’’). 539 Market Information Concept Release, supra note 22, at 70614. 540 One commenter stated that ‘‘[c]urrent market structure allows investors’ order [sic] to be traded at stale prices.’’ Better Markets Letter at 6. See also Capital Group Letter at 2, 4; Clearpool Letter at 2; DOJ Letter at 2, 4; Fidelity Letter at 2; MFA Letter at 2; State Street Letter at 2, 3; T. Rowe Price Letter at 1–2; Virtu Letter at 2, 5. PO 00000 Frm 00044 Fmt 4701 Sfmt 4700 market participants that receive proprietary DOB data feeds because they do not obtain access to the additional content and may be receiving data in a slower manner. Therefore, the Commission believes that the national market system must be modernized to allow ‘‘new data processing and communications systems [to] create the opportunity for more efficient and effective market operations.’’ 541 The centralized consolidation model no longer meets market participants’ need for real-time consolidated market data.542 The purpose of the decentralized consolidation model is to modernize the infrastructure of the national market system by eliminating the outdated centralized architecture for data consolidation and dissemination. Under the current model, each exclusive SIP must collect data for specific NMS stocks from geographically dispersed SRO data centers, consolidate the data, and then disseminate it from its location to endusers, which are often in other locations. The new decentralized consolidation model will speed up the dissemination of consolidated market data by allowing competing consolidators to collect data directly from each SRO and consolidate the data in the same data center as end users. Latency-sensitive data end-users will be able to receive consolidated market data products at the same data center location from which the competing consolidator operates. Under this new model, the relevant exchange will provide quotes and trades in the NMS stocks they trade directly to competing consolidators and selfaggregators and the hub-and-spoke method of centralized collection and dissemination will be eliminated.543 Further, by fostering a competitive environment for the collection, consolidation, and dissemination of consolidated market data, the 541 Section 11A(a)(1)(B) of the Exchange Act. supra Section II.C.2(a) (discussing the indirect benefits to market participants whose executing broker-dealers will receive expanded data content from competing consolidators); infra Section III.B.5 (discussing indirect benefits to investors from enhancements to trading by their broker-dealers resulting from reductions in latency, the expanded data content and the competitive environment fostered by the decentralized consolidation model). 543 See Proposing Release, 85 FR at n. 395. Under the centralized consolidation model, quotes and trades that occur on Nasdaq for NYSE-listed stocks must be provided to the CTA/CQ SIP for dissemination. Under the decentralized consolidation model, such quotes and trades in NYSE-listed stocks will be provided directly by Nasdaq to competing consolidators and selfaggregators. 542 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations decentralized consolidation model will incentivize greater innovation, competitive pricing, and the timely adoption of updated technologies into the national market system. The Commission believes that the decentralized consolidation model will better serve the needs of market participants and investors. It should address concerns about the costs associated with the current structure, in which many market participants are compelled to buy proprietary feeds and the exclusive SIP feeds to trade competitively and represent their customers’ orders.544 The amendments also should address the concerns about, and improve, the content and latency differentials that currently exist between SIP data and proprietary data.545 The Commission believes that the amendments will provide all market participants with access to a real-time stream of consolidated market data, improve the national market system, help to ensure the continued success of the U.S. securities markets, and better achieve the goals of Section 11A of the Exchange Act by assuring ‘‘the availability to brokers, dealers and investors of information with respect to quotations for and transactions in securities’’ that is prompt, accurate, reliable, and fair. B. Proposed Decentralized Consolidation Model The Commission proposed a decentralized consolidation model in which new competing SIPs, called competing consolidators, would collect the data content underlying consolidated market data from the individual SROs, consolidate the information of all of the SROs, and disseminate that consolidated information as consolidated market data to end users. The proposed decentralized consolidation model also would allow broker-dealers to act as self-aggregators to collect all of the data content underlying consolidated market data from the individual SROs and consolidate that information solely for their internal use. The Commission proposed this model to reduce significantly the geographic and other latencies inherent in the existing centralized consolidation model. The proposed decentralized consolidation model would allow competing consolidators and self-aggregators to eliminate the back-and-forth travel of data associated with the centralized 544 One commenter stated that it expects that its use of direct feeds would be eliminated if the proposal is implemented. See NBIM Letter at 4. 545 See Proposing Release, 85 FR at 16764–65. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 consolidation model, to operate in the data center of their choice (i.e., in close proximity to data subscribers), and to foster a competitive environment for the aggregation and transmission of consolidated market data.546 1. Comments on the Decentralized Consolidation Model The Commission received comments on the proposed decentralized consolidation model.547 Many commenters supported the goals of the decentralized consolidation model and the potential positive impacts this model would have on the provision of consolidated market data,548 while numerous commenters raised issues with—or questioned certain aspects of— the proposed model.549 546 See Proposing Release, 85 FR at nn. 419–20. BlackRock Letter; Fidelity Letter; State Street Letter; Wellington Letter; ICI Letter; Virtu Letter; AHSAT Letter; IntelligentCross Letter; BestEx Research Letter; MEMX Letter; Clearpool Letter; T. Rowe Price Letter; ACS Execution Services Letter; IEX Letter; SIFMA Letter; MFA Letter; Schwab Letter; RBC Letter; STANY Letter II; Angel Letter; Nasdaq Letter III; Nasdaq Letter IV; NYSE Letter II; FINRA Letter; Cboe Letter; Proof Trading Letter; Citadel Letter; TD Ameritrade Letter; Data Boiler Letter I; Healthy Markets Letter I; Joint CRO Letter; Susquehanna Letter; NovaSparks Letter; Better Markets Letter; Capital Group Letter; McKay Letter; NBIM Letter; Wharton Letter; letter from Kermit R. Kubitz, dated May 26, 2020, (‘‘Kubitz Letter’’); letter from Kelvin To, Founder and President, Data Boiler Technologies, LLC, dated June 10, 2020, (‘‘Data Boiler Letter II’’); DOJ Letter; letter from Nandini Sukumar, Chief Executive Officer, World Federation of Exchanges, to Chairman Clayton and Commissioners Lee, Peirce, and Roisman, dated May 26, 2020, (‘‘WFE Letter’’); letters to Vanessa Countryman, Secretary, Commission, from Stephen J. McNeany Chief Executive Officer, and Frank W. Piasecki, President, ACTIV Financial Systems, Inc., dated May 26, 2020, (‘‘ACTIV Financial Letter’’); Doris Choi, Co-General Counsel, ICE Data Services, dated May 29, 2020, (‘‘IDS Letter I’’); John L. Thornton and R. Glenn Hubbard, Co-Chairs, and Hal S. Scott, President, Committee on Capital Markets Regulation, dated Apr. 23, 2020, (‘‘Committee on Capital Markets Regulation Letter’’); Kevin R. Edgar, Counsel, BakerHostetler LLP and Counsel, Equity Markets Association, dated June 30, 2020, (‘‘Equity Markets Association Letter’’); Joanna Mallers, Secretary, FIA Principal Traders Group, dated June 3, 2020, (‘‘FIA PTG Letter’’); Tom C. W. Lin, Professor of Law, Temple University Beasley School of Law, dated May 26, 2020, (‘‘Temple University Letter’’); Tyler Gellasch, Executive Director, Healthy Markets, dated July 27, 2020, (‘‘Healthy Markets Letter II’’); Doris Choi, Co-General Counsel, ICE Data Services, dated Aug. 12, 2020, (‘‘IDS Letter II’’). 548 See BlackRock Letter; Fidelity Letter; State Street Letter; Wellington Letter; ICI Letter; Virtu Letter; AHSAT Letter; FIA PTG Letter; IntelligentCross Letter; Committee on Capital Markets Regulation Letter; BestEx Research Letter; Wharton Letter; MEMX Letter; Clearpool Letter; T. Rowe Price Letter; Capital Group Letter; DOJ Letter; ACS Execution Services Letter; IEX Letter; SIFMA Letter; ACTIV Financial Letter; MFA Letter; Better Markets Letter; NBIM Letter; NovaSparks Letter; letter from Anthony H Steinmetz, dated Feb. 17, 2020, (‘‘Steinmetz Letter’’) (supporting the proposal generally). 549 See STANY Letter II; Angel Letter; Nasdaq Letter III; Nasdaq Letter IV; NYSE Letter II; FINRA 547 See PO 00000 Frm 00045 Fmt 4701 Sfmt 4700 18639 Commenters that supported the decentralized consolidation model believed that it would inject needed competition into the consolidated market data environment,550 address conflicts of interest in the centralized consolidation model,551 reduce latency in the dissemination of consolidated market data,552 improve the usefulness of consolidated market data as an alternative to proprietary market data feeds,553 improve the reliability of the consolidated market data infrastructure,554 and reduce the cost of consolidated market data 555 while increasing its quality.556 Commenters that raised concerns about the proposed decentralized consolidation model said that it would not achieve its goal of disseminating consolidated market data to market participants in a more timely, efficient, and cost-effective manner than the current centralized consolidation model; 557 that its impact on the markets would be uncertain until implementation; 558 that the impact on fees and costs for consolidated market data was uncertain; 559 that the new Letter; Cboe Letter; Proof Trading Letter; Citadel Letter; TD Ameritrade Letter; Kubitz Letter; Data Boiler Letter I; Data Boiler Letter II; Healthy Markets Letter I; WFE Letter; Joint CRO Letter; Equity Markets Association Letter. 550 See MEMX Letter at 3, 8; Committee on Capital Markets Regulation Letter at 3; BestEx Research Letter at 1; State Street Letter at 3; ACTIV Financial Letter at 1; Fidelity Letter at 9; SIFMA Letter at 5, 12; Wellington Letter at 1; IntelligentCross Letter at 4–5; ICI Letter at 4, 10; RBC Letter at 6; DOJ Letter at 5; Capital Group Letter at 4; T. Rowe Price Letter at 4; Virtu Letter at 6. 551 See SIFMA Letter at 5; Fidelity Letter at 3, 10; IEX Letter at 2. 552 See MEMX Letter at 6, 7, 8; Fidelity Letter at 3, 10; Wellington Letter at 1; ICI Letter at 4, 10; Capital Group Letter at 4; BlackRock Letter at 5; IEX Letter at 3; Better Markets Letter at 3; AHSAT Letter at 1, 3; DOJ Letter at 3, 4; SIFMA Letter at 1, 5, 11; ACS Execution Services Letter at 5. 553 See MFA Letter at 2; Capital Group Letter at 2, 4; ICI Letter at 4; DOJ Letter at 2–3, 4; SIFMA Letter at 5; MEMX Letter at 2, 8; NBIM Letter at 4. 554 See NovaSparks Letter at 1. 555 See BestEx Research Letter at 1, 4; DOJ Letter at 3–4, 5; Committee on Capital Markets Letter at 3; IntelligentCross Letter at 5; Better Markets Letter at 3; RBC Letter at 5–6; State Street Letter at 3; Fidelity Letter at 3, 9; Wellington Letter at 1; BlackRock Letter at 5; IEX Letter at 3; SIG Letter at 1. 556 See Committee on Capital Markets Regulation Letter at 3; BestEx Research Letter at 1; RBC Letter at 5–6; State Street Letter at 3. 557 See Healthy Markets Letter I at 2; Kubitz Letter at 1; Data Boiler Letter I at 46–47; Data Boiler Letter II at 1; Citadel Letter at 5; TD Ameritrade Letter at 2; NYSE Letter II at 22; Nasdaq Letter IV at 2–3, 8; Angel Letter at 18–20; STANY Letter II at 5. 558 See FINRA Letter at 3, 4; letter from Linda Moore, President and CEO, TechNet, to Vanessa Countryman, Secretary, Commission, dated June 18, 2020, (‘‘TechNet Letter II’’) at 2. 559 See STANY Letter II at 5; Data Boiler Letter I at 47; TD Ameritrade Letter at 15; Nasdaq Letter E:\FR\FM\09APR2.SGM Continued 09APR2 18640 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations architecture could result in increased costs for some market participants; 560 and that it could result in increased costs for SROs.561 Commenters also questioned its feasibility,562 the complexity introduced by multiple competing consolidators,563 its impact on regulation,564 and its benefits to latency.565 A few commenters also suggested that the decentralized consolidation model would benefit from further consideration by market participants and the Commission and should be the subject of a separate rulemaking.566 These comments are addressed below. 2. Comments on the Effectiveness of the Proposal Several commenters questioned whether the proposed decentralized consolidation model would achieve its goal of disseminating consolidated market data to market participants in a more timely, efficient, and cost-effective manner than the current centralized consolidation model.567 One commenter stated that while the proposed system may be desirable, ‘‘it is not clear how the development of multiple parties interacting and providing quotations and trade data can be implemented over time to assure accuracy, completeness and avoidance of gaming and fraud.’’ 568 Another commenter said that the proposed decentralized consolidation model is impractical and would IV at 23, 26, 47–48, 60. See also, e.g., Angel Letter at 22–23. 560 See Cboe Letter at 23–24; FINRA Letter at 3, 4. See also, e.g., Angel Letter at 21. 561 See FINRA Letter at 3, 4; Nasdaq Letter IV at 27, 29, 30. 562 See Nasdaq Letter IV at 23–26; NYSE Letter II at 13, 17–18; IDS Letter I at 3, 4, 7–8; IDS Letter II at 1, 3; STANY Letter II at 6; Data Boiler Letter I at 46; Angel Letter at 18, 20; Equity Markets Association Letter at 3; FINRA Letter at 3; TechNet Letter II at 1–2. 563 See FINRA Letter at 2, 3, 5–6; Angel Letter at 18–19; Healthy Markets Letter I at 4–5; TechNet Letter II at 2; STANY Letter II at 6, 8; Joint CRO Letter at 2; Data Boiler Letter I at 48; Nasdaq Letter III at 8; Citadel Letter at 5; TD Ameritrade Letter at 12–13; WFE Letter at 1. 564 See Nasdaq Letter IV at 2, 3, 4, 12–13, 35; Joint CRO Letter at 2, 3, 4; FINRA Letter at 4, 5, 6; TechNet Letter II at 2; Data Boiler Letter I at 48; Healthy Markets Letter I at 4–5; TD Ameritrade Letter at 13; Citadel Letter at 5; Kubitz Letter at 1; NYSE Letter II at 23. 565 See Cboe Letter at 23; Nasdaq Letter IV at 49; STANY Letter II at 5, 6; Citadel Letter at 5; NYSE Letter II at 11, 22, 23; TD Ameritrade Letter at 12; Proof Trading Letter at 1; Angel Letter at 18, 19; FINRA Letter at 8; IDS Letter I at 15; Data Boiler Letter II at 1. 566 See Citadel Letter at 5; STANY Letter II at 8. 567 See Healthy Markets Letter I at 2; Kubitz Letter at 1; Data Boiler Letter I at 46–47; Data Boiler Letter II at 1; Citadel Letter at 5; TD Ameritrade Letter at 2, 12; NYSE Letter II at 22; Nasdaq Letter IV at 2– 3, 8; Angel Letter at 18–20; STANY Letter II at 5. 568 Kubitz Letter at 1. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 increase market fragmentation.569 One commenter stated that the Commission failed to show how the decentralized consolidation model would result in the dissemination of market data that is prompt, accurate, reliable, and fair and said that the proposal violates the Administrative Procedure Act (‘‘APA’’) 570 because it did not demonstrate a rational connection between the proposal and its goals.571 A few commenters stated that the Proposing Release did not include enough information to evaluate whether the decentralized consolidation model would reduce market data costs, improve transmission latency, and improve resiliency.572 One commenter stated that the proposal lacked information about ‘‘data quality, availability, reliability and potential for significant additional cost’’ and expressed the view that the negative effects of the proposal could exceed any benefits to retail investors.573 Another commenter said that it was ‘‘unclear whether the prices set by competing consolidators will be reliable, resilient, or well-regulated; and how anomalies and disparities among competing consolidators will be resolved.’’ 574 Some commenters raised questions regarding the competitive aspects of the proposal. One commenter stated that there was no guarantee that competition would improve latency and cost,575 and another commenter questioned the ability of competing consolidators to provide the needed competition to decrease latency and cost.576 Further, one commenter stated that, although the proposal would provide for competition, there is no guarantee that competition would occur or that the proposal would result in a competitive outcome that would benefit investors.577 This commenter stated that competition would result in competing consolidators selling differentiated products that would result in a proliferation of market data tiers and information asymmetries.578 However, several commenters said that the proposed decentralized consolidation model would introduce needed competition,579 which would 569 See Data Boiler Letter II at 1. U.S.C. 551 et seq. 571 See NYSE Letter II at 22. 572 See STANY Letter II at 5; TD Ameritrade Letter at 2. 573 TD Ameritrade Letter at 2. 574 TechNet Letter II at 2. 575 See TD Ameritrade Letter at 12. 576 See Data Boiler Letter I at 46–47. 577 See Nasdaq Letter IV at 3. 578 See id. 579 See MEMX Letter at 3, 8; T. Rowe Price Letter at 4; Committee on Capital Markets Regulation 570 5 PO 00000 Frm 00046 Fmt 4701 Sfmt 4700 result in better quality consolidated market data,580 lower market data costs,581 and improved latency.582 One commenter stated that competition in the consolidation and dissemination of market data would increase investor choice and would address both the conflicts of interest that exist in the centralized consolidation model and the latency advantages enjoyed by market participants that are able to purchase proprietary data feeds.583 One commenter stated that competition will allow for innovation that could reduce dependence on proprietary market data,584 and another asserted that ‘‘a market with competing data feeds will be more efficient and effective.’’ 585 One commenter said that modernization through competitive market forces would bring desired changes to consolidated market data and its framework,586 and another supported the proposal’s addition of competition ‘‘while still preserving a significant role for the exchanges to participate.’’ 587 Several commenters stated that the proposed decentralized consolidation model could improve the usefulness of consolidated market data and make it a viable alternative to proprietary market data feeds.588 Commenters indicated that the exchange operators of the exclusive SIPs currently lack the incentive to improve the content, Letter at 3; BestEx Research Letter at 1; State Street Letter at 3; ACTIV Financial Letter at 1; Fidelity Letter at 9; SIFMA Letter at 5, 12; Wellington Letter at 1; IntelligentCross Letter at 4–5; ICI Letter at 4, 10; RBC Letter at 6; DOJ Letter at 5; Capital Group Letter at 4; Virtu Letter at 6. 580 See Committee on Capital Markets Regulation Letter at 3; BestEx Research Letter at 1; RBC Letter at 6; State Street Letter at 3. 581 See Fidelity Letter at 3, 9, 10; Committee on Capital Markets Regulation Letter at 3; BestEx Research Letter at 1, 4; ACTIV Financial Letter at 1; SIFMA Letter at 12; State Street Letter at 3; Wellington Letter at 1; IntelligentCross Letter at 5; ICI Letter at 4; RBC Letter at 5–6; DOJ Letter at 3– 4, 5; Better Markets Letter at 3; BlackRock Letter at 5; IEX Letter at 3. 582 See SIFMA Letter at 1, 5, 11; ICI Letter at 4, 10; Capital Group Letter at 4; MEMX Letter at 8; Fidelity Letter at 3, 10; BlackRock Letter at 5; IEX Letter at 3; Better Markets Letter at 3; AHSAT Letter at 1; DOJ Letter at 3–4, Wellington Letter at 1 (‘‘We believe the introduction of competitive forces to the distribution of data will result in lower-latency, faster data that is more broadly available and also at reduced costs for participants.’’); NovaSparks Letter at 1 (‘‘The competitive nature of the new model will encourage Competing Consolidators to deliver excellent reliability, functionality and performance.’’). 583 See SIFMA Letter at 5, 12. 584 See State Street Letter at 3. 585 Capital Group Letter at 4. 586 See T. Rowe Price Letter at 4. 587 Virtu Letter at 6. 588 See MFA Letter at 2; Capital Group Letter at 2, 4; ICI Letter at 4; DOJ Letter at 2–3, 4; SIFMA Letter at 5; MEMX Letter at 2, 8; NBIM Letter at 4, 5–6. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations delivery, and pricing of consolidated market data because improved consolidated market data could reduce demand for the proprietary data feeds that the exchanges sell.589 Two commenters stated that the proposal would result in a less costly alternative to proprietary market data feeds.590 One of these commenters stated that alternatives to proprietary data feeds could increase participation in the financial services industry and bring down costs for market participants.591 Two commenters stated that the proposal would narrow the content and latency gaps between proprietary market data feeds and consolidated market data.592 One commenter said that equalizing the content and distribution of market data provided by exchanges to competing consolidators and selfaggregators and proprietary market data would eliminate the ‘‘two-tiered’’ market data structure.593 Another commenter stated that the proposal’s improvements to content and latency could result in greater reliance on consolidated market data.594 One commenter stated that the proposal would ‘‘put consolidators on more equal footing’’ with proprietary market data feeds.595 Another commenter indicated that the geographic diversification of competing consolidators could increase the use of consolidated market data.596 The commenter stated that its own need for direct proprietary market data feeds would be eliminated if a competing consolidator were located within the same data center as the broker-dealers the commenter uses.597 The commenter also stated that it is unlikely that brokerdealers and ‘‘higher-turnover market participants’’ would use consolidated market data as a substitute for lowestlatency, self-aggregated direct proprietary market data feeds because latency minimization is critical for their trading activities.598 589 See BestEx Research Letter at 1; State Street Letter at 3. 590 See DOJ Letter at 4; MEMX Letter at 8 (‘‘The new content and infrastructure enhancements would provide an opportunity to introduce new less-expensive NMS data alternatives to proprietary market data products.’’). 591 See DOJ Letter at 4. 592 See MFA Letter at 2 (stating that the proposal should narrow the ‘‘significant gap in usefulness between exchange proprietary data feeds and consolidated market data’’); Capital Group Letter at 2. 593 MEMX Letter at 2. 594 See ICI Letter at 4. 595 Capital Group Letter at 4. 596 See NBIM Letter at 5–6. 597 See id. at 4. 598 Id. at 4, 5. This commenter said that to be ‘‘consistently competitive,’’ broker-dealers need to self-aggregate and use the fastest connectivity VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission believes that the decentralized consolidation model will modernize the national market system so that consolidated market data is disseminated to market participants in an accurate, reliable, prompt, and fair manner.599 The Commission also believes that the decentralized consolidation model will help to ensure the accuracy and completeness of consolidated market data. The Commission disagrees with the comments that stated that the decentralized consolidation model would not achieve the goal of disseminating consolidated market data to market participants in a more timely, efficient, and cost-effective manner than the current centralized consolidation model.600 Further, in response to comments that stated that competition either would not materialize or would not guarantee any benefits to market participants,601 the Commission believes that the amendments will allow the introduction of competitive forces, and foster a competitive environment, for the dissemination of consolidated market data. Today, there is no competition in the collection, consolidation, and dissemination of SIP data. The exclusive SIPs do not compete with each other because Rule 603(b) currently requires the dissemination of all consolidated information for an individual NMS stock to occur through an exclusive SIP. Therefore, each exclusive SIP represents different tapes. The amendments to Rule 603(b) will provide an opportunity for competition to improve the dissemination of consolidated market data. Market participants have stated frequently that SIP data is slower than certain proprietary market data products distributed by the exchanges 602 and that the SRO operators of the Equity Data Plans—some of whom have an inherent conflict of interest because their proprietary data products compete with the SIP data distributed by the Equity Data Plans—have had little incentive to improve the quality of SIP data.603 The available. According to this commenter, this would require using direct proprietary market data feeds for algorithmic executions. Id. at 3–4. 599 See 15 U.S.C. 78k–1(c)(1)(B). 600 See Healthy Markets Letter I at 2; Kubitz Letter at 1; Data Boiler Letter I at 46–47; Citadel Letter at 5; TD Ameritrade Letter at 2, 12; NYSE Letter II at 22; Nasdaq Letter IV at 2–3, 8; Angel Letter at 18– 20; STANY Letter II at 5. 601 See TD Ameritrade Letter at 12; Data Boiler Letter I at 46–47; Nasdaq Letter IV at 3. 602 See BestEx Research Letter at 1; State Street Letter at 2; SIFMA Letter at 5. 603 See SIFMA Letter at 3, 5; BestEx Research Letter at 1, 4 (citing the Proposing Release, 85 FR at 16767). The first commenter stated that the current market data infrastructure provides no PO 00000 Frm 00047 Fmt 4701 Sfmt 4700 18641 exclusive SIPs have not kept pace with the needs of certain market participants, while the exchanges have expanded the content and reduced the latency of their proprietary data products in response to market participants’ needs. Some commenters stated that they will consider entering the competing consolidator business.604 These statements suggest the potential competitive landscape that will develop in the national market system with the decentralized consolidation model. The Commission believes that competitors will be drawn to the significant market for the enhanced data content that will be included in consolidated market data. By fostering a competitive environment for consolidated market data, the Commission is providing the opportunity for competing consolidators to end the exclusive SIP monopoly by competing on the technology and data services they offer. A competitive environment should lead to the use of new, updated technology in a more expedited fashion than occurs today. The Commission believes that competing consolidators will develop different consolidated market data products and services for their subscribers and will compete on the basis of latency, resiliency, services and products offered, and other factors, including price. The Commission agrees with the commenters who stated that competition will lower market data costs, reduce latency, and provide better quality data.605 Due to the structure of the decentralized consolidation model, the Commission believes that competing consolidators and self-aggregators will incentives for the SRO operators of the SIPs to make such improvements. See SIFMA Letter at 3. The commenter also noted the ‘‘inherent conflicts of interest in the existing exclusive SIP model.’’ Id. at 5. 604 See McKay Letter at 2; MIAX Letter at 1; NovaSparks Letter at 1 (‘‘[A] wide variety of trading firms consolidate this data and we believe several vendors will soon become Competing Consolidator.’’). See also Miami International Holdings Announces That It Is Evaluating Registration as a Competing Consolidator, dated Nov. 18, 2020, available at https:// www.miaxoptions.com/press-releases. The Commission notes that Virtu Financial submitted a comment letter on a proposed rule change in which it expressed interest in establishing a competing consolidator. See letter from Douglas A. Cifu, Chief Executive Officer, Virtu Financial, to Vanessa A. Countryman, Secretary, Commission, dated Aug. 28, 2020, available at https://www.sec.gov/ comments/sr-nyse-2020-05/srnyse202005-7707480222891.pdf. 605 See Committee on Capital Markets Regulation Letter at 3; Fidelity Letter at 9; BestEx Research Letter at 1; ACTIV Financial Letter at 1; SIFMA Letter at 5, 12; State Street Letter at 3; IntelligentCross Letter at 5; ICI Letter at 4, 10; RBC Letter at 6; DOJ Letter at 5; Wellington Letter at 1; Capital Group Letter at 4. E:\FR\FM\09APR2.SGM 09APR2 18642 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations significantly reduce the geographic, aggregation, and transmission latency differentials that exist between SIP data and proprietary data. With respect to geographic latency, competing consolidators will be able to deliver consolidated market data products directly to subscribers because such data will no longer be required to travel several miles to a separate location for consolidation by the exclusive SIPs. 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 in Mahwah, NJ, and the Nasdaq UTP SIP data center in Carteret, NJ, market participants located outside of these data centers should receive consolidated market data at reduced geographic latencies. With respect to aggregation latency, competition will incentivize competing consolidators to minimize the amount of time it takes to aggregate SRO data into consolidated market data products. Competition will also incentivize competing consolidators to reduce transmission latency because they will not be restricted to the transmission methods mandated by the Equity Data Plans; 606 therefore, they can compete based on the efficiency of their delivery of consolidated market data products. Even if a competing consolidator chooses not to consolidate data at its users’ data centers, the Commission believes the users may still benefit from reduced aggregation and transmission latencies because competing consolidators will be incentivized to use the latest aggregation and transmission mechanisms as a means to attract subscribers. The Commission believes that the competition fostered by the new model will enhance the speed and quality of the collection, consolidation, and dissemination of consolidated market data. For example, competing consolidators could seek to provide faster consolidation times, reduce transmission and connectivity latency, provide greater connectivity bandwidth, and reduce connectivity fees. Several commenters agreed that competition will enhance the national market system.607 606 As described in the Proposing Release, the transmission methods mandated by the Equity Data Plans typically rely on transmission options that are slower than competitive options. See Proposing Release, 85 FR at 16767. 607 See Committee on Capital Markets Regulation Letter at 3; Fidelity Letter at 9; BestEx Research Letter at 1; ACTIV Financial Letter at 1; SIFMA Letter at 5, 12; State Street Letter at 3; IntelligentCross Letter at 5; ICI Letter at 4, 10; RBC Letter at 6; DOJ Letter at 5; Wellington Letter at 1; Capital Group Letter at 4. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission recognizes that some market participants that require the lowest possible latency and additional (e.g., order-by-order data) content may continue to use proprietary data feeds for certain trading applications. However, for applications that do not require additional content beyond the scope of new core data, the Commission believes that, once operating in a competitive landscape with the requirement that data be made available ‘‘in the same manner and using the same methods, including all methods of access and the same format,’’ 608 latency alone will not be a compelling reason to subscribe to proprietary data.609 As affirmed by commenters, the Commission believes the model’s significant improvements to the latency and content of consolidated market data products will enhance the usefulness of the data provided to users under the national market system. The rules adopted for the decentralized consolidation model have been designed to avoid ‘‘gaming and fraud’’ 610 and to ensure the accuracy and completeness of consolidated market data. Competing consolidators and self-aggregators will be regulated entities, which will help monitoring efforts regarding the accuracy and 608 Rule 603(b) of Regulation NMS. See infra Section III.B.9. 609 The Commission recognizes that there will be a small ‘‘extra hop’’ for competing consolidators that could result in a small amount of additional latency as compared to proprietary data because competing consolidators must collect, consolidate, and disseminate consolidated market data products to end users. However, the extra hop will be significantly less than the geographic latency that currently exists with the exclusive SIPs. The extra hop refers to the need to transmit data within a data center, a span of feet, as compared to geographic latency among geographically diverse data centers, a span of miles. More specifically, a competing consolidator that chooses to collect, consolidate, and disseminate market data within the same data center as its end-users will only have to disseminate consolidated market data within the data center, while exclusive SIPs must collect data from geographically dispersed SRO data centers, and consolidate and disseminate consolidated market data to end-users in other data centers. If a competing consolidator does not consolidate data at its users’ data centers, its end-users may still benefit from reduced aggregation and transmission latencies due to the competitive aspect of the decentralized consolidated model. Further, the amount of latency that may result from using competing consolidators will depend upon other technical choices and competencies of the competing consolidator (i.e., a competing consolidator may choose to use the most technologically advanced aggregation and transmission technologies and therefore narrow its latency differential with proprietary data; conversely, a decision to use less state-of-the-art technology could widen this latency differential while potentially lowering costs to users). Selfaggregators would not have the extra hop because they will be collecting and consolidating this data for themselves. See infra Section III.D.2(d). 610 Kubitz Letter at 1. PO 00000 Frm 00048 Fmt 4701 Sfmt 4700 completeness of consolidated market data. Competing consolidators are required to register with the Commission pursuant to Rule 614 and will be subject to Commission oversight. In addition, self-aggregators, which must be registered entities—i.e., brokerdealers, national securities exchanges, national securities associations, or RIAs—will be subject to Commission oversight. Under Rule 614, all competing consolidators will be subject to standards with respect to the promptness, accuracy, reliability, and fairness of their consolidated market data products’ distribution.611 Form CC will require competing consolidators to provide operational transparency, and Rule 614(d) will require a competing consolidator to publish monthly performance metrics and other information concerning performance and operations.612 These requirements should help to ensure that consolidated market data products are provided in a prompt, accurate, and reliable manner by providing transparency to subscribers and potential subscribers into a competing consolidator’s performance and operations. Because these provisions require that all competing consolidators disclose the same information, they will allow market participants to evaluate and compare competing consolidators more easily based on cost, service, and performance. These requirements are designed to establish a system whereby a competing consolidator will have to provide consolidated market data products with competitive latency, but also reliably and accurately, and in a cost-effective manner in order to attract and maintain its subscriber base. The Commission does not believe that the decentralized consolidation model will be impractical or increase market fragmentation. While the decentralized consolidation model introduces multiple competing consolidators disseminating consolidated market data products, today, market participants utilize data products developed by multiple data vendors, exchanges, and the exclusive SIPs. The decentralized consolidation model does not introduce additional fragmentation in the market data landscape. 611 Under Section 11A(b)(3)(B) of the Exchange Act, 15 U.S.C. 78k–1(b)(3)(B), the Commission will be able to grant the registration of a competing consolidator only if the Commission is able to find, among other things, that the competing consolidator is so organized, and has the capacity, to be able to assure the prompt, accurate, and reliable performance of its functions and to operate fairly and efficiently as a SIP. 612 See infra Section III.C.8. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations In the Proposing Release, the Commission described the significant latencies that exist in the centralized consolidation model and explained specifically how the decentralized consolidation model will address them.613 Further, the Commission discussed how the proposed rules will address data quality, availability, and reliability 614 and the disclosure of fees set by competing consolidators. The Commission provided information demonstrating how the proposed rules would achieve the Commission’s goal of modernizing the national market system so that consolidated market data is disseminated to market participants in an accurate, reliable, prompt, and fair manner. 3. Comments on the Viability of the Decentralized Consolidation Model Commenters questioned whether enough competing consolidators would enter the market to make the decentralized consolidation model viable.615 Some commenters stated that the success of the model depends on the creation of multiple competing consolidators.616 Several of these commenters stated that the proposal lacked support to assume that multiple competing consolidators would enter the market.617 One commenter stated that 613 See Proposing Release, 85 FR at 16768. See also supra note 533 (discussing the latencies that exist in the current centralized consolidated model). See also infra Section III.B.5 (discussing comments on the decentralized consolidation model’s impact on latency). 614 See Proposing Release, 85 FR at 16782. See infra Section III.C.8 (discussing competing consolidator responsibilities under Rule 614). 615 See Nasdaq Letter IV at 23–26; NYSE Letter II at 9, 13–18; IDS Letter I at 3, 4, 7–8, 9; STANY Letter II at 6; Data Boiler Letter I at 46; Angel Letter at 18, 20. 616 See IDS Letter I at 3, 7; NYSE Letter II at 3, 13; Nasdaq Letter IV at 25; Equity Markets Association Letter at 3 (quoting NYSE Letter II at 3). 617 See NYSE Letter II at 9, 13–18; IDS Letter I at 3–4. One commenter said that the Commission should have considered the European Union’s efforts to create a consolidated tape with competing consolidators, noting that no such competing consolidators have registered. Angel Letter at 20. This commenter said that the proposal’s lack of discussion of other jurisdictions as alternatives was a potential violation of the APA. See id. at 21. The Commission does not believe the European Union’s experience with developing a consolidated tape is relevant for purposes of this proposal. The market and regulatory structure of the European Union are different than they are in the United States. In December 2019, the European Securities and Markets Authority (‘‘ESMA’’) released a report describing the obstacles to developing a consolidated tape in the EU, including the lack of data quality for OTC transactions, the need for a consolidated tape provider to have to negotiate contracts for data from 170 trading venues and approved publication arrangements, and certain regulatory requirements. See ESMA, MiFID II/ VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 the proposal assumes there would be a competitive market but lacks support for its assumption that there would be multiple competing consolidators.618 This commenter said that a competitive market could not arise if only a few competing consolidators were established, resulting in competing consolidators charging a premium for consolidated market data.619 The commenter said that the proposal did not consider this possibility, nor did it reasonably consider whether any competing consolidators would register, their viability, and the costs to investors and other market participants if the competing consolidators ceased operating.620 One commenter said that there may be few competing consolidators because ‘‘SROs or other firms may have cost or other economic advantages (e.g., scale or scope economies) not enjoyed by other potential consolidators . . .’’ resulting in competition insufficient to achieve the proposal’s goals.621 Two other commenters, however, stated that the proposal incorrectly presumed the willingness of SROs to become MiFIR Review Report No. 1: On the development in prices for pre- and post-trade data and on the consolidated tape for equity instruments (Dec. 5, 2019), available at https://www.esma.europa.eu/ sites/default/files/library/mifid_ii_mifir_review_ report_no_1_on_prices_for_market_data_and_the_ equity_ct.pdf. See also European Commission, The Study on the Creation of an EU Consolidated Tape (Sept. 2020), available at http:// www.marketstructure.co.uk/wp-content/uploads/ Full-Report--The-Study-on-the-Creation-of-an-EUConsolidated-Tape.pdf. The U.S. equity markets do not face the same issues and have vast experience in creating consolidated market data. 618 See IDS Letter I at 7. See also NYSE Letter II at 13. This commenter said that the success of the proposed decentralized consolidation model ‘‘rests entirely on unfounded assumptions regarding the appearance of a market for competing consolidators . . .’’ Id. at 3. 619 See IDS Letter I at 7. This commenter, a market data aggregation firm, also said that it would be very costly for it to become a competing consolidator because it would have to develop a new infrastructure to collect, consolidate, and disseminate NMS data since its method of data consolidation and dissemination is ‘‘fundamentally different’’ than that used by the exclusive SIPs. See IDS Letter II at 1, 2–3. 620 See IDS Letter I at 3, 9. The commenter also said that the Commission failed to meet its burden to examine economic costs and inefficiencies of the proposal because it did not consider the possibility of a delayed implementation, or that it may never be implemented or that it may cease to be viable. See also IDS Letter II at 3. The commenter stated that the proposal did not discuss contingencies in the event of such occurrences. See IDS Letter I at 8. See also Nasdaq Letter IV at 24 (stating that the Commission did not imagine an environment in which only a few competing consolidators survive the initial period of entry). 621 Nasdaq Letter IV at 25. See also Angel Letter at 20 (stating the only competing consolidators will be the two existing exclusive SIPs because only they can afford to comply with Regulation SCI). PO 00000 Frm 00049 Fmt 4701 Sfmt 4700 18643 competing consolidators.622 One of the commenters stated that the proposal lacked analysis supporting why SROs would want to incur the costs of becoming a competing consolidator, why the SROs that operate the existing exclusive SIPs would want to become competing consolidators, and how exchange-affiliated competing consolidators could avoid being deemed a facility of an exchange.623 Finally, one commenter questioned the proposal’s assumption that current market data vendors would choose to become competing consolidators.624 The commenter said data vendors that want to continue to receive proprietary data from an SRO would have to register as competing consolidators, or they would have to subscribe to a competing consolidator to purchase this data. The commenter said the price of this data could increase, causing a data vendor’s customer base to decrease. The commenter said the proposal lacks analysis of whether the added costs to vendors outweigh the benefits to vendors and said the proposal would cause data vendors to leave the market.625 Three commenters stated that large broker-dealers would opt to become self-aggregators instead of becoming competing consolidators or being subscribers of competing consolidators.626 Because one commenter believed that larger brokerdealers would likely become selfaggregators, the commenter said that the remaining potential customer base for competing consolidators would be less likely to need faster and more comprehensive market data and thus would not benefit from the introduction of competing consolidators.627 Another 622 See NYSE Letter II at 17–18; IDS Letter I at 3– 4. 623 See NYSE Letter II at 17–18. See also IDS Letter I at 3–4, 16 (stating that because the proposal did not establish criteria to determine when a competing consolidator would be deemed a facility of an exchange, there was no reasoned basis to assume that half of the competing consolidators would be exchanges); infra Section III.C.7(a)(iv) (discussing competing consolidators affiliated with exchanges). 624 See NYSE Letter II at 18. 17 CFR 242.614(a)(1) (Rule 614(a)(1)) provides that only entities that receive information with respect to quotations for and transactions in NMS stocks directly from a national securities exchange or national securities association pursuant to an effective NMS plan, and generate consolidated market data for dissemination, will be required to register as competing consolidators. See infra Section III.C.7(a)(iii) (discussing this change). 625 See NYSE Letter II at 18. 626 See id. at 17; Nasdaq Letter IV at 2, 24; STANY Letter II at 7 (‘‘[S]elf-aggregators may diminish what could potentially be a thin field.’’). 627 See NYSE Letter II at 17. See also Nasdaq Letter IV at 2. E:\FR\FM\09APR2.SGM 09APR2 18644 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations commenter stated that less than 1% of exclusive SIP customers are proprietary DOB feed customers, and because proprietary data feeds would continue to be faster than competing consolidators, the potential increase in subscribers for competing consolidators over the total number of professional SIP data subscribers would amount to a fraction of the 1%.628 The commenter stated that the Commission’s assumption that there would be 12 competing consolidators did not consider that many users of NMS information would become selfaggregators and not subscribers of competing consolidators.629 The Commission believes that the decentralized consolidation model is a viable data dissemination model and that a sufficient number of competing consolidators will register to provide data consolidation and dissemination services to market participants due to significant anticipated demand from market participants for consolidated market data products that will be provided competitively, with lower latency, enhanced content, and competitive pricing.630 Competing consolidators will be the only entities permitted to receive the data content underlying consolidated market data at the prices set by the Equity Data Plans, which will be filed with the Commission pursuant to Rule 608 and reviewed for compliance with statutory and regulatory standards,631 and permitted to sell consolidated market data products to customers, and the prices set by competing consolidators will be subject to competitive forces under the decentralized consolidation model. As consolidated market data products, including connectivity to competing consolidators, would be subject to competitive pricing, they would likely be offered at lower prices than the current equivalent proprietary data products.632 The Commission 628 See Nasdaq Letter III at 7. Nasdaq Letter IV at 24. One commenter also said that customers that decide to self-aggregate instead of subscribe to a competing consolidator would reduce the number of potential subscribers for competing consolidators. Accordingly, the potential revenues of competing consolidators would be reduced as well. IDS Letter I at 14. 630 See infra Section V.C.2(a)(ii)c. The Commission estimates that approximately eight entities, including SRO affiliates and broker-dealers that currently aggregate for themselves, will become competing consolidators. See infra Section IV.C.1(b). Some commenters responded that they are considering registering as competing consolidators. See supra note 604. The Commission believes that even if a smaller number of competing consolidators enters the market, there will be some degree of competition, which will yield benefits. See infra Section V.C.2(a)(ii). 631 See infra Section III.E.2(c). 632 See infra Section III.B.6. 629 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 believes that competitive pricing, combined with market participants’ need for consolidated market data, will drive demand for competing consolidators. The decentralized consolidation model will foster a competitive environment, which should provide benefits to market participants even if there is a small number of competing consolidators.633 Competing consolidators will be able to register and begin operations at any time.634 This competitive dynamic should enhance the operation of the national market system by incentivizing competing consolidators to continually seek to provide optimal consolidated market data products for end users. In addition, the Commission believes that because market participants require consolidated market data to participate in the market and to comply with regulatory requirements, such as Rule 611 and Rule 603(c), competing consolidators will enter the market to service this demand. The Commission believes that market participants will continue to need consolidated market data under the decentralized consolidation model because a significant number of non-professional subscribers and other market participants use SIP data today and likely will not become self-aggregators, thereby promoting the viability of this model. The Equity Data Plans report significant numbers of subscribers for SIP data. For example, the CTA Plan reports 5.4 million non-professional subscribers, 290,000 professional subscribers, 368 real-time internal use only vendors, 234 real-time external vendors, and 327 non-display vendors in the second quarter of 2020.635 The Nasdaq UTP Plan reports 5.7 million non-professional subscribers, 280,000 professional subscribers, 316 real-time only vendors, 252 real-time external vendors and 319 non-display vendors for second quarter of 2020.636 Many of these current exclusive SIP subscribers are likely to need the data services of a competing consolidator, which 633 See 634 See supra note 630. infra Section III.C.7. See also infra Section III.H. 635 See CTA Plan, CTA Tape A & B Subscriber/ Household Metrics: CTA Q2 2020, available at https://www.ctaplan.com/publicdocs/ctaplan/ CTAPLAN_Population_Metrics_2Q2020.pdf (last accessed Nov. 27, 2020) (describing the different categories of subscribers). 636 See UTP Plan, UTP Q2 2020 U.S. Equities Securities Information Processor (UTP SIP) Key Quarterly Operating Metrics of TAP: Tape C Subscriber/Household Metrics, available at http:// www.utpplan.com/DOC/UTP_2020_Q2_Stats_with_ Processor_Stats.pdf (last accessed Nov. 27, 2020) (describing the different categories of subscribers). PO 00000 Frm 00050 Fmt 4701 Sfmt 4700 indicates the potential demand for consolidated market data products. Further, some market participants that currently rely on proprietary market data feeds may decide to utilize a competing consolidator because the Commission believes that competing consolidators will offer faster and more comprehensive alternatives to current exclusive SIP and proprietary feeds at competitive pricing. Three commenters suggested that large broker-dealers that self-aggregate would either not become competing consolidators or would not become subscribers of competing consolidators.637 Some market participants today purchase exchange proprietary data products and aggregate such data for their own uses. There is no regulatory requirement to purchase proprietary data, but a market has developed for these enhanced products. The Commission believes that competing consolidators, operating in a decentralized consolidation model, will improve the latencies that exist in the current centralized consolidation model. The competitive environment fostered by the decentralized consolidation model should result in greater innovation and the timely adoption of updated technologies into the aggregation and transmission of consolidated market data.638 Further, the Commission believes that the additional content that will be available in consolidated market data products may also serve some market participants that purchase proprietary data. As a result, the Commission believes that some market participants may choose to use consolidated market data products disseminated by competing consolidators rather than aggregate it themselves; for example, with the improved latencies of a competing consolidator, it could be more convenient or cheaper for certain market participants to subscribe to a competing consolidator than to self-aggregate.639 Further, the Commission believes that it is possible that a broker-dealer or RIA that self-aggregates could decide to become a competing consolidator. For example, a firm may decide that the benefits of entering the competing consolidator business, such as 637 See supra note 626. supra note 533. 639 Additionally, self-aggregators are permitted to generate consolidated market data solely for internal use. A firm that wants to generate and disseminate consolidated market data to its customers will have to purchase the consolidated market data from a competing consolidator rather than self-aggregate to avoid the internal use limitation or would have to purchase proprietary data feeds. See Rule 600(b)(83); see also infra Section III.D.2. 638 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations generating a new revenue stream or providing services to its customers by disseminating consolidated market data products to them, exceed the costs of becoming a competing consolidator.640 One commenter stated that unresolved issues regarding the regulatory framework for competing consolidators would deter competing consolidators from registering, including whether and when the Commission would approve an effective national market system plan.641 The commenter said the proposal ‘‘does not adequately consider or analyze the structural requirements or potential revenue and cost streams for competing consolidators or the implications of this model on costs to market participants . . .’’ 642 The commenter said the proposal raises questions regarding the fees competing consolidators can charge and the value they add to subscribers.643 Similarly, another commenter stated that ‘‘[t]he stability and viability of any potential competing consolidator’s revenues are entirely dependent on outside conditions, including the yet-tobe determined fees set by NMS plans . . . . ’ ’’ 644 While the Commission acknowledges that the future fees for data content underlying consolidated market data have not been developed or proposed by the effective national market system plan(s),645 the Commission believes that this should not be an impediment to potential competing consolidators evaluating whether to register. The fees for the data content underlying consolidated market data will be established before competing consolidators can begin to register 646 640 See letter from Douglas A. Cifu, Chief Executive Officer, Virtu Financial, to Vanessa A. Countryman, Secretary, Commission, dated Aug. 28, 2020, at 4, available at https://www.sec.gov/ comments/sr-nyse-2020-05/srnyse202005-7707480222891.pdf (expressing interest in establishing a competing consolidator); infra Section V.C.2(d)(i). 641 The commenter said that no potential competing consolidator would register and incur the attendant costs of becoming a competing consolidator before the Commission approves the effective national market system plan. The commenter said, ‘‘[n]o rational entity would expend the effort to create a competing consolidator if it cannot estimate the relevant costs and benefits.’’ IDS Letter I at 8. The commenter also said that without knowing the number of competitors and customers and the fees it can charge, a potential competing consolidator cannot estimate whether its revenue would exceed its costs. See IDS Letter I at 14. 642 Id. at 3. 643 See id. 644 NYSE Letter II at 14. See also id. at 15 (stating that potential competing consolidators would be deterred from registering because they would not know the cost of market data or what they could charge for consolidated market data). 645 See infra Section III.E.2(c). 646 See infra Section III.H. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 and will be the same for all data users, so competing consolidators can evaluate how they will compete on the services they provide to subscribers, such as their aggregation and transmission services for consolidated market data products. Further, the Commission believes that there will be downward pressure on the fees for the data content underlying consolidated market data as compared to fees for proprietary data.647 Potential competing consolidators can evaluate the potential subscriber pool 648 of market participants that do not self-aggregate, including current SIP users, and current exclusive SIP metrics to evaluate potential technology needs.649 Finally, one commenter stated that the Commission did not address the possibility that a competing consolidator could begin operations, the exclusive SIPs would be dismantled, and the competing consolidator could go out of business and cease operations by publishing a notice of its cessation of operations on Form CC.650 This commenter also stated that the Commission did not ‘‘meaningfully rebut’’ the reasons why competing consolidators would not appear in sufficient numbers, qualifications, and duration to produce the proposed decentralized consolidation model 651 and that the Commission assumes, without relying on underlying data, that competing consolidators would be able to operate successfully.652 The commenter said this lack of analysis was a violation of the APA.653 Similarly, another commenter questioned what would happen if a number of competing consolidators ceased operations, which would result in the system not being viable.654 This commenter compared competing consolidators that could terminate operations by filing a Form CC to the exclusive SIPs, which are obligated to perform their duties.655 The commenter also stated that the proposal 647 See infra Section III.E.2(c). supra note 635 and accompanying text. 649 See, e.g., CTA Plan, Key Operating Metrics of Tape A&B U.S. Equities Securities Information Processor (CTA SIP), available at https:// www.ctaplan.com/publicdocs/ctaplan/CTAPLAN_ Processor_Metrics_3Q2020.pdf (last accessed Nov. 27, 2020) (providing peak messages per second, 100 milliseconds, and 10 milliseconds and peak transactions and capacity transactions per day and latency information for Tapes A and B); UTP Q3 2020—July Tape C Quote Metrics, available at http://www.utpplan.com/DOC/UTP_website_ Statistics_Q3-2020-July.pdf (last accessed Nov. 27, 2020) (for Tape C). 650 See NYSE Letter II at 13, n. 42. 651 Id. 652 See id. 653 See id. at 14. 654 See IDS Letter I at 9. 655 See id. 648 See PO 00000 Frm 00051 Fmt 4701 Sfmt 4700 18645 failed to consider the costs to investors and other market participants if a competing consolidator ceased to operate.656 The Commission believes that it is highly unlikely that all competing consolidators would cease operations because market participants require consolidated market data to trade, both for competitive purposes and to comply with regulatory requirements such as best execution, the Vendor Display Rule, and the Order Protection Rule. Market participants that do not selfaggregate will not be able to trade without the consolidated market data products produced by competing consolidators. This demand for consolidated market data will ensure that competing consolidators, as the providers of consolidated market data products, are operating in the national market system at all times. If one competing consolidator ceases to operate, the Commission believes that other competing consolidators will be available to provide consolidated market data products to the customers of the competing consolidator that has ceased operations or that new entrants would quickly arise to fill any gaps in supply. Finally, consistent with the requirements under the APA, the Commission discussed in the Proposing Release why it believes that competing consolidators would begin operations in the decentralized consolidation model and why they would be viable.657 4. Comments on Conflicts of Interest Three commenters said the proposed decentralized consolidation model would mitigate the conflicts of interest that exist in the current centralized consolidation model, in which the exchanges operate the exclusive SIPs while also selling proprietary market data products that compete with SIP data.658 Two of the commenters highlighted high market data costs and latency as two effects of the conflicts, suggesting that eliminating such conflicts would help make competing consolidators’ data dissemination a ‘‘viable alternative’’ to proprietary feeds.659 Another commenter stated that the proposal would ‘‘replace an outdated and conflicted monopoly system to deliver core data with one that is competitive and better able to adapt to future changes and investors’ needs.’’ 660 The Commission agrees that 656 See id. at 3. Proposing Release, 85 FR at 16776. 658 See SIFMA Letter at 5; Fidelity Letter at 3, 10; IEX Letter at 1, 2. 659 See SIFMA Letter at 5; Fidelity Letter at 3. 660 IEX Letter at 2. 657 See E:\FR\FM\09APR2.SGM 09APR2 18646 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations the decentralized consolidation model will help mitigate the conflicts of interest inherent in the existing exclusive SIP model by allowing independent entities in the form of competing consolidators and selfaggregators, rather than SRO-affiliated exclusive SIPs, to collect, consolidate, and disseminate consolidated market data. 5. Comments on Latency Several commenters stated that the proposed decentralized consolidation model could reduce latency in the dissemination of consolidated market data.661 One commenter stated that the decentralized consolidation model would allow more timely delivery of consolidated market data.662 Another commenter said the proposal’s content and latency reforms ‘‘go a long way.’’ 663 One commenter stated that the proposal’s changes to latency would ‘‘modernize market data infrastructure.’’ 664 This commenter said that competition among competing consolidators would reduce geographic and aggregation latency.665 Other commenters also noted the proposed decentralized consolidation model’s potential beneficial effects on geographic latency.666 One commenter stated that the proposal would reduce geographic latency because exchange data would no longer be aggregated by the exclusive SIPs in two locations, and competing consolidator subscribers could receive consolidated data within the data center of the competing consolidator.667 Two commenters said that the proposed decentralized consolidation model could reduce the geographic, aggregation, and transmission latency differentials between proprietary market data feeds and SIP data.668 Other commenters also noted the proposed decentralized consolidation model’s potential to 661 See AHSAT Letter at 1, 3; BlackRock Letter at 5; DOJ Letter at 2–3, 4; Fidelity Letter at 3, 10; MEMX Letter at 6, 7, 8; SIFMA Letter at 1, 5, 11; Wellington Letter at 1; ICI Letter at 4, 10; ACS Execution Services Letter at 5; Better Markets Letter at 3; Capital Group Letter at 4; IEX Letter at 3. 662 See DOJ Letter at 4. 663 AHSAT Letter at 1. 664 SIFMA Letter at 1. 665 See id. at 11. See also NovaSparks Letter at 1 (stating that competition will encourage competing consolidators to deliver excellent performance). 666 See MEMX Letter at 6, 7, 8; ICI Letter at 10; BlackRock Letter at 5. 667 See ICI Letter at 10. 668 See MEMX Letter at 6, 8; BlackRock Letter at 5. See also NBIM Letter at 6 (stating that it uses direct feeds to reflect the ‘‘physical reality’’ of the broker-dealers whose performance it needs to evaluate and that the proposal would provide an opportunity for competitive processors located in the same data centers as most institutional brokerdealers to emerge). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 reduce both the latency and the content differentials between proprietary market data feeds and SIP data.669 However, several commenters questioned whether the decentralized consolidation model could meaningfully impact the latency of consolidated market data.670 One commenter said that there was no guarantee that competition would result in improved latency.671 Another said that exchanges could increase the latency gap between proprietary data and consolidated market data with frequent upgrades.672 One commenter stated that the proposal failed to explain how the decentralized consolidation model would reduce latency and asked the Commission to explain why the proposed model is preferable to the distributed SIP alternative, which would address geographic latency.673 Another commenter said that the proposed decentralized consolidation model is inconsistent with the Commission’s obligations under the APA because it is not based on current market conditions and relies instead on ‘‘outdated discussions and panelist comments’’ from the Market Data Roundtable.674 The commenter said that changes to market data infrastructure and governance have since reduced the latency differentials.675 The Commission believes that fostering a competitive environment for the collection, consolidation, and dissemination of consolidated market data will result in such data being delivered to market participants in a decentralized manner with improved geographic, aggregation, and 669 See ACS Execution Services Letter at 5 (stating that the model would reduce content and latency differentials between SIP and proprietary market data); DOJ at 2–3, 4 (supporting the proposal’s efforts to address the granularity and latency differentials between SIP and proprietary market data). 670 See Cboe Letter at 23; Citadel Letter at 5; STANY Letter II at 5, 6; NYSE Letter II at 11, 22, 23; Nasdaq Letter IV at 49; Angel Letter at 18, 19; TD Ameritrade Letter at 12; FINRA Letter at 8; IDS Letter I at 15; Data Boiler Letter II at 2; Proof Trading Letter at 1. 671 See TD Ameritrade Letter at 12. 672 See Data Boiler Letter II at 2. 673 See Nasdaq Letter IV at 49. 674 NYSE Letter II at 9, 10, 23. Similarly, one commenter stated that the Commission solely relied on comments from the Market Data Roundtable to support its belief that the decentralized consolidation model would reduce transmission latency differentials between SIP and proprietary market data. See Nasdaq Letter IV at 45. 675 The commenter said that the Commission has ignored ‘‘the impact of significant changes to the SIP infrastructure already implemented by the SROs and to the governance of the national market systems that the Commission recently imposed, while overlooking the impressive performance of the existing system in a time of extreme market volatility.’’ NYSE Letter II at 10. PO 00000 Frm 00052 Fmt 4701 Sfmt 4700 transmission latencies. With respect to geographic latency, unlike the current exclusive centralized consolidation model, the decentralized consolidation model will allow the direct delivery of each SRO’s market data to competing consolidators and self-aggregators, and competing consolidators may be located in the same data center as their subscribers. This stands in stark contrast to today’s model where (a) one consolidator is located in one centralized data center while (b) a significant number (in some cases a majority) of subscribers are located in different data centers, and (c) each SRO’s market data is required to travel to the one centralized location to be aggregated, prior to (d) traveling to yet another data center for receipt and use by subscribers.676 In the decentralized consolidation model, SRO data will no longer be required to travel to a separate central location for consolidation by an exclusive SIP. Consolidation could 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. As one commenter stated, the physical location of a processor is critical.677 Furthermore, competition will incentivize competing consolidators to minimize latency and improve aggregation and transmission performance and services for consolidated market data products through the use of low-latency aggregation and transmission technologies.678 Competing consolidators and self-aggregators will not be restricted to the transmission methods mandated by the Equity Data Plans, and competing consolidators will compete with each other based on the efficiency of their aggregation of raw SRO data to generate consolidated market data. In contrast to today’s noncompetitive exclusive SIPs, the Commission believes that competing consolidators will be incentivized to 676 Today, each exclusive SIP must collect data from geographically dispersed SRO data centers, consolidate the data, and then disseminate the consolidated data from the exclusive SIP’s location to end-users, which are often in other locations, in a hub-and-spoke form of centralized consolidation that creates additional latency. See Proposing Release, 85 FR at 16765. 677 See NBIM Letter at 4. 678 See infra Section V.C.2(c) (discussing the effect of the decentralized consolidation model on innovation in data delivery and reducing latency differentials). Although the exclusive SIPs have reduced their aggregation latencies and made other improvements, as the Commission stated above, there is currently no competition for consolidated market data, and the technology for the distribution of SIP data has continued to meaningfully lag behind technologies utilized across the private competitive data landscape. See supra Section III.B.2. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations make continued improvements.679 For example, competing consolidators will be incentivized to minimize the amount of time it takes to aggregate consolidated market data products; 680 reduce their transmission latency681 (e.g., by offering wireless connectivity through microwave or laser technology, currently offered by exchanges 682); reduce connectivity latency (e.g., by offering field-programmable gate array (‘‘FPGA’’) services 683); lower connectivity fees; enhance customer service; and enhance their technology and services to remain competitive. Competing consolidators providing consolidated market data products to clients for electronic trading will likely compete along all of these lines, similar to the manner in which the providers of proprietary data products have competed. Further, self-aggregators will be able to better utilize technologies to perform their aggregation and transmission functions. One commenter asserted that the proposed decentralized consolidation model assumed that competing consolidators would specialize in lower latency data but said that this assumption was accurate only if the SROs from which they receive data can offer low-latency connectivity.684 The commenter noted that the proposal 679 See text accompanying notes 602–603. The Commission notes that the Nasdaq UTP SIP revised its technology in the fourth quarter of 2016 to lower quote latency at the 99th percentile from 5,393 microseconds to 28 microseconds. In the same quarter, the CQS SIP’s 99th percentile of latency was 1,570 microseconds and it did not reduce that latency to below 100 microseconds until the third quarter of 2020. See Nasdaq UTP Q3 2020— September Tape C Quote Metrics, available at http://utpplan.com/DOC/UTP_website_Statistics_ Q3-2020-September.pdf (last accessed Nov. 27, 2020); Key Operating Metrics of Tape A&B U.S. Equities Securities Information Processor (CTA SIP), available at https://www.ctaplan.com/ publicdocs/ctaplan/CTAPLAN_Processor_Metrics_ 3Q2020.pdf (last accessed Nov. 27, 2020). 680 See SIFMA Letter at 11; BlackRock Letter at 5. 681 See ICI Letter at 10; BlackRock Letter at 5. 682 See, e.g., ICE Global Network: New Jersey Metro, available at https://www.theice.com/marketdata/connectivity-and-feeds/wireless/new-jerseymetro (last accessed Nov. 27. 2020); Nasdaq, Wireless Connectivity—Metro Millimeter Wave Frequently Asked Questions, available at https:// www.nasdaq.com/docs/2020/01/15/Metro_ Millimeter_Wave_FAQ.pdf (last accessed Nov. 27, 2020). 683 See NovaSparks Letter at 1. See also Nasdaq Equity Trader Alert #2015–194, ‘‘Nasdaq Reintroducing FPGA Order Entry Ports, Announcing Port and Pricing Updates for 2016,’’ available at https://www.nasdaqtrader.com/ TraderNews.aspx?id=ETA2015-194 (last accessed Nov. 27, 2020); Flanagan, Terry, Co-Location: How Close Can You Get?, MarketsMedia (Dec. 27, 2012), available at https://www.marketsmedia.com/colocation-how-close-can-you-get/ (explaining the use of FPGA to reduce co-location latencies). 684 See IDS Letter I at 15. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 could result in the discontinuation of low-latency connectivity options by SROs and said that the Commission did not assess the impact of the proposal on this connectivity market.685 The Commission believes that this comment fails to recognize the ways in which the proposal addressed the connectivity market. In specifying ‘‘by the same means, and on the same terms,’’ at a minimum, the Commission has prohibited an SRO from providing superior connectivity for proprietary data products than it provides for NMS data. The Commission further addresses these concerns below.686 Some commenters stated that competing consolidators would not eliminate geographic latency.687 One commenter stated that geographic latency would still exist despite implementation of the proposed decentralized consolidation model.688 The commenter stated that incremental reductions to transmission latency would be the most the decentralized consolidation model could achieve but that the Commission failed to analyze whether such reductions would be worth the cost of the proposal.689 Another commenter stated that competing consolidators would still be subject to geographic and operational latency, which would result in competing consolidators located within the same data center disseminating differing prices.690 Other commenters stated that the proposed decentralized consolidation model would reduce the latencies associated with the dissemination of SIP data.691 The Commission agrees and believes that the model will significantly reduce geographic latency because, as described above, it will allow consolidation of market data to occur at the data center where a data end-user is located and end the consolidation of data at a single location where end-users may not be located. While full elimination of geographic latency for NMS data is impossible in a marketplace where different markets are located in different geographic locations, the reduction of latency caused by a centralized consolidation requirement is desirable and will result 685 See id. infra Section III.B.9. 687 See Citadel Letter at 5; STANY Letter II at 6; NYSE Letter II at 11, 23. 688 See NYSE Letter II at 23. 689 See id. at 11. 690 See Angel Letter at 18. 691 See AHSAT Letter at 1; BlackRock Letter at 5; DOJ Letter at 2–3, 4; Fidelity Letter at 10; MEMX Letter at 3, 6, 7, 8; SIFMA Letter at 1, 11; Wellington Letter at 1; ICI Letter at 10; ACS Execution Services Letter at 5; Better Markets Letter at 3. 18647 in significant latency benefits. If a competing consolidator chooses not to provide a consolidation service in all of the data centers of its users, the Commission believes the users will still benefit from reduced aggregation and transmission latencies resulting from competition among competing consolidators. Finally, one commenter said that the current latency of the exclusive SIPs is sufficient for agency trading and doubted that any latency improvements would benefit long-term investors.692 However, several commenters representing long-term investors expressed the view that the current latency of the SIPs was not sufficient to meet their needs.693 While the current latency of the exclusive SIPs may be sufficient for some retail investors and other visual consumers of market data, the Commission believes that the reduction in latency should enhance trading by the brokers who service retail investors by allowing them to evaluate the markets quickly, adjust their quotes, trade more efficiently and competitively, and facilitate best execution. Furthermore, the addition of new data content in consolidated market data and the competitive environment fostered by the decentralized consolidation model may allow agency brokers to purchase consolidated market data products, which may be offered at a lower cost than current proprietary data, rather than proprietary data feeds, which could result in cost savings for investors. While some commenters stated the proposed decentralized consolidation model would have little, if any, impact on latency,694 other commenters said that the decentralized consolidation model would perpetuate latency differentials.695 One commenter stated that competing consolidators would initiate a ‘‘costly arms race in speed,’’ 696 resulting in major market participants complaining about having to pay a premium for the fastest consolidator.697 One commenter said nothing in the proposal would address the Commission’s concerns expressed in the Proposing Release 698 about a ‘‘two- 686 See PO 00000 Frm 00053 Fmt 4701 Sfmt 4700 692 See Proof Trading Letter at 1. e.g., Capital Group Letter at 2, 4; Fidelity Letter at 2; State Street Letter at 2. 694 See supra note 670. 695 See Nasdaq Letter IV at 8, 23–24; NYSE Letter II at 22, 23; STANY Letter II at 6; Angel Letter at 19; FINRA Letter at 8–9. 696 Angel Letter at 19. 697 See id. 698 See Proposing Release, 85 FR at 16767–8. 693 See, E:\FR\FM\09APR2.SGM 09APR2 18648 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations tiered market data environment’’ 699 and argued that competing consolidators would create a multi-tiered market where market participants would be charged more for better products and faster services.700 Further, this commenter stated that competing consolidator subscribers, such as retail investors, would be at a latency disadvantage to self-aggregators that can generate an NBBO faster.701 This commenter also said that competing consolidators could even start a ‘‘new fragmentation war’’ for latency-sensitive subscribers that need to be co-located near their competing consolidator.702 The Commission believes that competing consolidators, based on subscriber demand, will develop different consolidated market data products for their subscribers and will compete on the basis of latency, resiliency, products and services offered, and other factors, including price. Subscribers also will be able to evaluate competing consolidators on the basis of system availability, network delay statistics, and data quality and system issues that will be publicly available in the Form CC and the performance statistics and operational information required to be disclosed by competing consolidators on a monthly basis by Rule 614. Different subscribers and trading applications may prioritize these factors differently. The Commission recognizes that there will be different needs for different participants and applications. However, the Commission does not believe that the realm of such differentiation and innovation should be exclusively limited to proprietary data products. As noted above, some commenters believed that the decentralized consolidation model would perpetuate latency differentials.703 Although there may be differences in the latencies among competing consolidators, the Commission believes the decentralized consolidation model will result in a net benefit in overall improved latencies for users of consolidated market data relative to the current model, and competitive market forces should 699 Nasdaq Letter IV at 23–24. This commenter also said that the ‘‘two-tiered’’ environment adds no cost to the majority of traders and believed that SIP data is sufficient for human traders who would not benefit from expensive infrastructure and that professional traders tend to opt for custom solutions rather than buying the same products anyway. Nasdaq Letter III at 5. 700 See Nasdaq Letter IV at 8. 701 See id. at 8, 42. 702 Id. at 26. 703 See Nasdaq Letter IV at 8, 23–24; NYSE Letter II at 22, 23; STANY Letter II at 6; Angel Letter at 19; FINRA Letter at 8–9. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 reduce the likelihood of an unlevel playing field. Two commenters stated that selfaggregators would have a latency advantage over competing consolidators, which would continue a two-tiered market data environment despite the presence of competitive forces.704 One of the commenters said that self-aggregators would continue to obtain and use market data faster than subscribers of competing consolidators.705 The commenter also said that the proposal lacked an analysis of the latency advantages of selfaggregators over competing consolidators.706 Another commenter said the decentralized consolidation model would ‘‘institutionalize latency inequities’’ through the use of selfaggregators and competing consolidators.707 The commenter stated that the latency advantage of selfaggregators over competing consolidators was not actually minor, nor did it believe that competing consolidators could minimize the latency differences.708 This commenter suggested that the Commission should either require the SROs to delay provision of market data to selfaggregators or allow only competing consolidators to provide consolidated market data.709 One other commenter stated that broker-dealers that offer algorithmic trading would not be able to utilize a competing consolidator due to the inherent latency of third party aggregation.710 As discussed more fully below,711 the Commission acknowledges that, unlike self-aggregators, competing consolidators would need to transmit consolidated market data to their customers,712 but does not believe that 704 See NYSE Letter II at 22, 23; STANY Letter II at 6. 705 See NYSE Letter II at 23. See also Healthy Markets Letter I at 2–3. 706 See NYSE Letter II at 23. 707 FINRA Letter at 8. 708 See id. at 8. The commenter also said that competing consolidators that aggregate data for themselves would have a latency advantage over their subscribers. Id. 709 See id. at 8–9. See also Healthy Markets Letter I at 3 (recommending that an exchange that wished to send data to its customer be required to do so ‘‘through an affiliate that would receive the same data, at the same time, on the same terms, and at the same cost as any competing SIP distributor’’). 710 See NBIM Letter at 4. This commenter, however, also stated that from an asset manager’s perspective, the proposal would reduce its needs for direct feeds if there is a competitive consolidated tape offering. Id. 711 See infra Section III.D.2(d). 712 In the Proposing Release, the Commission noted that self-aggregators could have a minor latency advantage over market participants that use a competing consolidator for their consolidated market data. See Proposing Release, 85 FR at 16791. PO 00000 Frm 00054 Fmt 4701 Sfmt 4700 this would lead to the development of a two-tiered market. Latency sensitive customers of competing consolidators are likely to be co-located in the same data centers as their competing consolidators, so the transmission time between the servers of the competing consolidator and its customer will be exceedingly small. The Commission expects that market participants that elect to aggregate consolidated market data, whether competing consolidators or self-aggregators, will innovate and compete aggressively on the efficiency and cost-effectiveness of their aggregation technologies to attract and retain subscribers (in the case of competing consolidators) or to facilitate their trading strategies (in the case of self-aggregators). The Commission believes that the development and implementation of the technology to collect, consolidate, and generate consolidated market data will create opportunities for latency efficiencies that are of substantially greater magnitude than the transmission time between the server of a competing consolidator and its customer. Competing consolidators, for example, may benefit from economies of scale that allow them to offer a very lowlatency product more cost effectively that an individual self-aggregator. In some cases, a competing consolidator may have a latency or cost advantage, and in others a self-aggregator may have such advantages.713 Competition may also impact the efficiency of choices.714 Therefore, the Commission does not believe that self-aggregators would necessarily have a systematic latency advantage over customers of competing consolidators. 6. Comments on the Potential Impact on Costs for Consolidated Market Data Several commenters said that the proposed decentralized consolidation model would result in a reduction in the cost of consolidated market data.715 One 713 Self-aggregators could have a cost advantage over market participants that receive consolidated market data from a competing consolidator because self-aggregators will not be required to compensate a competing consolidator for its services. A selfaggregator will of course incur expenses to generate consolidated market data including the costs of having the systems capability to collect, consolidate, and generate consolidated market data. It may use a vendor to establish connectivity to an SRO or to perform aggregation or other functions necessary for generating consolidated market data. As a result, any potential cost advantage of a selfaggregator over market participants that purchase consolidated market data from competing consolidators may not be significant. 714 See infra Section V.C.4(b). 715 See BestEx Research Letter at 4; DOJ Letter at 4, 5; Committee on Capital Markets Letter at 6; IntelligentCross Letter at 5; Better Markets Letter at E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations commenter stated that having multiple competing consolidators will reduce the prices of consolidated market data and proprietary market data feeds.716 Several commenters stated that competition could bring down fees or the cost of consolidated market data.717 One commenter said that competing forces should help market participants to access market data in a cost-effective manner,718 and another commenter said that competition would maintain fair prices.719 A commenter stated that the proposal would constrain the cost of consolidated market data through competition among consolidators and the requirement that the fees charged to competing consolidators by the SROs be subject to approval.720 Another commenter said the introduction of competing consolidators could impact aggregation and dissemination costs but stated that the proposal did not explain how competing consolidators would address exchange market data fees.721 However, other commenters expressed uncertainty about whether the proposed decentralized consolidation model would lower the cost of consolidated market data 722 or believed that the proposed model would increase costs.723 One commenter stated that the proposal lacked proof that competing consolidators would reduce market data costs, explaining that the proposal lacked sufficient guidance and analysis of how market data fees would be determined, how to define reasonable fees, and how the proposed model would control costs to participants.724 Another commenter said that competing 3; RBC Letter at 5–6; State Street Letter at 3; Fidelity Letter at 3, 9; Wellington Letter at 1; BlackRock Letter at 5; IEX Letter at 3. 716 See BestEx Research Letter at 4. 717 See DOJ Letter at 3–4 (‘‘The Department agrees with the SEC’s belief 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.’ ’’); Committee on Capital Markets Regulation Letter at 6; IntelligentCross Letter at 5; Fidelity Letter at 9; Wellington Letter at 1; ICI Letter at 4. 718 See Better Markets Letter at 3. 719 See RBC Letter at 5–6. 720 See IEX Letter at 3. 721 See Citadel Letter at 5. 722 See STANY Letter II at 5; Data Boiler Letter I at 46–47; TD Ameritrade Letter at 12; NYSE Letter II at 9. 723 See Cboe Letter at 23–24; FINRA Letter at 1, 2, 3, 4; Angel Letter at 21, 24; Kubitz Letter at 1; Nasdaq Letter IV at 23, 26, 47–48, 60; TD Ameritrade Letter at 15. 724 See STANY Letter II at 5. Similarly, another commenter said the proposal lacked a ‘‘reasoned analysis of expected costs and fees for market data under the decentralized consolidation model.’’ NYSE Letter II at 9. See also id. at 19–20. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 consolidators would not result in enough competition to lower the cost of consolidated market data,725 and a commenter stated that there was no guarantee that competition would improve costs.726 Commenters also stated that the proposed decentralized consolidation model would increase the cost of consolidated market data.727 One commenter stated that nothing in the proposal supported the conclusion that competing consolidators would price consolidated market data economically efficiently.728 This commenter argued that market data costs would be higher because differentiation would result in higher prices as differentiated competing consolidators would have fewer customers over which to spread their fixed costs.729 This commenter also said that the proposed increased content of consolidated market data could increase costs and burden retail investors who have no need for the more comprehensive data.730 The commenter also said that costs will be dependent on the effective national market system plan(s) and fee proposals.731 Another commenter said that retail investors could incur ‘‘exponentially more’’ costs as a result of the proposal.732 One commenter stated that product differentiation among competing consolidators could lead to an increase in prices as the fastest competing consolidators would charge more due to inelastic demand.733 This commenter also believed that only the existing SIPs could afford Regulation SCI compliance; therefore, as the only competing consolidators, they would charge oligopolistic prices for consolidated market data.734 This commenter also said that the real prices for consolidated market data are determined by what the Commission will permit the exchanges to charge, not competition.735 Several commenters stated that the proposed decentralized consolidation model would result in higher consolidated market data costs 736 as 725 See Data Boiler Letter I at 46–47. TD Ameritrade Letter at 12. 727 See Nasdaq Letter IV at 23, 26, 47–48, 60; TD Ameritrade Letter at 15. 728 See Nasdaq Letter IV at 23. 729 See id. at 26. 730 See id. at 60, n. 162. 731 See id. at 47–48. 732 TD Ameritrade Letter at 15. 733 See Angel Letter at 23. 734 See id. at 20. 735 See id. at 21. 736 See Cboe Letter at 23–24; Kubitz Letter at 1; Angel Letter at 21, 24; Nasdaq Letter IV at 27, 30, 60, n. 162; Data Boiler Letter II at 1. 726 See PO 00000 Frm 00055 Fmt 4701 Sfmt 4700 18649 well as other costs 737 for market participants. One commenter said that competing consolidators would ‘‘impose meaningful costs on investors’’ and said that the proposal did not explain how competing consolidators would charge fees to investors (such as whether they could charge additional fees for content or only for data delivery).738 This commenter also said that the proposal is deficient because ambiguities surrounding fees to be charged by competing consolidators to investors, as well as by SROs to competing consolidators, impede meaningful public comment and the ability of the Commission to perform a cost-benefit analysis as required under the APA.739 One commenter said that exchanges facing competitive pressure from shareholders will be forced to charge high prices to competing consolidators, which will then pass down these prices to their subscribers.740 Another commenter said that competing consolidators are ‘‘an intermediary between suppliers and users adding a layer of cost to the overall system.’’ 741 Two commenters stated that market participants would face increases in other costs as a result of the proposal.742 One of the commenters said that exchange trading costs for retail and other investors will increase due to reductions in SROs’ market data revenue as a result of the proposal.743 The other commenter said that costs would increase as a result of requiring broker-dealers (or other market participants) to subscribe and pay fees to multiple competing consolidators.744 The Commission recognizes that the fees for the data content underlying consolidated market data are unknown at this time and that such fees are a fixed cost for all competing consolidators to assess when developing their business plans. However, in response to the comments that expressed uncertainty about the direction of consolidated market data costs as a result of the proposal and those comments that stated that consolidated market data costs would increase for market participants, the 737 See FINRA Letter at 4; Nasdaq Letter IV at 5, 27, 30. 738 Cboe Letter at 23–24. 739 See Cboe Letter at 4. 740 See Angel Letter at 24. 741 Data Boiler Letter II at 1. 742 See FINRA Letter at 4; Nasdaq Letter IV at 5, 27, 30. 743 See Nasdaq Letter IV at 5, 27, 30. See also Clearpool Letter at 3 (suggesting safeguards to keep exchanges from increasing consolidated market data prices to recoup any revenue lost from the proposed requirement to sell core data to competing consolidators). 744 See FINRA Letter at 4. E:\FR\FM\09APR2.SGM 09APR2 18650 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Commission believes that competition will constrain the prices at which competing consolidators can sell consolidated market data products. Further, the Commission believes that there will be downward pressure on the fees for the data content underlying consolidated market data as compared to fees for proprietary data.745 Specifically, the new data content underlying consolidated market data (i.e., depth of book data, auction information, and odd-lot information) are currently elements of proprietary data products that are assessed under the statutory standards that apply to proprietary data, including Sections 6(b)(4), 15A(b)(5), and 11A(c)(1)(C)–(D) of the Exchange Act 746 and Rule 603(a) under Regulation NMS.747 These proprietary data fees are filed with the Commission pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder 748 and are effective upon filing with the Commission. Fees for the data content underlying consolidated market data will be assessed against the statutory standard that applies to fees proposed by the effective national market system plan(s), including Sections 11A(c)(1)(C)–(D) of the Exchange Act and Rule 603(a) under Regulation NMS. The proposed fees must be fair and reasonable and not unfairly discriminatory.749 The fees must be filed with the Commission pursuant to Rule 608 and will be published for public comment and thereafter, if consistent with the Exchange Act, must be approved by the Commission before becoming effective.750 In addition, a New Consolidated Data Plan has been filed that contains a proposed new governance structure and procedures that, if approved, will address some of the conflicts of interest inherent in the existing governance structure and will bring a more inclusive representation of market participants into the process for developing fees for the data content underlying consolidated market data.751 The Commission believes that the governance model required to be included in the proposed New 745 See infra Section III.E.2(c) (discussing the statutory requirements applicable to consolidated market data and the standards the Commission has historically applied to assessing compliance with the statutory requirements). 746 15 U.S.C. 78f(b)(4), 15 U.S.C. 78o–3(b)(5), and 15 U.S.C. 78k–1(c)(1)(C)–(D). 747 17 CFR 242.603(a). 748 17 CFR 240.19b–4. 749 See infra Section III.E.2(c). 750 See Effective-Upon-Filing Adopting Release supra note 17. 751 See Governance Order, infra note 1128; New Consolidated Data Plan Notice, supra note 40. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Consolidated Data Plan will support the building of broad consensus in developing the future fees for the data content underlying consolidated market data. Notwithstanding the new governance model, the new fees for data content underlying consolidated market data will have to satisfy statutory standards: They must be fair and reasonable and not unfairly discriminatory.752 Further, competition should constrain other aspects of consolidated market data costs, including the fees charged by competing consolidators for their products and services. Competing consolidators will compete in their aggregation and transmission services, which should also be reflected in their prices for such services. All competing consolidators will be required, under Rule 614(d), to disclose publicly metrics and other information concerning their performance and operations, which will allow market participants to evaluate effectively competing consolidators, fostering competition among competing consolidators. Further, competing consolidators are required to disclose their prices for consolidated market data products.753 In response to the comments warning that product differentiation would permit competing consolidators to increase their fees for consolidated market data products, the Commission believes that competing consolidators will face competition from each other and from potential new entrants, especially if a differentiated product serves as a material economic opportunity. This threat of competition will discipline prices and efficiency in the consolidated market data space. For example, if products tailored to the different needs of market participants become popular, competition should drive the creation and sale of similar products at prices attractive to subscribers. In response to the comment that stated that exchange trading costs, and consequently retail investor trading costs, would increase due to a reduction in exchange revenue as a result of the proposal,754 the Commission notes that the exchanges may file proposed rule changes to reflect any necessary adjustments to their fees as a result of the proposal. These proposed rule changes must meet the applicable statutory standards for fees. However, a reduction in proprietary data revenue, if it were to occur, would not, by itself, 752 See Sections 11A(c)(1)(C)–(D) of the Exchange Act and Rule 603(a) of Regulation NMS, 17 CFR 242.603(a). 753 See Form CC, Exhibit F. 754 See supra note 743. PO 00000 Frm 00056 Fmt 4701 Sfmt 4700 necessarily make it optimal for exchanges to adjust their trading fees.755 In response to the comment that stated that market participant costs will increase as a result of the proposal because all market participants would need to retain a back-up competing consolidator,756 the Commission is not requiring market participants to have back-up competing consolidators. Market participants may choose to subscribe to competing consolidators that are ‘‘SCI competing consolidators’’—those subject to the requirements of Regulation SCI that help ensure that the core technology systems of SCI entities remain reliable and resilient, including the requirements to have geographically diverse back-up and recovery capabilities, and conduct an SCI review each year, as discussed below. Some market participants may choose to subscribe to multiple competing consolidators. In either case, this choice will be for market participants to elect after evaluating the needs of their business and their customers. The Commission cannot estimate at this point specific cost increases, if any, for market participants that subscribe to competing consolidators.757 But market participants may face an overall reduction in costs due to the competitive environment for consolidated market data fostered by the decentralized consolidation model. 7. Comments on Complexity of the Decentralized Consolidation Model Several commenters stated that the proposed decentralized consolidation model would generally add complexity to the consolidated market data environment.758 One commenter said that competing consolidators would increase technological complexity, which would also increase risk and aggregate costs, while reducing resilience.759 Another commenter said that the complexity and costs created by competing consolidators could exceed 755 See note 2392 and accompanying text. FINRA Letter at 4. 757 Those broker-dealers that do not currently have back-up capabilities may decide not to have back-up capabilities under the decentralized consolidation model. To the extent that such broker-dealers decide to subscribe to redundant back-up competing consolidator feeds, they may incur higher costs. Further, as discussed below, the effective national market system plan(s) will have to develop MISU policies for consolidated market data subscribers. See infra Section III.E. 758 See TechNet Letter II at 1–2; STANY Letter II at 8. 759 See TechNet Letter II at 1–2. This commenter said that every new competing consolidator brings ‘‘exponentially increasing risks’’ and that the competing consolidator model lacked strong industry support. Id. at 2. 756 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations their benefits to investors.760 One commenter said that the proposed decentralized consolidation model and the proposed changes to consolidated market data ‘‘could introduce significant additional costs, confusion and complexity into an already complex system for equity market data, and raises a number of questions and issues.’’ 761 The markets currently have a decentralized model of data dissemination with regard to the exchange proprietary data feeds. This decentralized model operates alongside the current centralized consolidation model, and market participants must navigate the different data offerings, connectivity options, and fees. Therefore, the Commission does not believe that a decentralized consolidation model would necessarily increase complexity. Rather, the Commission believes that the decentralized consolidation model may lessen some of the complexities that exist today by eliminating the need to purchase both SIP data and proprietary data for some market participants. Additionally, because the Commission expects that there will be multiple competing consolidators providing consolidated market data products to market participants, rather than one exclusive SIP—the single point of failure that exists in the current model— the Commission believes that the decentralized consolidation model will enhance, rather than harm, the resiliency of the national market system.762 If one competing consolidator ceases operations, its impact on the markets should be minimized due to the presence of other competing consolidators that can perform the same functions 763 and the ability of new entrants to serve as competing consolidators. 760 See STANY Letter II at 8. Letter at 3. 762 See infra Section III.C.2. The competing consolidator model is designed to result in multiple viable sources of consolidated market data, not a single source of such data. Therefore, there will not be a single point of failure. However, the second prong of the definition of ‘‘critical SCI systems’’ in Regulation SCI, 17 CFR 242.1000 through 242.1007—a catch-all for systems that ‘‘[p]rovide 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’’— would apply in the event that availability of alternatives were significantly limited or nonexistent in the future. See infra Section III.F for a discussion of the application of Regulation SCI to competing consolidators. 763 See infra Section V.C.2(c)(iv) (discussing the benefits of the decentralized consolidation model to market resiliency). 761 FINRA VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 8. Comments on Surveillance and Regulation in the Decentralized Consolidation Model Several commenters expressed concern about the proposed decentralized consolidation model’s impact on regulation.764 Some commenters stated that the proposed model would present regulatory risks.765 Additionally, commenters asked questions related to the proposed model’s regulatory impact.766 One commenter stated that the proposal overlooked the effect of the proposed decentralized consolidation model on market surveillance and enforcement.767 The commenter also said that the proposal would limit exchange market data revenue because revenues would be based upon ‘‘some unspecified measure of cost,’’ which would impact exchanges’ abilities to perform their self-regulatory functions,768 while also increasing the cost of regulatory compliance.769 Another commenter, representatives from two exchanges, stated that the proposal leaves unclear whether SROs will be required to purchase all of the consolidated market data feeds of competing consolidators and selfaggregators for surveillance purposes, or if SROs can use a limited number of such feeds instead.770 The Commission does not believe that the decentralized consolidation model raises unique regulatory risks, undermines effective SRO surveillance, or imposes burdens on broker-dealers. The U.S. equity markets and the regulatory programs that have been developed to oversee their operation already have experience handling multiple sets of data due to the existence of the exclusive SIPs’ feeds and proprietary data feeds. Market participants currently can utilize many data options for different purposes, and the SROs are able to develop surveillance programs to oversee their members. Further, in the current model with both SIP data and proprietary data, the SROs develop their surveillance systems based on the data sets they believe best allow them to perform their 764 See Nasdaq Letter IV at 2, 3, 4, 12–13, 35; TechNet Letter II at 2; Kubitz Letter at 1; Joint CRO Letter at 2, 3, 4; FINRA Letter at 3, 4–5, 6; Citadel Letter at 5; TD Ameritrade Letter at 13. 765 See Nasdaq Letter IV at 35; TechNet Letter II at 2; Kubitz Letter at 1. 766 See Citadel Letter at 5; FINRA Letter at 4, 5, 6; TD Ameritrade Letter at 13. 767 See Nasdaq Letter IV at 2. 768 See id. at 37; see also NYSE Letter II at 22. 769 See Nasdaq Letter IV at 35; see also NYSE Letter II at 22. 770 See Joint CRO Letter at 3. PO 00000 Frm 00057 Fmt 4701 Sfmt 4700 18651 regulatory obligations.771 Broker-dealers using different data sets than those used by their SROs already have to respond to SRO surveillance requests based on the different data used by the SROs. This process will not change in the decentralized consolidation model. Surveillance and regulatory programs that utilize SIP data may have to be updated to utilize a new data source, either from a competing consolidator or based on self-aggregation by the SRO.772 SROs will not be required to purchase every consolidated feed from all competing consolidators to conduct enforcement or surveillance, just as they are not required today to purchase all consolidated (synthetic NBBO) data products provided by each of the different market data vendors aggregating proprietary feeds. Furthermore, all competing consolidators will register with the Commission and become regulated entities (if not already SROs) subject to Rule 614 of Regulation NMS and Commission oversight. As required by Rule 614, competing consolidators will provide information about their operations through a public Form CC, as well as monthly reports on their performance and other metrics relevant to potential subscribers, such as latency, system up-time, and system issues.773 Like many of the disclosures made by the exclusive SIPs,774 the information 771 Section 6(b)(1) of the Exchange Act provides that an exchange must be so organized and have the capacity to be able to enforce compliance by its members, and persons associated with its members, with the Exchange Act, the rules and regulations thereunder, and the rules of the exchange. See also Section 15A(b)(2) of the Exchange Act. See, e.g., Securities Exchange Act Release Nos. 74690 (Apr. 9, 2015), 80 FR 20282 (Apr. 15, 2015) (proposed rule change from Nasdaq explaining that Nasdaq uses a real-time surveillance system that uses a ‘‘mirrored’’ version of Nasdaq’s ‘‘NMS feed,’’ which consumes the Nasdaq Protected Quote Service as well as certain proprietary market data feeds and SIP data); 74967 (May 15, 2015), 80 FR 29127 (May 20, 2015) (proposed rule change from Nasdaq PHLX (‘‘Phlx’’) stating that Phlx’s surveillance similarly relies on a mirrored version of Phlx’s NMS feed, which consumes the Phlx Protected Quote Service and certain proprietary market data feeds and SIP data). See also Nasdaq Rule 4759(a) and Nasdaq PSX Rule 3304(a) for a list of the proprietary quotation feeds and SIP feeds used by the respective exchanges for the handling, routing, and execution of orders, as well as for regulatory compliance functions related to those functions. 772 The Commission has modified the definition of self-aggregator so that SROs would be permitted to be self-aggregators. 773 See Rule 614(d); see also infra Section III.C.8. 774 The information to be published by competing consolidators is based upon information that is currently produced by the CTA/CQ SIP and the Nasdaq UTP SIP, either for public or internal distribution. The exclusive SIPs currently publish to their respective websites monthly processor metrics that provide the following information: System availability, message rate and capacity E:\FR\FM\09APR2.SGM Continued 09APR2 18652 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations required pursuant to Rule 614(d) will be publicly available.775 Competitive forces also will incentivize competing consolidators to operate reliably and with low latency, and in conjunction with Commission oversight, the application of Regulation SCI and the required disclosures and transparency provided by Rule 614, should help to ensure high performance and system integrity. In response to the comment that stated the proposal would limit exchange market data revenue, hurting exchanges’ abilities to perform their self-regulatory functions 776 and increasing the cost of regulatory compliance,777 the Commission notes that SROs will develop fees for the data content underlying consolidated market data via the effective national market system plan(s), and the SROs will receive their revenue allocation for their data, as they do today.778 One commenter suggested having an ‘‘authority or agency’’ evaluate whether the proposed decentralized consolidation model could be gamed, arbitraged, or fraudulently used in a way to interfere with retail investors’ access to market data and execution of trades.779 The Commission believes that the adopted rules, as well as the oversight of SROs, competing 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 (last accessed Nov. 27, 2020); UTP Metrics, available at http:// www.utpplan.com/metrics (last accessed Nov. 27, 2020). 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 (last accessed Nov. 27, 2020); UTP–SIP System Alerts, available at http://www.utpplan.com/system_alerts (last accessed Nov. 27, 2020); UTP Vendor Alerts, available at http://www.utpplan.com/vendor_alerts (last accessed Nov. 27, 2020). 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 (last accessed Nov. 27, 2020); UTP Realized Latency Charting, available at http://www.utpplan.com/latency_ charts (last accessed Nov. 27, 2020). 775 Because this information is useful to current users of the exclusive SIPs and participants of the Equity Data Plans, the Commission believes that it should be made publicly available by competing consolidators. 776 See Nasdaq Letter IV at 37; see also NYSE Letter II at 22. 777 See Nasdaq Letter IV at 35; see also NYSE Letter II at 22. 778 See infra Section III.E.2. The Commission discusses the potential economic effects of the proposal on exchange proprietary market data revenue in Section V.C.4(a). See infra Section V.C.4(a); see also infra text accompanying notes 2468–2469. 779 Kubitz Letter at 1. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 consolidators, and self-aggregators should help to ensure that retail investors’ access to consolidated market data would not be impacted by the decentralized consolidation model. Specifically, Rule 603(b) requires the SROs to provide their information to competing consolidators, which would be responsible for disseminating consolidated market data products to their subscribers, which would likely include broker-dealers that have retail customers. Among other requirements, Rule 603(c) would continue to apply; therefore, broker-dealers and SIPs 780 must continue to provide a consolidated display of information in the context in which a trading decision can be implemented. Further, Rule 614(d)(3) requires competing consolidators to make available consolidated market data products to subscribers on terms that are not unreasonably discriminatory.781 Competing consolidators will also be subject to the requirements of Rule 614(d), which, among other things, mandate the filing of a public Form CC to provide operational transparency, as well as the public monthly disclosure of metrics and other information concerning performance and operations. These requirements should allow subscribers of a competing consolidator to verify that consolidated market data products are provided in a prompt, accurate, and reliable manner and thus motivate competing consolidators to continue to provide consolidated market data products accordingly. Commenters also raised questions related to the proposed decentralized consolidation model’s regulatory impact.782 One commenter asked whether there would be any regulatory immunity differences between competing consolidator offerings from SROs and non-SROs.783 SRO immunity considerations would depend on the particular facts and circumstances.784 780 Under Rule 600(b)(16) of Regulation NMS, a competing consolidator is defined as a SIP. See infra Section III.C.1(b). 781 See infra Section III.C.8. 782 See Citadel Letter at 5; FINRA Letter at 4–5, 6. 783 See Citadel Letter at 5. 784 See also infra Section III.C.7(a)(iv); Brief of the Securities and Exchange Commission, Amicus Curiae, No. 15–3057, City of Providence v. Bats Global Markets, Inc. (2d Cir.), at 21, 22. Courts have found that SROs are entitled to absolute immunity from private claims under certain circumstances. In particular, ‘‘when acting in its capacity as a SRO, [the SRO] is entitled to immunity from suit when it engages in conduct consistent with the quasigovernmental powers delegated to it pursuant to the Exchange Act and the regulations and rules promulgated thereunder.’’ See DL Capital Group, LLC v. NASDAQ Stock Market, Inc., 409 F. 3d 93, 97 (2d Cir. 2005) (quoting D’Alessio v. New York PO 00000 Frm 00058 Fmt 4701 Sfmt 4700 9. Access to Data: Rule 603(b) (a) Proposal Rule 603(b) of Regulation NMS currently requires a centralized consolidation model. The Commission proposed to amend Rule 603(b) to require each SRO to provide its NMS information, including all data necessary to generate 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 data formats, as such SRO makes available any information to any other person. Under the proposed approach, competing consolidators and self-aggregators would collect each SRO’s market data that is necessary to generate consolidated market data.785 As proposed, the same access options available to proprietary feeds, including, but not limited to, transmission medium (i.e., fiber optics or wireless), multicast communication, co-location options, physical port, logical port, bandwidth, and FPGA services, would be required to be made available for proposed consolidated market data feeds. Further, any enhancements to proprietary feed methods of access would similarly be made to consolidated market feeds.786 In the Proposing Release, the Commission stated that the exchanges could utilize their existing proprietary data product offerings that contain consolidated market data elements or the exchanges could develop new consolidated market data offerings for purposes of making information available under Rule 603(b). 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.787 The Commission also proposed to remove the requirement in Rule 603(b) that ‘‘all consolidated information for an individual NMS stock [be disseminated] through a single plan processor’’ 788 because it would be inconsistent with the proposed decentralized consolidation model. In a decentralized consolidation model, multiple competing consolidators would Stock Exchange, Inc., 258 F. 3d 93, 106 (2d Cir. 2001)). If an SRO fails to comply with the provisions of the Exchange Act, the rules or regulations thereunder, or its own rules, the Commission is authorized to take action. See 15 U.S.C. 78s(g). 785 See Proposing Release, 85 FR at 16769. 786 See id. 787 See id. 788 17 CFR 242.603(b). E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations disseminate consolidated market data in individual NMS stocks rather than single plan processors.789 In the proposal, the Commission stated that the proposed decentralized consolidation model and the proposed consolidated market data definition would not preclude the exchanges from continuing to sell proprietary data and that the fees for proprietary data, which are outside of the proposed definition of consolidated market data, would be subject to the rule filing process pursuant to Section 19(b) of the Exchange Act and Rule 19b–4.790 The Commission stated that if an exchange provided its proprietary data products to a competing consolidator or selfaggregator 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.791 Self-aggregators and competing consolidators that limited 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, in accordance with Rule 608 of Regulation NMS.792 (b) Final Rule and Response to Comments The Commission is adopting the amendments to Rule 603(b) as proposed. The Commission believes that these changes to Rule 603(b) are appropriate to establish the decentralized consolidation model. Under Rule 603(b), the SROs are required to make available all quotation and transaction information that is 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 SRO makes available any information with respect to quotations for and transactions in NMS stocks to any person. Competing consolidators and self-aggregators will be able to collect from the SROs that NMS information that is necessary to generate consolidated market data as defined in Rule 600(b)(19),793 which includes core data,794 regulatory data, 789 Proposing Release, 85 FR at 16771. U.S.C. 78s(b) and 17 CFR 240.19b–4. See id. at 16769. 791 See id. 792 17 CFR 242.608. 793 See also infra Section III.C.8(a). 794 For example, competing consolidators and self-aggregators will collect quotation information 790 15 VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 administrative data, and self-regulatory organization-specific program data. Under Rule 603(b), the SROs are allowed to provide their core data to competing consolidators and selfaggregators via the existing proprietary data feeds, a combination of proprietary data feeds, or a newly developed consolidated market data feed.795 However, if an SRO developed a dedicated consolidated market data feed, the SRO will have to take steps to ensure that any proprietary data feed is not made available on a more timely basis (i.e., by any time increment that could be measured by the SRO) than a consolidated market data feed.796 Rule 603(a) also applies to the provision of data content underlying consolidated market data by the SROs to competing consolidators. The Commission believes that under Rule 603(a), if an SRO developed a consolidated market data feed, it would likely have to throttle any order-by-order proprietary data feed so that it is not made available on a more timely basis than such dedicated consolidated market data feed. Any dedicated consolidated market data feed developed by an exchange would likely involve processing by an exchange to segment its consolidated market data elements, which adds latency to data dissemination, while an order-by-order proprietary data feed would involve no less processing by the exchange. Further, the SROs are allowed to offer different access options (e.g., with different latencies, throughput capacities, and data-feed protocols) to market data customers, as long as any access options available to proprietary data customers are made available to competing consolidators and selfaggregators for their selection for the collection of the data necessary to generate consolidated market data. In addition, if an SRO provided its proprietary data products to competing consolidators or self-aggregators for purposes of Rule 603(b) and a competing consolidator or selfaggregator developed a product, or otherwise used data content that is beyond the scope of consolidated that is necessary to calculate the NBBO as described in Rule 600(b)(50). 795 Competing consolidators and self-aggregators would be permitted to choose among the data feed options offered by the SROs to satisfy their obligations under Rule 603(b) to collect the SRO information that is necessary to generate consolidated market data. See also Section III.E.2(g) for a discussion of the licensing, billing and audit process. The effective national market systems plans through their licensing, billing and audit processes can determine the extent to which data content utilized by competing consolidators and self-aggregators constituted elements of consolidated market data. 796 See infra Section III.B.9(f). PO 00000 Frm 00059 Fmt 4701 Sfmt 4700 18653 market data (e.g., full depth of book data), the proprietary data content will be subject to the individual exchange fees for proprietary data,797 while the data content underlying consolidated market data will be subject to the fees established pursuant to the effective national market system plan(s).798 The Commission received several comments on its proposed amendments to Rule 603(b). Some commenters stated that the changes to Rule 603(b) were key to the success of the proposal.799 One commenter stated that the proposed changes to Rule 603(b) ‘‘should help to ensure that proprietary feeds, competing consolidators and self-aggregators operate on a more level playing field with regards to the speed that market participants can obtain market data and access.’’ 800 The commenter continued that the proposal would create a true alternative to subscribing to and paying for each individual exchange’s proprietary feed.801 Another commenter stated that the requirement to make data available to competing consolidators in the same manner as the exchanges make it available to any other person would address latency issues that exist in core data.802 One commenter suggested that the exchanges provide content that is similar to what they provide on their direct feeds, stating that all data can be useful for ‘‘execution algorithms’ quantitative trading decisions.’’ 803 Another commenter suggested that the exchanges should provide a single data feed—their proprietary DOB feed—to satisfy the requirements of the proposed rules, simplify data distribution, and ease Rule 603(a) burdens.804 The Commission has set forth minimum data content underlying consolidated market data that must be made available by the SROs under Rule 603(b). The Commission has identified these elements as necessary for a wide array of trading in the national market system. 797 Fees for proprietary data are filed with the Commission pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder. 798 Fees for the data content underlying consolidated market data will be filed with the Commission pursuant to Rule 608 of Regulation NMS, 17 CFR 242.608. 799 See McKay Letter; SIFMA Letter. See also Clearpool Letter at 7 (supporting the proposed language of Rule 603(b)). 800 SIFMA Letter at 11. See also McKay Letter at 4 (stating that the proposed language of Rule 603(b) would prevent an exchange from creating a proprietary data feed that would not be sufficient to create consolidated market data but which has a latency or other access advantage associated with it). 801 See SIFMA Letter at 11. 802 See Fidelity Letter at 10. 803 BestEx Research Letter at 5. 804 See MEMX Letter at 9. E:\FR\FM\09APR2.SGM 09APR2 18654 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Because the Commission recognizes that some market participants may need more information than what is defined as consolidated market data, SROs can provide additional information to these customers via proprietary feeds. Further, as discussed above, the SROs can satisfy their obligations under Rule 603(b) by utilizing their proprietary data feeds, a combination of proprietary data feeds, or a newly developed core data feed that contains all of the data content underlying consolidated market data.805 Rule 603(b) does not specify a required method of delivery of the data content underlying consolidated market data but requires that such data be provided in the same manner and using the same methods of access and the same format,806 as the SROs use to make any NMS information available in NMS stocks to any person. One commenter, however, stated, without further explanation, that the ‘‘same manner and methods’’ language was ‘‘merely a standard price list offered by the exchange.’’ 807 The commenter further stated that the ‘‘same format’’ language would hurt average investors and give high frequency trading firms an advantage and asserted that ‘‘[o]ne can only attempt to match faster connectivity by altering data format and compression methods.’’ 808 To the extent that the commenter is suggesting that investors who obtain consolidated market data products from a competing consolidator may be at a disadvantage to self-aggregators because of the latency advantage of self-aggregators, the Commission believes, as discussed in Section IV.D.2(d), that the selfaggregators will not necessarily have a systematic latency advantage over competing consolidators. If the commenter is suggesting that SROs provide data in a different format to compensate for faster connectivity, Rule 603(b) requires the SROs to make the data content underlying consolidated market data available to competing consolidators and self-aggregators in the same manner and methods, including all methods of access and the same format, as proprietary data. Further, Rule 603(a) prohibits an SRO from making NMS information available to any person on a more timely basis (i.e., by any time increment that could be measured by the SRO) than it makes such data available to competing consolidators and self-aggregators.809 805 See supra note 795 and accompanying text. Proposing Release, 85 FR at 16770. 807 Data Boiler Letter II at 1. 808 Id. at 1. 809 See infra Section III.B.9(f). 806 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Another commenter stated that the proposed language in Rule 603(b) did not consider that an exchange’s connectivity options may not have the capacity to be provided to all competing consolidators and self-aggregators in the same manner and using the same methods.810 The commenter stated that the proposal did not address the possible impact on wireless connectivity or how customers would be affected if the SROs ceased to offer wireless connectivity. The commenter did not expand upon how the decentralized consolidation model would burden capacity beyond what occurs today in the provision of proprietary data using the same connectivity options. The exchanges assess capacity needs for their proprietary data products and will be able to assess such needs for the connectivity options for the data content underlying consolidated market data. Each individual SRO will be required to provide the data underlying consolidated market data to competing consolidators and self-aggregators in the same manner and using the same methods as is provided for proprietary data. The exchanges can utilize their proprietary data feeds to make the data content underlying consolidated market data available to competing consolidators and self-aggregators and will be able to offer any access options available to proprietary data feeds to competing consolidators and selfaggregators for their selection. (c) Comments on Access Options In the Proposing Release, the Commission stated that the exchanges could provide 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. As 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.811 Further, an exchange must 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 810 See 811 See PO 00000 IDS Letter I at 11. Proposing Release, 85 FR at 16770. Frm 00060 Fmt 4701 Sfmt 4700 proprietary data, then the exchange must offer the competing consolidators and self-aggregators those types of transmission for consolidated market data. As discussed, the rule will 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 will have to offer them for consolidated market data as well. One commenter stated that all forms of data submission must assure full and equal, transparent, and equally timed access to data.812 Another commenter stated that the most important component for the success of the competing consolidator model is ‘‘to ensure that all market participants have the opportunity for equal access within the facilities of an exchange for purposes of receiving market data from the exchange, transmitting that market data out of the exchange and receiving and distributing market data from another exchange (e.g., to receive and deliver an away exchange’s market data.’’ 813 This commenter further stated that exchanges should not favor certain market participants over others and that equal access must cover both egress and ingress within exchange data centers.814 Further, the commenter stated that the economic incentive to become a competing consolidator may not be sufficient without such equal access.815 Another commenter cautioned that allowing an exchange to develop a new market data product that contains only the data elements that are specified in the proposed definition of consolidated market data could be problematic because (1) competing consolidators likely will have feed handlers for publicly available feeds, which would impose additional burdens; and (2) there would be no incentive for exchanges to keep the latency of these special feeds similar to that of public feeds.816 The Commission believes that the SROs should be required to provide the information 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 they provide to any person. Different forms of access affect 812 See Kubitz Letter. Letter at 3. See also Temple University Letter at 2 (stating that ‘‘intermediaries’’ including exchanges and SIPs should not ‘‘unfairly discriminate or privilege certain market participants to the detriment of others in terms of data access, execution and other market data operations’’ and that such intermediaries should act ‘‘independently and neutrally towards market participants to ensure the competitive integrity of the marketplace’’). 814 See McKay Letter at 3. 815 Id. 816 See NovaSparks Letter at 1–2. 813 McKay E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations the delivery of data. If an exchange provided a superior form of access to its proprietary data products, then transmission of consolidated market data would be negatively impacted and the benefits of the decentralized consolidation model, such as lower latencies, would not be realized. The national market system would be affected by this disparity as it is today— with certain proprietary data products providing superior access as compared to consolidated market data products. As stated in the Proposing Release, different market participants have different access needs. The Commission is not mandating a specific access option or limiting options for market participants, but all access options, including co-location, must be available to all market participants whether they are purchasing the data content underlying consolidated market data or proprietary data. The access requirement under Rule 603(b) requires the exchanges to 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. The requirement in Rule 603(b) that access be provided in the same manner as any other information is provided to any person encompasses co-location options that are provided by exchanges to market participants that purchase proprietary data. Proprietary data users are typically co-located near an exchange’s matching engine. Rule 603(b) will allow competing consolidators and selfaggregators to receive data at the same speeds, and with the same access options, as the exchange offers its market data.817 Different co-location options within a data center could raise concerns about whether that exchange is providing the same manner of access to its data as 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 as a competing consolidator or a subsidiary or affiliate that competes in the provision of proprietary data. (d) Comments on Latency Neutralization In the Proposing Release, the Commission stated that proposed Rule 603(b) would require that all access options be provided in a latencyneutralized manner such that all participants within an exchange’s data center—such as proprietary data 817 See also infra Section III.B.9(f). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 subscribers, competing consolidators, and self-aggregators—would receive information at the same time, regardless of their location or status within the data center. The Commission continued that exchanges could, for example, 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. Finally, the Commission stated that the SROs must use the same latency-neutralization processes for competing consolidators and self-aggregators as they offer subscribers of proprietary data. One commenter stated that to provide a level playing field ‘‘latencyneutralized’’ access must apply to locally produced data (i.e., data produced within an exchange’s data center where a market participant is colocated) and that the exchange must not interfere in the competition to provide inbound market data from exchanges located in other market centers.818 This commenter provided a detailed discussion of five steps of data access and delivery that it believed should be subject to latency neutralization requirements under Rule 603(b) if an exchange or its affiliate exercises direct control or indirect control.819 Specifically, the commenter stated that latency neutralization should apply to (1) the initial distribution from an exchange’s market data distribution engine to the cabinets of a competing consolidator, self-aggregator, or other direct recipient of market data; (2) the distribution from a competing consolidator’s cabinet out of an exchange’s data center to equipment (e.g., wireless or fiber equipment) for distribution to subscribers (described as the ‘‘egress leg’’); (3) the receipt of market data from an away exchange for delivery to co-located customers in the exchange’s data center (described as the ‘‘ingress leg’’); (4) the delivery of data from a competing consolidator’s cabinet of market data received from away markets to the competing consolidator’s 818 See McKay Letter at 6. id. at 7. The commenter suggested that ‘‘indirect control’’ means the use of the exchange or its affiliate’s influence, weight or pressure to create an advantage or disadvantage in exchange connectivity to select market participants. Further, the commenter described several different forms of direct or indirect control, including ‘‘requiring market participants to connect to a meet me room, specifying the types of cross connects that may be used, restricting the use of certain frequencies to certain market participants, through the use of one or more affiliates or select third parties to create advantages, or pursuant to formal and informal arrangements with the data center operator.’’ Id. at 8–9. 819 See PO 00000 Frm 00061 Fmt 4701 Sfmt 4700 18655 subscribers that are located in the same data center (described as the ‘‘delivery to subscriber leg’’); and (5) the transmission of data from an exchange data center to be received at other exchange data centers and/or for distribution to non-co-located market participants (described as the ‘‘transit leg’’). This commenter stated that these considerations are important to determining when and where competition begins in providing consolidated market data and that it believes that competition should begin when market data leaves those areas over which an exchange or its affiliates exercise direct or indirect control.820 Rule 603(b) requires that the exchanges provide their NMS information, including all data necessary to generate consolidated market data, in the same manner and using the same methods as such exchange provides any information to any person. As discussed above, this language encompasses the provision of data by an exchange at one data dissemination location co-located near each exchange’s matching engine to allow competing consolidators and selfaggregators to receive data at that location at the same speeds, and with the same access options, as the exchange offers its market data. The SROs are required to use the same latency-neutralization processes for competing consolidators and selfaggregators as they offer to subscribers of proprietary data such that all participants within the exchange’s data center, regardless of their location or status within the data center, would receive the data at the same time.821 In the Proposing Release, the Commission described latency neutralization protocols that exchanges could adopt, such as equal cable length protocols where cable lengths from network equipment to customer cabinets are harmonized for equal access. Any differential treatment of competing consolidators in the transmission of consolidated market data within a data center controlled by an exchange must be filed with the Commission as a proposed rule change pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder and satisfy statutory requirements, such as not 820 See id. at 10. Proposing Release, 85 FR at 16771. For example, exchanges could adopt equal cable length protocols (i.e., where cross-connect cable lengths from network equipment to customer cabinets are harmonized for equal access) and ports of the same bandwidth (i.e., 1G, 10G, and 40G) to ensure that all of the exchange’s data center connections provide market data simultaneously to market participants located within a data center. 821 See E:\FR\FM\09APR2.SGM 09APR2 18656 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations being designed to permit unfair discrimination 822 nor impose a burden on competition.823 (e) Comments on SRO Costs One commenter, FINRA, stated that the ADF would be required to connect and provide data to all competing consolidators and self-aggregators.824 FINRA said that it potentially could incur significant costs to establish and maintain this required connectivity, despite minimal fee revenue from data disseminated from the ADF given the low volume of regularly reported trades and lack of quoting participants.825 FINRA stated in its comment letter that the ADF has a low volume of over-thecounter (‘‘OTC’’) trades and no quotes. Therefore, the connectivity options would not need to support much data capacity, which should limit the amount of costs incurred by FINRA to establish such connectivity. However, FINRA could seek to recoup any costs associated with establishing and maintaining connectivity to competing consolidators and self-aggregators by proposing connectivity fees pursuant to Section 19(b) of the Exchange Act.826 Information about OTC quotations and trades in NMS stocks are an important component of SIP data today and will continue to be important in consolidated market data. This OTC information must be collected, consolidated, and disseminated in the decentralized consolidation model. (f) Interpretation of Rule 603(a) Currently, Rule 603(a) requires that SROs distribute NMS information on terms that are fair and reasonable and not unreasonably discriminatory.827 The Commission stated in the Regulation NMS Adopting Release that Rule 603(a) would prohibit an SRO from making its core data available to vendors on a more timely basis than it makes such data 822 Section 6(b)(5) of the Exchange Act, 15 U.S.C. 78f(b)(5). 823 Section 6(b)(8) of the Exchange Act, 15 U.S.C. 78f(b)(8). 824 See FINRA Letter at 4. 825 See id. 826 Connectivity to the data underlying consolidated market data would be a new data service because such service does not currently exist. The SROs will have to file with the Commission any proposed new fees for connectivity to their individual data that underlies consolidated market data pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, and any proposed connectivity fee must satisfy the statutory standards, including being fair and reasonable, being not unreasonably discriminatory, and reflecting an equitable allocation of reasonable fees. See Sections 6(b)(4) and 15A(b)(5) of the Exchange Act. See also infra note 1158 and accompanying text and Section III.E.2(c). 827 See Rule 603(a)(2) of Regulation NMS, 17 CFR 242.603(a)(2). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 available to the exclusive SIPs.828 In particular, the Commission said that ‘‘independently 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 data to a Network processor.’’ 829 Today, latency differentials of any measurable amount are meaningful for certain market participants and their trading strategies. The Commission believes that Rule 603(a) prohibits an SRO from making NMS information available to any person on a more timely basis (i.e., by any time increment that could be measured by the SRO 830) than it makes such data available to the existing exclusive SIPs and as amended, competing consolidators and selfaggregators. When it adopted Regulation NMS, the Commission did not provide a de minimis exception to the timeliness of data availability in Rule 603(a). If an SRO can measure the timeliness of data transmission in a specific increment, such increment generally should be utilized for determining whether such data has been transmitted on a more timely basis to persons other than an existing exclusive SIP, competing consolidators, or self-aggregators. 10. Calculation of the National Best Bid and National Best Offer Under Rule 600(b)(50) (a) Proposal The Commission proposed to amend the definition of national best bid and national best offer to reflect that competing consolidators and selfaggregators, 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 proposed to bifurcate the NBBO definition between NMS stocks 828 See Regulation NMS Adopting Release, supra note 7, at 37569. Specifically, the Commission stated, ‘‘Rule 603(a)(2) requires that any SRO, broker, or dealer that distributes market information must do so on terms that are not unreasonably discriminatory. These requirements prohibit, for example, a market from making its ‘core data’ (i.e., data that it is required to provide to a Network processor) available to vendors on a more timely basis than it makes available the core data to a Network processor.’’ Id. 829 Id. at 37567. 830 For example, latency is currently measured for SIP data in microsecond increments. 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/CTAPLAN_Processor_Metrics_3Q2020.pdf (last accessed Nov. 27, 2020). PO 00000 Frm 00062 Fmt 4701 Sfmt 4700 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 plan processor for options would continue to be responsible for calculating and disseminating the NBBO in listed options. The proposed changes to the definition of NBBO would not impact the manner in which the NBBO is calculated for NMS stocks.831 (b) Comments on Complexity and Confusion Resulting From Multiple NBBOs The Commission received multiple comments with respect to the proposed definition of NBBO, with commenters expressing concerns about multiple NBBOs and the impact on market participants and investors. Commenters stated that confusion could result from multiple NBBOs being available to market participants.832 One commenter stated that retail investors do not have experience with multiple NBBOs.833 The commenter further noted that multiple NBBOs would make brokerdealers’ Rule 605 reports difficult to compare because broker-dealers could be using different NBBOs.834 The commenter questioned whether a broker-dealer would be responsible for execution quality and compliance with the Vendor Display Rule if the competing consolidator that the brokerdealer is using miscalculates the NBBO.835 831 The NBBO will reflect the new round lot sizes. See supra Section II.D.2. 832 See TD Ameritrade Letter at 12 (‘‘In the present-day structure, SIPs provide a ‘gold copy’ standard of the NBBO which can be used for comparison when meeting the regulatory requirements of best execution and the Vendor Display Rule . . . The industry may have as many NBBO quotes as there are [competing consolidators] and self-aggregators.’’); Healthy Markets Letter I at 4 (‘‘We have significant concerns that by creating multiple, alternative SIPs, that market participants may cherry-pick the data feed that costs them the least or makes them look the best.’’); Nasdaq Letter IV at 12; Fidelity Letter at 10–11. 833 See TD Ameritrade Letter at 12–13 (‘‘Furthermore, even if proprietary feeds disseminate a different quote than the NBBO, such quote has never been permitted for purposes of use in the Vendor Display Rule, meaning the retail investor has not previously experienced a multiple NBBO environment.’’). See also Fidelity Letter at 10–11 (‘‘Under the Proposal, retail customers placing orders in the same security at two different brokerage firms may receive two different prices depending upon which competing consolidator each firm uses.’’). This scenario could happen today. The Commission does not believe the decentralized consolidation model will introduce confusion for retail investors. Retail investors will continue to be able to see the NBBO provided by their broker-dealer, whether it is calculated by their broker-dealer or a competing consolidator. 834 See TD Ameritrade Letter at 13. 835 See id. The commenter further questioned whether regulators would grant relief when E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Other commenters noted that a lack of a single NBBO as calculated by the existing SIPs could impact the market in a variety of ways, such as a lack of a single benchmark to determine trade quality; curtailing the Commission’s surveillance efforts; potentially creating a multi-tiered system where some traders can access faster NBBOs; 836 and adding significant complexity, confusion, and uncertainty to best execution analysis.837 One commenter said that it is unlikely the NBBOs produced by competing consolidators and their associated timestamps would ever be synchronized and that the NBBOs calculated by competing consolidators and self-aggregators will never align. The commenter said that the different versions of market data would impact broker-dealer compliance with market conduct rules.838 Another commenter noted that multiple NBBOs would make comparison of broker-dealer performance difficult, as broker-dealers may decide which NBBO to use depending on which NBBO costs the least or makes their execution quality look better.839 The commenter acknowledged that while there is no clear NBBO today, the exclusive SIPs do calculate and disseminate a NBBO.840 Commenters questioned how execution quality would be judged if each competing consolidator provided a different NBBO.841 Another commenter believed that multiple NBBOs will impact liquidity.842 One commenter said that latency arbitrage would be required to ‘‘keep markets in line,’’ estimating an increase of almost $3 billion in latency arbitrage profits as a reviewing execution quality on an order by order basis, when different competing consolidators are calculating NBBOs differently. 836 See Nasdaq Letter IV at 7 (‘‘Shedding the single NBBO—which has long been investors’ ‘North Star’ for price discovery—in favor of multiple NBBOs would further complicate market structure, confuse investors as to whether they are actually seeing the best price, and hinder market surveillance and enforcement efforts.’’). 837 See FINRA Letter at 6. 838 See id. at 3–4. 839 See Healthy Markets Letter I at 4. 840 See id. 841 See Schwab Letter at 6; NYSE Letter II at 24; WFE Letter at 1. 842 See Data Boiler Letter I at 3. The commenter did not describe how it thought multiple NBBOs would impact liquidity. As discussed, the current market operates with multiple NBBOs. The Commission believes that the NBBOs that will be calculated in the decentralized consolidation model better reflect current market conditions due to the improvements in latencies and therefore, will be more prompt, accurate, and reliable. The enhanced and faster consolidated market data resulting from the proposal should allow market participants access to more up-to-date market data (including NBBO data) than provided by the SIP, permitting them to more readily find liquidity than before. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 result of the multiple NBBOs introduced by the proposal.843 This commenter said that multiple NBBOs would also reduce investor confidence that trades will be executed at the best price 844 and believed that multiple NBBOs would negatively impact market quality, complicate best execution compliance by broker-dealers, and overall hurt investor confidence in the markets.845 Another commenter requested clarity that a single competing consolidator could produce multiple NBBOs at different locations at any given point of time, since some competing consolidators may co-locate at more than one exchange data centers.846 In the decentralized consolidation model, competing consolidators will replace the exclusive SIPs in generating the NBBO as defined in Rule 600. Therefore, there will be NBBOs generated by each competing consolidator, as well as self-aggregators, based upon the data content received from the SROs pursuant to Rule 603(b). While commenters expressed concerns about the loss of an NBBO generated by a single plan processor—the exclusive SIPs—the Commission believes that market participants will adjust to not having an NBBO generated by a single plan processor. ‘‘Multiple NBBOs’’ already exist today.847 Some market participants obtain the NBBO from the exclusive SIPs, and some market participants generate their own NBBO by aggregating multiple proprietary data feeds. Some market participants that generate their own NBBO use third party aggregation software or services to do so. The NBBO seen by market participants depends on the systems used to generate the NBBO and the systems used by the market participants to receive and view it. Market participants are therefore already accustomed to a market environment in which there are ‘‘multiple NBBOs’’ generated by different parties, at different speeds, in different locations. 843 Nasdaq Letter III at 8. Many firms that aggregate proprietary feeds today likely have different aggregation times and are likely already exposed to latency arbitrage. It is unclear why the use of latency arbitrage would increase as a result of the proposal, especially since the existence of multiple NBBOs would not represent a change from current market practices. 844 See Nasdaq Letter IV at 11. 845 See id. at 3. 846 See McKay Letter at 10–11 (‘‘. . . many market participants are colocated at one or more of the major exchange datacenters in New Jersey and receive their market data at such colocated points of presence. If a competing consolidator seeks to provide market participants with the fastest and most efficient consolidated market data possible, the result would be a slightly different NBBO at each exchange datacenter.’’). 847 See also infra Section V.B.2(f). PO 00000 Frm 00063 Fmt 4701 Sfmt 4700 18657 They are accustomed to performing best execution analysis and providing execution quality statistics in the current environment. Therefore, the Commission does not believe that the generation of NBBOs by multiple competing consolidators will add complexity or confusion to the markets. Moreover, neither the amended definition of NBBO, nor the decentralized consolidation model more generally, mandates the consumption of multiple NBBOs from multiple competing consolidators. So, while different competing consolidators may calculate and disseminate unique NBBOs or single competing consolidators may calculate different NBBOs at separate data center locations under the decentralized consolidation model, the Commission does not believe that this should cause confusion for market participants, who already consider market data from multiple sources. Finally, the amended definition of NBBO does not change the methodology by which the NBBO for a particular NMS stock is calculated, which will help to ensure consistency in the NBBO calculation. The Commission is therefore adopting the amendments to the definition of NBBO as proposed. (c) Comments on Impact of Multiple NBBOs on Best Execution Obligations With respect to best execution, commenters stated that the Commission did not sufficiently discuss the best execution implications of multiple NBBOs.848 Commenters stated that eliminating the single NBBO, and requiring broker-dealers to choose among multiple NBBOs, would complicate and increase the cost of compliance with best execution 848 See, e.g., Nasdaq Letter IV at 3, 12–13; Clearpool Letter at 8 (‘‘[W]hile the proposal states that the existence of multiple NBBOs does not impact a broker’s best execution obligations, we believe that ‘‘fragmenting’’ the NBBO could lead to several problems around such obligations, which would need to be addressed and clarified by the Commission prior to implementation.’’); Healthy Markets Letter I at 4–5 (‘‘Could a market participant seek to deliberately subscribe to an inferior data feed? . . . We urge the Commission to establish objective standards, including policies, procedures, and documentation requirements for brokers regarding their selection and usage of competing data feeds.’’); FINRA Letter at 5 (‘‘[T]he Commission may also want to consider providing guidance on whether a broker-dealer would, or should, be evaluated—by the Commission, FINRA, or others— on its decision of which competing consolidator(s) to receive consolidated market data from, what factors a broker-dealer should consider in evaluating its choice of a competing consolidator(s) (both initially and on an ongoing basis), and how a broker-dealer’s choice of a competing consolidator(s) might affect the broker-dealer’s best execution obligations.’’). E:\FR\FM\09APR2.SGM 09APR2 18658 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations obligations.849 However, another commenter stated that it ‘‘does not believe the existence of multiple NBBOs will create problems for market participants or the market as a whole at a level that would warrant not moving forward with the decentralized, competitive model. . . .’’ 850 Additionally, one commenter stated that expanding core data generally would facilitate best execution.851 As described above, ‘‘multiple NBBOs’’ already exist today. The amended definition of NBBO will not significantly alter this state of affairs; rather, it adjusts the definition of NBBO to accommodate the decentralized consolidation model to reflect that NBBOs will be calculated and disseminated by competing consolidators and calculated by selfaggregators. As is the case today, brokerdealers must act reasonably to obtain pricing information in carrying out their duty to seek to obtain the most favorable terms reasonably available under the circumstances for the execution of customer orders.852 the impact of multiple NBBOs on surveillance and compliance with investor protection rules 856 and that multiple NBBOs would affect surveillances that detect broker-dealer market access controls deficiencies and fraud and manipulation.857 The commenter also stated that the proposed model would make it almost impossible to monitor for locked and crossed markets and to conduct trade-through surveillance due to the multiple competing consolidator feeds.858 In addition, the commenter stated that regulators and market participants will have different views of the market depending on the NBBO they use, which would allow bad actors to take advantage of the resulting regulatory loopholes and inefficiencies.859 The commenter stated that multiple NBBOs could create false positives, more investigations and data requests, as well as false negatives.860 Additionally, one commenter stated that the multiple NBBOs that will be produced by competing consolidators and self-aggregators under the proposed decentralized consolidation model will (d) Comments on Impact of Multiple increase costs for exchanges to enforce NBBOs on Surveillance and their rules 861 and increase the risk of Enforcement market manipulation.862 This While some commenters expressed commenter also said that regulations concern about the proposed could be inconsistently applied due to decentralized consolidation model’s variations in consolidated market data impact on regulation,853 several from different competing commenters more specifically opined consolidators,863 and that the proposal that the multiple NBBOs resulting from would result in more frequent the proposed model would undermine enforcement investigations, expansive exchange surveillance and data requests, and delays in concluding 854 enforcement, and raised questions investigations.864 Another commenter about how market participants should stated that the proposed decentralized consider multiple NBBOs in tradeconsolidation model would hurt Rule through prevention and locked and 855 crossed markets. One commenter said 605 compliance because the baseline NBBO used by each market center for that the proposal did not fully consider comparisons would vary.865 These issues are not new or unique to 849 See Nasdaq Letter IV at 3, 42, 49; Joint CRO the decentralized consolidation model. Letter at 2; STANY Letter II at 6; TD Ameritrade Letter at 12–13. As discussed earlier,866 SRO 850 Clearpool Letter at 8; see also Capital Group surveillance and regulatory programs Letter at 4 (‘‘We also support the proposed currently need to consider different commercial competing consolidators. Different users have different needs with regards to data complexity (e.g., what data elements are included or excluded), latency and price. We do not see this as the creation of ‘multiple truths’ or ‘multiple markets.’ Because the data will also be available for post trade analysis, market participants will be able to analyze outcomes using the difference between the originating venue timestamps and the consolidator timestamps to determine if best execution obligations were fulfilled and if the speed they chose to pay for meets their needs.’’). 851 See Better Markets Letter at 2. 852 See supra Section I.E. 853 See supra Section III.B.8. 854 See Joint CRO Letter at 2, 3; Nasdaq Letter IV at 12; NYSE Letter II at 24; see also TechNet Letter II at 2 (stating that multiple NBBOs would undermine effective regulation and investor confidence). 855 See Joint CRO Letter at 2, 3, 4; Nasdaq Letter IV at 3, 12, 36, 49. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 856 See Joint CRO Letter at 2, 4. id. at 3. 858 See id. at 4. The commenter stated that reprogramming its systems to comply with and surveil for compliance with the locked and crossed and order protection rules would be an ‘‘extensive undertaking.’’ Id. See also Nasdaq Letter IV at 12, 36, 49. 859 See Joint CRO Letter at 3. 860 See id. at 2, 3. 861 See Nasdaq Letter IV at 12, 37. See also Joint CRO Letter at 4. 862 See Nasdaq Letter IV at 12. 863 See id. The commenter also stated that the proposal would lead to confusion and inconsistent application if adopted. See id. at 12–13. 864 See id. at 37. 865 See NYSE Letter II at 24. 866 See supra Section III.B.8. 857 See PO 00000 Frm 00064 Fmt 4701 Sfmt 4700 sources of market data, including different ‘‘NBBOs’’ calculated by different market participants as well as the NBBO calculated by exclusive SIPs pursuant to Rule 600(b)(50). While there may be an increased number of data sources in a decentralized consolidation model, the issues described by these commenters are currently dealt with by SRO market surveillance and enforcement staff today. Broker-dealers have considered multiple data sources in complying with trade-through and locked and crossed markets in the context of Regulation NMS. The Commission believes that the amended definition of NBBO should not cause increased exchange enforcement costs or an increase in alerts or false positives because the surveillance and regulatory process will continue as it does today. Currently, SROs already must decide among data sources to use for their surveillance and regulatory systems. SROs must also handle the different data sources used by market participants for regulatory compliance. Market participants may use SIP data, proprietary data, or a combination. Market participants also may calculate their own NBBOs. The data used by market participants today may differ from the data used by the SROs for their surveillance and regulatory systems. Broker-dealers are not required to use a particular source of market data for regulatory compliance. Because brokerdealers may rely on different sources of data—data sources that may not be used by SRO regulatory staff to generate alerts—SRO investigators typically request data from broker-dealers to evaluate whether an alert has discovered an actual violation of the Federal securities laws and exchange rules. This dynamic will not change in a decentralized consolidation model. SROs may decide to use a consolidated market data product generated by a competing consolidator, or they may decide to self-aggregate data to generate consolidated market data for purposes of their surveillance and regulatory systems. SROs will not be required to purchase every consolidated feed to conduct enforcement or surveillance, just as they are not required to purchase all direct proprietary feeds used by market participants. Therefore, SROs should not incur higher enforcement costs because the regulatory process will continue to operate as it does currently.867 Furthermore, even if SRO surveillance and regulatory programs used the same data source as a broker-dealer, SROs 867 See infra Section V.C.2(d); notes 1757–1760 and accompanying text. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations would still have to request information from such broker-dealer due to potential data differences—such as geographic latencies, access options, or processing options—to evaluate whether there is a potential violation. Therefore, the Commission believes that the existence of multiple NBBOs should not present any problems that the SROs have not previously handled. C. Competing Consolidators The Commission believes that the introduction of competing consolidators as the entities responsible for the collection, consolidation, and dissemination of consolidated market data products will update and modernize the national market system and provide market participants and investors with benefits. As noted above, the Commission received many comments that supported the goals of the decentralized consolidation model and the potential positive impacts this model would have on the provision of consolidated market data.868 However, some comments raised concerns about the introduction of competing consolidators and their impact on the national market system, which are discussed below. 1. Definition of ‘‘Competing Consolidator’’ Under Rule 600(b)(16) (a) Proposal The Commission proposed to amend Regulation NMS to introduce competing consolidators as the entities responsible for the collection, consolidation, and dissemination of consolidated market data. 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.’’ (b) Final Rule and Response to Comments The Commission received one comment supporting the proposed definition of competing consolidator.869 The Commission, however, is revising the definition to reflect that competing consolidators are not required to generate a complete consolidated market data product.870 Rule 600(b)(16) defines a competing consolidator 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 a consolidated market data product for dissemination to any person.’’ Regarding the consolidated market data that must be generated by competing consolidators, the Commission asked in the Proposing Release whether competing consolidators should be required to develop a consolidated market data product that contained all of the elements provided under the proposed definition of consolidated market data.871 As proposed, competing consolidators would have had the flexibility to offer different products but were also required to offer a full consolidated market data product. One commenter stated that competing consolidators should not be required to include depth-of-book in the products they sell, as including such data would increase latency and complexity.872 The commenter stated that not mandating the provision of depth-of-book data would encourage competition further and reduce data costs for all consumers.873 Another commenter stated that the requirement that competing consolidators develop a consolidated market data product that contained all of the elements of consolidated market data, regardless of demand, along with other proposed competing consolidator requirements, including registration and Regulation SCI, imposed costs on competing consolidators that would serve as a barrier to entry to potential competing consolidators.874 Another commenter suggested that only a single competing consolidator should be obligated to provide a consolidated market data 869 Data Boiler Letter I at 46. supra Section II.B.2. See also infra Section III.C.8(a)(ii) for a discussion of the revisions to the responsibilities of competing consolidators resulting from this change. 871 See Proposing Release, 85 FR at 16782. 872 See BestEx Research Letter at 2, 5. The commenter said the result would be consumers that prefer depth over latency would be able to find the right products, as would those that prefer latency over depth. 873 See id. at 5. 874 See NYSE Letter II at 14–15. 870 See 868 See supra Section III.B.1; BlackRock Letter, Fidelity Letter, State Street Letter, Wellington Letter, ICI Letter, Virtu Letter, AHSAT Letter, FIA PTG Letter, IntelligentCross Letter, Committee on Capital Markets Regulation Letter, BestEx Research Letter, Wharton Letter, MEMX Letter, Clearpool Letter; T. Rowe Price Letter; Capital Group Letter; DOJ Letter; ACS Execution Services Letter; IEX Letter; Steinmetz Letter (commenting on the entire proposal); SIFMA Letter; ACTIV Financial Letter; MFA Letter; Better Markets Letter. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 PO 00000 Frm 00065 Fmt 4701 Sfmt 4700 18659 product, not all competing consolidators.875 One commenter suggested that competing consolidators should have the flexibility to compete with proprietary data offerings and decide what products to offer to their subscribers.876 The Commission agrees with the comments that objected to requiring that all competing consolidators sell a product containing all of the specified elements of consolidated market data 877 because forcing higher fixed costs and a mandatory product offering across all competing consolidators potentially would make it more difficult for competing consolidators to enter the market and to tailor their services and product offerings while recouping expenses. The Commission believes that allowing competing consolidators to generate their own set of product offerings, tailored to the needs of their subscriber base or otherwise differentiated, will lower the fixed costs of those competing consolidators that elect to specialize in targeted products that do not contain all of the elements of consolidated market data. Specifically, these competing consolidators can offer such products without acquiring the underlying data and developing the technological capability necessary to calculate and consolidate all elements of consolidated market data. This reduction in fixed costs will enable these competing consolidators to offer products that do not contain all elements of consolidated market data and do so in a more costeffective manner, which should enhance their ability to meet the specific data needs of various market participants. In addition, increased participation by more streamlined competing consolidators that operate with fewer constraints and potentially fewer fixed costs, or costs tailored to their own unique product offerings, would promote competition in the market. The Commission recognizes that competing consolidators are the only entities that will generate and disseminate consolidated market data products in the national market system, and acknowledges the possibility that competing consolidators may not offer consolidated market data products that do not contain all of the elements of consolidated market data. However, consistent with the views expressed by a variety of market participants regarding the importance of the 875 Data Boiler Letter I at 52. Letter at 2–3. 877 See BestEx Research Letter at 2, 5; NYSE Letter II at 14–15; BlackRock Letter at 2–3; Data Boiler Letter I at 52. 876 BlackRock E:\FR\FM\09APR2.SGM 09APR2 18660 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations individual elements of consolidated market data, the Commission believes that there will be widespread demand for a product that contains all elements of consolidated market data, and particularly for the additional information included in core data.878 Specifically, because this additional data will provide useful information that will assist in order routing and placement decisions and achieving improved executions for customer orders,879 many broker-dealers that execute customer orders will acquire a product containing all elements of consolidated market data to compete effectively for customer business.880 Consolidated market data includes information that the Commission believes is necessary to disseminate under the rules of the national market system and useful for a broad-cross section of market participants. Accordingly, the Commission believes that there should be demand for products containing all elements of consolidated market data even though, as adopted, Rule 614 will not require competing consolidators to offer them. With respect to the receipt of data by competing consolidators, Rule 603(b), as adopted, requires each SRO to provide its NMS information, including all data necessary to generate consolidated market data, to competing consolidators. In accordance with Rule 603(b), competing consolidators will receive each SRO’s market data that is necessary to generate consolidated market data. One commenter stated that competing consolidators, their subscribers, and self-aggregators should be permitted to receive data elements or products based on need.881 As discussed above, 878 See supra note 112 and accompanying text (noting that multiple Roundtable panelists and commenters supported the inclusion of odd-lot information, depth of book data, and auction information); supra notes 152–153 and accompanying text (describing comments expressing support for the expansion of consolidated market data and core data); 242–244 (describing comments expressing support for the inclusion of smaller-sized orders in higher-priced stocks); 386–388 (describing comments expressing support for the inclusion of depth of book data); 462–464 (describing comments expressing support for the inclusion of auction information). 879 See Proposing Release, 85 FR at 16754 (describing how depth of book data can assist Smart Order Routers and electronic trading systems with the optimal placement of orders across markets); 16759 (explaining how information regarding the size and side of order imbalances can indicate the direction a stock’s price might move, inform decisions on where to price an auction order and what order type to use, and improve execution quality). See also supra Sections II.C.2(b)–II.D.2 (explaining how aggressively priced odd-lots will be included in core data through the definitions of odd-lot information and round lot); II.F.2; II.G.2. 880 See supra Section II.C.2(a). 881 See SIFMA Letter at 11. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 competing consolidators will be permitted to develop different types of consolidated market data products based on the demands of their customers.882 Accordingly, competing consolidators will not be required to receive all of the data content underlying consolidated market data. Rather, competing consolidators can receive the data they need to generate the consolidated market data products they decide to offer, but the Commission notes that competing consolidators that are SIPs required to be registered pursuant to Rule 614 must comply with the Vendor Display Rule when offering consolidated market data products and therefore must receive, at a minimum, the data necessary to satisfy the Vendor Display Rule.883 Competing consolidators will also have the ability to select for themselves, from among the options offered by the SROs, how to access the data underlying consolidated market data (e.g., with different latencies, throughput capacities, and data-feed protocols) and consider costs and complexities related to each option. The Commission believes that these provisions will provide competing consolidators with flexibility to develop their consolidated market data products business in a way that best suits their capabilities and their subscribers’ needs. 2. Comments on Resiliency The Commission received several comments with respect to the impact of competing consolidators on the resiliency of the markets.884 Some 882 See supra Section II.B.2 discussing the definition of consolidated market data product. 883 The Vendor Display Rule requires a SIP that provides a display of quotation and transaction information with respect to an NMS stock, in the context of which a trading or order-routing decision can be implemented, to also provide a consolidated display for that stock. Rule 603(c) of Regulation NMS, 17 CFR 242.603(c). See also supra note 97; FINRA, Regulatory Notice 15–46, 1, 3 n. 12 (2015) (‘‘The exercise of reasonable diligence to ascertain the best market under prevailing market conditions can be affected by the market data, including specific data feeds, used by a firm. For example, a firm that regularly accesses proprietary data feeds, in addition to the consolidated SIP feed, for its proprietary trading, would be expected to also be using these data feeds to determine the best market under prevailing market conditions when handling customer orders to meet its best execution obligations.’’). 884 See Committee on Capital Markets Regulation Letter at 3; BestEx Research Letter at 1; BlackRock Letter at 5; ACS Execution Services Letter at 5; Clearpool Letter at 7–8; Cboe Letter at 25; TechNet Letter II at 2; NYSE Letter II at 24; Data Boiler Letter I at 48; Data Boiler Letter II at 1; NBIM Letter at 6; NovaSparks Letter at 1. The Commission also received one comment that urged the Commission to focus on cybersecurity in upgrading the infrastructure for market data. Temple University Letter at 2. The Commission is amending Rule 1000 of Regulation SCI to make competing consolidators PO 00000 Frm 00066 Fmt 4701 Sfmt 4700 commenters stated that competing consolidators could add resiliency to the markets.885 One commenter said that competing consolidators would strengthen resiliency because there would no longer be a single point of failure that could cause ‘‘stock market paralysis.’’ 886 Similarly, another commenter said that competition could reduce the risk of a single point of failure,887 and another commenter said that the decentralized consolidation model would eliminate the SIP as a single point of failure.888 Two commenters said that having a ‘‘sufficient number of competing consolidators will be important to ensure resiliency and backup in the collection, consolidation, and distribution of consolidated market data.’’ 889 Commenters also argued that introducing competing consolidators could weaken the national market system by increasing a risk of failure,890 or that competing consolidators would not address concerns about a single point of failure.891 One commenter stated that introducing competing consolidators would, in fact, introduce multiple opportunities of failure.892 This commenter said that a competing consolidator with ‘‘a significant exceeding a threshold ‘‘SCI entities.’’ See infra Section III.F. 885 See Committee on Capital Markets Regulation Letter at 3; BestEx Research Letter at 1; BlackRock Letter at 5; ACS Execution Services Letter at 5; Clearpool Letter at 7–8; MEMX Letter at 3, 8; ACTIV Financial Letter at 1 (stating that competition could ‘‘provide investors with a . . . higher reliability framework for determining accurate pricing of NMS securities’’); NovaSparks Letter at 1 (‘‘The competitive nature of the new model will encourage Competing Consolidators to deliver excellent reliability, functionality and performance.’’). 886 Committee on Capital Markets Regulation Letter at 3. 887 See BestEx Research Letter at 1. This commenter also said that competing consolidators would reduce reliance on a single SIP vendor. Id. at 5. 888 See BlackRock Letter at 5. 889 ACS Execution Services Letter at 5; Clearpool Letter at 7–8. However, with respect to business continuity planning and disaster recovery, one commenter said that having a single competitor to the SIP would be sufficient to address concerns about a single point of failure. See Data Boiler Letter I at 48. 890 See Cboe Letter at 25; TechNet Letter II at 2. One commenter noted an inverse relationship between data connection speed and reliability. The commenter stated that exchanges and competing consolidators would need to create a protocol for conditional use of slower, reliable consolidated market data feeds to ensure reliability of such feeds. See NBIM Letter at 6. Competing consolidators will be required to comply with operational capability and resiliency obligations to help ensure that the provision of proposed consolidated market data remains reliable. See infra Section III.F. 891 See NYSE Letter II at 24; Data Boiler Letter I at 48; Data Boiler Letter II at 1. 892 See Cboe Letter at 25. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations customer base’’ could even cause market-wide trading halts if it had system problems and urged caution in making any changes that could ‘‘imperil the resiliency of the U.S. equities market.’’ 893 Another commenter said that competing consolidators would continue the risk of a single point of failure because customers of a single competing consolidator that failed would lose access to its consolidated market data, and unlike when an exclusive SIP fails and impacts all market participants, only customers of the competing consolidator would be disadvantaged.894 To mitigate the risk of failure, the commenter said that subscribers would have to subscribe to at least two competing consolidators and incur the costs of doing so.895 This commenter stated that the Commission did not provide evidence to support its conclusion that the proposed decentralized consolidation model would improve the stability of the market data system for data consumers.896 Another commenter said that there may be high-risk competing consolidators that enter the market (such as cheaper or slower competing consolidators) and their subscribers may not be able to avoid harm quickly enough if technological issues occur.897 Another commenter said that competing consolidators would add technical complexity, which would reduce resilience.898 The Commission does not believe that competing consolidators will expose the national market system to an increased risk of failure 899 or propagate the risk of a single point of failure.900 The Commission believes that the decentralized consolidation model will improve the resiliency of national market system by eliminating single points of failure that exist in the current system. Today, SIP data for Tapes A and B is only provided by the exclusive SIP for the CTA/CQ Plan and SIP data for Tape C is only provided by the exclusive SIP for the Nasdaq UTP Plan. These are single points of failure. In the 893 Id. 894 See NYSE Letter II at 24. Another commenter stated, ‘‘. . . if either of the SIPs experiences a systems issue affecting the quality or availability of market data, all market participants are affected equally by the issue. However, under the competing consolidator model, if one competing consolidator is impaired, it could severely disadvantage that competing consolidator’s subscribers and their investor clients.’’ FINRA Letter at 4. 895 See NYSE Letter II at 24. 896 See id. 897 See Nasdaq Letter IV at 8, 35. 898 See TechNet Letter II at 2. 899 See Cboe Letter at 25; TechNet Letter II at 2. 900 See NYSE Letter II at 24; Data Boiler Letter I at 48. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 decentralized consolidation model, there will be multiple entities— competing consolidators—collecting, consolidating, and disseminating consolidated market data products, which will enhance the resiliency of the national market system. Competing consolidators also will be subject to requirements that are designed to support their resiliency. For example, competing consolidators will be required to disclose publicly, on a monthly basis, their system availability.901 This will encourage competing consolidators to invest in their systems to make sure that they have high rates of system ‘‘up-time.’’ The monthly disclosures will help support systems resiliency by imposing competitive pressures on competing consolidators to ensure that their systems are resilient, as market participants can use the monthly disclosures to assess and compare the performance of a competing consolidator. Competing consolidators that cannot generate and disseminate consolidated market data products reliably likely will not attract or retain subscribers. Furthermore, competing consolidators will be subject to requirements that are designed to support their operational resiliency, including, as appropriate, Regulation SCI. The Commission is also adopting changes to Regulation SCI to help to ensure the integrity and resiliency of competing consolidators.902 The Commission believes that it is important to impose requirements to help ensure that the technology systems of competing consolidators are reliable and resilient, consistent with the policy goals of Regulation SCI. These requirements are designed to address concerns that competing consolidators will become multiple points of failure in the decentralized consolidation model. One commenter urged the Commission to issue standards for when a market participant would have to subscribe to multiple competing consolidators to mitigate the risk that its primary competing consolidator fails.903 As noted above,904 the Commission is not requiring market participants to have back-up competing consolidators, whether such market participants subscribe to SCI competing consolidators or competing consolidators that are not SCI entities, though some may choose to do so in light of their own business needs. The Commission believes that having 901 See 17 CFR 242.614(d)(6) (Rule 614(d)(6)). infra Section III.F. 903 See FINRA Letter at 4. 904 See supra text accompanying notes 756–757. 902 See PO 00000 Frm 00067 Fmt 4701 Sfmt 4700 18661 multiple competing consolidators collect, consolidate, and disseminate consolidated market data products would eliminate a single point of failure that would weaken the entire national market system because if one competing consolidator’s operations experiences a failure, its impact on the markets will be minimized due to the presence of other competing consolidators that can perform the same functions. 3. Comments on Data Quality Several commenters supported the introduction of competing consolidators because of the potential enhancements to the quality of consolidated market data.905 Three commenters believed that competition would improve the quality of consolidated market data.906 However, three commenters questioned the proposal’s impact on data quality, stating that the effects were uncertain and that competition could harm data quality and accuracy, including through attracting untested vendors who provide cheaper but potentially less reliable service.907 One of these commenters stated that competing consolidators could produce varying NBBOs and cheap data products that would limit market information to non-self-aggregating market participants.908 The commenter stated that the Commission will likely have to create additional regulations to set minimum standards ensuring the quality, availability, and accessibility of consolidated market data produced by competing consolidators. The Commission believes that the definitions in Rule 600, as well as the registration and disclosure requirements of Rule 614, will help to ensure the data quality of consolidated market data. All competing consolidators will register with the Commission and become regulated entities (if not already SROs) and will be required to generate consolidated market data products in a manner that is consistent with the definitions set forth in Rule 600. Further, the Commission believes that competition in the decentralized consolidation model will also support high quality consolidated market data. Competing consolidators will be required to produce public monthly reports on their performance and other metrics, which should incentivize 905 See Committee on Capital Markets Regulation Letter at 3; RBC Letter at 5–6; State Street Letter at 3. 906 See Committee on Capital Markets Regulation Letter at 3; RBC Letter at 5–6; Susquehanna Letter at 1. 907 See TD Ameritrade Letter at 13; Nasdaq Letter IV at 4, 7, 35; STANY Letter II at 6. 908 See Nasdaq Letter IV at 26. E:\FR\FM\09APR2.SGM 09APR2 18662 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidators by broker-dealers.915 The Commission believes that a brokerdealer will be responsible for selecting its competing consolidator(s) and will be required to perform its own due diligence to ensure that the competing consolidator(s) it chooses will be able to assist the broker-dealer in meeting its regulatory obligations and its 4. Comments on Competing obligations to its customers, including Consolidator Products best execution.916 Commenters offered suggestions on One commenter sought clarification of the types of products to be sold by a broker-dealer’s responsibility for 910 competing consolidators. Two problems caused by its choice of commenters suggested products that competing consolidator.917 This should be offered by competing commenter asked if a broker-dealer consolidators.911 One of the commenters could be held liable for its competing said that competing consolidators consolidator’s systems issues if such should provide consolidated market issues negatively impact its customers. data at no charge to a registered The commenter also suggested that the academic aggregator to act as an Commission provide guidance for intermediary for the academic broker-dealers that compliance with community.912 The other commenter rules dependent on the availability of stated that competing consolidators accurate market data be assessed based should be required to sell a regulatory on the data provided by a brokerdata-only feed at a fair and reasonable dealer’s competing consolidator or price (relative to the cost of that data as received directly by a self-aggregator.918 part of consolidated market data), and/ Broker-dealers have obligations to or exchanges should be allowed to sell their customers (e.g., a duty of best a regulatory data proprietary market execution) as well as regulatory data feed.913 One commenter requested obligations (e.g., Rule 603(c), Rule 611, clarification as to the ability of a competing consolidator to offer separate Regulation SHO). Broker-dealers need high quality data to satisfy their co-location offerings as part of its obligations. The choice of a competing competitive services.914 consolidator will be relevant to a brokerThe Commission is not requiring dealer’s receipt of market data and competing consolidators to offer therefore, a broker-dealer should assess, reduced cost or free services, but both upon its initial selection and on an competing consolidators could develop ongoing basis, the quality of data such products if they so desired. In received from a competing consolidator. addition to consolidated market data The Commission believes that the products, competing consolidators will selection of a competing consolidator be able to offer other products, such as can impact a broker-dealer’s services to academic products or regulatory data its customers as well as the brokerproducts. Further, the Operating dealer’s ability to comply with its Committee of the effective national regulatory obligations, such as market system plan(s) for NMS stocks providing best execution for its could develop reduced fees for the data content underlying consolidated market customers.919 Broker-dealers will need to conduct their own analysis and data for the academic community or for perform their own due diligence in regulatory data, or the exchanges could choosing and periodically assessing develop and propose, pursuant to competing consolidators that meet their Section 19(b) of the Exchange Act and regulatory needs and the needs of their Rule 19b–4 thereunder, similar customers. products. competing consolidators to perform at a high level in order to attract and maintain a subscriber base. A competing consolidator that does not produce accurate, high quality consolidated market data products would risk losing customers to other competing consolidators.909 5. Comments on Selection of a Competing Consolidator Several commenters raised questions concerning the selection of competing 909 Competing consolidators would also be subject to Commission oversight under Rule 614. See infra Section III.C.7. 910 See Wharton Letter at 4; MFA Letter at 3, 9; McKay Letter at 11. 911 See Wharton Letter at 4; MFA Letter at 3, 9. 912 See Wharton Letter at 4. 913 See MFA Letter at 3, 9. 914 See McKay Letter at 11. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 915 See Healthy Markets Letter I at 4–5 (urging the Commission to establish objective standards for brokers regarding their selection and usage of competing consolidator feeds); FINRA Letter at 6 (stating that a broker-dealer’s best execution obligations would prevent it from selecting a more advantageous source of market data for its proprietary activities than it uses for its clients); Fidelity Letter at 10 (suggesting that regulators examine why a broker-dealer would choose one competing consolidator over another). 916 See supra Section I.E. 917 See FINRA Letter at 4–5. 918 See id. at 5–6. 919 See supra Section I.E. PO 00000 Frm 00068 Fmt 4701 Sfmt 4700 6. Comments on a Standardized Consolidation Process Two commenters recommended standardizing aspects of the operation of competing consolidators, including the consolidation process and the content and distribution mechanism, arguing that standardization could make it easier for subscribers to switch to other competing consolidators and provide consistency across data sets.920 The Commission is not standardizing the competing consolidator consolidation and dissemination processes. The Commission believes competing consolidators are in the best position to develop technical standards for themselves. Furthermore, the Commission believes that competing consolidators should have the flexibility to design the consolidation and delivery services that their subscribers need.921 7. Registration and Responsibilities of Competing Consolidators: Rule 614 The Commission proposed Rule 614 to require SIPs that wish to act as competing consolidators to register with the Commission and publicly disclose certain information about their organization, operations, and products. Under proposed Rule 614, competing consolidators would be subject to certain obligations and would be required to regularly publish certain performance statistics on a monthly basis on their respective websites. (a) Competing Consolidator Registration: Rule 614(a) (i) Rule 614(a)(1)(i): Proposal Proposed Rule 614(a)(1)(i) would prohibit any person, other than an SRO, from (A) receiving directly from a national securities exchange or national securities association information with respect to quotations for and transactions in NMS stocks; and (B) 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 920 See BlackRock Letter at 5; MEMX Letter at 8. See also RBC Letter at 6 (suggesting that the Commission provide guidance on the minimum specifications for methods and processes of delivery for competing consolidators to avoid having multiple methods and processes, which could result in a tiered system of market data and reduced competition); MIAX Letter at 2 (suggesting that the Commission require all competing consolidators to utilize the same transport protocols (i.e., multicast) when transmitting data to market participants). 921 The Commission will monitor issues related to the implementation of the decentralized consolidation model, including whether standardization of the competing consolidator consolidation or dissemination processes would benefit market participants. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations The Commission is revising proposed Rule 614(a)(1)(i) to address a comment relating to market data vendors, as discussed below. Rule 614(a)(1)(i)(A), as adopted, will provide: ‘‘No person other than a national securities exchange or a national securities association . . . may receive directly, pursuant to an effective national market system plan, from a national securities exchange or national securities association information with respect to quotations for and transactions in NMS stocks’’ (addition in italics). This new language is intended to clarify the entities that will be required to register as a competing consolidator. The Commission requested comment on the proposed registration process, including whether competing consolidator registration should be subject to Commission approval and/or additional or different regulation.923 The Commission received several comments regarding proposed Rule 614(a)(1)(i). A few commenters described the proposed registration process as ‘‘onerous,’’ ‘‘overly burdensome’’ and a ‘‘barrier to entry.’’ 924 However, other commenters supported the registration process and urged regulating competing consolidators ‘‘with the same rigor and governance applied to the SIP plans today.’’ 925 While the registration of competing consolidators is a new regulatory process that will be required of entities that may not be regulated today, as discussed below, the registration process is necessary and does not unduly burden potential competing consolidators. While there are costs and burdens associated with the registration process,926 the Commission believes that such costs and burdens are justified by the benefits of Commission oversight and the disclosure of competing consolidator operations for market participants. As discussed in the Proposing Release, the regulatory regime and responsibilities of competing consolidators are 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 through a relatively streamlined process that imposes appropriate burdens on entities likely to register as competing consolidators. The Commission designed the competing consolidator registration process to provide the Commission with information necessary for it to perform its regulatory oversight of these important market participants without imposing burdensome regulatory requirements on registrants.927 Further, the registration process for competing consolidators was designed to limit the burdens on competing consolidators, commensurate with their role. The competing consolidator regime is less burdensome than the registration process applicable for exclusive processors. As described in the Proposing Release, the registration process for exclusive processors is set forth in Section 11A of the Exchange Act 928 and requires the Commission to grant applications or institute proceeding to determine whether a registration should be denied.929 The Commission, however, proposed a more streamlined and limited process. As part of this process, the Commission will not approve Form CC and amendments to Form CC. Rather, the Commission is adopting a process in which a potential competing consolidator’s registration will become effective unless the Commission issues an order declaring its Form CC ineffective. The Commission believes that this registration process will allow potential competing consolidators to begin operating relatively quickly, while still allowing the Commission to review Form CC for non-compliance with Federal securities laws and the rules and regulations thereunder, and for material deficiencies with respect to accuracy, currency, or completeness. Section 11A(b)(1) of the Exchange Act 930 provides that a SIP not acting as the ‘‘exclusive processor’’ 931 of any information with respect to quotations 922 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. 923 See Proposing Release, 85 FR at 16778. 924 NYSE Letter at 14; ACTIV Financial Letter at 2–3; Nasdaq Letter II at 37. 925 WFE Letter at 1. See also MIAX Letter at 5. 926 See infra Section V.C.3. 927 The Form CC filing process is a notice-based registration process and is similar to other noticebased filing processes required by the Commission. See Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844 (Dec. 22, 1998) (‘‘Regulation ATS Adopting Release’’). 928 15 U.S.C. 78k–1. 929 See Proposing Release, 85 FR at 16778. 930 15 U.S.C. 78k–1(b)(1). 931 See Section 3(b)(22)(B) of the Exchange Act for the definition of exclusive processor. with the Commission an initial Form CC and the initial Form CC has become effective pursuant to proposed Rule 614(a)(1)(v).922 (ii) Rule 614(a)(1)(i): Final Rule and Response to Comments VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 PO 00000 Frm 00069 Fmt 4701 Sfmt 4700 18663 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, a competing consolidator would not fall under the statutory definition of ‘‘exclusive processor.’’ Section 11A(b)(1) of the Exchange Act provides the Commission with authority to require the registration of a SIP not acting as an exclusive processor by rule or order. Under the adopted rules, competing consolidators will play a vital role in the national market system by collecting, consolidating, and disseminating consolidated market data. Because the availability of prompt, accurate, and reliable consolidated market data is essential to investors and other market participants, the Commission 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 Rule 614. The Commission is thus exercising this authority by adopting Rule 614 to establish the process by which SIPs that wish to act as competing consolidators will 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, by order grant the application or institute proceedings to determine whether the registration should be denied.932 At the conclusion of the proceedings, the Commission must, by order, grant or deny the registration.933 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 exempt conditionally or unconditionally 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 932 See 933 See E:\FR\FM\09APR2.SGM Section 11A(b)(3). Section 11A(b)(3)(B). 09APR2 18664 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations 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 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 934 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 exclusive SIPs 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 does not believe that this process for exclusive processors in necessary for competing consolidators. The Commission believes that the registration process in Rule 614 will 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. The streamlined registration process is also designed to reduce regulatory burdens and encourage entities to register as competing consolidators. In addition, the Commission 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,935 which requires a 934 15 U.S.C. 78k–1(b)(3). 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 935 Section VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 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 competing consolidators will not engage in collecting, processing, or preparing data on an exclusive basis. Therefore, the Commission 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 competing consolidators. The Commission believes that the decentralized consolidation model with multiple competing consolidators will reduce the likelihood that a subscriber will not be able to access consolidated market data. Subscribers will be able to obtain such data from another competing consolidator. Accordingly, the Commission believes that it will be consistent with the protection of investors and the public interest to exempt competing consolidators from Section 11A(b)(5) of the Exchange Act. (iii) Comments on Data Vendors Two commenters expressed concern that current market data vendors would have to register as competing consolidators to continue receiving consolidated market data directly from SROs.936 One of the commenters stated that proposed Rule 614(a)(1)(i) appeared to require market data vendors that generate and disseminate consolidated market data in NMS stocks based on information received directly from SROs to register as competing consolidators.937 The commenter further stated that the discussion of market data vendors in the Proposing Release created uncertainty regarding whether the Commission intended to require market data vendors to register as competing consolidators to continue engaging in their current businesses.938 The other commenter said the proposal stated that data vendors that want to continue to receive proprietary data that included data content underlying 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. 936 See IDS Letter I at 3, 4; NYSE Letter II at 18. 937 See IDS Letter I at 3, 4. 938 See id. at 3. PO 00000 Frm 00070 Fmt 4701 Sfmt 4700 consolidated market data from an SRO would have to register as competing consolidators, or they would have to subscribe to a competing consolidator to purchase this data. The commenter said the price of this data could increase, causing a data vendor’s customer base to decrease.939 In the Proposing Release, the Commission stated that 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).940 The Commission agrees that Rule 614(a)(1)(i), as proposed, could create uncertainty with respect to whether market data vendors would be able to continue their current businesses without being required to register as competing consolidators. Accordingly, the Commission is revising proposed Rule 614(a)(1)(i) to provide that no person, other than a national securities exchange or a national securities association, ‘‘[m]ay receive directly, pursuant to an effective national market system plan, from a national securities exchange or national securities association information with respect to quotations for and transactions in NMS stocks’’ and ‘‘[g]enerate consolidated market data products 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)’’ (italicized to show changes to the proposed language).941 939 See NYSE Letter II at 18. Proposing Release, 85 FR at 16770, n. 434. 941 This provision is also updated to reflect the new definition of consolidated market data product. See supra Section II.B. 940 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations The Commission believes that adopted Rule 614(a)(1) makes clear that only entities that receive information with respect to quotations for and transactions in NMS stocks directly pursuant to an effective national market system plan from a national securities exchange or national securities association, and generate consolidated market data products for dissemination, will be required to register as competing consolidators. A market data vendor that purchases proprietary data feeds from an SRO or SROs, or that purchases data from a competing consolidator, and aggregates and disseminates such data to its customers, will not be required to register as a competing consolidator. However, vendors that do not register as competing consolidators would not be permitted to purchase the NMS information necessary to generate consolidated market data from the SROs at prices established by an effective national market system plan. The commenter also argued that the proposal fails to assess the cost of the proposed changes on market data vendors.942 The commenter’s primary concern with respect to the proposal’s potential costs to market data vendors arose from the assumption that market data vendors would be required to register as competing consolidators. As stated above, a market data vendor is not required to register as competing consolidator unless it wishes to purchase information with respect to quotations for and transactions in NMS stocks directly from a national securities exchange or national securities association pursuant to an effective national market system plan, and generate consolidated market data products for dissemination, i.e., act as competing consolidator. Accordingly, the adopted rules do not necessarily increase costs for market data vendors. The commenter further stated that the primary impact of the proposal on a market data vendor that does not register as a competing consolidator (and therefore does not purchase data directly from the SROs at prices established by the effective national market system plan(s)) would come from changes in the prices that the SROs charge for their proprietary data feeds, which the commenter describes as ‘‘unregulated.’’ 943 The Commission acknowledges this assessment but clarifies that proprietary data fees are regulated, although such fees are not subject to this rulemaking nor are they subject to the same regulatory process that is used for effective national market 942 See 943 Id. IDS Letter I at 5–6. at 5. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 system plan(s) fees.944 The exchanges are required to file all proposed fees for their proprietary data products with the Commission pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder and the proposed fees must satisfy the standards under the Exchange Act, including Section 6(b)(4) and Section 15A(b)(5).945 (iv) Comments on Competing Consolidators Affiliated With Exchanges In the Proposing Release, the Commission stated that because Section 3(a)(22)(A) of the Exchange Act excludes SROs from the definition of SIP they would not have to register as a competing consolidator pursuant to proposed Rules 614(a) through (c) and proposed Form CC.946 The Commission stated that an SRO could either operate a competing consolidator under its SRO as a facility or could operate a competing consolidator in a separate affiliated entity, not as a facility of the SRO.947 Several commenters addressed this topic. One commenter, arguing that SRO obligations are not a substitute for the competing consolidator requirements, stated that an SRO or its affiliate that acts as a competing consolidator should be registered as such and should be subject to the same disclosure and other requirements as other competing consolidators.948 Two commenters questioned the proposal’s assumption that SROs or their affiliates would be willing to become competing consolidators.949 Three commenters stated that a competing consolidator that was a facility of a national securities exchange would be at a competitive disadvantage to competing consolidators that were not exchange facilities.950 One commenter noted that a competing consolidator that was not an exchange facility could change its products and their associated fees in response to competitive forces, while a competing consolidator that was a facility of an exchange would be required to file a proposed rule change with the 944 See Effective-Upon-Filing Adopting Release, supra note 17. NMS Plan amendments are subject to Rule 608 of Regulation NMS, 17 CFR 242.608. 945 Sections 6(b)(4) and 15A(b)(5) of the Exchange Act require that the rules of a national securities exchange or national securities association provide for the equitable allocation of reasonable dues, fees, and other charges among its members and issuers and other persons using its facilities. 946 See Proposing Release, 85 FR at 16779, n. 537. 947 See Proposing Release, 85 FR at 16779, n. 537. 948 See IEX Letter at 8–9. 949 See NYSE Letter II at 17–18; IDS Letter I at 15– 21. 950 See NYSE Letter II at 17–18; IDS Letter I at 19– 21; MIAX Letter at 5. PO 00000 Frm 00071 Fmt 4701 Sfmt 4700 18665 Commission pursuant to Section 19(b) of the Exchange Act to make the same changes.951 Another commenter stated that the proposal established a two tiered system, with competing consolidators that are not affiliated with an exchange subject to the relatively streamlined Form CC regime and exchange facility competing consolidators subject to the more stringent framework, including the 19b– 4 rule filing process.952 A third commenter suggested that to alleviate this disparity the Commission should subject both SROs and non-SROs that seek to become competing consolidators to the same regulatory standards by subjecting the Form CC, and any amendment thereto, to Commission review and approval.953 Two commenters also stated that the Proposal did not explain how a competing consolidator affiliated with an exchange could avoid being a facility of the exchange.954 One commenter stated that the absence of guidance with respect to when an affiliated competing consolidator would be a facility of an exchange substantially reduces the likelihood that entities affiliated with SROs would create competing consolidators.955 The commenter further asserted that the failure to address this important issue for potential competing consolidators made it impossible to comment adequately and comprehensively on the proposal.956 Another commenter stated that the Commission should consider issuing interpretive guidance to provide 951 See NYSE Letter II at 17–18. IDS Letter I at 21. Another commenter stated that disparate treatment of exchanges as competing consolidators violates the APA, explaining that exchanges acting as competing consolidators would be subject to Sections 6(b) and 19(d) of the Exchange Act, while non-facility competing consolidators would not be subject to these requirements. The commenter stated that nonfacility competing consolidators would enjoy a ‘‘significant competitive advantage over exchange competing consolidators by having greater pricing flexibility and not being subject to the denial of access process.’’ See Nasdaq Letter IV at 44. 953 See MIAX Letter at 5. The commenter also expressed concern that an exchange-operated competing consolidator with an unregulated affiliate that provides access and connectivity services could use the networks of the nonregulated affiliate to offer pricing discounts or other incentives to encourage market participants to purchase the competing consolidator’s consolidated market data. The commenter asserted that an affiliate of an exchange that provides access and connectivity to exchange systems is a facility of the exchange because it is a ‘‘system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange.’’ Id. at 4. 954 See NYSE Letter II at 17; IDS Letter I at 17. 955 See IDS Letter I at 21. 956 See id. at 18. 952 See E:\FR\FM\09APR2.SGM 09APR2 18666 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations additional clarity around the definition of a facility of an exchange.957 The questions raised by commenters relate to the Commission’s application of the terms ‘‘exchange’’ and ‘‘facility’’ of an exchange, defined in Sections 3(a)(1) and (2) of the Exchange Act, to the activities of competing consolidators affiliated with exchanges. Section 3(a)(1) defines an ‘‘exchange’’ to include ‘‘an organization, association, or group of persons, whether incorporated or unincorporated,’’ that maintains a ‘‘market place’’ for ‘‘bringing together purchasers and sellers of securities.’’ 958 Section 3(a)(2) defines a ‘‘facility’’ of an exchange to include the exchange’s premises, tangible or intangible property whether on the premises or not, or any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange.959 Section 3(a)(2) specifically includes services such as systems of communication to or from the exchange.960 The Commission has observed that the determination of whether a service is a facility of an exchange requires an analysis of the particular facts and circumstances.961 In the Proposing Release, the Commission stated that an exchange could choose whether to operate a competing consolidator (1) as a facility of the exchange, or (2) as a separate affiliate, not as a facility, registered as a competing consolidator.962 The application of the definition of ‘‘facility’’ of an exchange does not turn 957 See McKay Brothers Letter at 2. 3(a)(1) of the Exchange Act defines ‘‘exchange’’ as any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange. 15 U.S.C. 78c(a)(1). See also 17 CFR 240.3b–16. 959 Section 3(a)(2) of the Exchange Act defines the term ‘‘facility’’ when used with respect to an exchange includes its premises, tangible or intangible property whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any system of communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service. 15 U.S.C. 78c(a)(2). 960 See id. See also Securities Exchange Act Release No. 90209 (October 15, 2020), 85 FR 67044, 67048 (October 21, 2020) (SR–NYSE–2020–05; SR– NYSE–2020–11 et al.) (‘‘NYSE Wireless Order’’). 961 See Securities Exchange Act Release No. 76127 (October 9, 2015), 80 FR 62584, 62586 n. 9 (October 16, 2015) (SR–NYSE–2015–36) (Order Approving Proposed Rule Change amending Section 907.00 of the Listed Company Manual). 962 Proposing Release, 85 FR at n. 537. 958 Section VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 on which particular entity directly holds a particular asset, including the national securities exchange license.963 Accordingly, whether a competing consolidator affiliated with a national securities exchange is a facility of that exchange does not depend solely on corporate structure, but rather on a facts-and-circumstances analysis of the functions provided by the affiliated competing consolidator and its relationship with the exchange.964 The Commission would expect that the activities of a competing consolidator affiliated with a national securities exchange would be likely to fall within the statutory definitions. The Commission also understands that the facts and circumstances with respect to each exchange and competing consolidator relationship may be different, including that there are different corporate structures under which an exchange could operate a competing consolidator. Therefore, to address the concerns raised by commenters and to foster a level competitive playing field for competing consolidators that are facilities of an exchange, the Commission believes that an exemption from certain regulatory requirements, subject to the conditions set forth below, would be appropriate in the public interest and consistent with the protection of investors. Section 36(a)(1) of the Exchange Act authorizes the Commission, subject to certain limitations, to conditionally or unconditionally exempt any person, security, or transaction, or any class thereof, from any provision of the Exchange Act or rule thereunder, if necessary or appropriate in the public interest and consistent with the 963 See NYSE Wireless Order, supra note 960, at 67047. Cf. Securities Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 70844, 70852 (Dec. 22, 1998) (‘‘Regulation ATS Adopting Release’’) (stating, in the context of entities providing trading systems that function as ATSs, that ‘‘[t]he Commission will attribute the activities of a trading facility to a system if that facility is offered by the system directly or indirectly (such as where a system arranges for a third party or parties to offer the trading facility). . . . In addition, if an organization arranges for separate entities to provide different pieces of a trading system . . . , the organization responsible for arranging the collective efforts will be deemed to have established a trading facility.’’). 964 A particular function provided by an organization, association, or group of persons, whether incorporated or unincorporated, may fall within the statutory definition of ‘‘exchange’’ when business activities performed across the group constitute part of that market place for bringing together purchasers and sellers. See NYSE Wireless Order, supra note 960, at 67047. An entity’s mere affiliation with an exchange, without more, is not solely determinative of whether a function is a facility of an exchange. See Securities Exchange Act Release No. 44983 (Oct. 25, 2001), 66 FR 55225 (Nov. 1, 2001) (SR–PCX–00–25). PO 00000 Frm 00072 Fmt 4701 Sfmt 4700 protection of investors.965 The limited exemption would exempt a national securities exchange with respect to its competing consolidator activities from (i) the rule filing requirements in Section 19(b)(1) of the Exchange Act and Rule 19b–4 thereunder, (ii) the denial of access provisions in Section 19(d) of the Exchange Act, (iii) the requirements in Section 6(b) of the Exchange Act; and (iv) the requirements in Regulation SCI applicable to SCI SROs (unless the competing consolidator is otherwise subject to Regulation SCI as Regulation SCI would be applied to a competing consolidator). As a condition of the exemptive relief, the competing consolidator must be registered under Rule 614 and be in compliance with all regulatory requirements applicable to competing consolidators under Rule 614, including the requirement to file Form CC. To promote a level playing field, and as required by Rule 603(b), the national securities exchange must not provide any latency, content, connectivity, cost or other competitive advantages with respect to the provision of the content underlying the consolidated market data to the affiliated competing consolidator.966 As a further condition of the exemption, and to ensure that the national securities exchange does not leverage exchange products and services to establish an unfair competitive advantage, a national securities exchange would not be permitted to link the pricing for or condition availability for services of the affiliated competing consolidator to any products or services of the exchange, including transactions, connectivity and data.967 Such limited exemptive relief is appropriate and in the public interest to foster the successful implementation of the decentralized consolidation model. The limited exemptive relief is designed to help foster a competitive environment premised on a level regulatory playing field. In particular, it will facilitate the entry of competing consolidators that are affiliated with national securities exchanges into the market for the consolidation and 965 15 U.S.C. 78mm(a)(1). 603(b) requires a national securities exchange to provide its NMS information, including all data necessary to generate consolidated market data, to all competing consolidators and selfaggregators in the same manner and using the same methods, including all methods of access and the same format, as the national securities exchange makes available any information to its affiliated competing consolidator. 967 This condition is based on the particular risk, given the special position of exchanges in the market and the regulatory requirements applicable to exchanges, posed by allowing exchanges to link services and pricing with those of the competing consolidator. 966 Rule E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations dissemination of consolidated market data products thereby increasing competition for those services as contemplated by the decentralized consolidation model. This exemptive relief will not place any burdens on, or otherwise disadvantage, non-affiliated competing consolidators. The limited exemptive relief is also consistent with the protection of investors. Rule 19b–4 requires an SRO to file a proposed rule change with respect to any ‘‘material aspect’’ of the operation of its facilities that is then subject to Commission review and approval.968 Section 6(b), among other things, requires the rules of an exchange to provide for equitable allocation of reasonable fees, not permit unfair discrimination between customers, and not impose any unnecessary or inappropriate burden on commerce. Section 19(d) of the Exchange Act, among other things, limits the denial of access to SRO services. The registration, disclosure and other regulatory requirements for competing consolidators in Rule 614 and Form CC, including the potential that such forms could be declared ineffective and the requirement to make consolidated market data products available to subscribers on terms that are not unreasonably discriminatory, help ensure appropriate transparency and oversight for the protection of investors. In addition, competing consolidators that are affiliated with national securities exchanges that elect the exemption will be subject to the same Regulation SCI requirements applicable to other competing consolidators, which will help ensure systems integrity, reliability, and resiliency to protect the interests of investors. This exemptive relief will promote a level playing field among the various types of competing consolidators. The exemptive relief and the conditions for that relief serve to subject competing consolidators that are affiliated with a national securities exchange to the same regulatory framework that applies to other competing consolidators to eliminate competitive advantages and foster a competitive environment for all competing consolidators. This exemptive relief thus addresses the concerns raised by commenters that competing consolidators that are affiliated with a national securities 968 17 CFR 240.19b–4. Section 19(b)(1) of the Exchange Act defines a ‘‘proposed rule change’’ as ‘‘any proposed rule, or any proposed change in, addition to, or deletion from the rules of’’ a selfregulatory organization. 15 U.S.C. 78s(b)(1). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 exchange will be at a disadvantage to other competing consolidators.969 The Commission intends to monitor the activities of all registered competing consolidators, including those that are affiliated with a national securities exchange, through the notification and filing requirements in Rule 614 and Form CC, and other requirements applicable to competing consolidators. In addition, the Commission will monitor the activities of competing consolidators that are facilities of an exchange through its examinations of both the national securities exchange and the competing consolidator. This exemptive relief is limited to the regulatory requirements described above. The Commission will consider requests for additional exemptive relief from specific regulatory provisions to address any remaining concerns about creating and maintaining an equal playing field. The Commission will consider such requests based on the particular facts and circumstances at hand, and grant such a request if necessary or appropriate in the public interest and consistent with the protection of investors. This limited exemptive relief does not affect any regulatory obligations that apply to any other functions, products or services provided by exchanges or facilities thereof, including the provision, distribution and transport of proprietary market data feeds and other market data, communication systems that convey order information to and from the exchange, or connectivity to those communication systems. (v) Minimum Standards for Competing Consolidators Two commenters recommended that the Commission establish uniform baseline standards that all competing consolidators would be required to meet continuously to avoid possible ‘‘conflation,’’ which, according to the commenters, may occur when an exchange or other market participant provides only its most-recent quote or trade to the SIPs and skips or removes prior quotes due to system capacity constraints or by purposefully shaping bandwidth to remain below certain capacity thresholds.970 The commenters stated that the absence of uniform standards could allow a competing consolidator to offer a lower-cost product that would often be conflated and incomplete and that could conceal 969 See IDS Letter I at 21 and Nasdaq Letter IV at 44 (comments discussed supra note 952). 970 See MIAX Letter at 2; Healthy Markets Letter II at 2. PO 00000 Frm 00073 Fmt 4701 Sfmt 4700 18667 potential abuses.971 One commenter identified minimum standards that it believed the Commission should require a competing consolidator to satisfy.972 Rule 614(d) requires each competing consolidator to calculate and generate consolidated market data products and make consolidated market data products available to its subscribers. This means that competing consolidators must be able to accept all of the data content that encompasses the consolidated market data products they offer. In addition, competing consolidators will be subject to operational capability, systems integrity, and resiliency obligations,973 and Rule 614(d)(5) requires each competing consolidator to publish certain system performance metrics on its website each month. As stated above,974 these disclosures should help to facilitate a broker-dealer’s ability to achieve and analyze best execution because they provide information regarding the timeliness, completeness, and accuracy of the market data offered by competing consolidators.975 These disclosures also provide statistics on capacity, network delay and latency, offering additional insight into the technical capabilities and expected performance of a competing consolidator. This information will assist a broker-dealer in selecting an appropriate competing consolidator, which in turn impacts the brokerdealer’s ability to obtain ‘‘the most favorable terms reasonably available under the circumstances’’ for its customer orders. The Commission believes that these requirements will help to ensure that competing consolidators have adequate system capacity to meet the needs of different types of subscribers and will ensure an accurate record of quotes and trades for 971 See id. MIAX Letter at 2. The commenter recommended that the Commission do the following: ‘‘set forth reasonable minimum bandwidth requirements for Competing Consolidators to ensure that conflation does not occur due to capacity constraints, including during times of increased market volatility; set forth minimum performance requirements for Competing Consolidators that allow for a reasonable amount of conflation; require all Competing Consolidators to utilize the same transport protocols (i.e., Multicast) when transmitting data to market participants; likewise require that each national securities exchange utilize these same transfer protocols when transmitting core data to a Competing Consolidator; and require each national securities exchange to sequence the message fields in the same manner when transmitting their core data to a Competing Consolidator or via their proprietary data products, with any supplemental information (i.e., data regarding exchange specific programs) sequenced behind core data.’’ See MIAX Letter at 2. 973 See infra Section III.F. 974 See supra notes 104–105 and accompanying text. 975 See supra note 90 and accompanying text. 972 See E:\FR\FM\09APR2.SGM 09APR2 18668 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations subscribers. Accordingly, the Commission does not believe that it is necessary, at this time, to mandate minimum capacity or other minimum standards for competing consolidators.976 (vi) Potential Advantage of Incumbent Exclusive SIPs One commenter asserted that the incumbent exclusive SIPs would have a significant advantage over other entities seeking to become competing consolidators because they could use their existing infrastructure to operate a competing consolidator that could charge lower fees than new entrants because they would not incur the upfront capital expenditures required to build a competing consolidator.977 The commenter suggested that the Commission consider ways to require the incumbent exclusive SIPs to reimburse each Plan’s Participants their proportionate share of their costs paid and used to build and support each exclusive SIP’s systems as a means to allowing each exclusive SIP to purchase its existing infrastructure to use to act as a competing consolidator.978 Any determinations regarding payments to Participants or the disposition of the assets of the exclusive SIPs would be made by the Participants of the Equity Data Plans.979 If the operators of the exclusive SIPs (i.e., SIAC and Nasdaq) decide to become competing consolidators and to operate their competing consolidator business using existing infrastructure of the exclusive SIPs, the Commission does not believe that they will have a significant advantage over other potential competing consolidators. The current operators of the exclusive SIPs would need to reach an agreement with the Participants of the Equity Data Plans regarding the disposition of the assets of the exclusive SIPs and would need to modify existing systems to produce consolidated market data products, which as described above, may contain more information than what the exclusive SIPs currently provide as SIP data. In addition, the exclusive SIPs will have to make changes to their systems to accommodate the changes to regulatory data. The exclusive SIPs also might find it necessary to upgrade the 976 The Commission will monitor the performance of competing consolidators, including whether there is a need to establish minimum standards for competing consolidators. 977 MIAX Letter at 2–3. 978 Id. at 3. 979 If the Participants determine that the effective national market system plan(s) needs to be amended for this purpose, such amendment would have to be filed with the Commission pursuant to Rule 608 of Regulation NMS. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 performance of the existing systems to compete effectively against market data vendors that currently utilize superior technology and may register to become competing consolidators. (b) Rule 614(a)(1)(ii): Electronic Filing and Submission (i) Proposal 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. The proposal contemplated 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 used by SROs to file proposed rules and rule changes and by SCI entities to file Forms SCI.980 Other potential methods of electronic filing of Form CC were also described, including 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. (ii) Final Rule and Response to Comments The Commission requested comment on the electronic filing requirement and asked whether EFFS or another system would be efficient for purposes of filing Form CC. One commenter supported the use of EFFS.981 The Commission believes that an electronic filing process is efficient and cost effective. The Commission has used EFFS for many years for proposed SRO rules and rule changes filed pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, as well as Regulation SCI and the Commission believes that this system will be appropriate for registering competing consolidators. Further, the Commission believes that it will be easier and cost effective for competing consolidators and the Commission to use one system for competing consolidator filings. Competing consolidators that are SCI entities will have to submit filings pursuant to Regulation SCI via EFFS.982 Therefore, for those competing consolidators it would be easier and cost effective to use one filing system to 980 See Securities Exchange Act Release No. 50486 (Oct. 4, 2004), 69 FR 60287 (Oct. 8, 2004) (adopting EFFS for use in filing Form 19b–4). 981 See Data Boiler Letter I at 50. 982 See 17 CFR 242.1006 (Rule 1006) of Regulation SCI (relating to electronic filing and submission). PO 00000 Frm 00074 Fmt 4701 Sfmt 4700 submit filings with the Commission.983 The use of EFFS for all competing consolidators’ filings will also be cost effective for the Commission. (c) Rule 614(a)(1)(iii): Commission Review Period (i) Proposal 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.984 The Commission believed 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.985 (ii) Final Rule and Response to Comments The Commission did not receive any comments on this proposed rule. The Commission believes that the review period provides adequate time for the Commission to evaluate an initial Form CC. Therefore, the Commission is adopting the rule as proposed. (d) Rule 614(a)(1)(iv): Withdrawal of Initial Form CC (i) Proposal 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). (ii) Final Rule and Response to Comments The Commission did not receive any comments on this proposed rule. The Commission believes that competing consolidators should withdraw an initial Form CC that becomes inaccurate or incomplete to ensure that the Commission’s review is based upon complete and accurate information. Therefore, the Commission is adopting the rule as proposed. (e) Rule 614(a)(1)(v): Effectiveness; Ineffectiveness Determination (i) Proposal Proposed Rule 614(a)(1)(v)(A) would provide that an initial Form CC would 983 See infra Section V.C.3(a). also proposed Rule 17 CFR 242.614(a)(1)(iv)(B) (Rule 614(a)(1)(iv)(B)). 985 See Proposing Release, 85 FR at 16779. 984 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations 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. (ii) Final Rule and Response to Comments The Commission requested comment on whether the proposal to allow an initial Form CC to become effective by operation of the rule without a Commission issuing an order would provide sufficient notice that an initial Form CC has become effective.986 One commenter stated, without more, that ‘‘an official order would be nice to have.’’ 987 The Commission is adopting Rule 614(a)(1)(v) as proposed. The Commission believes that 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, an initial Form CC should be declared ineffective. The Commission will 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, currency, or completeness. If the Commission declares an initial Form CC ineffective, the applicant will be prohibited from operating as a competing consolidator, but will be able to file a new Form CC to address any disclosure deficiencies or other issues that caused the initial Form CC to be declared ineffective. While one commenter suggested without articulating a reason that the Commission issue an order declaring a Form CC effective, the Commission does not believe that such an order is necessary in this context because all effective Form CCs will be published by the Commission on the Commission’s website, which will provide notice to market participants that a competing consolidator has an effective Form CC and is permitted to operate. 986 See 987 See Proposing Release, 85 FR at 16780. Data Boiler Letter I at 50. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 (f) Rule 614(a)(2): Form CC Amendments (i) Proposal Proposed Rule 614(a)(2) would provide the requirements for amending an effective Form CC. Proposed Rule 614(a)(2)(i) would 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 (a ‘‘Material Amendment’’); 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’’) (each a ‘‘Form CC Amendment’’).988 (ii) Final Rule 614(a)(2) and Response to Comments The Commission received several comments regarding proposed Rule 614(a)(2). One commenter questioned how far ahead of implementing a new service or fee a competing consolidator would be required to file a Form CC amendment.989 The commenter also questioned whether the Commission or its staff could object to a new service or fee.990 One commenter stated that the requirement to file a Material Amendment, along with information relating to operational capability, market data products fees, co-location, and related services, would reduce the variety of products offered.991 The commenter asserted that this information would change frequently as a competing consolidator improved and modified its services to meet the needs of different customers.992 The commenter further stated that market participants would find other ways to select competing consolidators, making it unnecessary to report this information publicly.993 One commenter raised no objection to the proposed requirement to prepare an Annual Report because interested persons may be interested in learning about changes in ownership.994 The Commission is adopting Rule 614(a)(2) as proposed. The Commission acknowledges the commenter’s concern that the requirement to file a Material Amendment, along with information relating to operational capability, 988 See proposed Rules 614(a)(1)(i) and (a)(2)(i) and (ii). 989 See IDS Letter I at 10. 990 See id. 991 See NovaSparks Letter at 2. 992 See id. 993 See id. 994 See Data Boiler Letter I at 51. PO 00000 Frm 00075 Fmt 4701 Sfmt 4700 18669 market data products fees, co-location, and related services, could reduce the variety of products offered. However, the Commission believes that the required Form CC amendments, including Material Amendments and Annual Reports, and the process by which they are filed, properly balances this concern with the need to provide market participants with necessary information regarding a competing consolidator’s organization, operational capability, consolidated market data products, fees, and co-location and related services to determine whether to subscribe, or continue subscribing, to a competing consolidator. As required by Rule 614(a)(2)(i), a competing consolidator must file a Material Amendment, which is defined as a material change to the pricing, connectivity, or products offered, prior to such change’s implementation. The Commission will review all Form CC amendments for completeness, clarity, and conformance with the requirements of Rule 614 and Form CC. The instructions to Form CC state that an incomplete or deficient filing may be returned to the competing consolidator and any filing so returned will be deemed not to have been filed with the Commission. However, the Commission will not affirmatively approve amendments to Form CC, including Material Amendments, which should streamline the process. Although some competing consolidators may frequently file amendments to Form CC to respond to subscriber demand, these amendments would not be subject to Commission approval before effectiveness. The information in Form CC amendments will assist market participants in evaluating which products and services of the competing consolidator will be most useful to them. This information 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 be required to maintain an accurate, current, and complete Form CC. The Commission disagrees with the commenter’s assertion that it is unnecessary to make the information required in the initial Form CC and in Material Amendments publicly available. The information reported in the initial Form CC and in Material Amendments will help to ensure that all E:\FR\FM\09APR2.SGM 09APR2 18670 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations market participants have access to the same information regarding competing consolidators, the products and services they offer, and the fees for those products and services, and that that information remains current. Although the filing of Form CC and Material Amendments will create an administrative requirement for competing consolidators, the Commission does not believe that these filing requirements will unduly limit the products that a competing consolidator is able to offer. different consolidated market data products and use different formats. Firms will likely need to make systems changes and perform testing of a new competing consolidator if the competing consolidator they use decides to cease operations. The Commission believes that firms should be provided with sufficient time to make necessary systems changes and conduct performance testing before losing the services of a competing consolidator so that they are able to have continuity of consolidated market data services. (g) Rule 614(a)(3): Notice of Cessation (h) Rule 614(a)(4): Date of Filing (i) Proposal Proposed Rule 614(a)(3) required a competing consolidator to file 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 will cause the Form CC to become ineffective on the date designated by the competing consolidator. (i) Proposal (ii) Final Rule 614(a)(3) and Response to Comments The Commission received one comment regarding proposed Rule 614(a)(3), which stated that the 30-day time period in proposed Rule 614(a)(3) was too long and that 15 days would provide sufficient time for a brokerdealer to switch to a different service provider.995 The Commission is revising proposed Rule 614(a)(3) to require a competing consolidator to provide 90 calendar days’ notice of its cessation of operations.996 The Commission believes that 90 calendar days’ notice will help to ensure that the subscribers of a competing consolidator that ceases operations will have adequate time to identify and transition to a new competing consolidator, including making any necessary systems changes and establishing connectivity to the new market data provider. While one commenter stated that firms would only need 15 days to switch to a new competing consolidator, the Commission believes that firms will likely need more time to switch effectively to another competing consolidator. As discussed above, competing consolidators may generate 995 See Data Boiler Letter I at 51. 614(a)(3), as adopted, will provide: Notice of cessation. A competing consolidator shall notice its cessation of operations on Form CC at least 90 calendar 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. 996 Rule VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission proposed 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 proposed Rule 614 are deemed to have been made on a particular business day. Specifically, the Commission proposed to define ‘‘business day’’ in the same manner in which it is defined in Rule 19b–4(b)(2).997 (ii) Final Rule and Response to Comments The Commission did not receive any comments on proposed Rule 614(a)(4). The Commission is adopting the rule as proposed. The Commission believes that the provisions providing a date-offilings 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 Rule 614. (i) Rule 614(b): Public Disclosures (i) Proposal Proposed Rule 614(b) would require the publication of all Form CC reports and other information filed by competing consolidators. Proposed Rule 614(b)(1) stated that every Form CC filed pursuant to Rule 614 shall constitute a ‘‘report’’ within the meaning of sections 11A, 17(a), 18(a), and 32(a) of the Exchange Act (15 U.S.C. 78k–1, 78q(a), 78r(a), and 78ff(a)), and any other 997 See Rule 19b–4(b)(2), 17 CFR 240.19b–4(b)(2). Proposed Rule 614(a)(ii) provided that if the conditions of proposed Rule 614 and proposed 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. PO 00000 Frm 00076 Fmt 4701 Sfmt 4700 applicable provisions of the Exchange Act. Proposed Rule 614(b)(2) stated that the Commission would publish on its website each (1) effective initial Form CC, as amended; (2) order of ineffective initial Form CC; (3) Form CC amendment no later than 30 calendar days from the date of filing thereof; and (4) notice of cessation. (ii) Final Rule and Response to Comments The Commission requested comment on proposed Rule 614(b). One commenter stated without more that it had ‘‘no objection’’ to the publication of the Form CC on the Commission’s website.998 The Commission is adopting this provision as proposed but with one addition to the items that will be published by the Commission on its website pursuant to Rule 614(b)(2). Specifically, the Commission will publish on its website a list of the names of each potential competing consolidator that files with the Commission an initial Form CC and the date of filing.999 This list would be updated upon each filing of an initial Form CC by a potential competing consolidator. The Commission believes that publishing a regularly updated list of potential competing consolidators that have filed to register with the Commission may encourage other potential competing consolidators to register for the ‘‘first wave’’ of the transition period.1000 The Commission believes that making the information detailed in Rule 614(b) available will assist market participants in evaluating a particular competing consolidator as a potential source of consolidated market data, as well as motivate potential competing consolidators to enter the market by signaling interest in the market. (j) Rule 614(c): Posting of Hyperlink to the Commission’s Website (i) Proposal Proposed Rule 614(c) would require each competing consolidator to make public via posting on its website a direct URL hyperlink to the Commission’s website that contains each (1) effective initial Form CC, as amended; (2) order of ineffective initial Form CC; (3) Form CC amendment no later than 30 calendar days from the date of filing thereof; and (4) notice of cessation (if applicable). 998 See Data Boiler Letter I at 52. Adopted Rule 614(b)(2). 1000 See infra Section III.H.2 for a discussion of the transition period. 999 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations (ii) Final Rule and Response to Comments The Commission received one comment on proposed Rule 614(c) from a commenter who stated that it did not oppose the proposal.1001 The Commission is adopting this provision as proposed.1002 The Commission believes that this requirement will make it easier for market participants to review a competing consolidator’s Form CC filings. This provision provides an additional means for market participants to locate Form CC filings that are posted on the Commission’s website. 8. Responsibilities of a Competing Consolidator The Commission proposed Rule 614(d) to establish the responsibilities applicable to all competing consolidators, including competing consolidators that are affiliated with SROs and those that are not, under the decentralized consolidation model. Under proposed Rule 614(d), all competing consolidators would be required to perform many of the obligations currently performed by the existing exclusive SIPs. Proposed Rule 614(d) also would require all competing consolidators to disclose performance metrics and other information that would facilitate Commission oversight of competing consolidators and assist market participants in evaluating and choosing competing consolidators. (a) Rules 614(d)(1) Through (3): Collection, Calculation, and Dissemination of Consolidated Market Data (i) Proposal Proposed Rules 614(d)(1) through (3) would require competing consolidators to collect, consolidate, and disseminate consolidated market data. 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). Proposed Rule 614(d)(2) would require each competing consolidator to calculate and generate consolidated market data, as defined in proposed Rule 600(b)(19), from the information collected in proposed Rule 614(d)(1). This proposed rule would require competing consolidators to 1001 See Data Boiler Letter I at 52. 1002 The Commission notes that Rule 614(c) is being updated to reflect a change to the numbering of Rule 614(b)(2). The requirements of Rule 614(c) are not changing and are adopted as proposed. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 develop a complete consolidated market data product that contained all of the data elements specified in the proposed definition of consolidated market data.1003 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 Rules 614(d)(4) and (e)(1)(ii), as discussed below. (ii) Final Rule and Response to Comments The Commission received several comments regarding proposed Rules 614(d)(1) through (3).1004 One commenter strongly supported requiring competing consolidators to be subject to appropriate standards, such as providing fair access to market participants.1005 Two commenters criticized the proposed rules. One commenter stated that incorporating aggregated odd-lot quotes into the NBBO calculation would cause confusion and suggested instead that the NBBO be based on exchange BBOs ‘‘to minimize any calculation or interference/influences’’ by competing consolidators.1006 With respect to proposed Rule 614(d)(2), one commenter said that because the Commission did not define what it meant by ‘‘generate’’ proposed consolidated market data, it was unclear what types of activity would warrant registration by competing consolidators.1007 The commenter also argued that the Commission did not describe the meaning of ‘‘unreasonably discriminatory’’ in proposed Rule 614(d)(3),1008 the consequences for competing consolidators that make data available on an unreasonably discriminatory basis, the ‘‘costs of the mechanisms and consequences for application and enforcement of the unreasonably discriminatory requirement for both the relevant 1003 See Proposing Release, 85 FR at 16782. Clearpool Letter at 7; Data Boiler Letter I at 52; IDS Letter I at 10–11. 1005 See Clearpool Letter at 7. 1006 Data Boiler Letter I at 52. This commenter also suggested that only a single competing consolidator should be obligated to provide a consolidated market data product, not all competing consolidators. See supra Section III.C.1(b). 1007 IDS Letter I at 11. 1008 The commenter said that data vendors are currently not held to an ‘‘unreasonably discriminatory’’ standard. Because the commenter believed the Commission did not explain how it would apply this standard, the commenter said that commenters cannot assess the standard’s burden on potential competing consolidators, including data vendors. Id. at 10. 1004 See PO 00000 Frm 00077 Fmt 4701 Sfmt 4700 18671 competing consolidator and its clients,’’ and whether agreements between a competing consolidator and its subscribers that limit the competing consolidator’s liability would be deemed ‘‘unreasonably discriminatory.’’ 1009 As discussed above,1010 the Commission is not requiring competing consolidators to sell a full consolidated market data product and is amending proposed Rules 614(d)(1) through (3) to reflect this change. Rule 614(d)(1), as amended, requires each competing consolidator to collect from each national securities exchange and national securities association, either directly, or indirectly, only the information required under Rule 603(b) that is necessary for the competing consolidator to create the particular consolidated market data product(s) it chooses to sell. Rule 614(d)(2), as amended, requires each competing consolidator to calculate and generate a consolidated market data product from the data collected pursuant to Rule 614(d)(1). Rule 614(d)(3), as amended, requires each competing consolidator to make the consolidated market data product(s) available to subscribers on terms that are not unreasonably discriminatory, and timestamped as required by Rule 614(d)(4) and including the national securities exchange and national securities association generated timestamp as required by Rule 614(e)(2). With respect to the comment that the NBBO should be based on exchange BBOs and that incorporation of aggregated odd-lot quotes would cause confusion,1011 the Commission believes that requiring the exchanges to calculate their BBOs before sending them to the competing consolidators for calculation into NBBOs would add latency to the collection, consolidation, and dissemination of consolidated market data products. One of the goals of the introduction of competing consolidators is the reduction of latencies. Any exchange processing of the data content underlying consolidated market data will add latency in the collection, calculation, and dissemination of consolidated market data. Further, the exchanges currently aggregate odd-lot quotes into their BBOs, which are used to calculate the NBBO. Therefore, the Commission does not believe that this 1009 Id. at 10–11. supra Section II.B.2; see also supra Section III.C.1(b). The Commission is adopting a definition for ‘‘consolidated market data product’’ in Rule 600(b)(20). 1011 See Data Boiler Letter I at 52. 1010 See E:\FR\FM\09APR2.SGM 09APR2 18672 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations provision will cause confusion.1012 The Commission believes that aggregating odd-lots into the BBO provides market participants with a more complete view of the market for each security. In response to the comment that only one competing consolidator should be obligated to provide a consolidated market data product,1013 the Commission is not requiring all competing consolidators to provide all consolidated market data. Competing consolidators may sell a consolidated market data product comprising some or all components of consolidated market data.1014 The Commission believes that competing consolidators should have the flexibility to tailor their market data products to their subscribers’ needs. Not requiring competing consolidators to sell a product that contains all of the data elements of full consolidated market data should enhance competition among competing consolidators by providing more parameters (e.g., products) upon which they can compete. With respect to the comment that requested clarification of the use of the term ‘‘generate’’ in proposed Rule 614(d)(2), competing consolidators will be required to calculate and generate a consolidated market data product from the individual data streams made available by the SROs pursuant to Rule 603(b). For example, competing consolidators that choose to sell a consolidated market data product that includes the NBBO will calculate the NBBO as set forth in Rule 600(b)(50) and disseminate the NBBO in the consolidated market data product. Competing consolidators that sell a consolidated market data product that includes depth-of-book data will generate depth-of-book data by considering the NBBO and then determining the five price levels above (below) the NBBO from the quotation information provided by the SROs. The ‘‘calculate and generate’’ description refers to the processes that competing consolidators will use to create a consolidated market data product from the individual SRO quotation and transaction information they receive. Competing consolidators that receive transaction and quotation information from the individual SROs pursuant to Rule 603(b) and calculate and generate a consolidated market data product for dissemination must register pursuant to Rule 614. ‘‘Unreasonably discriminatory’’ is a term used in Section 11A(c)(1)(D) of the 1012 See supra Section III.B.10. Data Boiler Letter I at 52. 1014 See Rule 600(b)(20). 1013 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Exchange Act.1015 Section 11A(c)(1)(D) of the Exchange Act states that all exchange members, brokers, dealers, SIPs, and, subject to such limitations that the Commission may impose as necessary or appropriate for the protection of investors or maintenance of fair and orderly markets, all other persons may obtain on terms that are not unreasonably discriminatory such information with respect to quotations for and transactions in any security, other than an exempted security, as is published or distributed by any SRO or SIP. The term ‘‘unreasonably discriminatory’’ in Rule 614(d)(3) has the same meaning as in Section 11A(c)(1)(D). With respect to the comment asking about the applicability of this term,1016 while such determinations are facts and circumstances-based and specific to each individual situation, a competing consolidator should have a reasonable basis for providing a consolidated market data product on different terms to different customers. (b) Rule 614(d)(4): Timestamping of Consolidated Market Data (i) Proposal 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. (ii) Final Rule and Response to Comments The Commission received several comments regarding proposed Rule 614(d)(4).1017 Three commenters supported the timestamp requirement of the proposed Rule.1018 One commenter said that market participants could use the originating venue timestamp and the consolidator timestamps to gauge whether the latency meets their needs and whether their best-execution obligations were met.1019 Another commenter suggested a time granularity 1015 15 U.S.C. 78k–1(c)(1)(D). See also Bloomberg Order, supra note 22. 1016 See IDS Letter I at 10–11. 1017 See Capital Group Letter at 4; IEX Letter at 8; Data Boiler Letter I at 53; TD Ameritrade Letter at 13. 1018 See Capital Group Letter at 4; IEX Letter at 8; Data Boiler Letter I at 53. 1019 See Capital Group Letter at 4. PO 00000 Frm 00078 Fmt 4701 Sfmt 4700 of +/¥ 50 milliseconds or in submilliseconds.1020 One commenter, however, stated that the proposed rule could create confusion.1021 This commenter said that multiple quotes with the same timestamp could cause sequencing confusion and suggested that the Commission provide more specificity to address this concern.1022 The Commission believes that timestamps are of particular importance in a decentralized consolidation model because competing consolidators will be generating consolidated market data products individually. Market participants must be able to understand the market at the time their orders are represented and executed. Further, timestamps help to ensure that competing consolidators are accurately calculating and disseminating consolidated market data products. Therefore, the Commission is adopting these requirements as proposed. The exclusive SIPs’ timestamp information is similar to what is required of competing consolidators under Rules 614(d)(4)(i) and (iii). The timestamp requirement will allow subscribers to ascertain 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 its consolidated market data product to subscribers (its realized latency). The Commission also believes that this information will provide transparency that should help subscribers evaluate a potential competing consolidator or determine whether an existing competing consolidator continues to meet their needs. The Commission does not think that the addition of timestamps on competing consolidators’ consolidated market data products will cause sequencing confusion. Rule 614(d)(4) requires each competing consolidator to affix its own timestamps to the information collected in Rule 614(d)(1): (i) Upon receipt from each SRO 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. As noted above, currently, the exclusive SIPs similarly timestamp information. The timestamp requirement should not introduce any new sequencing confusion. Instead, this timestamping requirement should help subscribers 1020 See Data Boiler Letter I at 53. TD Ameritrade Letter at 13. 1022 See id. 1021 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations understand a competing consolidator’s performance in generating consolidated market data products. Competing consolidators will have different systems to collect, calculate, and disseminate the data they receive from the SROs and their timestamps will help market participants measure latencies. (c) Rules 614(d)(5) and (6): Monthly Website Publication of Performance and Operational Information (i) Proposal Proposed Rule 614(d)(5) required 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. In particular, proposed Rule 614(d)(5) required the publication of the following performance metrics: (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; (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 VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 corresponding consolidated message to a subscriber. Proposed Rule 614(d)(6) required 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; 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. (ii) Final Rule and Response to Comments The Commission received several comments regarding proposed Rules 614(d)(5) and (6).1023 Five commenters supported the proposed Rules.1024 One commenter objected to the proposed rules.1025 One commenter requested guidance from the Commission relating to broker-dealers’ use of the required information.1026 Several commenters supported requiring competing consolidators to disclose the information required by the proposed rules,1027 and some commenters said this information would be useful in choosing a competing consolidator.1028 One commenter said that such transparency could help keep costs down,1029 and another commenter stated that the publication of performance metrics, in combination with competition, would ‘‘advance the objective of promoting useful and widely available market data for a range of market participants.’’ 1030 1023 See Clearpool Letter at 9; IntelligentCross Letter at 5; IEX Letter at 8; ACS Execution Services Letter at 6; Data Boiler Letter I at 53; STANY Letter II at 6; FINRA Letter at 5. 1024 See Clearpool Letter at 9; IntelligentCross Letter at 5; IEX Letter at 8; ACS Execution Services Letter at 6; Data Boiler Letter I at 53. 1025 See STANY Letter II at 6. 1026 See FINRA Letter at 5. 1027 See Clearpool Letter at 9; IntelligentCross Letter at 5; IEX Letter at 8. 1028 See IntelligentCross Letter at 5; ACS Execution Services Letter at 6. 1029 See ACS Execution Services Letter at 6. 1030 IEX Letter at 8. PO 00000 Frm 00079 Fmt 4701 Sfmt 4700 18673 One commenter indicated that the information and frequency with which it would be provided were acceptable but suggested benchmark testing instead of information disclosures.1031 The commenter said that benchmark tests would better demonstrate a competing consolidator’s capabilities without revealing proprietary information.1032 One commenter believed that the requirement to disclose performance statistics as well as provide transparency into the performance of competing consolidator systems would deter potential competing consolidators from registration.1033 Another commenter asked the Commission to issue guidance outlining a brokerdealer’s obligations with respect to review of the monthly performance metrics prior to and after selection of a competing consolidator, and reevaluation of its chosen competing consolidator based on such metrics or other information.1034 The Commission is adopting Rules 614(d)(5) and (6) as proposed.1035 The Commission believes that this information will be useful to market participants in evaluating competing consolidators. The Commission believes that the public disclosure of this information—particularly the system availability and network delay statistics and data quality and system issues— will encourage competing consolidators to provide consolidated market data products in a stable and resilient manner and will allow market participants to hold them accountable for their performance metrics. The Commission does not believe that these disclosures will deter potential competing consolidators from registering because the disclosures should help competing consolidators to market themselves to potential subscribers. This information will be used by market participants to evaluate 1031 See Data Boiler Letter I at 53. This commenter did not elaborate on benchmark testing. 1032 See id. The performance and operational information to be provided as required by Rules 614(d)(5) and (6) do not require the disclosure of proprietary information. Rules 614(d)(5) and (6) require the reporting of data that demonstrates how competing consolidators are actually operating which should be directly pertinent to subscribers and potential subscribers of competing consolidators. If competing consolidators believe that benchmark testing would be worthwhile, they can decide on their own to establish benchmark criteria and publish the results of testing, in addition to complying with the requirements of Rules 614(d)(5) and (6). 1033 See STANY Letter II at 6–7. 1034 See FINRA Letter at 5. 1035 The Commission is adopting Rules 614(d)(5) and (6) with minor technical changes to cite more specifically to the information that must be published by a competing consolidator to its website on a monthly basis. E:\FR\FM\09APR2.SGM 09APR2 18674 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations competing consolidator performance. Competing consolidators could also use these disclosures to evaluate their competitors, which could motivate them to make changes to better serve their subscribers or attract new ones. Finally, the Commission believes that the information disclosed under these provisions—such as performance statistics, system availability, and data quality issues—can help a broker-dealer assess whether a potential competing consolidator can meet the brokerdealer’s performance and operational needs and should help to facilitate a broker-dealer’s ability to achieve and analyze best execution.1036 For these reasons, the Commission encourages these disclosures to be provided in a manner facilitating comparison across competing consolidators and their consolidated market data products. (d) Rules 614(d)(7) and (8): Maintenance and Provision of Information for Regulatory Purposes (i) Proposal Proposed Rule 614(d)(7) required 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.1037 The proposed rule required 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) required 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.1038 1036 See supra notes 104–105 and accompanying text. 1037 See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 78q(a)(1). 1038 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 (Mar. 19, 2015) (similarly interpreting VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 (ii) Final Rule and Response to Comments disclosures across competing consolidators. The Commission received two comments on proposed Rules 614(d)(7) and (8) from the same commenter.1039 The commenter stated that the document retention and recording time periods of proposed Rule 614(d)(7) were acceptable.1040 In response to proposed Rule 614(d)(8), the commenter suggested that the Commission require benchmark testing instead of paper documents.1041 The Commission is adopting Rules 614(d)(7) and (8) as proposed. These requirements will facilitate the Commission’s oversight of competing consolidators and the national market system. These provisions are similar to those used by the Commission in other contexts.1042 The Commission does not believe that ‘‘benchmark testing’’ is applicable to the Commission’s record retention requirements because these requirements address the records to retain, how long to retain them, and to whom the records should be furnished, not how competing consolidators should demonstrate the capability of their systems.1043 (ii) Final Rule and Response to Comments The Commission received multiple comments from one commenter on proposed Form CC. In response to the Commission’s question as to whether the instructions to Form CC were sufficiently clear, one commenter asked when a Form CC needed to be filed ‘‘in order to give [the] regulator sufficient time to review before authorizing it to operate?’’ 1044 Under Rule 614(a)(1)(i), no competing consolidator may receive the data content underlying consolidated market data and generate a consolidated market data product for dissemination unless an initial Form CC has been filed with the Commission and become effective. Therefore, Form CC needs to be filed prior to a competing consolidator beginning operations. Further, as described in Rule 614(a)(1)(iii), the Commission may declare an initial Form CC ineffective no later than 90 calendar days from the date of filing with the Commission. The Commission also asked whether competing consolidators would bundle their products and/or services and if so, whether this should be required to be disclosed on Form CC. One commenter responded that bundling would be likely but did not specify whether it should be disclosed on Form CC.1045 Two commenters stated that the Commission should not to allow competing consolidators to link their pricing to other areas of business.1046 In the Proposing Release, the Commission stated that the information in Section V of Form CC—which includes Exhibit F (a description of all consolidated market data products), Exhibit G (a description and identification of any fees or charges for the use of the competing consolidator with respect to consolidated market data), and Exhibit H (a description of any co-location and related services, and the terms and conditions for colocation, connectivity and related services)—would assist market participants in determining whether to become a subscriber of a competing consolidator by requiring the availability of information regarding the services offered and fees charged for consolidated market data. The Form CC disclosures will require the disclosure of fees and services related to consolidated market data products that (e) Form CC (i) Proposal The Commission proposed Form CC to require competing consolidators to provide information and/or reports in narrative form to the Commission and to make such information public. The proposed form required 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 explained that the requested information would assist the Commission in understanding the competing consolidator’s overall business structure, technological reliability, and services offered, and would better ensure consistent 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, 67578–79 n. 1347 (Nov. 12, 2013) (similarly interpreting the term ‘‘prompt’’ in the context of Exchange Act Rule 15Ba1–8(d)). 1039 See Data Boiler Letter I at 54. 1040 Id. 1041 Id. 1042 See Section 17(a)(1) of the Exchange Act, 15 U.S.C. 78q(a)(1). 1043 See supra note 1032. PO 00000 Frm 00080 Fmt 4701 Sfmt 4700 1044 See Data Boiler Letter I at 55. id. at 56. 1046 See Clearpool Letter at 4; ACS Execution Services Letter at 6. 1045 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations may be bundled by a competing consolidator. The Commission does not believe that competing consolidators should be prohibited from linking their pricing of consolidated market data products to other areas of their business.1047 The Commission believes that the transparency resulting from the disclosures provided on Form CC will facilitate competition across similar products and/or services and help to protect market participants from unfair and unreasonable pricing. Further, the Commission asked whether Form CC should require any additional information or whether any proposed items should be removed. One commenter responded that the NBBO should not be interfered with or influenced by competing consolidators ‘‘with ties to foreign government officials’’ and that Form CC should have disclosure of any such ties.1048 Form CC requires specific information about the owners and operators of a competing consolidator. If a ‘‘foreign government official’’ were an owner of 10 percent or more of a competing consolidator’s stock or directly or indirectly controls the management of policies of the competing consolidator, such person would have to be identified in Exhibit A to Form CC. If a ‘‘foreign government official’’ were an officer, director, governor, or other person performing similar functions for a competing consolidator, such person would have to be identified in Exhibit B to Form CC. These exhibits would provide disclosure of such ties. Further, as discussed above, all competing consolidators will be required to calculate the NBBO as set forth in Rule 600(b)(50).1049 Competing consolidators could not calculate a NBBO in another manner. All competing consolidators will be regulated entities subject to 1047 In this regard, concerns regarding linked pricing or conditioning availability could exist in the context of a competing consolidator affiliated with a registered broker-dealer that offers execution services to broker-dealer clients. For example, if the registered broker-dealer linked the pricing for, or conditioned the availability of the services of an affiliated competing consolidator to, the execution services offered by the registered broker-dealer to a broker-dealer client, and the registered brokerdealer was an execution venue included on the broker-dealer client’s report required by Rule 606(a) of Regulation NMS, the material aspects of such an arrangement must be disclosed by the broker-dealer client pursuant to Rule 606(a)(1)(iv) of Regulation NMS. See also Securities Exchange Act Release No. 84528, 83 FR 58338, 58376 n. 397 and accompanying text. In addition, in such a scenario, the broker-dealer client of the registered brokerdealer with an affiliated competing consolidator would continue to be obligated to seek the best execution for its customers’ orders. See supra Section I.E. 1048 Data Boiler Letter I at 4. 1049 See supra Section III.B.10. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 inspection by Commission staff, which should deter the development of inaccurate NBBOs. This commenter also suggested a requirement that ‘‘all procedures’’ in the section on Operational Capability should exclude proprietary techniques of a competing consolidator.1050 Exhibit E to Form CC requires a narrative 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. The information provided in Form CC relating to operational capability should contain information that will allow market participants to evaluate potential competing consolidators. It does not require the public disclosure of proprietary information. The Commission is adopting Form CC substantially as proposed, with modifications to provide for the reporting of systems disruptions or intrusions, as required under Rule 614(d)(9).1051 Form CC, as adopted, will include new Section VI, which will require a competing consolidator to promptly report whether a systems disruption or intrusion (or both) has occurred, and to provide information regarding the time and duration of the event, the date and time when the competing consolidator had a reasonable basis to conclude that a systems disruption/intrusion had occurred, whether and when the event had been resolved, whether and when the investigation had been closed, and the name of the system(s) involved. The revised Form CC also requires the competing consolidator to attach as Exhibit J all other information regarding the systems disruption or intrusion as required by Rule 614(d)(9)(iii) (including a detailed description, an assessment of those systems potentially affected, a description of the progress of corrective action, and when the event has been or is expected to be resolved). As discussed further below, Rule 614(d)(9) requires a competing consolidator that is not required to comply with Regulation SCI to publicly disseminate certain information regarding systems disruptions and notify the Commission of systems disruptions and systems intrusions.1052 Exhibit J to Form CC would be publicly available, although Form CC provides for a competing consolidator to request confidential treatment for information relating to a systems intrusion. In addition, Form CC, as adopted, has been modified to accommodate filing by competing consolidators that are affiliated with an exchange.1053 Section II of Form CC requires a competing consolidator to report whether it is affiliated with an exchange. Section III of Form CC specifies Form 1 exhibits related to the ownership and leadership of an exchange that may be provided by an exchange-affiliated competing consolidator in lieu of filing Exhibits A and B of Form CC. Specifically, Section III states that a competing consolidator that is affiliated with an exchange may provide Exhibit K of Form 1 relating to owners, shareholders, or partners that are not also members of the exchange in lieu of Exhibit A of Form CC, and Exhibit J of Form 1 relating to officers, governors, members of all standing committees, or persons performing similar functions in lieu of Exhibit B of Form CC. If the competing consolidator chooses not to file Exhibits A and B of Form CC or Exhibits J and K of Form 1, it must certify that the information requested under Exhibits A and B of Form CC is available on an internet website and provide the URL. The Commission believes that permitting the filing of Exhibit J and K of Form 1 would lessen the burden of registration for an exchange-affiliated competing consolidator since this information has already been prepared and reported to the Commission with the affiliated exchange’s Form 1. (iii) Comments on Fees Charged by Competing Consolidators Under Form CC, competing consolidators are required to disclose the fees they charge to their subscribers for the consolidated market data product services. The Commission received several comments on the fees competing consolidators would charge for their consolidated market data products.1054 One commenter said that it is unclear how competing consolidators will price their data and whether such prices will be ‘‘reliable, resilient or well-regulated.’’ 1055 One commenter stated that the Commission should treat competing consolidator fees similar to SRO proposed fee changes and should publish on its website each amendment to a competing 1053 See 1050 Data Boiler Letter I at 55. 1051 See infra Section III.F. 1052 See infra Section III.F and text accompanying notes 1302–1312. PO 00000 Frm 00081 Fmt 4701 Sfmt 4700 18675 supra Section III.C.7(a)(iv). Clearpool Letter at 4; ACS Execution Services Letter at 5, 6; RBC Letter at 6; TechNet Letter II at 1–2. 1055 TechNet Letter II at 1–2. 1054 See E:\FR\FM\09APR2.SGM 09APR2 18676 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidator’s fees no later than 30 days after the amendment was filed.1056 Another commenter suggested requiring competing consolidator price transparency for investors.1057 Fees set by competing consolidators for the consolidated market data services they offer will be transparent as they must be disclosed on Exhibit G of Form CC. The Commission expects that competing consolidator fees will reflect the services they provide relating to consolidated market data products, such as collecting, consolidating, generating, and disseminating the products that contain the data underlying consolidated market data. The Commission, however, is not implementing an approval process for competing consolidator fees. Competing consolidators are not SROs and therefore not subject to Section 19(b) of the Exchange Act with respect to their services or fees. The Commission believes that competition, along with disclosure, should be sufficient to establish a fee structure based on market forces. On the other hand, the fees for the data content underlying consolidated market data must be proposed by the effective national market system plan(s) and are required to be submitted to the Commission pursuant to Rule 608.1058 These fees will be published for public comment and will not become effective until the Commission approves them by order.1059 D. Self-Aggregators 1. Proposal The Commission proposed to amend Regulation NMS to permit brokerdealers to ‘‘self-aggregate’’ consolidated market data under the decentralized consolidation model. Under proposed Rule 600(b)(83), a self-aggregator was defined 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.’’ Under proposed Rule 603(b), the SROs would make available to self1056 See Clearpool Letter at 4. See also ACS Execution Services Letter at 5 (stating that requiring competing consolidator fees to be subject to Commission approval would potentially reduce uncertainty about the cost of consolidated market data). 1057 See RBC Letter at 6. 1058 See infra Section III.E. 1059 See Effective-Upon-Filing Adopting Release, supra note 17. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 aggregators the data necessary to generate proposed consolidated market data in the same manner and using same methods, including all methods of access and the same format, as other persons, including competing consolidators.1060 A self-aggregator that limits its use of SRO data to the creation of proposed consolidated market data would be charged only for proposed consolidated market data pursuant to the fee schedules set forth by the effective national market system plan(s).1061 A self-aggregator that uses an exchange’s proprietary data (e.g., full depth of book data) would be charged separately for the proprietary data use pursuant to the individual exchange’s fee schedule.1062 2. Final Rule and Response to Comments For the reasons discussed below, the Commission is revising the definition of self-aggregator. Adopted Rule 600(b)(83) defines a self-aggregator as a broker or dealer, national securities exchange, national securities association, or investment adviser registered with the Commission 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 make consolidated market data available to its affiliates that are registered with the Commission for their internal use. Except as provided in the preceding sentence, a self-aggregator may not disseminate or otherwise make available consolidated market data, or components of consolidated market data, as provided in § 242.600(b)(20), to any person. (a) Scope of the Definition of SelfAggregator (i) National Securities Exchanges and National Securities Associations The Commission requested comment on several questions relating to selfaggregators, including whether entities other than broker-dealers should be allowed to act as self-aggregators.1063 One commenter argued that exchanges should be permitted to act as selfaggregators of consolidated market data because they use data to aid in matching 1060 See supra Section III.B.9. infra Section III.E. for a discussion of the effective national market system plan(s). 1062 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) of the Exchange Act and Rule 19b–4 thereunder. 1063 See Proposing Release, 85 FR at 16791. 1061 See PO 00000 Frm 00082 Fmt 4701 Sfmt 4700 trades or routing orders to other markets through their affiliated routing brokers.1064 Another commenter stated that exchanges must receive and process data to comply with Regulation NMS and that allowing exchanges to act as self-aggregators would provide exchanges with flexibility to use NMS data made available by the SROs or exchange proprietary data products.1065 The national securities exchanges are SROs registered with and overseen by the Commission. The national securities exchanges currently aggregate market data obtained from the exclusive SIPs and from proprietary data feeds to perform several exchange functions, including order handling and execution, order routing, and regulatory compliance.1066 Among other things, exchanges must determine protected quotations on other markets for purposes of complying with order protection requirements of Rule 611 and the locked and crossed markets prohibition in Rule 610(d), including identifying where to route intermarket sweep orders.1067 Exchanges also must know the NBBO for purposes of order types that are priced based on the NBBO, and must determine the NBB for purposes of complying with Rule 201 of Regulation SHO. To help exchanges perform these functions, the Commission believes that national securities exchanges should be permitted to act as self-aggregators. As self-aggregators, national securities 1064 See IEX Letter at 9. See also NYSE Letter II at 18 (stating that the Commission had not explained why SROs would not be permitted to continue to consolidate data obtained directly from other SROs). 1065 See MEMX Letter at 7. 1066 See, e.g., Securities Exchange Act Release Nos. 72685 (July 28, 2014), 79 FR 44889 (Aug. 1, 2014) (notice of filing and immediate effectiveness of File No. SR–BATS–2014–082); 72687 (July 28, 2014), 79 FR 44926 (Aug. 1, 2014) (notice of filing and immediate effectiveness of BYX–2014–012); 72684 (July 28, 2014), 79 FR 44956 (Aug. 1, 2014) (notice of filing and immediate effectiveness of File No. SR–NASDAQ–2014–072); and 72708 (July 29, 2014), 79 FR 45572 (Aug. 5, 2014) (notice of filing and immediate effectiveness of File No. SR– NYSEArca–2014–82). See also IEX Rule Series 11.400. 1067 An intermarket sweep order is a limit order for an NMS stock that meets the following requirements: (i) When routed to a trading center, the limit order is identified as an intermarket sweep order; and (ii) Simultaneously with the routing of the limit order identified as an intermarket sweep order, one or more additional limit orders, as necessary, are routed to execute against the full displayed size of any protected bid, in the case of a limit order to sell, or the full displayed size of any protected offer, in the case of a limit order to buy, for the NMS stock with a price that is superior to the limit price of the limit order identified as an intermarket sweep order. These additional routed orders also must be marked as intermarket sweep orders. See 17 CFR 242.600(b)(38) (Rule 600(b)(38)) of Regulation NMS. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations exchanges will have the flexibility to determine the optimal means for obtaining the market data they require to fulfill their regulatory obligations. One commenter recommended that exchanges be permitted to act as selfaggregators for purposes of consolidated market data used to aid in matching trades or routing orders to other markets through their affiliated routing brokers.1068 The Commission believes that national securities exchanges may route orders to away markets, primarily through affiliated brokers that act as a facilities of the exchange and are subject to exchange rules.1069 Because a brokerdealer used by an exchange for order routing is a facility of the exchange, an exchange’s use of consolidated market data to route orders through an affiliated broker-dealer generally would be an ‘‘internal use’’ of consolidated market data by the exchange. An exchange that routes orders using an unaffiliated broker-dealer would not provide that unaffiliated broker-dealer with consolidated market data. The Commission understands that the exchange would either send the routing broker a directed order or would allow the broker to make the routing decision. In either case, the exchange would not provide the unaffiliated routing broker with consolidated market data for purposes of routing orders. Like the national securities exchanges, FINRA is an SRO registered with and overseen by the Commission. FINRA requires market data to perform its regulatory oversight functions, including surveillance of the U.S. equity and options markets. The Commission believes that FINRA should have the same flexibility as the national securities exchanges to determine how it will obtain consolidated market data. Accordingly, the Commission is modifying the proposed definition of self-aggregator to include national securities associations as well as national securities exchanges. (ii) Investment Advisers and Other Market Participants Some commenters argued that entities other than broker-dealers should be permitted to be self-aggregators.1070 One commenter, a proprietary trading firm, stated that because self-aggregated data would only be used internally, it did not appear to be necessary for a selfaggregator to be a broker-dealer.1071 The commenter further stated that ‘‘the primary ability needed to act as a selfaggregator is technical skill, whereas the qualifications of a broker dealer are primarily financial, regulatory, and legal.’’ 1072 The commenter also suggested that permitting additional entities to act as self-aggregators would help to promote competitive forces.1073 One commenter stated that preventing registered investment advisers and other non-broker-dealer direct consumers of market data from acting as selfaggregators would be as disruptive to the current market data infrastructure as preventing broker-dealers from selfaggregating market data for their own use.1074 This commenter further stated that many non-broker-dealer market participants currently subscribe directly to proprietary data feeds from exchanges to facilitate their trading activity and reduce latency.1075 Market participants that currently self-aggregate consolidated market data using the exchanges’ proprietary data feeds will be able to continue to do so under the adopted rules. Broker-dealers were not proposed to be permitted to act as self-aggregators because of their technical ability to consolidate market data but because of the important functions they perform in the national market system. Broker-dealers are the only entities that can be members and direct customers of exchanges. Brokerdealers execute customer orders and are subject to specific requirements under Regulation NMS related to the routing and execution of orders in the national market system, including Rules 611 and 610(d). In addition, broker-dealers are subject to the duty of best execution, which requires a broker-dealer to seek to obtain the most favorable terms available under the circumstances for its customer orders.1076 Broker-dealers also are subject to FINRA rules requiring them to use reasonable diligence to ascertain the best market for a security and to buy or sell in that market so that 1071 See 1068 The commenter noted that routing brokerdealers do not aggregate data themselves but receive it from their affiliated exchanges. See IEX Letter at 9. 1069 A broker-dealer that an exchange uses for outbound order routing generally is regulated as a facility of the exchange. See Securities Exchange Act Release No. 63241 (Nov. 3, 2010), 75 FR 69792, 69799 (Nov. 15, 2010) (stating that, in general, the outbound order routing service provided to exchanges by broker-dealers is regulated as a facility of the exchange). 1070 See, e.g., MFA Letter; AHSAT Letter. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 AHSAT Letter at 3. 18677 the resultant price to the customer is as favorable as possible under prevailing market conditions.1077 Broker-dealers use consolidated market data to fulfill these regulatory obligations, and allowing broker-dealers to act as selfaggregators could assist them in fulfilling these obligations. With respect to the commenter’s assertion that allowing additional nonregistered entities to act as selfaggregators would promote competitive forces, the Commission believes that the presence of competing consolidators will foster a competitive environment for consolidated market data. However, the Commission believes that certain non-broker-dealers should also be permitted to act as self-aggregators, including RIAs and, as discussed above, SROs. Today, some RIAs may aggregate consolidated market data to facilitate their electronic trading systems or strategies. The Commission believes that RIAs, which are subject to Commission oversight and examination, should continue to be allowed to act as selfaggregators to enable them to continue to consolidate data for their trading strategies if they so choose.1078 (iii) Self-Aggregators and Market Data Vendors The Proposing Release stated that ‘‘[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.’’ 1079 One commenter stated that the definition of self-aggregator could be flawed.1080 The commenter asked whether aggregating consolidated market data in a public cloud would be a self-aggregator’s own facility, what constituted a standard format, and whether reselling a variated version of consolidated market data would be permitted.1081 The commenter suggested that competing consolidators might not be able to earn a reasonable return on their investment and that the proposal was unfair to competing 1072 Id. 1073 See id. See also IEX Letter at 9 (stating that the ability of broker-dealers to self-aggregate will spur innovation by competing consolidators, which will be motivated to differentiate their services and deliver market data as efficiently as possible). 1074 See MFA Letter at 3–4. 1075 See id. at 4. 1076 See Securities Exchange Act Release No. 51808 (June 5, 2005), 70 FR 37496, 37537–38. See also Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996); supra Section I.E. PO 00000 Frm 00083 Fmt 4701 Sfmt 4700 1077 See FINRA Rule 5310, ‘‘Best Execution and Interpositioning.’’ 1078 In addition, RIAs are fiduciaries to their advisory clients, with a fundamental obligation to act in the best interests of their clients and to provide investment advice in their clients’ best interests. RIAs also must seek to obtain the best price and execution for the securities transactions of their advisory clients. 1079 Proposing Release, 85 FR at 16790. 1080 See Data Boiler Letter I at 59. 1081 See id. E:\FR\FM\09APR2.SGM 09APR2 18678 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidators and biased towards selfaggregators.1082 The commenter also questioned whether market data vendors would be self-aggregators and urged the Commission to respect the commercial autonomy of private data vendors.1083 Under Rule 600(b)(83), as adopted, a self-aggregator may use consolidated market data solely for its internal use. A market data vendor could not be a selfaggregator because its function is to disseminate data to its subscribers.1084 With respect to the commenter’s question regarding the sale of a variated version of consolidated market data, as discussed in the Proposing Release, a self-aggregator that redistributed or redisseminated consolidated market data, or any subset of proposed consolidated market data, would be performing the functions of a competing consolidator and would be required to register as a competing consolidator.1085 With respect to the commenter’s question regarding whether a vendor aggregating consolidated market data in a public cloud would be using its own facility, the Commission believes it would to the extent the vendor is contracting for its own use of the public cloud, but not if the vendor is contracting on behalf of individual self-aggregator customers. However, the determination of whether a vendor is facilitating its customer’s self-aggregation or is acting as a competing consolidator will depend on an assessment of the individual facts and circumstances of its business and its arrangements with its customers. In this regard, the Commission believes that a key factor in this determination will be the degree of customization in the product or service that the vendor provides because a highly customized product or service would suggest that the vendor is fulfilling the highly specialized and specific needs of its client. Thus, a vendor that provides meaningfully customized products or services to its customers likely would be facilitating its customer’s selfaggregation and not acting as a competing consolidator.1086 A vendor that provides a standardized consolidated market data product to its customers, however, likely would be acting as a competing consolidator. With respect to the comment regarding a competing consolidator’s ability to make a return on its investment, the 1082 See id. id. at 60. 1084 See also supra Section III.C.7(a)(iii) for a discussion of data vendors and competing consolidator registration. 1085 See Proposing Release, 85 FR at 16790. 1086 See Proposing Release, 85 FR at 16790. 1083 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 viability of the decentralized model is discussed in Section III.B.3, supra. (b) Permitted Uses of Self-Aggregated Data (i) Sharing Consolidated Market Data With Affiliates The Commission requested comment on whether the restriction preventing self-aggregators from providing consolidated market data or a subset thereof to customers or affiliates reflected a significant departure from current practices.1087 One commenter stated that broker-dealers that selfaggregate typically share consolidated market data with affiliates,1088 and another stated that requiring selfaggregators either to register as competing consolidators or to maintain separate and redundant market data sets for each affiliated entity could be costly and disruptive.1089 Some commenters recommended that the Commission allow self-aggregators to share market data with affiliated entities to avoid significant changes to how firms currently consume and manage data.1090 One commenter stated that the proposal would raise costs for firms affiliated with a self-aggregator,1091 and another stated that requiring each affiliated entity to aggregate and build its own market data systems would be a needless drain of resources.1092 This commenter further stated that selfaggregators should be permitted to share 1087 See id. at 16791. SIFMA Letter at 12. 1089 See FIA–PTG Letter at 1–2. See also SIFMA Letter at 12 (broker-dealers should be able to continue their established practice of sharing consolidated market data with affiliated entities rather than being required to register as competing consolidators or to develop and maintain redundant consolidated data sets for each affiliate user within the organization); Susquehanna Letter at 5 (precluding self-aggregating broker-dealers from sharing market data with affiliates would be a ‘‘significant departure from current practices’’ and ‘‘unnecessarily disruptive to the current market data infrastructure landscape’’). 1090 See SIFMA Letter at 12. See also STANY Letter II at 7 (stating that self-aggregators should include broker-dealer affiliated organizations to avoid significant changes to how firms currently consume and manage data). 1091 See MFA Letter at 5. 1092 See Susquehanna Letter at 5. In addition, the commenter argued that ‘‘self-aggregator organizations should not be faced with the disruptive and needlessly costly and burdensome choice of (1) developing and maintaining redundant consolidated data sets for each respective user within the organization, (2) registering as a CC and assum[ing] the related obligations and liabilities even though it never wanted to be in that business, or (3) subscribing to the outside services of registered CCs (again on a redundant basis for each entity within the organization), whose quality and/ or cost efficiency may be less, and over whom such organization would have less control to customize or improve services, or to remediate problems.’’ Id. at 6. 1088 See PO 00000 Frm 00084 Fmt 4701 Sfmt 4700 self-aggregated data with their affiliates because a market maker should be able to know when facilitating interest for an agency affiliate that its view of the quoted market is consistent with that of the affiliate.1093 Another commenter suggested that the Commission allow self-aggregators to use consolidated market data in handling and routing orders on behalf of the broker-dealer’s customers, including in cases where customer business is conducted through an affiliate, without being required to pay separate fees for that purpose.1094 However, one commenter stated that permitting a self-aggregator to disseminate consolidated market data to its affiliates would allow the selfaggregator to perform the function of a competing consolidator without the burdens of being a competing consolidator.1095 The Commission believes that selfaggregators should be permitted, as an internal use, to make consolidated market data available to their affiliates that are registered with the Commission. A broker-dealer or RIA that is affiliated with a self-aggregator may require consolidated market data to fulfill its regulatory obligations, as described above. In addition, as noted above, the Commission has the authority to examine the registered affiliated entities of a self-aggregator and would be able to determine how the self-aggregator provides consolidated market data to a registered affiliate and how the registered affiliate uses that data. Therefore, a self-aggregator will be permitted to share consolidated market data only with affiliates that are registered with the Commission. An affiliate of a self-aggregator that is not registered with the Commission, however, may not have the same regulatory obligations as registered entities,1096 and the Commission does not have the authority to examine a selfaggregator’s unregistered affiliates. In 1093 See Susquehanna Letter at 4. IEX Letter at 9. One commenter expressed the view that sharing consolidated market data within a single affiliated entity organization, under common beneficial ownership and senior hierarchical management, is not performing the functions of a competing consolidator because the consolidated market data is not intended for public dissemination in connection with commercial competition of exchange data feeds. See Susquehanna Letter at 5– 6. 1095 See Data Boiler Letter I at 60. 1096 For example, broker-dealers execute customer orders and must comply with Regulation NMS related to the routing and execution of orders in the national market system, including Rules 611 and 610(d). In addition, broker-dealers are subject to the duty of best execution. RIAs and SROs also have regulatory obligations, as discussed above in Sections III.D.2(a)(ii) and III.D.2(a)(i), respectively. 1094 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations addition, as discussed above, the Commission believes the widespread dissemination of consolidated market data must be subject to Commission oversight and, accordingly, must be performed by competing consolidators. Competing consolidators will be subject to the registration, disclosure, and other regulatory requirements in Rule 614 and Form CC.1097 (ii) Sharing Consolidated Market Data With Customers Several commenters stated that broker-dealers that self-aggregate should be permitted to display their selfaggregated data to their customers without registering as a competing consolidator or becoming a Regulation SCI entity.1098 One commenter stated that if brokers are not permitted to share consolidated market data with their customers, proprietary traders and high frequency firms would add to their significant data cost advantage over retail investors and the two-tiered data system would be preserved.1099 The commenter further stated that the Commission should allow selfaggregators to display consolidated market data to their customers to encourage competition among the competing consolidators, enable retail investor access to data with the least amount of latency without additional cost, and allow broker-dealers to share with their customers the same view of the same core data.1100 Another commenter stated that registered broker1097 See supra Section III.C.7(a)(iv). SIFMA Letter at 12 (stating that brokerdealers that self-aggregate should be permitted to display their data to their customers, subject to the requirements of the Vendor Display Rule, without being required to register as a competing consolidator or Regulation SCI entity); TD Ameritrade Letter at 12 (stating that registered broker-dealers should be allowed to use selfaggregated consolidated market data for display to their brokerage clients, without further sale or redistribution to unaffiliated third parties; the proposal would require a broker-dealer selfaggregator that wishes to provide its self-aggregated data to its clients to invest time and resources into becoming a competing consolidator compliant with Regulation SCI requirements, or to buy consolidated market data from competing consolidators for display purposes); Schwab Letter at 2, 6–7 (stating that self-aggregators should be allowed to share consolidated data with their customers on a not-forprofit and non-redistribution basis, but not with external parties, and should not be required to comply with Regulation SCI because they are not holding themselves out as a ‘‘public utility’’). 1099 See Schwab Letter at 7. See also TD Ameritrade Letter at 11–12 (stating that the internaluse limitation on self-aggregated data could disadvantage retail investors because a brokerdealer would be compelled to purchase consolidated data from a competing consolidator, and those able to pay the competing consolidator for faster speeds could ‘‘get to the market’’ more quickly). 1100 See Schwab Letter at 6. 1098 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 dealers should be allowed to share selfaggregated consolidated market data with their brokerage clients without registering as competing consolidators, noting that the benefits of Regulation SCI compliance are ‘‘inherent in the registered broker-dealer regulatory regime for continuity of operations and display of the data.’’ 1101 Under the amendments, selfaggregators will not be permitted to disseminate or otherwise share or make available consolidated market data to any persons, including their customers or clients.1102 The dissemination of consolidated market data entails a different process from self-aggregating consolidated market data for internal uses (e.g., for order handling, routing, and execution). Self-aggregators are not subject to the regulatory regime established for competing consolidators, which is designed to ensure that consolidated market data is reliable, resilient, and accurate. The Commission believes that entities that deliver consolidated market data to third parties should be subject to such standards.1103 The Commission believes that investors and other non-registered entities should receive consolidated market data from entities that are subject to a regulatory regime that is designed to ensure the data they receive is reliable, resilient, and accurate and that they are able to assess such reliability, resiliency, and accuracy on 1101 TD Ameritrade Letter at 12. The commenter noted that broker-dealers are subject to FINRA Rule 4370 (establishing requirements for designing business continuity plans which require data backup and recovery, mission critical systems, and alternate location requirements, among others) and FINRA Rule 4380 (requiring mandatory participation in FINRA business continuity and disaster recovery (‘‘BC/DR’’) Testing under Regulation SCI if determined necessary by FINRA). See id. at n. 36. 1102 The Commission has revised the definition of self-aggregator to further clarify that a selfaggregator may not disseminate or otherwise make available consolidated market data, or components of consolidated market data, as provided in § 242.600(b)(20), to any person other than an affiliate that is registered with the Commission. 1103 Competing consolidators will be registered with the Commission and will be subject to systems integrity and operational capability standards that will help to ensure the accuracy and availability of the consolidated market data that they produce. See infra Section III.F. Competing consolidators also will have certain responsibilities and obligations, including obligations to disclose publicly operational information and performance metrics, which will help to ensure transparency, accountability, and oversight, and obligations to ensure the integrity, quality, and resiliency of consolidated market data. See supra Section III.C.8. Self-aggregators, by contrast, will not be subject to similar requirements in the collection, consolidation, or generation of consolidated market data because they will not disseminate consolidated market data or otherwise make consolidated market data available to persons other than affiliates registered with the Commission. PO 00000 Frm 00085 Fmt 4701 Sfmt 4700 18679 an ongoing basis. Self-aggregators are not subject to such standards or requirements and therefore will not be permitted to disseminate or otherwise make available self-aggregated consolidated market data with customers, clients, or non-registered affiliates. (c) Self-Aggregators and Market Data Fees One commenter stated that exchanges seeking the business of self-aggregators might offer ‘‘enterprise license’’ pricing packages that would allow a firm and all of its affiliates to receive proprietary data for one price, effectively allowing the self-aggregator to share data with its affiliates.1104 An exchange seeking to establish ‘‘enterprise license’’ pricing packages for proprietary data would be required to file those proposed fees with the Commission pursuant to Section 19(b) of the Exchange Act and Rule 19b– 4 thereunder, and such fees must satisfy the statutory standards of being an equitable allocation of reasonable fees, dues, and other charges,1105 not being unfairly discriminatory,1106 and not an undue burden on competition.1107 (d) Two-Tiered Market and Potential Advantages of Self-Aggregators The Commission requested comment on the potential latency advantage of self-aggregators.1108 One commenter stated that self-aggregators’ latency advantage would not be material.1109 In contrast, another commenter stated that the latency advantage would not be minor, given the time increments currently used in the market and the likelihood of finer increments over time.1110 The commenter questioned whether the Commission had considered eliminating the selfaggregator category and requiring all market participants to receive data from one or more competing consolidators, or requiring SROs to delay the provision of data to match the latencies introduced by competing consolidators.1111 One 1104 Nasdaq Letter IV at 57, n. 80. 6(b)(4) of the Exchange Act. 1106 Section 6(b)(5) of the Exchange Act. See also Rule 603 of Regulation NMS. 1107 Section 6(b)(8) of the Exchange Act. 1108 See Proposing Release, 85 FR at 16791. 1109 See Clearpool Letter at 10. 1110 See FINRA Letter at 8. See also Data Boiler Letter I at 59 (stating that the latency advantage would be material). 1111 See FINRA Letter at 8–9. See also Angel Letter at 8 (suggesting that the Commission embargo the exchanges from releasing any data until the consolidators have had sufficient time to process the data to create a more level playing field); Healthy Markets Letter at 3 (suggesting that the Commission remove the latency advantage of exchange proprietary data feeds by requiring all 1105 Section E:\FR\FM\09APR2.SGM Continued 09APR2 18680 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations commenter stated that, because of ‘‘the additional inherent latency in thirdparty aggregation,’’ it is unlikely that broker-dealer algorithms would be competitive without selfaggregation.1112 Another commenter stated that the proposal would create a tiered market in which broker-dealers have systematically better and more timely access to market data than registered investment advisers and noted that self-aggregators would have both a speed and potential cost advantage over those who receive consolidated market data from competing consolidators.1113 Other commenters similarly argued that the proposal would create a two-tiered market data system comprising selfaggregators and those who receive data from competing consolidators.1114 The Commission acknowledges that, unlike self-aggregators, competing consolidators would need to transmit consolidated market data to their customers, but does not believe that this would lead to the development of a twotiered market. Latency sensitive customers of competing consolidators are likely to be co-located in the same data centers as their competing consolidators, so the transmission time between the servers of the competing consolidator and its customer will be exceedingly small. In many cases, selfaggregators may be located in the same data centers, and the potential latency differential between a self-aggregator and competing consolidator resulting from the extra hop that competing consolidators add to the process of data consolidation and dissemination could amount only to the period of time it takes to send a message from one server (i.e., a competing consolidator’s server) that is located in close proximity to another server (i.e., a subscriber’s market participants to receive data from SIP distributors). 1112 See NBIM Letter at 4. 1113 The commenter stated that self-aggregators would be able to receive the data necessary to generate consolidated market data at the price established by the effective national market system plan(s), while market participants that receive consolidated market data from competing consolidators might have to pay a premium over that amount to compensate the competing consolidator for its services. See MFA Letter at 4. 1114 See, e.g., FINRA Letter at 8; NYSE Letter II at 23 (stating that the proposal would continue the two-tiered structure, with participants that can afford to act as self-aggregators able to obtain and use that data faster than those relying on competing consolidators); STANY Letter II at 6 (stating that the proposal would replace the existing two-tiered structure between SIPs and proprietary data feeds with, at minimum, a different two-tiered structure between self-aggregators and competing consolidators); Nasdaq Letter IV at 3 (stating that self-aggregation would add market-wide disparities in terms of data content and speed). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 server) and connected via a cross connect. The Commission expects that market participants that elect to aggregate consolidated market data, whether competing consolidators or selfaggregators, will innovate and compete aggressively on the efficiency and costeffectiveness of their aggregation technologies. The Commission believes that the development and implementation of the technology to collect, consolidate, and generate consolidated market data will create opportunities for latency efficiencies that are of substantially greater magnitude than the transmission time between the server of a competing consolidator and its customer. Competing consolidators, for example, may benefit from economies of scale that allow them to offer a very lowlatency product more cost effectively that an individual self-aggregator. In some cases, a competing consolidator may have a latency or cost advantage, and in others a self-aggregator may have such advantages.1115 Competition may also impact the efficiency of choices.1116 Therefore, the Commission does not believe that self-aggregators would necessarily have a systematic latency advantage over customers of competing consolidators. (e) Fees Charged by Competing Consolidators One commenter recommended that the Commission implement a mechanism for it to review or abrogate fees charged by competing consolidators to ensure that consolidated market data is available on terms that are fair and reasonable (i.e., reasonably related to costs) if non-broker-dealers are not permitted to act as self-aggregators.1117 As discussed above, competing consolidator fees will be disclosed on Exhibit G to Form CC. The Commission believes that competition among competing consolidators, along with disclosure, will help to ensure that the fees charged by competing consolidators are fair and reasonable. The fees for the 1115 Self-aggregators could have a cost advantage over market participants that receive consolidated market data from a competing consolidator because self-aggregators will not be required to compensate a competing consolidator for its services. At the same time, a self-aggregator will need to have the systems capability to collect, consolidate, and generate consolidated market data, and it may use a vendor to establish connectivity to an SRO or to perform aggregation or other functions necessary for generating consolidated market data. As a result, any potential cost advantage of a self-aggregator over market participants that purchase consolidated market data from competing consolidators may not be significant. 1116 See infra Section V.C.4(b). 1117 See MFA Letter at 5. PO 00000 Frm 00086 Fmt 4701 Sfmt 4700 data content underlying consolidated market data established by the Equity Data Plan(s) will be filed under Rule 608 and must comply with statutory standards.1118 E. Amendment to the Effective National Market System Plan(s) for NMS Stocks Under Rule 614(e) The effective national market system plan(s) for NMS stocks will continue to play an important but modified role in the provision of consolidated market data to market participants.1119 Today, the Equity Data Plans operate the exclusive SIPs and therefore, directly collect, consolidate, and disseminate SIP data. Under the decentralized consolidation model, the effective national market system plan(s) for NMS stocks will no longer operate the exclusive SIPs and therefore, will not be directly responsible for collecting, consolidating, and disseminating consolidated market data. The plan(s) will, however, continue to develop and oversee the national market system for consolidated market data. 1. Proposal The Commission proposed Rule 614(e), to require the participants to the effective national market system plan(s) for NMS stocks to file an amendment to such plan(s) to reflect the decentralized consolidation model and the new role and functions of the plan(s). The Commission proposed several specific provisions to be included in the amendment, including (1) the proposed fees to be charged by the plan(s) for the data content underlying consolidated market data, (2) a requirement under the plan(s) for the application of timestamps by the SROs to the data content underlying consolidated market data, (3) a requirement under the plan for the completion of annual assessments by the plan participants of the performance of competing consolidators, and (4) a requirement for the development a list of the primary listing markets for each NMS stock. In addition, under proposed Rule 614(d)(5), the plan(s) would be required to develop the monthly performance metrics for competing consolidators. As proposed, the participants would be required to file this amendment pursuant to Rule 608 within 60 calendar days from the effective date of Rule 614. 2. Final Rule and Response to Comments The Commission continues to believe in the importance of the use of effective 1118 See 1119 See E:\FR\FM\09APR2.SGM infra Section III.E.2(c). Governance Order, infra note 1128. 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations national market system plan(s) in the planning, development, operation, and regulation of the national market system for the dissemination of consolidated market data. The Commission believes that joint consideration by the SROs and other market participants on the Operating Committee of such plan(s) will help to foster a consolidated market data national market system that is prompt, accurate, reliable, and fair and furthers the goal of helping to ensure that the consolidated market data remains useful to investors in the future. The Commission received several comments on proposed Rule 614(e) and the role of the effective national market system plan(s) in the decentralized consolidation model.1120 One commenter questioned the need for the effective national market system plan(s) saying that retention of the plan(s) was ‘‘illogical’’ as the SROs would no longer be responsible for jointly disseminating data.1121 This commenter described the current responsibility of the Operating Committees to include ‘‘entering into agreements with the exclusive processors, overseeing the operation of the exclusive processors, establishing the fees for the consolidated data disseminated by the exclusive processors, and overseeing the functions of the Administrators, which manage the subscriber agreements, collect fees and distribute revenue to SROs.’’ 1122 Another commenter stated that the proposal would increase the power of the Operating Committee over the ‘‘market for market data.’’ 1123 The Commission continues to believe that the SROs should have joint responsibilities and should continue to have an important role in developing, operating, and regulating the national market system for the dissemination of consolidated market data. Therefore, 1120 See NYSE Letter II; Nasdaq Letter IV; Better Markets Letter. 1121 NYSE Letter II at 26. 1122 Id. at 27. 1123 Nasdaq Letter IV at 34. This commenter stated that the Operating Committee would set fees for ‘‘the sale of any proprietary data products of the exchanges that provide any of the newly defined ‘core data.’ ’’ Id. The Operating Committee will not be setting fees for proprietary data products. The Operating Committee will be required to develop the fees for data content underlying consolidated market data and subsets of consolidated market data. Subject to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, each exchange would be responsible for establishing fees for its proprietary market data. While some proprietary DOB products may be provided by the exchanges to competing consolidators and self-aggregators for purposes of complying with Rule 603(b), the exchanges will have to develop fees for their proprietary data and the Operating Committee will have to develop the fees for the data content underlying consolidated market data. See also supra Section III.B.9(b). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Rule 603(b) requires the SROs to act jointly pursuant to one or more effective national market system plans for the dissemination of consolidated market data. As noted, the plan(s) will be responsible for: (1) Developing the fees for the data content underlying consolidated market data; (2) the billing and the audit process; (3) establishing the multiple installations, single users (‘‘MISU’’) policy; 1124 (4) allocating revenue to the SRO participants that is collected for the data content underlying consolidated market data; (5) considering additional regulatory, administrative, or self-regulatory organization-specific program data elements that may be included as consolidated market data in the future; 1125 (6) developing the list of primary listing exchanges; (7) developing the monthly performance metrics for competing consolidators; (8) assessing the operation of the decentralized consolidation model; and (9) developing an annual report that assesses competing consolidator performance for provision to the Commission. The Operating Committee is equipped under the plan(s) to develop the policies and rules necessary for developing, operating, and regulating the national market system for the dissemination of consolidated market data to market participants, subject to Commission oversight under Rule 608. While the SROs may not be acting jointly in operating the exclusive SIPs, they will continue to act jointly in planning, developing, and regulating the national market system for the provision of consolidated market data. These are important responsibilities for the operation of the national market system and the Commission believes that the national market system plan structure continues to be an efficient and necessary mechanism. Section 11A(a)(3)(B) of the Exchange Act authorizes the Commission, by rule or order, to require the SROs to act jointly with respect to matters as to which they share authority in planning, developing, operating, or regulating a national market system (or subsystem thereof) or 1124 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 will need to be conformed in the decentralized consolidation model to reflect that consolidated market data users may seek to receive consolidated market data through more than one competing consolidator and/or access through multiple devices. 1125 See 17 CFR 242.600(b)(19)(v) (Rule 600(b)(19)(v)). PO 00000 Frm 00087 Fmt 4701 Sfmt 4700 18681 one or more facilities thereof to facilitate the establishment of a national market system. Rule 614(e) requires the effective national market system plan(s) to file an amendment to conform the plan(s) to the decentralized consolidation model, including several specified provisions.1126 The Commission is extending the date of the filing for the participants to the effective national market system plan(s) to file the amendment to the plan from within 60 calendar days to within 150 calendar days, after the effectiveness of Rule 614. The additional time will allow the Operating Committee of the existing Equity Data Plans or of the New Consolidated Data Plan (if it has replaced the existing plans) to develop and file the plan amendment. The Commission is adopting Rule 614(e) substantially as proposed with modifications to account for the establishment of a Regulation SCI competing consolidator threshold, which is discussed below,1127 to require the SROs to apply time stamps to the data content underlying consolidated market data, and for the Commission to make public the annual assessment on the Commission’s website. Further, the Commission received other comments on Rule 614(e) and the required amendment. These comments are discussed below. (a) Governance Order On May 6, 2020, the Commission issued an order directing the SROs to develop and file with the Commission a new effective national market system plan that would combine the existing three Equity Data Plans into single national market system plan, the New Consolidated Data Plan.1128 The New Consolidated Data Plan was filed with the Commission pursuant to Rule 608 on August 11, 2020, and contains several provisions related to its governance that are not in the existing Equity Data Plan, including establishing a new Operating Committee structure 1126 The amendment required by Rule 614(e) does not require the plan(s) to include provisions to decommission the exclusive SIPs. The exclusive SIPs will continue to collect, consolidate and disseminate SIP data through the transition period. See infra Section III.H. 1127 See infra Section III.F (discussing amendment to Rule 1000 of Regulation SCI to apply to competing consolidators exceeding a specified threshold and the adoption of Rule 614(d)(9) establishing a tailored set of operational capability and resiliency obligations to all competing consolidators during the transition period and to other competing consolidators below a threshold thereafter). 1128 See Securities Exchange Act Release No. 88827 (May 6, 2020), 85 FR 28702 (May 13, 2020) (‘‘Governance Order’’). E:\FR\FM\09APR2.SGM 09APR2 18682 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations with non-SRO members, a new voting structure for SRO members as well as non-SRO members, new conflicts of interest and confidentiality policies, the retention of an independent plan administrator, and the use of executive sessions by the Operating Committee.1129 The Commission received several comments regarding commenters’ views of the relationship between the Governance Order and the Market Data Infrastructure Proposing Release, with several commenters supporting the Governance Order,1130 but others stating that the Governance Order and the Proposing Release are contradictory or inconsistent.1131 The Governance Order and the Proposing Release are not contradictory or inconsistent. Rather, the two proposals address distinct aspects of the exclusive SIPs and the national market system for NMS information. The Governance Order addresses the governance structure of the Equity Data Plans and particularly concerns about certain conflicts of interest and the allocation of voting power with respect to these Plans. The amendments address the content of NMS information and the manner in which it is collected, consolidated, and disseminated under the rules of the national market system. (b) Comments on the Plan’s Role in Developing Fees for Data Content Underlying Consolidated Market Data While the effective national market system plan(s) will no longer operate the exclusive SIPs, the Operating Committee of the effective national market system plan(s) for NMS stocks will continue to develop and file with the Commission the fees associated with the NMS information that is required to be collected, consolidated, and disseminated, i.e., the data content underlying consolidated market data. Specifically, the Operating Committee will need to propose the new fees that will be charged for the quotation and transaction information that is necessary to generate consolidated market data that is required to be made available by the SROs under Rule 603(b) to competing consolidators and selfaggregators.1132 The proposed new fees 1129 New Consolidated Data Plan Notice, supra note 40. 1130 See Clearpool Letter; Fidelity Letter; MFA Letter; RBC Letter; Schwab Letter; State Street Letter. 1131 See letter from Joan C. Conley, Senior Vice President and Corporate Secretary, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated Feb. 28, 2020, (‘‘Nasdaq Letter I’’); Cboe Letter at 4; NYSE Letter II at 12. 1132 The fees for the data content underlying consolidated market data will be proposed and filed with the Commission under Rule 608 of Regulation VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 will need to reflect the following: (i) That consolidated market data includes additional new content (i.e., 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) is no longer operating the exclusive SIPs and is no longer performing collection, consolidation, and dissemination 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.1133 The proposed new fees for the data underlying consolidated market data must be fair and reasonable and not unfairly discriminatory 1134 and must be filed with the Commission pursuant to Rule 608 under the Exchange Act. Several commenters supported the proposal to retain the use of the effective national market system plan(s) to propose fees for the data content underlying consolidated market data in the decentralized consolidation model.1135 One commenter suggested that the effective national market system plan(s) also propose fees for connectivity ‘‘in order to avoid the imposition of fees that are substantially disproportionate to the cost of providing these connectivity methods.’’ 1136 NMS. The effective national market system plan(s) will not develop fees for individual SRO data. If competing consolidators wish to receive SRO data that is beyond what is required to be provided by the SROs pursuant to Rule 603(b), they will have access to such data pursuant to individual SRO rules and fees. 1133 Under Rule 603(b), each SRO must provide its NMS information, including all data necessary to generate 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 would be responsible for establishing the connectivity and transmission services they use to connect to the SROs. 1134 See Rule 603(a) of Regulation NMS, 17 CFR 242.603(a). See infra Section III.E.2(c) for a discussion of the statutory standards for the data content underlying consolidated market data. 1135 See IEX Letter at 8. See also Clearpool Letter at 3 (stating that it hoped the new governance structure of the effective national market system plan(s) would provide additional checks into controlling market data costs and help to ensure the reasonableness of such fees). 1136 IEX Letter at 8. This commenter also suggested alternatives such as clarifying that the exchanges would not be permitted to impose a separate set of connectivity fees to competing consolidators and self-aggregators or charge fees for connectivity that are different than those charged to proprietary data customers. Connectivity fees will be developed by the exchanges. The SROs will need to develop new connectivity fees for competing consolidators and self-aggregators to receive the data necessary to generate consolidated market data. New connectivity fees will have to reflect that PO 00000 Frm 00088 Fmt 4701 Sfmt 4700 Four commenters questioned the role of the Operating Committee of the effective national market system plan(s) in developing fees for the data content underlying consolidated market data.1137 One commenter stated that the exchanges would ‘‘continue to have pricing power over a fundamental component of the NMS.’’ 1138 Two commenters argued that such a responsibility would be inconsistent with Section 19(b) of the Exchange Act.1139 Specifically, one commenter stated that fees for exchange facilities, including proprietary market data products, are considered part of the SROs’ rules and subject to the Section 19(b) rule filing process.1140 The other commenter stated that the Exchange Act authorizes the exchanges to set their own fees for market data products.1141 One of the commenters further pointed out that an SRO would run afoul of the Exchange Act if it charged certain classes of customers a price for its proprietary products that is different from the pricing established pursuant to its effective fee schedule.1142 The Commission believes that the effective national market system plan(s) should continue to have an important role in the operation, development, and regulation of the national market system for the collection, consolidation, and dissemination of consolidated market data. The development, and proposal under Rule 608, of the fees for the data underlying consolidated market data, along with the other responsibilities described above, are critical for the successful operation of the national market system. The development of the fees for information required to be made available by the SROs pursuant to Rule 603(b) of Regulation NMS to competing consolidators and self-aggregators is an integral component of the national market system.1143 the SROs are only providing data to competing consolidators and self-aggregators with such connectivity. Further, as discussed below, the fees proposed by the SROs should not contain redistribution fees for competing consolidators because this would hinder their ability to compete. 1137 See NYSE Letter II at 28; Nasdaq Letter IV at 34; Cboe Letter at 27; ACTIV Financial Letter at 3. One commenter offered suggestions as to the governance of the effective national market system plan(s). See Better Markets Letter at 7. The Commission has not proposed further governance changes in this release. 1138 ICI Letter at 11. 1139 See Cboe Letter at 27; Nasdaq Letter IV at 10. 1140 The commenter stated that ‘‘as a practical matter order-by-order depth-of-book products are likely the only way to enable the creation of consolidated market data.’’ Cboe Letter at 28. 1141 See Nasdaq Letter IV at 10. 1142 See Cboe Letter at 28. 1143 The Commission believes that the use of effective national market system plan(s), along with E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations The Equity Data Plans have been developing fees for SIP data for many years. It is one of their main responsibilities. The Commission disagrees with comments that the plan(s) will be developing fees for exchange data and that the development of fees by the plan(s) will be inconsistent with Sections 6 and 19 of the Exchange Act. The Commission is exercising its authority under Section 11A of the Exchange Act to expand the content of core data to include new data elements that the Commission believes are necessary to enhance the usefulness of the NMS information that is disseminated within the national market system. Therefore, the fees for data content underlying consolidated market data, as now defined, are subject to the national market system process that has been established—specifically the effective national market system plan(s) will develop the fees for data content underlying consolidated market data and seek Commission approval for such fees pursuant to the notice and comment process under Rule 608. The amended rules, however, do not permit the plan(s) to develop fees for connectivity to the individual SROs. These fees must be filed by individual SROs with the Commission and approved pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder, and are subject to the substantive requirements of Sections 6 and 15A of the Exchange Act, respectively for exchanges and national securities associations, as well as Section 19(b) of the Exchange Act. The plan(s) will not be developing fees for an SRO’s proprietary data products.1144 As the Commission discussed in the Proposing Release, the SROs may continue to develop proprietary data products and must propose fees for such products subject to the requirements of Sections 6(b), 15A(b), and 19(b) of the Exchange Act. One commenter expressed concern about the ability of the SROs, some of which may become competing consolidators, to develop fees.1145 This commenter noted the new governance the new governance structure required by the Governance Order, will help to ensure broad participation in the development, operation, and regulation of the national market system. See infra note 1185 and accompanying text. 1144 One commenter stated that the Operating Committee would be establishing fees for exchange proprietary data products, which the commenter stated would greatly increase the power of the Operating Committee. See Nasdaq Letter IV at 34. However, the Operating Committee will only be developing fees for data content underlying consolidated market data products, not the exchanges’ fees for proprietary data products. 1145 See ACTIV Financial Letter at 3. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 provisions on voting but stated that if the SROs could arbitrarily set fees charged to their competitors and ‘‘jam them through’’ the Operating Committee then no firm would be able to compete effectively and it would be doubtful that any firm would become a competing consolidator without assurances that the fees would be fair, reasonable, and do not unduly benefit one participant.1146 The fees for data content underlying consolidated market data will be filed with the Commission pursuant to Rule 608. These fees will be subject to the procedure set forth in Rule 608(b)(1) and (2), including an opportunity for public comment and Commission approval by order before such fees can become effective. This regulatory process set forth in Rule 608 allows commenters to provide their views about any proposed fee before they are charged and allows the Commission to consider commenters’ views before such fees becomes effective.1147 One commenter stated that the Operating Committee would have no experience in undertaking a cost allocation between the data underlying consolidated market data and proprietary data.1148 This commenter stated that directing the Operating Committee to engage in cost allocation without standards is arbitrary because the Operating Committee would be unable to predict whether its cost allocation decisions and permissible rates of return would be consistent with the Exchange Act.1149 The Commission disagrees with the commenter that the Operating Committee is ill-suited to allocate costs to develop fees for the data content underlying consolidated market data or that the exchanges cannot develop reasonable fees for proprietary data products that contain data content underlying consolidated market data. The Operating Committee(s) have plenty of experience in developing fees for SIP data that contain different cost elements, and any future Operating Committee, which will comprise many 1146 Id. See also Schwab Letter at 6 (stating that competing consolidators would be unlikely to commit to a business without confidence that the prices charged do not put then at a competitive disadvantage); ICI Letter at 11. 1147 See Effective-Upon-Filing Adopting Release, supra note 17. 1148 See Nasdaq Letter IV at 34. This commenter also suggested that the Operating Committee would reduce fees for proprietary market data, which the commenter stated would limit access to new proprietary data products. The commenter continued that this would be inconsistent with Section 11A(a)(2) of the Exchange Act by undermining the public interest and protection of investors. The Operating Committee would not be establishing fees for proprietary data products. 1149 See Nasdaq Letter IV at 34. PO 00000 Frm 00089 Fmt 4701 Sfmt 4700 18683 of the same participants, should be wellsuited to develop fees for the data content underlying consolidated market data, with the expectation that the Operating Committee can leverage the experience and knowledge from operating today’s Equity Data Plans. The SROs and the Equity Data Plans each develop fees for market data—the SROs develop fees for proprietary data and the Equity Data Plans develop fees for SIP data. The Operating Committees have to evaluate, develop, and propose SIP data fees and the exchanges have to evaluate, develop, and propose proprietary data fees for the proprietary data products that they decide to offer. This dynamic will not change in the decentralized consolidation model. The effective national market system plan(s) will develop fees for the data content underlying consolidated market data,1150 and the SROs will develop fees for proprietary data, each of which may contain some of the same underlying data content. One commenter stated that the proposal to retain the use of the effective national market system plan(s) is at odds with how the Commission considered a competing consolidator model in the context of adopting Regulation NMS.1151 Another commenter suggested that the Commission rethink the use of effective national market system plan(s) and instead allow the exchanges to develop their individual fees for data content underlying consolidated market data.1152 This commenter questioned the need for the effective national market system plan(s) because the SROs would no longer be jointly operating an exclusive SIP and therefore no longer involved in the collection, consolidation, or dissemination of consolidated market data. The commenter stated that it would be more efficient and would eliminate the need for the plan(s) to determine fees for a competitor’s data.1153 As to the questions about the Commission’s past analysis of a competing consolidator model that was discussed in the context of adopting Regulation NMS, the Commission was analyzing a different competing consolidator model—one that would have eliminated the use of effective national market system plan(s). The 1150 As described below, the proposed new fees for the data content underlying consolidated market data must be fair and reasonable and not unfairly discriminatory and must be filed with the Commission pursuant to Rule 608 under the Exchange Act. See Section III.E.2(c). 1151 See Cboe Letter at 29. 1152 See NYSE Letter II at 27. 1153 Id. E:\FR\FM\09APR2.SGM 09APR2 18684 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Regulation NMS competing consolidator alternative eliminated the use of effective national market system plans, and the Commission expressed concerns about the lack of competitive forces in setting data fees because each SRO would be establishing its own individual fees for NMS information. The Commission stated that payment of every SRO’s fees would be mandatory and would afford little room for competitive forces to influence the level of fees. Further, the Commission stated that such a model would require it to review ‘‘at least ten separate fees’’ for the individual SROs and that it was unlikely that any SRO would voluntarily propose to lower its own fees. The Commission also had stated that the fees established under the Equity Data Plans reflected broad industry consensus and that such ‘‘consensus underlying a single fee for a Network’s stream of data would be lost’’ 1154 in the competing consolidator model that it was then analyzing. In contrast, the decentralized consolidation model that the Commission proposed, and as adopted, retains the effective national market system plan structure. The Commission believes today, as it did when it was considering Regulation NMS, that elimination of the use of an effective national market system plan(s) would not further the goals of the national market system because the Commission still believes that the effective national market system plan structure is the appropriate method for developing, operating, and regulating the national market system. The suggestion that the Commission eliminate the effective national market system plan(s) structure and allow the SROs to develop individual fees for their data content that is used to develop consolidated market data was dismissed by the Commission when it considered the competing consolidator proposal in the context of Regulation NMS. The Commission believes that the same shortcomings, described above, will occur similarly today if the plan(s) were not developing the fees for the data underlying consolidated market data. (c) Comments on Fees for Consolidated Market Data There will be several fee components related to the collection, consolidation and dissemination of consolidated market data and consolidated market data products. The effective national market system plan(s) will propose and 1154 See Securities Exchange Act Release No. 49325 (Feb. 26, 2004), 69 FR 11126, 78 (Mar. 9, 2004) (‘‘Regulation NMS Proposing Release’’). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 file with the Commission, pursuant to Rule 608, the fees for the data content underlying consolidated market data. The fees for the data content underlying consolidated market data must satisfy the statutory standards of being fair, reasonable and not unreasonably discriminatory.1155 As described further below, the Commission has historically assessed fees for data such as the data content underlying consolidated market data using a reasonably related to cost standard. Further, the SROs will have to develop and propose their own fees for connectivity. Individual SRO connectivity fees must be filed with the Commission pursuant to Section 19(b) of the Exchange Act and Rule 19b–4 thereunder and satisfy the statutory requirements under Sections 6 and 15A of the Exchange Act.1156 Connectivity to all of the SROs for purposes of receiving the data content underlying consolidated market data is necessary under Rule 603(b) and the SROs are the sole providers of such access. Because of the mandatory nature of connectivity to all of the SROs for purposes of providing the information necessary to generate consolidated market data,1157 the Commission believes that one method for demonstrating that such fees are fair and reasonable and not unreasonably discriminatory is by demonstrating that they are reasonably related to costs.1158 Finally, competing consolidators will establish fees for their consolidated market data products. These fees will be disclosed on Exhibit G of Form CC. Competing consolidators’ fees for their services related consolidated market 1155 Sections 11A(c)(1)(C) and 11A(c)(1)(D) and Rule 603(a) of Regulation NMS. 1156 See also supra note 826. 1157 See Rule 603(b) of Regulation NMS. 1158 Historically, the Commission has stated that one method for assessing the fairness and reasonableness of fees charged by an exclusive processor, as defined in Exchange Act Section 3(a)(22)(B), is to show a reasonable relation to the costs. See Market Information Concept Release, supra note 22, at 70627 (‘‘[T]he 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.’’). See also Proposing Release at 16770, note 439 and accompanying text. Several exchanges have filed proposed connectivity fees and have provided information about costs related to such connectivity to demonstrate compliance with statutory standards. Cf. Securities Exchange Act Release Nos. 86626 (Aug. 9, 2019), 84 FR 41793 (Aug. 15, 2019) (SR–IEX–2019–07); 87875 (Dec. 31, 2019), 85 FR 770 (Jan. 7, 2020) (SR–MIAX–2019–51); 87876 (Dec. 31, 2019), 85 FR 757 (Jan. 7, 2020) (SR–PEARL– 2019–36); 87877 (Dec. 31, 2019), 85 FR 738 (Jan. 7, 2020) (SR–EMERALD–2019–39); 88161 (Feb. 11, 2020), 85 FR 8968 (Feb. 18, 2020) (SR–BOX–2020– 03). PO 00000 Frm 00090 Fmt 4701 Sfmt 4700 data products may include fees for aggregation and generation of consolidated market data products and transmission of such products to subscribers. Competing consolidators’ fees may include the fees for the data content underlying consolidated market data as well as fees for connectivity to the SROs, or the fees for data content underlying consolidated market data may be charged directly to the end users. The Commission received several comments on the anticipated fees for the data content underlying consolidated market data.1159 Some commenters stated that understanding the anticipated fees for data content underlying consolidated market data is necessary to analyzing the implications of the decentralized consolidation model 1160 and necessary to evaluating whether entities would decide to make the business decision to act as a competing consolidator.1161 Two commenters argued that the failure to describe anticipated fees violates the APA by denying commenters the ability to assess the proposal and impairing the Commission in its ability to conduct a cost-benefit analysis.1162 The Commission disagrees. Fees proposed by the plan(s) for the data content underlying consolidated market data will be a fixed cost that will be imposed on all competing consolidators and self-aggregators. These entities can develop business plans on whether to enter this business based on other information, such as the technology that will be necessary to aggregate, generate, and disseminate consolidated market data, and their expected subscribers. The Commission believes that there is sufficient information available to potential entrants to assess the costs and benefits of acting as a competing consolidator.1163 Further, in the Proposing Release, the Commission described the anticipated new fees for the data underlying consolidated market data as needing to reflect the following: (i) That consolidated market data includes new content described above, including depth of book data, auction information, 1159 See, e.g., SIFMA Letter; Nasdaq Letter IV; Cboe Letter; NYSE Letter II; BlackRock Letter; Fidelity Letter; State Street Letter; Schwab Letter; ICI Letter; MFA Letter; Citadel Letter; Virtu Letter; AHSAT Letter; Proof Trading Letter; Wharton Letter; ACTIV Financial Letter; Clearpool Letter; STANY Letter II. 1160 See, e.g., STANY Letter II; NYSE Letter II; Cboe Letter; Schwab Letter; IDS Letter I; ACTIV Financial Letter. 1161 See STANY Letter II; IDS Letter I; ACTIV Financial Letter. 1162 See NYSE Letter II; Cboe Letter. 1163 See supra note 649 and accompanying text. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and additional information on orders of sizes smaller than 100 shares; 1164 (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. In addition, the Commission believes that the fees for the data content underlying consolidated market data should not include redistribution fees for competing consolidators.1165 Competing consolidators will take the place of the exclusive SIPs in the dissemination of consolidated market data, which today do not pay redistribution fees for the consolidation and dissemination of SIP data. The Commission believes imposing redistribution fees on data content underlying consolidated market data that will be disseminated by competing consolidators would be difficult to reconcile with statutory standards of being fair and reasonable and not unreasonably discriminatory in the new decentralized model.1166 Under the new decentralized consolidation model, selfaggregators also will directly receive the data content necessary for generating consolidated market data from the SROs and, because by definition they are limited to using the data for internal purposes, would not be subject to fees for redistributing such consolidated market data. If the plan(s) proposed to impose redistribution fees on the data content underlying consolidated market data, the Commission would be concerned that competing consolidators could be subject to unreasonable discrimination as they would be required to pay higher fees for such data than self-aggregators would pay for the same data. The Equity Data Plans have not imposed redistribution fees on the exclusive SIPs and the Commission believes that such plan(s) should not impose such fees on the entities that will distribute consolidated market data 1164 See supra Section II.B. AHSAT Letter (‘‘The Commission should take care that SROs do not design their fee structure to unduly target competing consolidators in practice, especially when SROs are likely to operate their own competing consolidators . . . In this way profit-motivated SROs that are allowed to charge competing consolidators might find ways to make them uneconomic, thereby eliminating the competitiveness presented by the new consolidated data feeds.’’). 1166 See infra note 1172 and accompanying text. 1165 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 in the decentralized consolidation model, i.e., competing consolidators. Several commenters stated that the Commission should scrutinize SRO fees for market data.1167 Some commenters requested the Commission review market data fees to help to ensure that they are fair and reasonable,1168 while a few stated that market data fees should be cost-based.1169 One commenter, however, stated that the proposal establishes a rate-making board and would impose cost-based regulation on the sale of consolidated market data.1170 This commenter stated that the proposal failed to provide guidance on how to determine the cost of market data especially in light of exchange practices of allocating costs across products.1171 In the Proposing Release, the Commission explained that it seeks to ensure that consolidated market data is widely available for reasonable fees.1172 The Commission must assess the proposed fees for data content underlying consolidated market data and determine whether they are fair and reasonable, and not unreasonably discriminatory.1173 To do this, the Commission must have ‘‘sufficient information before it to satisfy its statutorily mandated review function’’— that the fees meet the statutory standard.1174 The Commission stated 1167 See BlackRock Letter; Fidelity Letter; State Street Letter; ICI Letter; Virtu Letter; SIFMA Letter. 1168 See BlackRock Letter; ICI Letter. 1169 See Schwab Letter; ICI Letter; SIFMA Letter; AHSAT Letter. One commenter argued that current market data fees have no relationship to cost and that the proposal provided no mechanism to connect SIP fees to cost. See Proof Trading Letter. 1170 See Nasdaq Letter IV at 9, 22. 1171 Id. 1172 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. See 15 U.S.C. 78k– 1(c)(1)(C). See also 17 CFR 242.603(a)(1). 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. See 15 U.S.C. 78k– 1(c)(1)(D). See also 17 CFR 242.603(a)(2). As competing consolidators will be securities information processors, Exchange Act Section 11(A)(c)(1)(C) will continue to apply. Similarly, self-aggregators are broker-dealers, SROs, or RIAs (i.e., others) and thus Exchange Act Section 11A(c)(1)(D) will continue to apply. 1173 See 15 U.S.C. 78k–1(c). See also Rules 603(a)(1) and (2), 608 of Regulation NMS, 17 CFR 242.603(a)(1) and (2), 608; Bloomberg Order, supra note 22, at 11–12. 1174 Bloomberg Order, supra note 22, at 15; cf. 17 CFR 201.700, Rule of Practice 700 (providing that the burden of demonstrating that a proposed rule change satisfies statutory standards is on the selfregulatory organization that proposed the rule change). PO 00000 Frm 00091 Fmt 4701 Sfmt 4700 18685 that fees for consolidated SIP data can be shown to be fair and reasonable if they are reasonably related to costs.1175 The Commission cited the Market Information Concept Release, in which 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.’’ 1176 The Commission later explained in the context of approving an SRO fee filing that, because core data must be purchased, their fees are less sensitive to competitive forces; 1177 therefore, 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.’’ 1178 The Commission then stated that the proposal did not change the mandatory nature of the provision of the data necessary to generate consolidated market data by the SROs.1179 These standards have been previously articulated by the Commission; they are not new. The Commission was not proposing a ‘‘new cost-based regulation’’ or a new ‘‘rate-making board.’’ The Equity Data Plans have been establishing fees for SIP data for many years. The Commission proposed to utilize the current plan mechanism for establishing fees, subject to applicable statutory standards and 1175 See Proposing Release, 85 FR at 16770. Information Concept Release, supra note 22, at 70627. An ‘‘exclusive processor’’ is defined in Section 3(a)(22)(B) of the Exchange Act and includes 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 quotations or transactions on or effected or made by means of any facility of such exchange or quotations distributed or published by means of any electronic system operated or controlled by such association. 1177 See Securities Exchange Act Release No. 59039 (Dec. 2, 2008), 73 FR 74770, 74782 (Dec. 9, 2008) (File No. SR–NYSEArca–2006–21). 1178 Bloomberg Order, supra note 22, at 15 & n. 63. 1179 See Proposing Release, 85 FR at 16770. 1176 Market E:\FR\FM\09APR2.SGM 09APR2 18686 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations regulatory requirements.1180 Under Rule 603(b), the SROs are required to make available all data that is necessary to generate consolidated market data. The Commission has determined that it is necessary to disseminate this data within the national market system. The Commission believes that consolidated market data will significantly enhance the ability of market participants to trade competitively and efficiently and will indirectly benefit investors, even if they do not directly consume all of the new data elements of consolidated market data, by facilitating executing broker-dealers’ access to information. One commenter cautioned the Commission to ensure that fee structures are not designed to unduly target competing consolidators in practice, especially if one or more SROs become competing consolidators.1181 All fees for the data underlying consolidated market data must satisfy the statutory standards, including not being unreasonably discriminatory. A fee that unduly ‘‘targets’’ competing consolidators in an unfair or unreasonable manner would not satisfy statutory requirements. One commenter stated that it hoped that in a new competitive model that overall costs for broker-dealers would be lower. The commenter, however, stated that broker-dealers would still need to purchase proprietary data to get information that is not included in consolidated market data. Therefore, the commenter suggested that the Commission ensure that safeguards are in place to keep exchanges from increasing market data prices to recoup revenue lost from the requirement to provide new core data to competing consolidators.1182 The Commission will analyze fees for data content underlying consolidated market data consistent with the standards set forth above. The new governance structure required by the Governance Order,1183 as well as the recently adopted Effective-Upon-Filing Amendments,1184 will provide additional opportunities for interested market participants to participate in establishing effective national market system plan fees. In the Governance 1180 See supra notes 1173–1179 and accompanying text. 1181 See AHSAT Letter at 2. 1182 See Clearpool Letter at 3 (‘‘It will therefore be important for the Commission to ensure that robust safeguards are in place under the new regime to control market data costs and prevent exchanges from just increasing market data prices to make up for any loss of revenue due to the proposed requirement to provide the new core data to competing consolidators.’’). 1183 See Governance Order, supra note 1128. 1184 See Effective-Upon-Filing Adopting Release, supra note 17. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Order, the Commission stated that ‘‘a more diverse set of perspectives from full voting members of the operating committee of the New Consolidated Data Plan would improve the governance structure of the SIPs and help to ensure that the [O]perating [C]ommittee benefits from these views before it takes action or files plan amendments with the Commission.’’ 1185 Further, pursuant to the Effective-Upon-Filing Amendments, fees established and proposed by the effective national market system plan(s) are no longer effective upon filing but must be published for public comment and approved by the Commission before they can take effect. Several commenters discussed whether market data fees would be lower in a decentralized consolidation model.1186 One commenter suggested that if competitive forces fail to materialize and drive fees for consolidated market data down that the Commission should adopt a rule to enable it to review consolidated market data fees for fairness, reasonableness, and non-discriminatory pricing.1187 Another commenter stated that the New Consolidated Data Plan, the EffectiveUpon-Filing Amendments,1188 the Commission’s continued scrutiny of exchange fee proposals, and public disclosure of SRO costs were necessary predicates to control market data costs.1189 Fees for the data content underlying consolidated market data must be filed with the Commission pursuant to Rule 608 and must satisfy statutory standards. In addition, one commenter stated that the Commission failed to analyze how exchanges have incentives to cut trading fees in order to win market share and increase market data revenues. The commenter stated that the proposal would eliminate the incentive to reduce trading fees. Further, this commenter argued that the Commission failed to consider the all-in price of trading.1190 However, another commenter stated that market data fees comprise ‘‘a largerthan-ever share’’ of overall transaction costs and urged the Commission to ensure that any new fees are consistent with the Exchange Act.1191 The Commission is not considering the proposed fees for data content underlying consolidated market data in 1185 Governance Order, supra note 1128. Clearpool Letter; Schwab Letter; Fidelity Letter; Nasdaq Letter IV; Citadel Letter. 1187 See Schwab Letter at 6. 1188 See Effective-Upon-Filing Adopting Release, supra note 17. 1189 See Fidelity Letter at 8. 1190 See Nasdaq Letter IV at 29. 1191 ICI Letter at 11. 1186 See PO 00000 Frm 00092 Fmt 4701 Sfmt 4700 this release; they have not been developed or filed with the Commission, as required pursuant to Rule 608. The effective national market system plan(s) will have to develop and file such proposed fees with the Commission pursuant to Rule 608 within 150 days of the effectiveness of Rule 614, as noted above 1192 and they must satisfy statutory standards.1193 As discussed above, the Commission believes that there will be downward pressure on the fees for the data content underlying consolidated market data as compared to fees for proprietary data. The proposed new fees for the data content underlying consolidated market data, while needing to reflect additional new content, will be evaluated by the Commission for compliance with statutory standards and one way to assess compliance is to show they are reasonably related to costs.1194 In addition, proposed SRO connectivity fees will have to satisfy statutory standards in a similar manner to reflect the mandatory nature of such connectivity. Finally, the fees established by competing consolidators for their consolidated market data products will be subject to competitive market forces in the aggregation and transmission of such data. One commenter stated its ‘‘strong opinion’’ that ‘‘the regulated privilege of order protection [pursuant to Rule 611] be accompanied by a requirement to openly disseminate information regarding those orders at no revenue to the SRO or liquidity provider.’’ 1195 This commenter stated that this could lead to ‘‘higher net transaction fees or even order placement fees,’’ but the commenter said that ‘‘competitive forces are working better with respect to net transaction fees than market data fees.’’ 1196 In the alternative, the commenter suggested that competing consolidators pay the SROs their marginal cost to disseminate data but also acknowledged that marginal costs may be difficult to calculate. Further, the commenter stated that ‘‘[t]he marginal cost is likely to strictly focus on the modest networking costs of an additional multicast recipient, and to 1192 See infra Section III.H.2. supra note 1172 and accompanying text. In the Market Information Concept Release, the Commission said that ‘‘the total amount of market information revenues should remain reasonably related to the cost of market information.’’ Market Information Concept Release, supra note 22, at 28. 1194 See Proposing Release, 85 FR at 16770; supra note 1172 and accompanying text. See also supra note 1158. 1195 AHSAT Letter at 2. 1196 Id. 1193 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations exclude SRO software development or broader marketplace costs.’’ 1197 This comment relates to a future proposed fee amendment. The Commission has not proposed to modify the revenue formula or set fees for data content underlying consolidated market data. (d) Comments on Transparency of Market Data Fees Several commenters stated that there should be enhanced transparency around market data fees.1198 One commenter suggested that the Commission require exchanges to publicly disclose, on a periodic basis, the cost of the equity market data content that they sell to competing consolidators in order to allow the Commission and the public to ensure that the fees for this data are fair and reasonable.1199 The Commission has reviewed these comments and reiterates that any fees for data content underlying consolidated market data, including subsets of consolidated market data, will be set pursuant to fees that will be proposed and filed by the effective national market system plan(s) pursuant to Rule 608.1200 (e) Comments on Fees for Different Consolidated Market Data Offerings In the Proposing Release, the Commission stated that the plan(s) would develop and file with the Commission 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 and could also develop fees for data content underlying other consolidated market data offerings that contain subsets of the components of consolidated market data.1201 The Commission believed that the effective national market system plan(s) could develop different fees for data content underlying market data offerings that contain subsets of the data content underlying consolidated market data based upon the needs of market participants and cited a NYSE proposal to develop different levels of SIP data products.1202 Thus, in addition to 1197 Id. 1198 See Fidelity Letter; State Street Letter; Schwab Letter; SIFMA Letter; Committee on Capital Markets Letter; ACTIV Financial Letter at 3. 1199 See Committee on Capital Markets Regulation Letter at 3. 1200 See supra note 1174 and accompanying text. 1201 See Proposing Release, 85 FR at n. 616 and accompanying text. 1202 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/ data-insights/stock-quotes-and-trade-data-one-size- VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 developing a fee for data content underlying a consolidated market data offering that contains all of the data content underlying consolidated market data,1203 the plan could develop a fee for data content underlying a consolidated market data offering that contains only TOB information, regulatory data, and administrative data, or the plan could develop a fee for depth of book data, regulatory data, and administrative data but not auction information. As described, the proposed new fee schedule would include proposed new fees for the data content underlying consolidated market data, as well as any proposed new fees for consolidated market data offerings that reflect only a subset of consolidated market data. One commenter challenged the view that the plan(s) would develop different fees for different subsets of the data content underlying consolidated market data.1204 The commenter stated that the Commission could not assume that the Operating Committee would develop such fees.1205 The Commission notes that this commenter had developed a proposal similar to the suggestion for SIP data.1206 The commenter had acknowledged in its proposal that a ‘‘one-size-fits-all’’ SIP data product was not meeting the needs of market participants 1207 and recommended that the Operating Committee establish different content products that would be designed to serve the needs to specific types of investors.1208 The Commission believes that the Operating Committee will consider the needs of investors and the different use cases for consolidated market data when developing the proposed fees for the data content underlying consolidated market data. The Commission recently has taken steps to help to ensure that the needs of investors are considered in the national market system in addition to the adopted rules. For example, the New Consolidated Data Plan is required to doesnt-fit-all. The NYSE proposed offering different levels of services based on the needs of market participants (‘‘NYSE SIP Tiers Proposal’’). The Operating Committee could develop different products that utilize consolidated market data components and propose the relevant fees for such products. See also Feb. NYSE Letter. 1203 As described above, the Commission is adopting a new definition of consolidated market data products, which will allow competing consolidators to develop market data product offerings that contain all consolidated market data or subset thereof. See Rule 600(b)(20); Section II.B.2. 1204 See NYSE Letter II at 4. 1205 See id. 1206 See NYSE SIP Tiers Proposal, supra note 1202. 1207 Id. 1208 Id. PO 00000 Frm 00093 Fmt 4701 Sfmt 4700 18687 contain a new governance structure that has a broader representation of market participants involved in the operation of the plan,1209 and the Commission adopted amendments to the filing and review process for plan fees.1210 One commenter, however, suggested that competing consolidators, not the Operating Committee, should be able to develop competing products that contain consolidated market data.1211 This commenter said that competing consolidators could develop products to satisfy the needs of market participants.1212 Competing consolidators will develop consolidated market data products that their end users desire. However, the Commission believes that the Operating Committee of the effective national market system plan(s) needs to develop the fees associated with the data content underlying any consolidated market data product or subset thereof. The Operating Committee is well-situated to develop and propose such fees. However, competing consolidators could convey their subscribers’ market data needs to the Operating Committee and suggest new offerings as necessary, as could any person. Further, competing consolidators could communicate via the public comment process for effective national market system plan(s)’ proposed data content underlying consolidated market data fees that must be filed with the Commission pursuant to Rule 608. (f) Comments on Collection of Fees for Data Content Underlying Consolidated Market Data and Allocation of Revenues The effective national market system plan(s) would be responsible for collecting the fees for the data content underlying consolidated market data and underlying any consolidated market data offerings that contain subsets of the components of consolidated market data. The effective national market system plan(s) also would be responsible for allocating revenues among the SRO participants. One commenter stated that the Commission failed to address the revenue allocation formula in the Proposing Release and how it would work under the decentralized consolidation model, if at all.1213 The 1209 See Governance Order, supra note 1128. Effective-Upon-Filing Adopting Release, supra note 17. 1211 See MEMX Letter at 8. 1212 See id. 1213 See Nasdaq Letter IV at 37. See also id. at 39– 40 and 60, n. 149 (stating that the proposal fails to address how the revenue allocation formula adopted as part of Regulation NMS and the new 1210 See E:\FR\FM\09APR2.SGM Continued 09APR2 18688 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations commenter stated these issues are needed to evaluate the proposed rules and that failure to address the revenue allocation formula was arbitrary and capricious. The revenue allocation formula was adopted in Regulation NMS, and the Commission stated that ‘‘the language added to the Plans by the Allocation Amendment can be adjusted in the future pursuant to the normal process of Commission approved amendments.’’ 1214 The Commission believes that the Operating Committee is best placed to evaluate whether and, if so, how the revenue allocation formula needs to be amended to reflect the new content of data that is included in the definition of consolidated market data as well as the new responsibilities of the primary listing exchanges in collecting and calculating Regulatory Data. Any plan amendment would be developed by the Operating Committee and filed with the Commission pursuant to Rule 608. (g) Comments on Accounts and Audits As proposed, the plan(s) would be responsible for overseeing accounts and conducting audits for purposes of billing, among other things. The plan(s) generally would also have to develop a harmonized approach to data billing protocols, including with respect to any unified MISU policy.1215 One commenter stated that the proposal did not specify how contracting for data would occur under the plan(s), including who would enter into contracts with, collect fees from, and resolve disputes with customers.1216 This commenter questioned whether ‘‘(a) the SROs would charge data fees to the competing consolidators and then the competing consolidators would pass through the cost of data to their customers, (b) the SROs would charge competing consolidators’ customers directly for the SROs data, or (c) the NMS Plans would charge data fees to the competing consolidators and their customers.’’ 1217 As stated in the Proposing Release, the effective national market system plan(s) would charge the fees for the data content underlying consolidated market data, collect the revenue, oversee accounts and billing, and develop billing protocols, including any MISU policies. The proposal set forth the framework for disseminating and pricing market data would work together, and that abandoning the revenue allocation formula would be arbitrary and capricious and therefore violate the APA). 1214 Regulation NMS Adopting Release, supra note 7, at 37561–62. 1215 See supra note 1124. 1216 See IDS Letter I at 12. 1217 Id. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 responsibilities of the effective national market system plan(s) as to billing. The SROs would not be responsible for charging competing consolidators or their customers directly for consolidated market data. The Commission believes that the licensing, billing, and audit processes under the decentralized consolidation model could be similar to existing processes that are in place under the Equity Data Plans. For example, while today the Equity Data Plans provide a data feed to market participants, the fees and billing for that data are not based simply upon the receipt of the data feed. Rather, broker-dealers and other market participants who receive SIP data are billed based upon both the type of user (e.g., professional vs. non-professional) and specific use cases for the data (e.g., display vs. non-display). Purchasers of SIP data provide the administrator of the Equity Data Plans with information and attestations about the number and type of users and specific use cases, and the administrator (or its auditor) audit and assess this information to determine appropriate billing for SIP data purchasers. As discussed above, the SROs can comply with their obligation under Rule 603(b) to make all data necessary to generate consolidated market data available by providing their existing proprietary data feeds that contain this information to competing consolidators and self-aggregators.1218 These data feeds may contain information that goes beyond what is necessary to generate consolidated market data, but competing consolidators and selfaggregators will not be billed based upon the data feed that they receive. Similar to the current billing, reporting and audit processes, the administrator of the effective national market system plan(s) could be expected to license and bill and, when required, employ an audit process to assess the usage of the data content made available to competing consolidators and selfaggregators under Rule 603(b) for billing purposes.1219 (h) Comments on Timestamps As proposed, Rule 614(e)(1)(ii) required that the amendment to the effective national market system plan(s) for NMS stocks include provisions requiring the application of timestamps by the SRO participants on all consolidated market data, at the time the consolidated market data component was generated by the SRO participant and at the time the SRO 1218 See 1219 See PO 00000 supra Section III.B.9(b). supra Section III.E.2(e). Frm 00094 Fmt 4701 Sfmt 4700 participant made the consolidated market data available to competing consolidators and self-aggregators.1220 One commenter stated that the proposal would require the effective national market system plan(s) participants to apply timestamps to consolidated market data even though they were not consolidating and disseminating consolidated market data.1221 The Commission has modified the language of Rule 614(e)(1)(ii) to require the SRO participants to apply timestamps to all information with respect to quotations for and transactions in NMS stocks that is necessary to generate consolidated market data and not to consolidated market data as the proposed rule required. Specifically, the timestamps applied by the SROs must be to the individual components of data content underlying consolidated market data, i.e., all of the individual components of data content underlying core data, regulatory data, administrative data, self-regulatory organization-specific program data, and additional elements defined as ‘‘consolidated market data.’’ This commenter also criticized the proposal for underestimating the burdens of adding timestamps.1222 The Commission disagrees with the commenter regarding the burden of adding timestamps. The SROs currently add timestamps to all elements of consolidated market data and thus, the Commission does not believe that ensuring that timestamps are applied in a consistent manner going forward would impose significant, if any, costs to the SROs. Timestamps are important for market participants as they provide the ability to measure latency and ensure accurate sequencing of data. The application of timestamps may also incentivize the SROs to make available their consolidated market data as quickly as possible. Therefore, the 1220 The SROs currently submit timestamped data under the Equity Data Plans and the National Market System Plan Governing the Consolidated Audit Trail (‘‘CAT NMS Plan’’). See, e.g., CTA Plan, supra note 10, at Section VI.(c); Nasdaq UTP Plan, supra note 10, at Section VIII; CAT NMS Plan at Sections 6.3(d), 6.8, available at https:// www.catnmsplan.com/sites/default/files/2020–02/ CAT-2.0-Consolidated-Audit-Trail-LLC%20PlanExecuted_%28175745081%29_%281%29.pdf (last accessed Nov. 27, 2020). See also 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 was Exhibit A to the CAT NMS Plan Approval Order. However, the limited liability company agreement of a new limited liability company named Consolidated Audit Trail, LLC now serves as the CAT NMS Plan. See Securities Exchange Act Release No. 87149 (Sept. 27, 2019), 84 FR 52905 (Oct. 3, 2019). 1221 See NYSE Letter II at 21. 1222 See id. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations application of timestamps needs to be consistent and reliable.1223 (i) Comments on Annual Assessment As proposed, Rule 614(e)(1)(iii) required the amendment to the effective national market system plan(s) for NMS stocks to reflect that the participants are required 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. The Equity Data Plans play an important role in governing the operation of the national market system. The Commission believes that the effective national market system plan(s) for NMS stocks should continue in this important role by monitoring the overall performance of the provision of consolidated market data by competing consolidators to seek to ensure that the decentralized consolidation model is operating soundly and is therefore adopting this provision, as proposed, with one modification. As described in the Proposing Release, the plan must assess several key factors of the operation of the decentralized consolidation model, including: (1) The speed of competing consolidators in receiving, calculating, and disseminating consolidated market data products; (2) the reliability of the transmission of consolidated market data products; and (3) a detailed cost analysis of the provision of consolidated market data products. The effective national market system plan(s) would base their assessments on the information made publicly available by competing consolidators, including the information that each competing consolidator is required to make available under Rule 614. One commenter supported requiring the filing of a proposed plan amendment to mandate an annual assessment and suggested that the annual assessment be made public to further assist broker-dealers in selecting competing consolidators.1224 One commenter stated that ‘‘the Proposal 1223 SRO timestamps will also assist market participants in their ability to assess latencies in the provision of consolidated market data. Under Rule 614(d)(3), competing consolidators are required to make available consolidated market data products that include timestamps assigned by the SROs as well as competing consolidators. Competing consolidators will be required to timestamp the data underlying consolidated market data at specific intervals: (1) Upon receipt from an SRO at the SRO data center, (2) upon receipt at its aggregation mechanism, and (3) upon dissemination of consolidated market data to customers. See supra Section III.C.8(a) and the discussion of Rule 614(d)(4). 1224 See Clearpool Letter at 9. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 does not indicate whether the results of particular assessments will be made publicly available to firms and what, if any, actions broker-dealers will be required to make in response to such assessments.’’ 1225 One commenter suggested that the annual report not review individual competing consolidator performance ‘‘in silo’’ by also reviewing at the competition.1226 The Commission is adopting the rule, with the addition that the annual report would be made publicly available by the Commission. The Commission believes that the annual report should be made publicly available to provide transparency to investors as to the operation of the national market system. The Commission believes that the annual report can assist the Commission in monitoring and evaluating the operation of the national market system and decentralized consolidation model. The annual report, however, is not an assessment of individual competing consolidators but of the overall performance of the provision of consolidated market data by competing consolidators. Market participants that want to evaluate the individual performance of a competing consolidator can utilize the individual competing consolidator’s disclosures on its Form CC and the monthly performance metrics published by each competing consolidator. Another commenter stated that the SROs would incur costs associated with assessing competing consolidators although the effective national market system plan(s) would not have a role in selecting or monitoring competing consolidators.1227 The SROs currently incur costs in overseeing the national market system and some of these costs may change in the decentralized consolidation model, including the new costs associated with conducting an assessment and developing the annual report. The Commission does not believe that the costs should be overly burdensome. As stated above, the Operating Committee can use public reports of competing consolidator performance as well as any pertinent information that the plan(s) believe 1225 TD Ameritrade Letter at 13. This commenter asked several questions about the expectations on broker-dealers in response to the annual report. See id. at 13–14. As discussed above, the annual report will not be a report on individual competing consolidators but rather a report on the operational status of the whole decentralized consolidation model. 1226 See Data Boiler Letter I at 64 (‘‘How CC beat their competition among peers, and the overall industry rely less on Exchanges’ PP and SAs’ services are the best key performance indicators (KPIs).’’). 1227 See NYSE Letter II at 28. PO 00000 Frm 00095 Fmt 4701 Sfmt 4700 18689 would be useful to assess competing consolidators and develop the annual report. Further, the Commission believes that the Operating Committee is well-suited to perform this assessment. The SROs will be making the data content underlying consolidated market data available to competing consolidators and establishing the necessary connectivity to competing consolidators, and as stated, the effective national market system plan(s) will continue to have important responsibilities in developing, operating, and regulating the national market system. The Commission believes that the Operating Committee should develop the annual report as a means to monitor the overall performance of competing consolidators and to seek to ensure that the national market system is operating soundly. (j) Comments on List of Primary Listing Exchanges Finally, proposed Rule 614(e)(1)(iv) required the amendment to the effective national market system plan(s) for NMS stocks to include a list of the primary listing exchanges for each NMS stock.1228 The primary listing exchanges will be required to collect, calculate, and make available regulatory data to competing consolidators and selfaggregators. Therefore, each primary listing exchange must be identified to determine who is responsible for collecting, calculating, and making regulatory data available. One commenter agreed with developing a list identifying the primary listing exchange.1229 One commenter suggested that the Commission develop this list.1230 The Commission believes that the plan(s) are best suited to develop the list and to ensure that it is kept current and readily accessible. The Commission is modifying the language of Rule 614(e)(1)(iv) to require that the plan(s) develop, maintain, and publish the list. The Commission believes that the list of primary listing exchanges should be maintained and published so that market participants will know which exchange is responsible for providing regulatory data. Further, competing consolidators and self-aggregators will need to know which exchange will be making regulatory data available. (k) Regulation SCI The Commission is modifying Rule 614(e) to accommodate the new definition of SCI competing 1228 The term ‘‘primary listing exchange’’ is defined in Rule 600(b)(68). 1229 See Data Boiler Letter I at 64. 1230 See NYSE Letter II at 28. E:\FR\FM\09APR2.SGM 09APR2 18690 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidator classification under Regulation SCI. Specifically, new paragraph (v) of Rule 614(e) will require the participants to the effective national market system plan(s) for NMS stocks to file with the Commission an amendment that requires the plan(s) to calculate and publish on a monthly basis the consolidated market data gross revenues for NMS stocks as specified by: (1) Listed on the NYSE; (2) listed on Nasdaq; and (3) listed on exchanges other than NYSE or Nasdaq. The Commission believes that the plan(s) are best suited to calculate and publish this information because, as noted above, the effective national market system plan(s) will charge the fees for the data content underlying consolidated market data, collect the revenue, and oversee accounts and billing. Competing consolidators will use the calculation and publication of consolidated market data gross revenues to assess whether they have reached the 5% threshold described in Rule 1000 for SCI competing consolidators. As discussed below, the Commission believes that competing consolidators that reach these thresholds should be held to higher systems resiliency and integrity standards as required under Regulation SCI than competing consolidators that are below this threshold.1231 F. Systems Capability: Amendment to Rule 1000 of Regulation SCI To Expand ‘‘SCI Entities’’ Definition To Include ‘‘SCI Competing Consolidator’’; Adoption of Rule 614(d)(9): Systems Integrity In the Proposing Release, the Commission stated its preliminary belief that competing consolidators should be subject to the requirements of Regulation SCI.1232 The Commission adopted Regulation SCI in November 2014 to strengthen the technology infrastructure of the U.S. securities markets, reduce the occurrence of systems issues in those markets, improve their resiliency when technological issues arise, and establish an updated and formalized regulatory framework, thereby helping to ensure more effective Commission oversight of such systems.1233 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) 1231 See infra Section III.F. Proposing Release, 85 FR at 16785–89. 1233 See Securities Exchange Act Release No. 73639 (Nov. 19, 2014), 79 FR 72252 (Dec. 5, 2014) (‘‘SCI Adopting Release’’), at 72252–56 for a discussion of the background of Regulation SCI. 1232 See VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 (‘‘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.1234 As the Commission stated in the Proposing Release, competing consolidators, as sources of consolidated market data, would serve an important role in the national market system. The Commission explained that, as it had stated when adopting Regulation SCI, ‘‘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.’’ 1235 For these reasons, Regulation SCI applies to both the exclusive providers of consolidated market data (i.e., the plan processors) and to proprietary market data systems, and is not limited to applicable systems of plan processors, but rather also includes the market data systems of any SCI entity, including SCI SROs. Taking into consideration the role of competing consolidators as providers of consolidated market data feeds that are likely to be widely used and relied upon by market participants, the Commission proposed to apply Regulation SCI to competing consolidators by including them within the definition of ‘‘SCI entity’’ and requested public comment.1236 In particular, among other things, the Commission requested 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 1234 See Rule 1000. Proposing Release, 85 FR at 16786 (quoting SCI Adopting Release, supra note 1233, at 72275). 1236 In addition, the Commission proposed to revise the definition of ‘‘critical SCI system’’ to account, among other things, for the systems of OPRA’s plan processor, since the competing consolidator model will not apply with respect to trading in options. See Proposing Release, 85 FR at 16786–87. The Commission is adopting the revision to the definition of ‘‘critical SCI system’’ as proposed. See infra notes 1315–1316 and accompanying text. 1235 See PO 00000 Frm 00096 Fmt 4701 Sfmt 4700 a competing consolidator), and penetration testing.1237 A number of commenters supported applying the requirements of Regulation SCI to competing consolidators in some form.1238 In particular, a few commenters supported application of Regulation SCI to competing consolidators as proposed.1239 Others argued that competing consolidators should be considered to have ‘‘critical SCI systems’’ like the exclusive SIPs and thus subject to higher requirements than proposed.1240 Some commenters, however, expressed concern that the costs of SCI compliance would be a barrier to entry and could deter entities from seeking to become competing consolidators.1241 Similarly, several commenters, although not citing Regulation SCI specifically, expressed general skepticism about the ability to attract new entrants to register as competing consolidators, citing among other factors, potential lack of economic incentives.1242 The Commission continues to believe that competing consolidators, as providers of consolidated market data products, will serve an important role in the national market system. Thus, consistent with the views of many commenters, the Commission believes that it is important to impose requirements to help ensure that the technology systems of competing consolidators are reliable and resilient, consistent with the policy goals of Regulation SCI.1243 The Commission is cognizant that Regulation SCI entails compliance burdens for new entrants 1244 and, in particular, that 1237 See Proposing Release, 85 FR at 16789. Cboe Letter at 26; Nasdaq Letter IV at 35– 36; Data Boiler Letter I at 57; STANY Letter II at 6; FINRA Letter at 4, n. 14; MEMX Letter at 8; Fidelity Letter at 3, 10; Clearpool Letter at 9. 1239 See FINRA Letter at 4, n. 14; MEMX Letter at 8; Fidelity Letter at 3, 10. See also Clearpool Letter at 9; STANY Letter II at 6. 1240 See Cboe Letter at 26; Nasdaq Letter IV at 35– 36; Data Boiler Letter I at 57; STANY Letter II at 6. 1241 See NYSE Letter II at 15; ACTIV Financial Letter at 2; IDS Letter I at 13; STANY Letter II at 6–7; Angel Letter at 19–21. See also TD Ameritrade Letter at 13; Nasdaq Letter III at 4. 1242 See also supra notes 626–629 and 641–649 and accompanying text (discussing commenters’ views that a lack of sufficient economic incentives for potential competing consolidators and the costs to become a competing consolidator outweigh the benefits). 1243 See supra note 1233 and accompanying text; Cboe Letter at 26; Nasdaq Letter IV at 35–36; Clearpool Letter at 9; Data Boiler Letter I at 57; FINRA Letter at 4, n. 14; MEMX Letter at 8; Fidelity Letter at 10. See also IntelligentCross Letter at 5, BlackRock Letter at 5; ACS Execution Services Letter at 5; Temple University Letter at 1–2. 1244 See Proposing Release, 85 FR at 16808–09, 16836–38, 16845–48 (discussing paperwork burdens, costs, and benefits of complying with 1238 See E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations those costs could serve as a barrier to entry for potential competing consolidators and deter some potential entities from becoming competing consolidators, as noted by several commenters.1245 The Commission is adopting a two-pronged approach to competing consolidators with respect to Regulation SCI, as described more fully below. The Commission estimates that under this approach, due to the threshold levels being adopted, the requirements of Regulation SCI 1246 will apply to most competing consolidators following an initial transition period.1247 In addition, the Commission is adopting a tailored set of operational capability and resiliency obligations designed to help ensure that the provision of consolidated market data products is prompt, accurate, and reliable, that is applicable to all competing consolidators during the transition period and to competing consolidators that are below the adopted threshold thereafter. First, the Commission believes that the inclusion of certain competing consolidators in the definition of ‘‘SCI entity’’ is appropriate. Several commenters supported the Commission’s proposal to apply the requirements of Regulation SCI to all competing consolidators, emphasizing the importance of ensuring the resiliency and reliability of the infrastructure for market data Regulation SCI). See also Nasdaq Letter III at 4; NYSE Letter II at 15; Schwab Letter at 7; TD Ameritrade Letter at 13; ACTIV Financial Letter at 2; IDS Letter I at 13; STANY Letter II at 6–7; Angel Letter at 19–21. 1245 See Nasdaq Letter III at 4; NYSE Letter II at 15; Schwab Letter at 7; TD Ameritrade Letter at 13; ACTIV Financial Letter at 2; IDS Letter I at 13; Angel Letter at 19–21. 1246 As discussed in the Proposing Release, Regulation SCI would, among other things, require SCI entities, which would now include SCI competing consolidators (as discussed below), 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. See 17 CFR 242.1001 (Rule 1001) of Regulation SCI. 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. See Rules 1002–1007 of Regulation SCI. 1247 See infra Section III.H for a discussion of the initial transition period. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 dissemination.1248 However, in recognition of the more limited role that certain competing consolidators may play in the securities markets and to address the concerns of other commenters who believed that the compliance costs of Regulation SCI would be burdensome to potential competing consolidators and could pose a significant barrier to entry for some potential competing consolidators, the Commission has made certain modifications from the proposal.1249 The Commission is adopting a definition of ‘‘SCI competing consolidator’’ that will subject competing consolidators to Regulation SCI, after a one-year transition period (as discussed below) (‘‘SCI CC Phase-In Period’’),1250 if they are above the adopted threshold.1251 This approach is similar to that taken regarding the definition of ‘‘SCI ATS,’’ which applies Regulation SCI to those ATSs that meet certain volume thresholds and thus were determined by the Commission to play a significant role in the securities markets.1252 Specifically, an ‘‘SCI competing consolidator’’ will be defined in Rule 1000 of Regulation SCI to mean ‘‘any competing consolidator, as defined in § 242.600 which during at least four of the preceding six calendar months, accounted for five percent (5%) or more of consolidated market data gross revenue paid to the effective national market system plan or plans required under § 242.603(b) for NMS stocks (1) listed on the New York Stock Exchange LLC, (2) listed on The Nasdaq Stock Market LLC, or (3) listed on national securities exchanges other than the New York Stock Exchange LLC or The Nasdaq Stock Market LLC, as reported by such plan or plans pursuant to the terms thereof.’’ 1253 In the Proposing Release, the Commission requested comment on 1248 See FINRA Letter at 4, n. 14; MEMX Letter at 8; Fidelity Letter at 3, 10. See also Clearpool Letter at 9; STANY Letter II at 6. 1249 See supra notes 1244–1245 and accompanying text. 1250 See infra note 1268 and accompanying text (discussing that SCI competing consolidators will not be required to comply with Regulation SCI until one year after the compliance date of Rule 614(d)(3)). 1251 The definition of ‘‘SCI entity’’ under Rule 1000 of Regulation SCI would be amended to include ‘‘SCI competing consolidators.’’ 1252 See Rule 1000 of Regulation SCI (definition of ‘‘SCI ATS’’). As discussed further below, for those competing consolidators, that are either (i) newly registered and operating during the initial transition period, or (ii) do not otherwise satisfy the SCI entity definition (because they are below the five percent threshold for an SCI competing consolidator), a more tailored set of safeguards would apply. 1253 See Rule 1000 of Regulation SCI. PO 00000 Frm 00097 Fmt 4701 Sfmt 4700 18691 whether it would be appropriate to set a threshold to determine which competing consolidators should be subject to Regulation SCI.1254 The Commission received one comment addressing the threshold inquiries, which expressed support for the adoption of a threshold.1255 The Commission believes that adopting a threshold to determine which competing consolidators are subject to Regulation SCI is responsive both to commenters who emphasized the importance of ensuring the resiliency, reliability, and integrity of the infrastructure for market data dissemination, as well as commenters that expressed concerns about barriers to entry. In adopting a threshold in the definition of ‘‘SCI competing consolidator,’’ the Commission believes it is establishing a reasonable scope for the application of Regulation SCI to competing consolidators. The adopted threshold level is designed to identify those entities which, if they were to experience a systems issue, could potentially affect a substantial number of market participants and impact a broad swath of the national market system.1256 The Commission believes that the 5% threshold level is reasonable for assessing materiality both generally and in the context of competing consolidated market data providers.1257 Specifically, the Commission believes that the adopted threshold level is not 1254 See Proposing Release, 85 FR at 16789 (requesting comment on whether a threshold test would be appropriate for competing consolidators subject to Regulation SCI and, if so, what such a threshold test should be). 1255 See Data Boiler Letter I at 57 (arguing that because compliance with Regulation SCI would be a possible barrier to entry, the Commission should adopt a threshold of ten percent for requiring compliance and arguing also that those below the threshold should be encouraged to voluntarily adopt SCI as ‘‘best practices’’). See also infra note 1263 and accompanying text. 1256 Further, while the Commission believes that the competing consolidator model is designed to result in multiple viable sources of consolidated market data, the Commission believes that adopting a threshold will ensure that, if the market is largely reliant on a small number of competing consolidators for the distribution of consolidated market data, such competing consolidators will be subject to the safeguards of Regulation SCI. The Commission believes that this could arise if only a small number of entities register as competing consolidators, if certain competing consolidators dominate the market, or if competing consolidators subsequently exit the market resulting in a concentration of competing consolidators. See also infra notes 1315–1316 and accompanying text (discussing ‘‘critical SCI systems’’ and competing consolidators). 1257 The adopted five percent threshold is consistent with the threshold level in the ‘‘Fair Access’’ rule (Rule 301(b)(5)) of Regulation ATS, as well as one of the volume threshold levels in the definition of SCI ATS in Rule 1000 of Regulation SCI. E:\FR\FM\09APR2.SGM 09APR2 18692 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations so high so as to exclude competing consolidators for which a systems issue could have a significant impact on market participants or the national market system as a whole and, at the same time, provides an opportunity for a competing consolidator to enter and grow its business prior to incurring the costs of compliance with Regulation SCI if it were to exceed the threshold level.1258 Notably, during this time competing consolidators will be subject to the requirements of Rule 614(d)(9) of Regulation NMS, as discussed below. The Commission recognizes that this threshold ultimately represents a matter of judgment by the Commission relating to the application of Regulation SCI to a new decentralized consolidation model and a new category of regulated entity. In the exercise of this judgment, the Commission has sought to identify a threshold level designed to ease barriers to entry for competing consolidators during the SCI CC PhaseIn Period and for new competing consolidators thereafter.1259 The adopted thresholds describe plan revenues by reference to current Tapes A, C, and B, respectively.1260 Although it is possible that the existing definition of tapes may be modified postimplementation, the thresholds acknowledge that listing exchange status has been, and may continue to be, relevant as the plan(s) develop pricing for data content underlying consolidated market data because Tape A, C, and B encompass securities listed on NYSE, Nasdaq, and national securities other than NYSE and Nasdaq, respectively.1261 Accordingly, this threshold is designed to help ensure that any competing consolidator that might have material market share for the securities in current Tapes A, B, or C 1258 Basing the threshold on a measure of the consolidated market data gross revenue paid to the plan, rather than number of subscribers, will reflect the value of the consolidated market data as determined by the plan’s fees and thus account for those competing consolidators that may have fewer subscribers but pay higher fees due to having mainly professional subscribers who typically trade at significantly higher volumes than retail customers, as well as those competing consolidators that may have a relatively high number of retail subscribers that pay lower fees. 1259 Competing consolidators not subject to Regulation SCI will be subject to Rule 614(d)(9), as discussed below. 1260 As discussed below, the Commission is also requiring the amendment to the effective national market system plan(s) to include a provision that requires the plan(s) to calculate and publish information relating to the consolidated market data gross revenues on a monthly basis. 1261 Should pricing for consolidated market data become more granular than exists today (e.g., by moving from a per-tape basis to a per-listing exchange basis), reconsideration of the adopted thresholds may be appropriate. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 (where a significant number of market participants rely on it for such market data, for example, if a competing consolidator were to focus or specialize in stocks listed on a particular exchange), is subject to the requirements of Regulation SCI, even if its market share in stocks listed across all national securities exchanges is not as significant.1262 Although one commenter suggested that the Commission adopt a ten percent threshold for compliance with Regulation SCI,1263 the Commission believes that such a threshold could exclude competing consolidators for which a systems issue or cybersecurity incident could have a significant impact on market participants or the national market system as a whole. As noted above, the numerical thresholds in the definition of ‘‘SCI competing consolidator’’ reflect an assessment by the Commission of the likely economic consequences of the specific numerical threshold included in the definition. The Commission believes that the time measurement period for calculating the threshold (‘‘during at least four of the preceding six calendar months’’), is appropriate for evaluating the market share of a competing consolidator, because it provides a new entrant time to develop their business prior to having to incur the costs of complying with 1262 For context, annual tape revenues reported by the CTA and Nasdaq UTP plans in 2019 were as follows: $162.9 million, $95.8 million, and $130.7 million, Tapes A, B, C, respectively. Thus, Tape A accounted for 41.8% of total revenues, Tape B accounted for 24.6% of total revenues, and Tape C accounted for 33.6% of total revenues. Five percent of these annual figures divided by 12 (i.e., per month) yield monthly figures as follows: $679,000, $399,000, and $545,000, for Tapes A, B, and C, respectively. As illustrated by these figures, the notional value of the threshold level in the definition of SCI competing consolidator will vary for NMS stocks (i) listed on the NYSE, (ii) listed on Nasdaq, or (iii) listed on national securities exchanges other than the NYSE or Nasdaq. However, based on these 2019 figures, the threshold level for each tape represents over 1% of total monthly revenues across all tapes ($324,500). Specifically, the threshold for Tape A represents approximately 2.1% of total monthly revenues, the threshold for Tape B represents approximately 1.2% of total monthly revenues, and the threshold for Tape C represents approximately 1.7% of total monthly revenues. See CTA, SIP Revenue Allocation Summary, Q1 2020 Quarterly Revenue Disclosure, available at https://www.ctaplan.com/ publicdocs/ctaplan/CTA_Quarterly_Revenue_ Disclosure_1Q2020.pdf (last accessed Nov. 27, 2020); UTP, SIP Revenue Allocation Summary, Q1 2020 Quarterly Revenue Disclosure, available at http://www.utpplan.com/DOC/UTP_Revenue_ Disclosure_Q12020.pdf (last accessed Nov. 27, 2020). 1263 See Data Boiler Letter I at 57 (arguing that those below the threshold should be encouraged to voluntarily adopt SCI as ‘‘best practices’’). The commenter did not provide further detail as to how it believed this threshold should be measured (e.g., total subscribers) or provide any rationale as to why this would be an appropriate threshold level. PO 00000 Frm 00098 Fmt 4701 Sfmt 4700 Regulation SCI,1264 and it provides a long enough period of data on revenue and subscriber levels to evaluate reasonably a competing consolidator’s significance to the market.1265 It also mitigates a possible barrier to entry for some new competing consolidators. Further, the Commission believes that this time measurement period will help to ensure that competing consolidators meeting the definition of SCI competing consolidator are those that have sustained gross revenue levels at the threshold warranting the protections of Regulation SCI and is less likely to result in competing consolidators moving in and out of the scope of the definition than if the Commission were to adopt a shorter measurement period. The adopted definition of ‘‘SCI competing consolidator’’ also provides that consolidated market data gross revenue paid to the effective national market system plan or plans required under § 242.603(b) for NMS stocks (1) listed on the NYSE; (2) listed on Nasdaq; or (3) listed on exchanges other than NYSE or Nasdaq will be ‘‘as reported by such plan or plans pursuant to the terms thereof.’’ Competing consolidators will need information regarding the consolidated market data gross revenues to assess whether they meet the 5% threshold and are required to comply with Regulation SCI. Accordingly, as discussed above, Rule 614(e) will provide that the amendment to the effective national market system plan(s) will have to include a provision that requires the plan(s) to calculate and publish total consolidated market data gross revenues for NMS stocks (1) listed on the NYSE, (2) listed on Nasdaq, and (3) listed on national securities exchanges other than the NYSE or Nasdaq, on a monthly basis.1266 As noted above, the requirements of Regulation SCI will not apply to any competing consolidator 1267 during an 1264 See infra note 1271 (discussing the time period before a competing consolidator would be subject to Regulation SCI). 1265 This time measurement period is drawn from the current measurement period in the definition of ‘‘SCI ATS.’’ See Rule 1000 of Regulation SCI (definition of ‘‘SCI ATS’’). This measurement period is also consistent with the measurement period in 17 CFR 242.301(b)(6) (Rule 301(b)(6) of Regulation ATS). 1266 See supra Section III.E. 1267 National securities exchanges are subject to the requirements of Regulation SCI because they are SCI entities. See Rule 1000 of Regulation SCI. As discussed above, an exchange affiliated competing consolidator may qualify for a conditional exemption from certain requirements otherwise applicable to national securities exchanges. See supra Section III.C.7(a)(iv). If an exchange qualifies for such an exemption, during the SCI CC PhaseIn Period and, subsequent to such period, if it does not exceed the threshold in the definition of ‘‘SCI competing consolidator’’ in Rule 1000 of Regulation E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations initial period of one year after the compliance date of Rule 614(d)(3) of Regulation NMS.1268 Instead, during this SCI CC Phase-In Period, competing consolidators will be subject to the requirements adopted in Rule 614(d)(9) of Regulation NMS, as discussed below, which includes requirements similar to some of the key provisions of Regulation SCI. The Commission believes that this phase-in period will mitigate the concerns raised by some commenters regarding potential barriers to entry by allowing potential competing consolidators to enter the market and develop their business and subscriber base, without requiring them to immediately shoulder the costs and burdens of Regulation SCI as SCI entities. At the same time, applying the requirements of Rule 614(d)(9) of Regulation NMS provides that competing consolidators are immediately subject to certain obligations to help ensure the reliability and resiliency of their systems during the SCI CC Phase-In Period. In addition, during this initial period, the plan processors would still be required to operate and would be SCI entities, subject to the requirement of Regulation SCI.1269 In addition, the Commission believes that it is appropriate to provide competing consolidators who enter the market after the SCI CC Phase-In Period and meet the revenue threshold in the definition of ‘‘SCI competing consolidators’’ for the first time, a period of time before they are required to comply with the requirements of Regulation SCI. Thus, Rule 1000 provides that an SCI competing consolidator will not be required to comply with the requirements of Regulation SCI until six months after satisfying the threshold in the definition of SCI competing consolidator for the first time.1270 The Commission believes that this six-month ‘‘grace’’ period is appropriate and necessary to allow an SCI competing consolidator the time needed to take steps to meet the requirements of the rules, rather than requiring compliance immediately upon meeting the threshold level. The SCI, its exchange-affiliated competing consolidator would be subject to the requirements of Rule 614(d)(9) of Regulation NMS and not subject to the requirements of Regulation SCI. 1268 Rule 614(d)(3) requires competing consolidators to make consolidated market data products available to subscribers on a consolidated basis on terms that are not unreasonably discriminatory. See infra note 1356 and accompanying text. 1269 See infra Section III.H (discussing the transition period and compliance dates). 1270 See Rule 1000 of Regulation SCI (paragraph (b) of definition of ‘‘SCI competing consolidator’’). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Commission also believes that this additional period for compliance should give a new competing consolidator entrant the opportunity to initiate and develop its business by allowing additional time before a new competing consolidator must incur the costs associated with compliance with the requirements of Regulation SCI.1271 Some commenters argued that competing consolidators should not only be subject to the standard requirements of Regulation SCI but should be held to the heightened requirements imposed on ‘‘critical SCI systems.’’ 1272 As the Commission stated in the Proposing Release, under the current consolidation model, because the exclusive SIPs represent single points of failure, they are all subject to heightened requirements as ‘‘critical SCI systems.’’ 1273 However, the competing consolidator model is designed to result in multiple viable sources of consolidated market data, and the competing consolidator model would not be initiated until a transition period is complete. Accordingly, the Commission believes that including systems of such competing consolidators within the scope of ‘‘critical SCI systems’’ is unnecessary, because any individual competing consolidator would no longer be the sole source of a consolidated market data product, as each SIP is today for its respective securities.1274 Some commenters argued that, even with multiple competing consolidators, due to product differentiation, certain consolidators would become uniquely important to market participants and such participants would not be able to 1271 After the SCI CC Phase-In Period discussed above has passed (i.e., after which paragraph (c) of the definition of SCI competing consolidator will no longer apply), any new competing consolidator would have at least ten months, at a minimum, before it would be subject to Regulation SCI, because the time measurement period within paragraph (a) of the definition of SCI competing consolidator (that a competing consolidator will be subject to Regulation SCI only if they meet the numerical threshold ‘‘during at least four of the preceding six calendar months’’) would occur prior to the start of the six-month ‘‘grace’’ period. For example, if a competing consolidator began operating in January of a year after the initial oneyear SCI CC Phase-In Period, the earliest it would satisfy the thresholds in paragraph (a) of the definition of SCI competing consolidator for the first time would be May 1st of that year (i.e., if such competing consolidator satisfied the threshold requirement in each of January, February, March and April). It would then have six months from that time to become fully compliant with Regulation SCI, and thus would have to comply with the requirements of Regulation SCI by November 1st. 1272 See Cboe Letter at 25–26; Nasdaq Letter IV at 35–36; Data Boiler Letter I at 57; STANY Letter II at 6. 1273 See Proposing Release, 85 FR at 16786. 1274 Id. at 16786–87. PO 00000 Frm 00099 Fmt 4701 Sfmt 4700 18693 readily switch to another competing consolidator in the event of a systems issue.1275 As such, commenters argued that each competing consolidator could become a single point of failure for its customers.1276 However, in adopting the definition of ‘‘critical SCI systems,’’ the Commission explained that the definition is designed to ‘‘identify those SCI systems that are critical to the operation of the markets, including those systems that represent single points of failure in the securities markets,’’ and that the systems included in this category are those that, if they were to experience systems issues ‘‘would be the most likely to have a widespread and significant impact on the securities markets.’’ 1277 The Commission does not dispute that a systems issue at an individual SCI competing consolidator could have a significant impact on its subscribers, but the Commission does not believe that such a systems issue would have the same type of widespread impact on the national market system that the Commission had contemplated in its definition of ‘‘critical SCI system.’’ 1278 Second, during the one-year SCI CC Phase-In Period and, subsequently, for competing consolidators that are not SCI competing consolidators, the Commission believes that a more tailored approach is appropriate, and is adopting a framework that imposes requirements similar to some of the key provisions of Regulation SCI on these 1275 See Nasdaq Letter IV at 35–36; Cboe Letter at 25–26. See also Nasdaq Letter IV at 8. 1276 See Nasdaq Letter IV at 35–36; Cboe Letter at 25–26; see, however, e.g., Committee on Capital Markets Regulation Letter at 3 (‘‘[W]ith multiple competing consolidators, there will no longer be a single point for failure capable of inducing stock market-wide paralysis, strengthening market resiliency.’’). See also NYSE Letter II at 24; FINRA Letter at 4. 1277 SCI Adopting Release at 72277. 1278 Some commenters also argued that the Commission’s proposal not to apply the standards for critical SCI systems to competing consolidators was based on the assumption that there will be multiple competing consolidators that enter the market. These commenters expressed doubt as to whether this would be the case. See Nasdaq Letter IV at 35–36; Cboe Letter at 25. See also Angel Letter at 20–21. However, the Commission notes that the second prong of the definition of ‘‘critical SCI systems’’ provides a catch-all for systems that ‘‘[p]rovide 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.’’ See Rule 1000 of Regulation SCI (definition of ‘‘critical SCI system’’). As discussed above, the competing consolidator model is designed to result in multiple viable sources of consolidated market data, would not be initiated until a transition period is complete, and thus should not result in a single point of failure. However, the second prong of the definition of ‘‘critical SCI systems’’ would apply in the event that availability of alternatives were significantly limited or nonexistent in the future. E:\FR\FM\09APR2.SGM 09APR2 18694 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations entities. The Commission believes that this two-pronged approach will help ensure that the automated systems of competing consolidators have adequate levels of capacity, integrity, resiliency, availability, and security to maintain operational capability, while at the same time allowing all competing consolidators to grow their business for an initial transition period and subsequently, affording new entrants a similar opportunity to do so, taking into consideration their functions, potential risks, and the costs and burdens associated with the various requirements of Regulation SCI.1279 For those competing consolidators that (i) are newly registered and operating during the initial SCI CC Phase-In Period, or (ii) subsequently, do not satisfy the SCI entity definition because they are below the five percent SCI competing consolidator threshold, new paragraph (d)(9) of Rule 614 will apply. The provisions of Rule 614(d)(9) will subject competing consolidators that are not SCI competing consolidators to certain, but not all, obligations that are similar to those that apply to SCI entities.1280 Paragraph (d)(9)(i) of Rule 614 contains certain definitions applicable to Rule 614(d)(9), which are discussed below.1281 Paragraph (d)(9)(ii) of Rule 614 relates to the obligations of competing consolidators with respect to policies and procedures. Specifically, competing consolidators will be required to establish, maintain, and enforce written policies and procedures reasonably designed to ensure: That their systems involved in the collection and consolidation of consolidated market data, and dissemination of 1279 See supra note 1271 and accompanying text. While one commenter suggested that competing consolidators that do not meet the threshold level should be encouraged to voluntarily adopt SCI as ‘‘best practices,’’ see Data Boiler Letter I at 56, the Commission believes that because of the importance of ensuring the reliable delivery of core market data to market participants in the securities markets, a more appropriate approach is to include in Rule 614(d)(9) requirements similar to some of the core provisions of Regulation SCI for competing consolidators that are not SCI competing consolidators. 1280 Although competing consolidators that are not SCI entities would not be subject to the requirements of Regulation SCI, because of the similarities between the provisions of Rule 614(d)(9) and certain parallel provisions in Regulation SCI (as described herein), the Commission notes that competing consolidators can look to the Regulation SCI Adopting Release in certain cases for further explanation and guidance regarding these provisions. See generally SCI Adopting Release, supra note 1233. See also SCI Adopting Release at 72289–92 (for a discussion of 17 CFR 242.1001(a)(1) (Rule 1001(a)(1)) of Regulation SCI). 1281 See infra notes 1295–1297 and accompanying text (discussing the definitions of systems disruption and systems intrusion). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 consolidated market data products, have levels of capacity, integrity, resiliency, availability, and security adequate to maintain the competing consolidator’s operational capability and promote the maintenance of fair and orderly markets; and the prompt, accurate, and reliable dissemination of consolidated market data products.1282 Paragraph (d)(9)(ii)(A)(1) of Rule 614 mirrors the broad policies and procedures obligation relating to capacity, integrity, resiliency, availability, and security in Rule 1001(a)(1) of Regulation SCI, which is core to ensuring the operational capability and resiliency of competing consolidators.1283 This rule does not follow the Regulation SCI approach of requiring minimum elements that are required for the operational capability policies and procedures of SCI entities.1284 For competing consolidators that do not meet the definition of SCI competing consolidator and pose less risk to the markets as discussed above, the Commission believes it is appropriate to take a more flexible approach for the required policies and procedures under 17 CFR 242.614(d)(9)(ii) (Rule 614(d)(9)(ii)). The rule affords these competing consolidators the flexibility to design and tailor their policies and procedures based on their own assessment of their policies and procedures obligations relating to capacity, integrity, resiliency, availability, and security in paragraph (d)(9)(ii)(A)(1). Importantly, paragraph (d)(9)(ii)(A)(1) of Rule 614 incorporates into the general policies and procedures provision the requirement that a competing consolidator’s policies and procedures be reasonably designed to ensure the ‘‘prompt, accurate, and reliable dissemination of consolidated market data products.’’ 1285 Rule 1001(a)(2)(v) of Regulation SCI, which relates to BC/DR plans, specifically requires SCI entities to have BC/DR plans that ‘‘include maintaining backup and recovery capabilities sufficiently resilient and geographically 1282 See 17 CFR 242.614(d)(9)(ii)(A)(1) (Rule 614(d)(9)(ii)(A)(1)) of Regulation NMS. 1283 In assessing whether its consolidated market data systems meet the security standard of Rule 614(d)(9)(ii)(A)(1), a relevant consideration would be whether any other systems provide vulnerable points of entry to a competing consolidator’s consolidated market data systems, heightening the risk of a systems intrusion. 1284 However, as discussed below, the Commission is incorporating into the general policies and procedures requirement the minimum element that relates directly to market data in 17 CFR 242.1001(a)(2)(v) (Rule 1001(a)(2)(v)) of Regulation SCI. 1285 17 CFR 242.614(d)(9)(ii)(A)(1). See also 17 CFR 242.1001(a)(2)(vi) (Rule 1001(a)(2)(vi)) of Regulation SCI. PO 00000 Frm 00100 Fmt 4701 Sfmt 4700 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.’’ 1286 Like the other minimum elements enumerated in Rule 1001(a)(2) of Regulation SCI, the Commission is not adopting this requirement for competing consolidators who do not meet the thresholds in the definition of SCI competing consolidator. Some commenters noted the impact that the impairment of a competing consolidator’s data could have on its subscribers and stated the importance for subscribers to retain backup competing consolidators.1287 Competing consolidators that are not SCI entities may choose to adhere voluntarily with the provisions in Regulation SCI related to BC/DR plans. Many market participants that receive consolidated market data products from a competing consolidator, whether an SCI competing consolidator or not, will take steps to assess the reliability and resilience of the competing consolidator, such as understanding the backup capabilities of a competing consolidator, as well as reviewing contract terms, due diligence, and monitoring. After such an assessment and evaluating the needs of their business and their customers, some market participants may choose to maintain connections to backup competing consolidators (i.e., from a secondary source) that would be able to immediately provide such market participants with consolidated market data if their primary competing consolidator was unable to do so. Paragraph (d)(9)(ii)(A)(2) of Rule 614 provides that the policies and procedures under paragraph (d)(9)(ii)(A)(1) will be deemed to be reasonably designed if they are consistent with current industry standards, which would 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. Compliance with such current industry standards, however, will not be the exclusive means to comply with the requirements of paragraph (d)(9)(ii)(A) of Rule 614.1288 This provision mirrors the safe harbor relating to industry 1286 Rule 1001(a)(2)(v) of Regulation SCI. e.g., FINRA Letter at 4. 1288 See 17 CFR 242.614(d)(9)(ii)(A)(2) (Rule 614(d)(9)(ii)(A)(2)) of Regulation NMS. 1287 See, E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations standards in 17 CFR 242.1001(a)(4) (Rule 1001(a)(4)) of Regulation SCI.1289 Competing consolidators will also be required to review periodically the effectiveness of the policies and procedures required by paragraph (d)(9)(ii)(B) of Rule 614 and take prompt action to remedy deficiencies in such policies and procedures.1290 This requirement in paragraph (d)(9)(ii)(B) of Rule 614 mirrors the requirement for periodic review found in 17 CFR 242.1001(a)(3) (Rule 1001(a)(3)) of Regulation SCI.1291 In addition, competing consolidators will be required to establish, maintain, and enforce reasonably designed written policies and procedures that include the criteria for identifying responsible personnel, the designation and documentation of responsible personnel, and escalation procedures to inform quickly responsible personnel of potential systems disruptions and systems intrusions; and periodically review the effectiveness of the policies and procedures, and take prompt action to remedy deficiencies.1292 This paragraph (d)(9)(ii)(C) of Rule 614 maintains the framework found in 17 CFR 242.1001(c) (Rule 1001(c)) of Regulation SCI that requires an SCI entity to have policies and procedures, including escalation procedures, for identifying and designating responsible personnel who are responsible for assessing whether systems disruptions or systems intrusions have in fact occurred.1293 Paragraph (d)(9)(iii) of Rule 614 relates to the obligations of competing consolidators with respect to systems disruptions and systems intrusions.1294 These provisions are similar to the SCI event obligations found in 17 CFR 242.1002 (Rule 1002) of Regulation SCI, 1289 See SCI Adopting Release at 72298–03 (discussing Rule 1001(a)(4) of Regulation SCI). Concurrent with the adoption of Regulation SCI, Commission staff issued guidance providing examples of industry standards. See Staff Guidance on Current SCI Industry Standards (Nov. 19, 2014), available at http://www.sec.gov/rules/final/2014/ staff-guidance-current-sci-industry-standards.pdf. 1290 See 17 CFR 242.614(d)(9)(ii)(B) (Rule 614(d)(9)(ii)(B)) of Regulation NMS. 1291 See SCI Adopting Release at 72291–92 (discussing Rule 1001(a)(3) of Regulation SCI). 1292 See Rule 614(d)(9)(ii)(B) of Regulation NMS. The Commission notes that Rule 614(d)(9) does not define responsible personnel, as it believes it is likely that a competing consolidator would define this and other key terms in its policies and procedures, which pursuant to paragraph (d)(9)(ii)(A)(1) must be reasonably designed. The Commission also notes that competing consolidators may look to the definitions of this and other terms in Rule 1000 of Regulation SCI as guidance in developing their own definitions. 1293 See SCI Adopting Release at 72314–16 (discussing Rule 1001(c) of Regulation SCI). 1294 See Rule 614(d)(9)(iii) of Regulation NMS. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 with certain changes as discussed below. Systems disruption is defined in 17 CFR 242.614(d)(9)(i) (Rule 614(d)(9)(i)) to mean an event in a competing consolidator’s systems involved in the collection and consolidation of consolidated market data, and dissemination of consolidated market data products, that disrupts, or significantly degrades, the normal operation of such systems.1295 Systems intrusion is defined in Rule 614(d)(9)(i) to mean any unauthorized entry into a competing consolidator’s systems involved in the collection and consolidation of consolidated market data and dissemination of consolidated market data products.1296 These definitions mirror the definitions of those terms in Regulation SCI but are narrower in that they only focus on a competing consolidator’s consolidated market data systems.1297 As a general matter, Rule 614(d)(9)(iii) only covers systems disruptions and systems intrusions and, unlike Rule 1002 of Regulation SCI, does not cover systems compliance issues. The Commission believes that this is appropriate as the regulatory framework for competing consolidators is largely limited to broad operational principles and targeted disclosures. One of the goals of imposing obligations related to systems compliance issues on SCI entities was to address past instances in which self-regulatory rule filings filed by some SCI entities were inconsistent with how their technology systems operated in practice.1298 Systems compliance issues were included within the scope of Regulation SCI to help ensure an SCI entity’s operational compliance with its own rules and governing documents (i.e., to prevent systems from operating in a manner inconsistent with the rules and governing documents of an entity).1299 In contrast, competing consolidators will not have similar requirements (e.g., to file detailed rule filings) with respect to the operation of their automated systems. Under paragraph (d)(9)(iii)(A) of Rule 614, competing consolidators will be required to, upon responsible personnel having a reasonable basis to conclude that a systems disruption or systems 1295 See Rule 614(d)(9)(i) of Regulation NMS. id. 1297 See Rule 1000 of Regulation SCI. 1298 See Securities Exchange Act Release No. 69077 (Mar. 8, 2013), 78 FR 18084, 03 (Mar. 25, 2013) (Regulation SCI Proposing Release describing examples of systems compliance issues). 1299 See SCI Adopting Release at 72287 (describing the definition of ‘‘systems compliance issue), 72304 (discussing the requirement to have policies and procedures to achieve systems compliance). 1296 See PO 00000 Frm 00101 Fmt 4701 Sfmt 4700 18695 intrusion of consolidated market data systems has occurred, begin to take appropriate corrective action which must include, at a minimum, mitigating potential harm to investors and market integrity resulting from the event and devoting adequate resources to remedy the event as soon as reasonably practicable.1300 This provision mirrors the corrective action obligations of SCI entities found in 17 CFR 242.1002(a) (Rule 1002(a)) of Regulation SCI, including the obligations of responsible personnel in assessing whether or not a systems issue has occurred.1301 In addition, promptly upon responsible personnel having a reasonable basis to conclude that a systems disruption (other than a system disruption that has had, or the competing consolidator reasonably estimates would have, no or a de minimis impact on the competing consolidator’s operations or on market participants) has occurred, a competing consolidator will be required to disseminate publicly information relating to the event (including the system(s) affected and a summary description); and, when known, promptly publicly disseminate additional information relating to the event (including a detailed description, an assessment of those potentially affected, a description of the progress of corrective action, and when the event has been or is expected to be resolved); and until resolved, provide regular updates with respect to such information.1302 These requirements in paragraph (d)(9)(iii)(B) of Rule 614 are broadly similar to 17 CFR 242.1002(c) (Rule 1002(c))’s information dissemination provisions in Regulation SCI with several important distinctions.1303 First, unlike in Regulation SCI, the dissemination of information requirement in paragraph (d)(9)(iii)(B) of Rule 614 is not limited to dissemination to ‘‘members or participants,’’ as is the case for SCI entities in Rule 1002(c) of Regulation SCI. Instead, competing consolidators are required to disseminate ‘‘publicly’’ this information.1304 The Commission 1300 See 17 CFR 242.614(d)(9)(iii)(A) (Rule 614(d)(9)(iii)(A)) of Regulation NMS. 1301 See SCI Adopting Release at 72316–17 (discussing Rule 1002(a) of Regulation SCI). See also SCI Adopting Release at 72315–16 (discussing the triggering standard for SCI event obligations). 1302 See 17 CFR 242.614(d)(9)(iii)(B) (Rule 614(d)(9)(iii)(B)) of Regulation NMS. 1303 See SCI Adopting Release at 72331–36 (discussing Rule 1002(c) of Regulation SCI). 1304 The Commission expects that there are various methods by which a competing consolidator may publicly disseminate this information including, but not limited to, a E:\FR\FM\09APR2.SGM Continued 09APR2 18696 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations believes this is appropriate because, as discussed above, market participants will be looking to the reliability and resilience of respective competing consolidators in deciding which competing consolidator(s) to use as its source of consolidated market data products. By requiring public dissemination of any systems issues, all market participants, whether or not they are ‘‘members or participants’’ of the competing consolidator, will be able to access this information and use it, in combination with the competing consolidators’ published performance metrics, in assessing the reliability and resilience of the various competing consolidators they may be considering. In addition, the public dissemination requirement in paragraph (d)(9)(iii)(B) of Rule 614 contains a simplified framework when compared to Rule 1002(c) of Regulation SCI 1305 and only applies to systems disruptions. The Commission believes that this streamlined approach is appropriate to limit burdens for these competing consolidators (as compared to the parallel requirements for SCI competing consolidators), and the Commission believes that the new requirements for competing consolidators described above that will require public disclosure of metrics and other information—such as information on system availability, network delay statistics, data quality, and systems issues—help to achieve some of the same goals of public transparency and help to ensure the resiliency of competing consolidators’ systems as the information dissemination provisions of Regulation SCI.1306 Similar to Regulation SCI’s requirements for systems disruptions, paragraph (d)(9)(iii)(B) of Rule 614 includes a provision that exempts information dissemination for a ‘‘system disruption that has had, or the competing consolidator reasonably ‘‘systems status’’ web page of the competing consolidator that is easily and clearly locatable from the competing consolidator’s home web page and accessible at no cost to the public, or a messaging service that anyone can subscribe to without cost that will provide, without delay, alerts to subscribers regarding the competing consolidator’s systems status. 1305 For example, paragraph (d)(9)(iii)(B) of Rule 614 requires only ‘‘an assessment of those potentially affected’’ by an event, while Rule 1002(c) of Regulation SCI requires an SCI entity’s ‘‘current assessment of the types and number of market participants potentially affected by’’ an event. 1306 See Proposing Release, 85 FR at 16777, 16781, 16783–84 (explaining that the required information on Form CC and published performance metrics will help the Commission and market participants to evaluate the resiliency and technological reliability of a competing consolidator’s systems); see also supra Sections III.C.7(c) and (d). VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 estimates would have, no or a de minimis impact on the competing consolidator’s operations or on market participants.’’ Concurrent with public dissemination of information relating to a systems disruption, competing consolidators will also be required to provide the Commission notification of such event, including the information required to be publicly disseminated.1307 In addition, competing consolidators will be required to notify the Commission promptly upon responsible personnel having a reasonable basis to conclude that a systems intrusion (other than a system intrusion that has had, or the competing consolidator reasonably estimates would have, no or a de minimis impact on the competing consolidator’s operations or on market participants) has occurred. Notifications regarding systems disruptions and systems intrusions that competing consolidators must provide to the Commission under this provision include information relating to the event (including the system(s) affected and a summary description); when known, additional information relating to the event (including a detailed description, an assessment of those potentially affected, a description of the progress of corrective action and when the event has been or is expected to be resolved); and until resolved, regular updates with respect to such information. This is the same information that paragraph (d)(9)(iii)(B) of Rule 614 will require competing consolidators to disseminate publicly for systems disruptions.1308 Paragraph (d)(9)(iii)(C) of Rule 614 does not require competing consolidators to adhere to the detailed framework for notifying the Commission of SCI events under Regulation SCI.1309 Rather, the rule requires competing consolidators to provide, concurrent with public dissemination of information relating to a systems disruption, or promptly upon responsible personnel having a reasonable basis to conclude that a nonde minimis systems intrusion has 1307 See 17 CFR 242.614(d)(9)(iii)(C) (Rule 614(d)(9)(iii)(C)) of Regulation NMS. 1308 Rule 614(d)(9)(iii)(B) does not require competing consolidators to publicly disseminate information relating to systems intrusions. However, Rule 614(d)(9)(iii)(C) requires information relating to a system intrusion to be filed with the Commission on Form CC, which will be publicly available, though competing consolidators may seek confidential treatment for such information. See supra note 1052 and accompanying text. 1309 Regulation SCI contains a detailed framework that SCI entities must follow to notify the Commission about SCI events, including prescribed timelines to provide the Commission with initial report, updates, and final reports regarding SCI events. See 17 CFR 242.1002 (Rule 1002 of Regulation SCI). PO 00000 Frm 00102 Fmt 4701 Sfmt 4700 occurred, the Commission notification of such event and, until resolved, updates of such event. The Commission believes that this streamlined Commission notification requirement via Form CC, in combination with other requirements for competing consolidators that require disclosure of other information on Form CC and through performance metrics,1310 help to achieve the goal of keeping the Commission informed of the nature and frequency of issues that occur affecting the systems of competing consolidators that are not SCI entities.1311 Unlike the information that is filed with the Commission on Form SCI, which is treated as confidential subject to applicable law, Form CC, including any information about systems disruption and systems intrusions, will be publicly available. The Commission recognizes that information regarding systems intrusions may be sensitive, and making such information publicly available could compromise the security of the systems or an investigation into the systems intrusion. Because Rule 614(d)(9) does not otherwise require public dissemination of such events, Form CC will permit competing consolidators to seek confidential treatment of Commission notifications related to systems intrusions. Unlike Rule 614(d)(9), Regulation SCI requires public dissemination of information relating to systems intrusions. However, the Commission similarly recognized the potentially sensitive nature of information relating to systems intrusions and provided a limited exception allowing SCI entities to delay dissemination of any information about a systems intrusion if dissemination would compromise the security of SCI systems or an investigation into the systems intrusion.1312 Section 242.614(d)(9)(iv) (Rule 614(d)(9)(iv)) will require competing consolidators to participate in the industry- or sector-wide coordinated testing of BC/DR plans required of SCI entities pursuant to paragraph (c) of 17 CFR 242.1004 (Rule 1004) of Regulation SCI.1313 Section 242.1004(c) (Rule 1004(c)) of Regulation SCI relates to the 1310 See supra Sections III.C.7(c) and (d). stated in the Proposing Release and discussed above, the requirements to provide information on Form CC and publish performance metrics are designed to facilitate the Commission’s oversight of competing consolidators and help ensure the resiliency and technological reliability of a competing consolidator’s systems. See Proposing Release, 85 FR at 16777, 16781, 16783–84; see also supra Sections III.C.7(c) and (d). 1312 See 17 CFR 242.1002(c)(2) (Rule 1002(c)(2)) of Regulation SCI; SCI Adopting Release at 72334. 1313 See Rule 614(d)(9)(iv) of Regulation NMS. 1311 As E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations coordination of BC/DR testing required by Rule 1004 of Regulation SCI on an industry- or sector-wide basis with other SCI entities.1314 Because the consolidated market data, in total, provided by competing consolidators is essential to testing the systems of SCI entities, and because the SCI entities and their members or participants who are designated to participate in the testing required by Rule 1004 of Regulation SCI may rely on different competing consolidators to supply consolidated market data products, the Commission believes that it is appropriate that all competing consolidators be required to participate in the industry- or sector-wide testing required by paragraph (c) or Rule 1004 of Regulation SCI. Finally, the Commission proposed certain changes to Rule 1000 of Regulation SCI’s definition of ‘‘critical SCI system.’’ 1315 These changes are being adopted as proposed. First, the Commission proposed to revise the phrase ‘‘the provision of consolidated market data’’ in paragraph (1)(v) of the definition of ‘‘critical SCI systems’’ to ‘‘the provision of market data by a plan processor.’’ In addition, to avoid confusion with the term ‘‘consolidated market data,’’ that phrase was replaced with ‘‘market data’’ in the definition of ‘‘critical SCI systems.’’ The Commission did not receive any comment on the proposed revisions to the definition of ‘‘critical SCI system’’ and is adopting these changes to such definition as proposed for the reasons set forth in the proposal.1316 G. Effects on the National Market System Plan Governing the Consolidated Audit Trail In the Proposing Release, the Commission described the anticipated effect on the CAT NMS Plan. Specifically, the CAT NMS Plan requires the Central Repository 1317 to ‘‘collect (from a SIP 1318 or pursuant to 1314 See SCI Adopting Release at 72354–55 (discussing Rule 1004(c) of Regulation SCI). 1315 See Proposing Release, 85 FR at 16786–87. 1316 But see supra notes 1272–1278 and accompanying text (discussing commenters concerns that competing consolidators would not have critical SCI systems under Regulation SCI, unlike plan processors today). 1317 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 1220, at Section 1.1. 1318 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. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 an NMS Plan 1319) and retain on a current and continuing basis . . . all data, including the following (collectively, ‘SIP Data’).’’ 1320 Because consolidated market data includes information beyond what is provided in SIP data—such as orders in new round lot sizes, depth of book data, and auction information—the scope of the consolidated market data collected and retained by the Central Repository would increase. In addition, the Central Repository may have to collect the data from a different source. The Commission received four comments on the effect of the decentralized consolidation model on the CAT NMS Plan.1321 One commenter stated that significant changes to the content or source of data collected by CAT, such as those proposed, could impact the CAT implementation timeline, especially if the changes occur while CAT implementation is still in progress.1322 Therefore, the commenter recommended that the expanded content in consolidated market data and the decentralized consolidation model be implemented after CAT has been fully implemented.1323 Another commenter suggested that the Commission review the choice of competing consolidator as the Central Repository’s source of consolidated market data.1324 Additionally, in response to a question raised by the Commission in the Proposing Release asking whether CAT should receive consolidated market data from one, all, or a subset of competing consolidators,1325 one commenter noted its preliminary belief that the Central Repository should receive only consolidated market data from one competing consolidator with a connection to an additional competing consolidator as a back-up source of data 1319 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. 1320 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. 1321 See FINRA Letter at 11; TD Ameritrade Letter at 15; Fidelity Letter at 11; Data Boiler Letter I at 64–65. 1322 See FINRA Letter at 12. 1323 See id. 1324 Fidelity Letter at 11. 1325 See Proposing Release, 85 FR at 16794. PO 00000 Frm 00103 Fmt 4701 Sfmt 4700 18697 in the event of a systems disruption at the selected competing consolidator.1326 The commenter also stated that whether CAT uses a single or multiple competing consolidators would raise concerns about increased complexity.1327 Another commenter expressed concern about conflicting data produced by competing consolidators. Assuming CAT takes in data from every competing consolidator, the commenter asked how CAT would handle conflicting data it received from the competing consolidators and how industry participants would be expected to respond to such conflicting data.1328 The Commission does not believe that implementation of the amendments discussed herein should be delayed until CAT has been fully implemented. The systems used by the Central Repository must be adaptable to permit incorporation of improved technologies, additional order data, and changes in regulatory requirements; 1329 therefore, the Central Repository should be capable of incorporating the changes added by the amendments discussed herein. The Commission expects the CAT NMS Plan Operating Committee to develop plans for the necessary changes to the Central Repository. As discussed in the following section, there will be a transition period for switching from the exclusive SIPs to the decentralized consolidation model. During this time, the CAT NMS Plan Operating Committee can integrate the necessary 1326 See FINRA Letter at 12. id. at n. 50. 1328 TD Ameritrade at 15. Finally, another commenter suggested that instead of receiving data from competing consolidators, CAT should directly access the ‘‘real-time analytical platform’’ of SROs and competing consolidators in order to analyze and monitor trading in real-time, stating that ‘‘CAT’s ‘T+5 Regulatory Access’ is too late. . . .’’ Data Boiler Letter I at 64. As described above, Section 6.5(a)(ii) of the CAT NMS Plan requires the Central Repository to collect (from a SIP or pursuant to a NMS plan) all data, including SIP data. This requires the Central Repository to collect consolidated data, not individual SRO feeds for the Central Repository to consolidate. Therefore, the Commission believes this comment is beyond the scope of the present rulemaking. 1329 17 CFR 242.613(a)(1)(v) (Rule 613(a)(1)(v)) provides that the CAT NMS Plan must include ‘‘the flexibility and scalability of the systems used by the central repository to collect, consolidate, and store consolidated audit trail data, including the capacity of the consolidated audit trail to efficiently incorporate, in a cost effective manner, improvements in technology, additional capacity, additional order data, information about additional securities or transactions, changes in regulatory requirements, and other developments.’’ See also CAT NMS Plan, supra note 1220, at Appendix D, Section 1.1. (stating ‘‘The Central Repository must be designed and sized to ingest, process, and store large volumes of data. The technical infrastructure needs to be scalable, adaptable to new requirements and operable within a rigorous processing and control environment.’’). 1327 See E:\FR\FM\09APR2.SGM 09APR2 18698 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations changes into the Central Repository requirements in a manner consistent with its change management policies. With respect to the comment stating that the Central Repository should only receive consolidated market data from a single competing consolidator, with a connection to a back-up competing consolidator in the event of a systems disruption, and the comment asking how CAT would reconcile conflicting data across all of the competing consolidators, the Commission is not requiring the Central Repository to subscribe to multiple competing consolidators. Whether CAT uses a single competing consolidator or multiple competing consolidators to receive all of consolidated market data is a choice that should be made by the CAT NMS Plan Operating Committee in its management of CAT in order to comply with its obligations under the CAT NMS Plan.1330 In addition, the CAT NMS Plan Operating Committee has the experience and is well positioned to determine the best and most reliable sources of data while at the same time minimizing any costs that may be associated with multiple sources. In response to the commenter suggesting that the Commission review the Operating Committee’s selection of a competing consolidator for the Central Repository, the CAT NMS Plan Operating Committee will have to select a competing consolidator that would allow it to comply with its obligations under the CAT NMS Plan, which is subject to Commission oversight. Notwithstanding the modification to allow competing consolidators to develop consolidated market data products that may not contain all elements of consolidated market data, the Commission believes that because Section 6.5(a)(ii) of the CAT NMS Plan requires the Central Repository to collect and retain ‘‘all data’’ from ‘‘a SIP or pursuant to an NMS Plan,’’ the Central Repository will be required to collect and retain all elements of consolidated market data. In the Proposing Release, the Commission stated that ‘‘the Central Repository would be required to collect and retain consolidated market data’’ and that ‘‘the scope of the consolidated data collected and retained by the CAT Central Repository would be expanded’’ as a result of the proposed amendments.1331 The requirement in Section 6.5(a)(ii) that the Central Repository collect and retain ‘‘all data’’ from ‘‘a SIP or pursuant to an NMS Plan’’ requires the Central 1330 See CAT NMS Plan, supra note 1220, at Article IV. 1331 Proposing Release, 85 FR at 16794. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Repository to collect and retain all elements of consolidated market data. Moreover, the Commission is not reducing the scope of information that is required to be collected and retained by the Central Repository. Therefore, the Central Repository must continue to collect and retain ‘‘all data’’ that it currently collects and retains, such as information regarding quotations and transactions in OTC equity securities that it collects pursuant to the Nasdaq UTP Plan.1332 H. Transition Period and Compliance Dates 1. Proposal In the Proposing Release, the Commission stated that a transition period would be necessary to implement the decentralized consolidation model. The Commission described the following things that would have to occur to implement the decentralized consolidation model: (1) The SROs may need development time to create new separate data feeds for consolidated market data; 1333 (2) the SROs would need to make adjustments to their data collection and processing systems to integrate regulatory data into their new or existing data feeds; (3) firms intending to act as competing consolidators or self-aggregators would need time to register, develop or modify systems, establish pricing, and make other preparations; and (4) market participants would need some period of time for implementation and testing of any new data feeds, and would need a consistent and reliable source of consolidated market data as these changes are being implemented. The Commission stated that, during the transition period, the exclusive SIPs should continue their operations until such time as the Commission considers and approves an effective national market system plan amendment that would effectuate a cessation of their operations as exclusive SIPs. The Commission stated that to approve this plan amendment, the Commission would need to consider the operational readiness of competing consolidators and self-aggregators and that sufficient operational readiness would only be achieved once consolidated market data generated 1332 See supra Section II.C.2(c). Data about OTC equity securities is not included in consolidated market data. Therefore, as stated in the Proposing Release, the Central Repository may have to obtain this data from a different source. Proposing Release, 85 FR at 16794. 1333 The Proposing Release described how the SROs may use existing proprietary data feeds to provide consolidated market data but that they also may decide to develop new dedicated data feeds. PO 00000 Frm 00104 Fmt 4701 Sfmt 4700 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 regulatory obligations, such as under Rules 603(c) and Rule 611 under Regulation NMS and best execution. The Commission would also consider the state of the market and the general readiness of the competing consolidator infrastructure. The Commission stated that considerations could include: (1) The status of registration, testing, and operational capabilities of multiple competing consolidators, selfaggregators, and market participants; (2) capabilities of competing consolidators to provide monthly performance metrics and other data required to be published pursuant to proposed Rules 614(d)(5) and (6); and (3) the consolidated market data products offered by competing consolidators.1334 The Commission requested comment on various aspects of the proposed transition period, including, but not limited to, the time period for SROs to make necessary changes to provide data content necessary for consolidated market data to competing consolidators and selfaggregators, the time period for brokerdealers to make any necessary changes, and how long the transition period should last. 2. Final Rule and Response to Comments The Commission received several comments on the proposed transition period. One commenter described the proposed transition period as ‘‘undefined and indefinite’’ and in violation of the APA and as granting ‘‘unchecked decision-making authority outside the rulemaking process’’ to the Commission because market participants would not be able to comment on the Commission’s evaluation of whether the decentralized consolidation model is ready to be implemented.1335 This commenter stated that the Commission failed to define how it would determine ‘‘operational readiness’’ necessary to terminate the transition period and did not consider what would happen if no competing consolidators register.1336 Further, the commenter stated that the Commission did not place specific parameters around the transition period and that potential entrants and market 1334 Proposing Release, 85 FR at 16795. Letter II at 15–16. 1336 Id. at 16. The commenter also said that the Commission has not considered what would happen if the initial implementation phase does not create sufficient competition. Id. at 13. 1335 NYSE E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations participants would incur substantial costs and expenses while the Commission waits to see whether competing consolidators will emerge.1337 Similarly, another commenter stated that the proposed transition period incorrectly assumes that competing consolidators would form before the Commission approves the NMS plan amendment, explaining that market participants would ‘‘have no incentive to expend the millions of dollars, time, and effort to create a competing consolidator before the Commission approves the NMS plan.’’ 1338 This commenter also stated that the lack of a time limit on when the model would be implemented would result in competing consolidators, selfaggregators, and SROs incurring substantial costs to prepare only to be ‘‘left in limbo’’ during a potential unlimited delay.1339 One other commenter requested clarification on the data that exclusive SIPs would be required to produce before competing consolidators have registered, and whether exclusive SIPs would be required to continue operating if they decide not to register as competing consolidators.1340 Two commenters offered suggestions for the timing of the implementation of the decentralized consolidation model.1341 One of the commenters said that the proposal should be implemented in three phases.1342 The first phase would establish the decentralized consolidation model within one year of the approval of the proposed amendments.1343 In the second phase, which would be implemented within six months of the implementation of the first phase, core data would be enhanced to include depth of book data, auction information, and aggregated odd-lots. The third phase would address the proposed definitions of round lot and protected quote and would be completed within six months of the completion of the second phase.1344 Another commenter stated that the proposed changes to the content and speed of consolidated market data should be accomplished closely in time.1345 1337 Id. at 16. The commenter also stated that the inability to earn returns during the transition period despite the need to make substantial investments to become a competing consolidator or self-aggregator would make the failure of the decentralized consolidation model more likely. Id. 1338 IDS Letter I at 8. 1339 Id. at 9. 1340 RBC Letter at 7. 1341 See Clearpool Letter at 5; RBC Letter at 2. 1342 See Clearpool Letter at 5. 1343 See id. 1344 See id. at 5–6. 1345 See RBC Letter at 2. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The transition period will be an important phase in the implementation of the decentralized consolidation model and the expansion of NMS information. Several events during the transition period will serve as public benchmarks and provide market participants with information as to the timing of implementation. During this period, there would be at least two effective national market system plan(s) amendments submitted. One is required under Rule 614(e) and must be submitted within 150 days of Rule 614’s effectiveness; the other would be filed later to terminate operations of the exclusive SIPs. Each of these amendments will be filed pursuant to Rule 608 and subject to public comment that will inform Commission action. The Commission, however, is providing additional details regarding the transition to the decentralized consolidation model and the expansion of NMS information, including the sequence of key implementation steps, to provide greater clarity to market participants and respond to certain concerns raised by commenters. Specifically, as discussed further below, the Commission believes today’s amendments should be implemented in three phases to facilitate an orderly transition, to avoid unnecessary stress on the functioning of the market, and to avoid unnecessary and duplicative programming and development by the existing exclusive SIPs, SROs, and other market participants. The phased approach also establishes finite time limits for the steps in the transition process based on discrete periods of time from key implementation milestones, which addresses comments regarding the uncertainty around the details of the proposed transition period.1346 Phase One. During the first phase of the transition period, the fees for data content underlying consolidated market data will be filed with the Commission, and competing consolidator infrastructure will be developed and tested. Plan amendments. The first key milestone will be the amendment to the effective national market system plan(s) 1346 Section 36(a)(1) of the Exchange Act authorizes the Commission, subject to certain limitations, to conditionally or unconditionally exempt any person, security, or transaction, or any class thereof, from any provision of the Exchange Act or rule thereunder, if necessary or appropriate in the public interest and consistent with the protection of investors. 15 U.S.C. 78mm(a)(1). The Commission will monitor the implementation of these amendments during the transition period and may exercise this exemptive authority, for example, to provide exemptions from the deadlines and compliance dates set forth below. PO 00000 Frm 00105 Fmt 4701 Sfmt 4700 18699 required under Rule 614(e), which must include the fees proposed by the plan(s) for data underlying consolidated market data.1347 The proposed amendment must be filed with the Commission within 150 days of the effectiveness of Rule 614. Within 90 days of the date of publication of the proposed amendment, or within such longer period as to which the plan participants consent, the Commission shall, by order, approve or disapprove the amendment, or institute proceedings to determine whether the amendment should be disapproved.1348 Such proceedings shall include notice of the grounds for disapproval under consideration and opportunity for hearing and shall be concluded within 180 days of the date of publication of notice of the plan or amendment. At the conclusion of such proceedings the Commission shall, by order, approve or disapprove the plan or amendment.1349 The time for conclusion of such proceedings may be extended for up to 60 days (up to 240 days from the date of notice publication) if the Commission determines that a longer period is appropriate and publishes the reasons for such determination or the plan participants consent to the longer period.1350 The time for conclusion of proceedings to determine whether a proposed amendment should be disapproved may be extended for an additional period up to 60 days beyond the period set forth in paragraph (b)(2)(i) of Rule 608 (up to 300 days from the date of notice publication) if the Commission determines that a longer period is appropriate and publishes the reasons for such determination or the plan participants consent to the longer period.1351 Initial Registration and Review Period. The next step in the first phase of the transition period—the registration of an initial ‘‘first wave’’ of competing consolidators—will commence on the date the Commission approves the amendments to the effective national market system plan(s) required under Rule 614(e), including the fees for the SRO data content necessary to generate 1347 See supra note 1126 and accompanying text. The Operating Committee could also propose a revised revenue allocation formula for the fees collected for the data content underlying consolidated market data, and exchanges would propose any connectivity fees they intend to charge for the data content underlying consolidated market data during this time period through the Section 19(b) rule filing process. 1348 See 17 CFR 242.608(b)(2)(i) (Rule 608(b)(2)(i)). 1349 See id. 1350 See id. 1351 See 17 CFR 242.608(b)(2)(ii) (Rule 608(b)(2)(ii)). E:\FR\FM\09APR2.SGM 09APR2 18700 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidated market data.1352 Thus, fees for the SRO data content necessary to generate consolidated market data will be established prior to competing consolidator registration. The Commission believes that sequencing the approval of the amendments to the effective national market system plan(s) to precede competing consolidator registration will address concerns raised by several commenters that understanding the fees for data content underlying consolidated market data is necessary for competing consolidators and self-aggregators to develop business plans and decide whether to enter the market in these capacities. It will also allow competing consolidators to understand plan data costs for customers relative to proprietary data so that they can better assess anticipated market demand. The registration period for the first wave of competing consolidators will begin on the date that the plan amendments are approved by the Commission and will continue for 90 days. Pursuant to Rule 614(a)(1)(v), the initial Forms CC filed during this period will become effective, unless declared ineffective by the Commission, after the 90 calendar day Commission review period set forth in Rule 614(a)(1)(iii). The Commission believes that establishing a first wave process for the initial competing consolidators will provide incentives for entities to register because only those competing consolidators that register during the first wave will be permitted to participate in the testing period discussed below. All other competing consolidators will have to wait until the Commission approves the second plan amendment to terminate the operation of the exclusive SIPs.1353 The Commission believes that allowing the entities that register during the first wave to operate during the testing period will help ease the transition to the decentralized consolidation model and limit the potential for systems or other operational problems within the national market system.1354 Development period. Starting with the approval of the plan amendments, and simultaneous with the 180 day registration and review period, there will be a development period. During this time, the SROs would develop the capacity to make the data content necessary to generate consolidated market data available from their data centers. SROs will be required to make the data content necessary to generate consolidated market data available to competing consolidators and selfaggregators 180 calendar days after the approval of the plan amendments.1355 Similarly, competing consolidators and self-aggregators would develop the capacity to receive the SRO data content and generate consolidated market data products during this period. Testing period. Following the development period, there will be a 90 day testing period. During this time, competing consolidators and selfaggregators will implement the technological changes made during the development period and test capacity with the SROs and potential customers. Phase One Go-Live. Following the development and testing periods, there will be an initial go-live period where competing consolidators can go live on a rolling basis and begin to provide consolidated market data products to subscribers.1356 Phase Two. Initial Parallel Operation Period. Following the phase one go-live, the decentralized consolidation model will run in parallel to the existing exclusive SIP model for an initial parallel operation period of 180 calendar days. During this initial parallel operation period, the exclusive SIPs will continue to provide the market data required under the current effective national market system plan(s). The Commission believes that requiring the existing exclusive SIPs to continue disseminating the same data that they currently do will prevent the imposition of unnecessary costs—namely, any change to the data content the SIPs currently disseminate—on the existing exclusive SIPs immediately prior to their retirement. Nothing in the rules would prevent competing consolidators from providing market data to their subscribers during the initial parallel operation period.1357 This will enable competing consolidators to earn returns and recoup their development costs during the transition period. With respect to regulatory data during the initial parallel operation period, the existing SIPs will be required to continue to calculate and generate the regulatory data that they do currently— such as LULD price bands and messages regarding the triggering of a marketwide circuit breaker—and will provide this information to the primary listing exchanges, who will in turn make this information available to competing consolidators and self-aggregators.1358 Similarly, the primary listing exchanges will continue to calculate and generate regulatory data as currently required— such as messages regarding the triggering of a short sale circuit breaker and trading halt and pause messages— and will make this information available to competing consolidators and selfaggregators. The Commission believes that this approach, which maintains the current status quo regarding the party that calculates and generates regulatory data during the initial parallel operation period, will avoid the potential confusion and market disruption that could result from multiple parties—i.e., the primary listing exchanges and the existing SIPs—generating this information. In addition, it would avoid the imposition of unnecessary costs on the existing SIPs immediately prior to their retirement that would be associated with other approaches, such as shifting the calculation and generation of all regulatory data to the primary listing exchanges at an earlier stage and requiring the existing SIPs to develop the capacity to pass this information through to market participants. Furthermore, the primary listing exchanges would develop and test the capacity to calculate and generate LULD price bands, marketwide circuit breaker trigger messages, 1352 The compliance date for Rule 614(a), which provides the Form CC registration process requirements for competing consolidators, will thus be the date of the Commission’s approval of the amendments to the effective national market system plan(s) required under Rule 614(e). 1353 See infra note 1360 and accompanying text. 1354 As discussed above, some commenters questioned whether enough competing consolidators would enter the market to make the decentralized consolidation model viable. See supra Section III.B.3. The Commission believes that implementing a first wave of registrations to encourage entities that wish to act as competing consolidators will help to ensure that sufficient numbers of entities enter the market. See infra notes 2142–2144 and accompanying text. 1355 The compliance date for the amendments to Rule 603(b), which require SROs to make available all data content necessary to generate consolidated market data to competing consolidators and selfaggregators, will thus be 180 calendar days from the date of the Commission’s approval of the amendments to the effective national market system plan(s) required under Rule 614(e). 1356 The compliance date for Rule 614(d)(3), which requires competing consolidators to make consolidated market data products available to subscribers on a consolidated basis on terms that are not unreasonably discriminatory, will thus be 270 days from the date of the Commission’s approval of the amendments to the effective national market system plan(s) required under Rule 614(e). 1357 As discussed below, the transition to the new round lot sizes would occur later. The consolidated market data products offered by competing consolidators during the initial parallel operation period would be based on the current definition of round lot. In addition, the new revenue allocation formula would be coded and tested during phase two. 1358 The Proposing Release describes in detail how the various components of regulatory data are currently calculated and disseminated, including the specific obligations of the primary listing exchanges and the existing SIPs, as well as how these processes and responsibilities will be modified under the decentralized consolidation model. See Proposing Release, 85 FR at 16732–33, 16759–63. See also supra Section II.H.2. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 PO 00000 Frm 00106 Fmt 4701 Sfmt 4700 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and other regulatory messages currently generated by the existing SIPs—the calculation and generation of which will be shifted to the primary listing exchanges pursuant to these amendments 1359—during the initial parallel operation period and prior to the retirement of the existing SIPs. After the initial parallel operation period ends, the SIPs and competing consolidators will continue to run in parallel operation as the Operating Committee and the Commission consider the retirement of the exclusive SIPs in the next phase. Continuing parallel operation and retirement of the exclusive SIPs. At the end of the initial parallel operation period, the Operating Committee of the effective national market system plan(s), in consultation with market participants including SROs, broker-dealers, vendors, and others that consume market data, will evaluate the performance of the decentralized consolidation model during the initial parallel operation period. Within 90 days of the end of the initial parallel operation period, the Operating Committee will make a recommendation to the Commission as to whether the exclusive SIPs should be decommissioned. The Commission will consider an effective national market system plan amendment to effectuate a cessation of the operations of the exclusive SIPs and, if consistent with the requirements of Rule 608 and the Exchange Act, approve such an amendment. Such an approval order will facilitate the final completion of the transition over to the new decentralized consolidation model. The Commission does not agree with the comment that the proposal failed to define the ‘‘operational readiness’’ of the decentralized consolidation model that would be necessary to approve the cessation of operations of the exclusive SIPs or that the Commission has reserved for itself ‘‘unchecked decisionmaking authority’’ over the implementation of the decentralized consolidation model. As discussed above,1360 the Commission described in the Proposing Release the elements that the Commission would consider that would inform its decision to approve the plan amendment to terminate the centralized consolidation model and operation of the exclusive SIPs and allow the decentralized consolidation model to operate on its own and 1359 See supra Section II.H (describing the regulatory data elements that primary listing exchanges will be required to provide to competing consolidators and self-aggregators pursuant to these amendments). 1360 See supra note 1334 and accompanying text. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 solicited comment on what additional factors it should consider in reaching this decision. Furthermore, as stated above, the termination of the exclusive SIPs would be effectuated through the plan amendment process under Rule 608 and subject to public comment that will inform Commission action. Phase Three. Registration of additional competing consolidators. Following the cessation of the operation of the exclusive SIPs, other entities interested in becoming a competing consolidator but that did not register during the initial ‘‘first wave’’ period described above, may register as competing consolidators.1361 Round lot testing and implementation. For a period of 90 days starting with the date of the cessation of the operation of the exclusive SIPs, the changes necessary to implement the new round lot sizes will be tested. At the end of the 90 day test period, the new round lot sizes will be implemented. The Commission believes that sequencing this step after the parallel operation period is important to avoid either: (1) Potential confusion and market disruption that could result from two different round lot structures operating at the same time; or (2) imposing reprogramming costs on the exclusive SIPs for a limited time period prior to their retirement. I. Alternatives to the Centralized Consolidation Model In the proposal, the Commission identified several alternative approaches to the centralized consolidation model that had been suggested both by Roundtable respondents and 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 Several commenters suggested that the distributed SIP alternative would address the issues that the Commission was trying to address, while retaining the resiliency of the centralized consolidation model.1362 One commenter stated that the Commission should implement a distributed SIP 1361 Aside from the difference in the timing of registration, the registration process and other requirements of Rule 614 will be the same for competing consolidators that do not register during the first wave. 1362 See Cboe Letter at 3; NYSE Letter II at 9–10; Nasdaq Letter II at 35–36, 49; STANY Letter II at 6. Another commenter stated that the existence of multiple consolidators is not a unique solution compared to an exclusive SIP distributing consolidated market data from multiple locations. See Citadel Letter at 5. PO 00000 Frm 00107 Fmt 4701 Sfmt 4700 18701 model to reduce geographic latency instead of the decentralized consolidation model, which the commenter stated would reduce the resiliency of critical market infrastructure.1363 Another commenter said that the Commission only considered the distributed SIP using information from the Market Data Roundtable and that market participants had implemented undefined changes that rendered the Commission’s consideration outdated.1364 This commenter also suggested that a distributed SIP model, with competing SIPs, would be subject to the oversight of the effective national market system plan(s).1365 One commenter described current exclusive SIP latencies and suggested that the introduction of a distributed SIP model would solve geographic latencies by allowing market participants to receive market data from the exclusive SIPs at the location where it is produced.1366 This commenter stated that competing consolidators would be unlikely to offer improvements in processor latency. This commenter provided statistics that geographic latency accounts for 96% of overall exclusive SIP latency, and therefore, the potential, hypothetical latency reduction from a competing consolidator with the ‘‘best-in-class technology’’ would be at most 4%.1367 Further, the commenter stated that ‘‘it is short sighted to view SIP architecture as purely a latency issue’’ as the exclusive SIPs have been ‘‘incredibly resilient and have an uptime of close to 100%.’’ 1368 The commenter said that a distributed SIP would provide significant resiliency benefits and would be easier for market participants to implement.1369 The commenter stated that the distributed SIP would provide the benefits of the competing consolidator model but without adding resilience concerns.1370 Other commenters disagreed. One commenter stated that a distributed SIP would not solve the latency issue.1371 Another commenter stated that it agreed with the Commission that the distributed SIP would increase costs and complexity and would not address 1363 See Cboe Letter at 3. NYSE Letter II at 26. 1365 See NYSE Letter II at 8–9, n. 26. 1366 See Cboe Letter at 23 (stating the competing consolidator model and distributed SIP model could produce the same geographic latency benefits). 1367 Id. at 23. 1368 Id. at 24–25. 1369 See id. at 25 (stating that market participants would have to code and connect to competing consolidators). 1370 See id. See also note 892 and accompanying text. 1371 See Data Boiler Letter I at 66. 1364 See E:\FR\FM\09APR2.SGM 09APR2 18702 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations content and latency differentials in a competitive manner.1372 In the Proposing Release, the Commission explained that a distributed SIP alternative was suggested as one possible means to reduce geographic latency. 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. The benefit of the distributed SIP alternative was that consolidated market data would not have to travel multiple locations (from an exchange at one location to an exclusive SIP at a second location for consolidation and dissemination to a subscriber that may be at a third location) before reaching subscribers. Although the distributed SIP model could reduce the geographic latency inherent in the centralized consolidation model, the Commission believes that this model does not adequately address the problems with the existing model. Specifically, while the plan proposed pursuant to the Governance Order will be required to comply with requirements designed to mitigate conflicts of interest, it will not eliminate them. The SROs will retain sufficient voting power to act jointly on behalf of any new NMS data plan, for regulatory purposes. Further, the exchanges will continue to be permitted to sell proprietary data in a new decentralized consolidation model. Therefore, the Commission believes that the distributed SIP model lacks the incentives offered by the competing consolidator approach. The lack of incentives may prevent the regular upgrade of technology and product offerings and would perpetuate the need for end-users to obtain market data from multiple sources.1373 The distributed SIP model would continue to allow a single SIP to have exclusive rights to the dissemination of market data for the NMS stocks on a consolidated tape. The Commission does not believe that it is 1372 See MEMX Letter at 8. Commission notes that the Equity Data Plans started considering the distributed SIP model in early 2018 and have not submitted any recommendations to the Commission for consideration. 1373 The VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 necessary for the exchanges to continue to control the consolidation and dissemination of consolidated market data. Further, because such a model lacks competition, the Commission believes the distributed SIP model would be less likely to incorporate technological enhancements improving latency and to make available more comprehensive and relevant product and service offerings. Furthermore, the end-users would still have to obtain market data from multiple SIPs because, as it is today, the data would not be consolidated across the exclusive SIPs. One commenter suggested a distributed SIP model that would allow for competition among SIPs subject to the oversight of the effective national market system plan(s). The decentralized consolidation model with competing consolidators is a similar proposal without the direct oversight of competing consolidators by the effective national market system plan(s). The Commission believes that the role and functions of the plans as outlined above is appropriate for the decentralized consolidation model. Further, this model would continue to suffer from conflicts of interest by allowing the effective national market system plan(s) controlled by the exchanges to oversee the dissemination of consolidated market data by competing consolidators. As to the comment regarding the provision of different market data products offered based on investors’ needs, the Commission acknowledged this suggestion in the proposal. Further, the Commission stated that such an idea could be implemented in a decentralized consolidation model. The Commission stated that the Operating Committee could develop different levels of fees for different consolidated market data products based on the needs of investors. The commenter, however, now states that the Commission cannot assume that the Operating Committee would create such a product. The Commission believes that if the commenter and the Operating Committee believe that such products would be useful to investors, then they would consider developing them in the decentralized consolidation model. 2. Single SIP Alternative The Commission also discussed another suggestion to address latency concerns by combining the exclusive SIPs into a single exclusive SIP for all exchange-listed securities. The Commission stated that this alternative 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, PO 00000 Frm 00108 Fmt 4701 Sfmt 4700 and could eliminate certain inefficiencies in having two separate exclusive SIPs for SIP data. The Commission also stated that having a single administrator and exclusive SIP could ease these burdens and introduce benefits such as a less complex infrastructure and greater standardization. One commenter stated that a single dedicated SIP could satisfy the requirements of the decentralized consolidation model.1374 However, the commenter acknowledged that the proposal’s ‘‘use of competition to maintain fair prices and enhance the quality and speed’’ is a reasonable approach.1375 In the Proposing Release, the Commission stated that it believed that the single SIP alternative suffered several key shortcomings: (1) 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; and (2) 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 did not receive any comments offering any persuasive reason as to why this conclusion was inadequate. Therefore, the Commission continues to believe that the decentralized consolidation model is an appropriate means to modernize the national market system and address the deficiencies of the current model. 3. Other Alternatives Several commenters offered views on alternatives to the decentralized consolidation model. One commenter stated that the Proposing Release’s consideration of alternatives did not evaluate the ‘‘current state of market data infrastructure.’’ 1376 This 1374 See RBC Letter. 1375 Id. 1376 NYSE Letter II at 26. Despite the changes discussed by the commenter to reduce latency in the transmission and aggregation of SIP data, there is currently no competition in the market for consolidated market data. See NYSE Letter II at 10– 11. This commenter also stated that the Commission did not consider whether the changes to data content or the creation of a decentralized consolidation model independently would have been sufficient to achieve the Commission’s goals. As discussed throughout, the amendments to the content of NMS information and the means by which it is disseminated are designed to better facilitate competition, to help ensure the prompt, accurate, reliable, and fair collection of information and to help ensure the fairness and usefulness of NMS information. The amendments to the content of NMS information and the amendments to adopt E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations commenter stated that market participants had implemented changes to render the consideration of alternatives outdated. The commenter stated that the Commission failed to consider whether the changes addressed in the Governance Order, along with discreet changes in the Proposing Release, would be sufficient to achieve the Commission’s goals in the Proposing Release.1377 The commenter stated that the Commission did not explain why the governance changes would be insufficient and how the Commission could come to such a conclusion before the governance changes are implemented.1378 This commenter stated that the Commission’s failure to consider alternatives would violate the APA.1379 The Governance Order addresses the governance structure of the Equity Data Plans and particularly concerns about conflicts of interest and the allocation of voting power with respect to these Plans. It does not address the content of NMS information and the means by which it is disseminated in the national market system.1380 The commenter also stated that the Commission failed to consider an alternative that it had set forth in response to the Governance Order.1381 Specifically, this commenter stated that it had proposed creating different levels of SIP data products to match the demands of different types of customers.1382 The Commission believes that the Operating Committee should consider the commenter’s proposal for different levels of fees for the data content underlying consolidated market data.1383 Finally, one commenter suggested that a single dedicated SIP could also improve core data content and reduce latency but stated that the ‘‘[p]roposal’s use of competition to maintain fair prices and enhance quality and speed is an approach that we believe is reasonable.’’ 1384 The Commission agrees. The decentralized consolidation model will introduce price and latency a decentralized consolidation model address different but related issues that together are necessary to update and modernize the national market system. 1377 See NYSE Letter II at 25. 1378 See id. 1379 See id. 1380 See supra Section III.E.2(a). 1381 See NYSE Letter II at 26. 1382 See id. This commenter, however, stated that the Operating Committee may not implement a fee schedule with different consolidated market data products that could meet the demand of investors. 1383 See supra Section III.E.2(c). 1384 RBC Letter at 5–6. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 competition into the national market system. IV. Paperwork Reduction Act Certain provisions of the rules and rule amendments that the Commission is adopting contain ‘‘collections of information requirements’’ within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).1385 The Commission published a notice requesting comment on the collection of information requirements in the Proposing Release and submitted relevant information to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA and its implementing regulations.1386 The title of the new collection of information is ‘‘Market Data Infrastructure and Form CC.’’ An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the agency displays a currently valid control number. The Commission has applied for an OMB Control Number for this collection of information. The Commission requested comment on the collection of information requirements in the Proposing Release. The Commission received comments on the estimates for the collection of information requirements included in the Proposing Release, which are discussed below. A. Summary of Collection of Information The rules and rule amendments include collection of information requirements within the meaning of the PRA. 1. Registration Requirements and Form CC Under Rule 614(a)(1)(i), each competing consolidator is required to register with the Commission by filing Form CC electronically in accordance with the instructions contained on the form.1387 To file a Form CC, a competing consolidator needs to access the Commission’s EFFS and register each individual who will access EFFS on behalf of the competing consolidator. Rule 614(a)(1)(ii) requires any reports required under Rule 614 to be filed electronically on Form CC, include all of the information as prescribed in Form CC, and contain an electronic signature. Rule 614(a)(2)(i) requires competing consolidators to amend an effective 1385 44 U.S.C. 3501 et seq. U.S.C. 3507; 5 CFR 1320.11. 1387 As explained above, exchanges that wish to rely upon an exemption from certain exchange provisions for affiliated competing consolidators will be required to register with the Commission on Form CC. See supra Section III.C.7(a)(iv). 1386 44 PO 00000 Frm 00109 Fmt 4701 Sfmt 4700 18703 Form CC and Rule 614(a)(3) requires a competing consolidator to provide notice of its cessation of operations on Form CC. 2. Competing Consolidators’ Public Posting of Form CC Rule 614(c) requires each competing consolidator to make public on its website a direct URL hyperlink to the Commission’s website that contains Form CC. 3. Competing Consolidator Duties and Data Collection Rule 614(d)(1) through (3) requires competing consolidators to collect from the SROs quotation and transaction information for NMS stocks, calculate and generate a consolidated market data product, and make the consolidated market data product available on terms that are not unreasonably discriminatory to subscribers. Rule 614(d)(4) requires competing consolidators to timestamp the information they collect from the SROs pursuant to Rule 614(d)(1) upon receipt, upon receipt by its aggregation mechanism, and upon dissemination to subscribers. 4. Recordkeeping Rule 614(d)(7) requires 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. Rule 614(d)(8) requires each competing consolidator, upon request of any representative of the Commission to furnish promptly to such representative copies of any documents required to be kept and preserved by it. 5. Reports and Reviews Rule 614(d)(5) requires each competing consolidator, within 15 calendar days after the end of month, to publish prominently on its website monthly performance metrics, as defined by the effective national market system plan(s) for NMS stocks. Rule 614(d)(6) requires a competing consolidator, within 15 calendar days after the end of each month, to publish prominently on its website certain detailed information about its operations. 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks Rule 614(e) directs the participants of the effective national market system plan(s) for NMS stocks to file with the E:\FR\FM\09APR2.SGM 09APR2 18704 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations Commission an amendment to such plan(s) within 150 days of the effectiveness of Rule 614. 7. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations Rule 603(b) requires 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. Accordingly, the SROs will be required to collect and make available to competing consolidators and selfaggregators the information necessary to generate consolidated market data. In addition, the primary listing exchanges are required to collect and make available pursuant to Rule 603(b) regulatory data as defined in Rule 600(b)(78). B. Proposed Use of Information 1. Registration Requirements and Form CC The information collected under Rule 614(a)(1) and (2) and Form CC are used for purposes of registering competing consolidators. The information collected on Form CC will be used to help ensure that a competing consolidator’s disclosures comply with the requirements of Rule 614. The information on Form CC would be publicly available and therefore could be used by market participants to evaluate the services offered by competing consolidators. 2. Competing Consolidators’ Public Posting of Form CC The collection of information under Rule 614(c)—which requires each competing consolidator to make public on its website a direct URL hyperlink to the Commission’s website that contains the documents enumerated in paragraphs (b)(2)(ii) through (v), including each effective initial Form CC, each order of ineffective initial Form CC, each Form CC amendment to an effective Form CC, and each notice of cessation (if applicable)—will help to ensure that such information is readily available to the public. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 3. Competing Consolidator Duties and Data Collection The information collected under Rules 614(d)(1) through (3) constitutes the main obligations of competing consolidators: To collect data content underlying consolidated market data and to calculate and disseminate a consolidated market data product, which will be used by market participants for trading. Widespread availability of consolidated market data promotes fair and efficient markets and facilitates the ability of brokers and dealers to trade more effectively and to provide best execution to their customers. The information collected under Rule 614(d)(4) would help subscribers to determine a competing consolidator’s realized latency and would assist subscribers in choosing a competing consolidator or in deciding whether a chosen competing consolidator continues to meet their latency demands. 4. Recordkeeping The Commission will use the information collected under Rules 614(d)(7) and (8) in its oversight of competing consolidators. 5. Reports and Reviews The information collected under Rules 614(d)(5) and (6) will provide transparency with respect to the services and performance of a competing consolidator and allow market participants to evaluate the merits of a competing consolidator. 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks Rule 614(e) requires the participants to the effective national market system plan(s) for NMS stocks to file an amendment with the Commission, pursuant to Rule 608, that includes several provisions. First, Rule 614(e)(1) requires that the amendment conform the plan(s) to reflect the provision of information with respect to quotations for and transactions in NMS stocks by the SROs to competing consolidators and self-aggregators and define the monthly performance metrics that competing consolidators must publish pursuant to Rule 614(d)(5). The information collected pursuant to this Rule 614(e)(1) will help to ensure that the plan(s) accurately reflect the new market data dissemination model and will inform market participants of the operation of the plan(s). In addition, the information that is collected pursuant to Rule 614(e)(1) will facilitate the Commission’s oversight of the plan(s). Finally, the information collected will PO 00000 Frm 00110 Fmt 4701 Sfmt 4700 inform competing consolidators of the monthly performance metrics that they are required to develop. Second, Rule 614(e)(2) requires that the plan(s) be amended to require the application of timestamps by the SROs to all of the information that is necessary to generate consolidated market data, including the time the information was generated by the applicable SRO and the time the SRO made the information available to competing consolidators and selfaggregators. Timestamps help to measure latencies and sequence information. The timestamp information collected will be used by competing consolidators and self-aggregators to sequence information properly and measure latencies relating to the collection, consolidation, and generation of consolidated market data. Third, Rule 614(e)(3) provides that the plan(s) must be amended to reflect that the plan(s) must conduct an assessment of competing consolidator performance and develop an annual report of such assessment to be provided to the Commission. The information collection will assist the Commission in overseeing the operation of the national market system. Fourth, Rule 614(e)(4) provides that the plan(s) must be amended to provide for the development, maintenance, and publication of a list that identifies the primary listing exchange for each NMS stock. This information collection will help to identify which primary listing exchange is responsible for making Short Sale Circuit Breaker information available pursuant to Rule 201(b)(3). Finally, Rule 614(e)(5) provides that the plan(s) must be amended to include a requirement to calculate and publish on a monthly basis the consolidated market data gross revenues for NMS stocks as specified by (1) listed on the New York Stock Exchange (NYSE); (2) listed on Nasdaq; and (3) listed on exchanges other than NYSE or Nasdaq. This information will be used to determine whether a competing consolidator is subject to Regulation SCI. 7. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations The information collected pursuant to Rule 603(b) promotes fair and efficient markets and facilitates the ability of brokers and dealers to trade more effectively and to provide best execution to their customers. This information will be used by competing consolidators to develop consolidated market data products for market participants and by E:\FR\FM\09APR2.SGM 09APR2 18705 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations self-aggregators to develop consolidated market data that they need to make trading decisions. In addition, the primary listing exchanges are required to collect and make available pursuant to Rule 603(b) regulatory data as defined in Rule 600(b)(78). The information collected is necessary for compliance with Federal securities laws. C. Respondents The collection of information titled Market Data Infrastructure and Form CC will apply to competing consolidators and the national securities exchanges and national securities associations. The below table summarizes the Commission’s initial and adopted estimates of the number of respondents for each collection of information requirement: Applicable respondents Registration Requirements and Form CC .................... Entities that register pursuant to Rule 614 to act as competing consolidators. Entities that register pursuant to Rule 614 to act as competing consolidators. Entities that register pursuant to Rule 614 to act as competing consolidators. Entities that register pursuant to Rule 614 to act as competing consolidators. Entities that register pursuant to Rule 614 to act as competing consolidators. National securities exchanges and national securities associations that are participants to the effective national market system plan(s) for NMS stocks. National securities exchanges and national securities associations on which NMS stocks are traded. Competing Consolidators’ Public Posting of Form CC Competing Consolidator Duties and Data Collection ... Recordkeeping .............................................................. Reports and Reviews ................................................... Amendment to the Effective National Market System Plan(s) for NMS Stocks. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations. 1. Initial Estimate In the Proposing Release, the Commission estimated that there would be 12 persons who may decide to perform the functions of a competing consolidator and would have to comply with the information collections under Rule 614. In addition, the Commission estimated that the 16 national securities exchanges and one national securities association (the Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’)) that are members of the effective national market system plan(s) would have to comply with the information collection under Rule 614(e).1388 1388 At the time of the Proposing Release, these national securities exchanges were: Cboe BYX Exchange, Inc.; Cboe BZX Exchange, Inc.; Cboe EDGA Exchange, Inc.; Cboe EDGX Exchange, Inc.; Cboe Exchange, Inc.; Investors Exchange LLC; LongTerm 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. In addition, there will VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 Furthermore, the Commission estimated that the 16 national securities exchanges that trade NMS stocks and one national securities association would have to comply with the information collection under Rule 603(b). (a) Comments Received on Initial Estimates Two commenters suggested that the estimated number of competing consolidators was unsupported.1389 One commenter argued that the different categories of competing consolidators identified by the Commission may not become competing consolidators for varying reasons.1390 Specifically, this commenter stated that large brokerbe one primary listing exchange for each NMS stock responsible for making regulatory data available and such primary listing exchange would be identified in the effective national market system plan(s). 1389 See NYSE Letter II at 17; Nasdaq Letter IV at 25. 1390 See NYSE Letter II at 17. PO 00000 Frm 00111 Fmt 4701 Sfmt 4700 Estimate for adopted rules Initial estimate Collection of information 8 8 12 8 12 8 12 8 12 8 17 19 17 17 dealers that currently aggregate proprietary market data would likely become self-aggregators, rather than competing consolidators, due to increased operational costs and regulatory scrutiny.1391 The commenter stated that the proposal lacked analysis to support the conclusion that existing SROs would become competing consolidators and that existing SROs would be subject to ‘‘substantial infrastructure costs’’ and additional regulatory requirements.1392 Finally, the commenter stated that there was no evidence that the SROs that operate the exclusive SIPs would become competing consolidators because SROaffiliated competing consolidators would be subject to Section 19(b) of the Exchange Act while other competing consolidators would not.1393 1391 Id. 1392 Id. 1393 Id. E:\FR\FM\09APR2.SGM 09APR2 18706 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations (b) Estimate for the Adopted Rules The Commission believes that the estimate of 12 persons who could decide to perform the functions of a competing consolidator should be adjusted downwards to eight persons. This revision reflects reductions in (1) the estimated number of competing consolidators associated with SROs from four, as proposed, to one; 1394 and (2) the estimated number of competing consolidators that would be brokerdealers that aggregate market data for internal uses from two, as proposed, to one. While the actual number of entities that decide to register as a competing consolidator is unknown at this time because this is a new type of entity, the Commission believes that for purposes of estimating the paperwork collection costs and burdens that eight is a reasonable number.1395 Of that number, the Commission estimates that eight of those persons will have to file a Form CC to register with the Commission as a competing consolidator. All competing consolidators will have to comply with the other information collections described above under Rule 614. The Commission notes that there are 18 national securities exchanges 1396 and one national securities association that are participants in the effective national market system plan(s) for NMS stocks and would have to comply with the information collection under Rule 614(e). The Commission estimates that there are 16 national securities exchanges (the securities exchanges that trade NMS stocks) and one national securities association that would have to comply with the information collection under Rule 603(b).1397 D. Total Initial and Annual Reporting and Recordkeeping Burden 1. Registration Requirements and Form CC Competing consolidators are required to register pursuant to Rule 614 and Form CC. In addition, competing consolidators are required to file amendments to Form CC pursuant to Rule 614(a)(2). (a) Initial Burden and Costs The Commission’s adopted estimates for initial burdens and costs have been slightly revised from the proposal. The tables below summarize these changes. Proposed estimates Completion of the Initial Form CC: Number of Respondents: Number of Respondents Subject to the Registration Requirements of Rule 614 and Form CC. Completion of the Initial Form CC: Number of Hours: Number of Hours Needed for Each Respondents to complete an Initial Form CC ............. Number of Hours Needed for Each CC to Access EFFS ..................................................... Total Number of Hours for Each Respondent to Complete Form CC and Access EFFS. Completion of the Initial Form CC: Total One-Time Initial Registration Burden: Total Burden Hours (Number of Respondents × Number of Hours to Complete Form CC and Access EFFS). Total Cost to Register All Respondents (Total Number of Hours × Hourly Rate) 1402 ......... Completion of the Initial Form CC: Digital Signing of Form CC: Number of Individuals from Each Respondent Signing Form CC ........................................ Cost of Obtaining a Digital ID ............................................................................................... Total Cost of Digitally Signing Form CC for All Respondents (Number of Signers × Cost of Digital ID × Number of Respondents). Completion of the Amendments to Form CC: Number of Amendments Expected to be Filed During First Year of Form CC Effectiveness 1403. Total Estimated Number of Burden Hours per Amendment per Respondent ............... Total Cost Associated with Amendments During First Year of Form CC Effectiveness (Number of Amendments × Number of Hours per Amendment × Number of Respondents × Attorney Hourly Rate). Adopted estimates 8 1398 ........................... 8. 200 1399 ....................... 0.3 1400 ........................ 200.3 1401 .................... 200. 0.3. 200.3. 8 Respondents × 200.3 Hours = 1,602.4. 1,602.4 Hours × $467 = $748,320.80. 8 Respondents × 200.3 Hours = 1,602.4. 1,602.4 Hours × $467 = $748,320.80. 2 .................................. 2. $25 .............................. $25. 2 Signers × $25 × 8 2 Signers × $25 × 8 Respondents = $400. Respondents = $400. 2 .................................. 2. 6.0 ............................... 2 Amendments × 6 Hours × 8 Respondents × $467 = $44,832. 6.0. 2 Amendments × 6 Hours × 8 Respondents × $467 = $44,832. (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission preliminarily estimated the 1394 In the Proposing Release, the Commission described potential competing consolidators associated with SROs. As discussed above, the Commission is exempting exchanges from certain provisions of the Exchange Act related to the operation of affiliated competing consolidators. See supra Section III.C.7(a)(iv). One condition of the exemption is a requirement that such exchange affiliated competing consolidator file a Form CC. Accordingly, the adopted PRA includes paperwork collection estimates for the filing of Form CC by exchange affiliated competing consolidators. 1395 The Commission estimated this number based on its knowledge of the different types of entities that currently collect and disseminate NMS VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 information as well as from information received at the Roundtable and the comment file. 1396 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.; MEMX LLC; MIAX Pearl, LLC; 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. 1397 As noted above, the primary listing exchange for each NMS stock responsible for making PO 00000 Frm 00112 Fmt 4701 Sfmt 4700 regulatory data available would be identified in the effective national market system plan(s). 1398 In the Proposing Release, the Commission preliminarily estimated that 12 respondents would decide to perform the functions of a competing consolidator, which included four SROs that would not be required to file Form CC. Therefore, the Commission estimated that eight respondents would be subject to the registration requirements of Rule 614 and Form CC. 1399 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 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations number of respondents who would be subject to the registration requirements of Rule 614 and Form CC (8), the number of hours for each to complete Form CC (200) and the number of hours for each to access EFFS (0.3). Based on these, the Commission estimated a onetime initial registration burden for all competing consolidators is approximately 1,602.4 burden hours and a total cost to register all competing consolidators would be $748,320.80. In addition to this, the Commission estimated the total cost for respondents to obtain digital IDs to access EFFS for the purposes of signing the Form CC at approximately $400 for all respondents. Finally, the Commission estimated the total burden of filing amending Form CC in the first year after effectiveness at a total of 96 hours (for a total cost of $44,832). (ii) Comments/Responses on Initial Burden and Costs One commenter stated that the ‘‘legal requirements would be overly burdensome and have little impact on the utility of . . . service to the marketplace’’ and requested the Commission to reduce the legal cost burdens by adopting a formal regulated SIP. 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.’’). Form CC includes nine exhibits, and the Commission estimates that completing proposed Form CC would take 200 hours, which is half the time for Form SIP. 1400 The Commission estimated 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. 1401 200 hours to complete an initial form CC + 0.3 hours to access EFFS = 200.3 hours. 1402 The Commission estimated that competing consolidators would, as a general matter, prepare Form CC internally and not use external service providers to complete the form. The Commission also stated that Form CC would likely be prepared by an attorney. 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 believed that competing consolidators would use in-house counsel and not use external service providers or outside counsel to file the Form CC. 1403 The Commission preliminarily estimated that competing consolidators would file two amendments—one Material Amendment and one Annual Report—during its first year after the effectiveness of its Form CC. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 entity lite regime limited to 10 hours of legal work.1404 The Commission is not imposing a minimum level of costs, legal or otherwise, on competing consolidators. The estimates are those costs that the Commission believes that an entity may bear when registering as a competing consolidator. The Commission acknowledges that competing consolidators will have to bear certain regulatory and legal costs to be registered. (iii) Adopted Estimates—Initial Burden and Costs The Commission believes that, for reasons discussed above, the initial burden hour estimate included in the Proposing Release continues to be an appropriate estimate. The number of competing consolidators and the estimates do not need to be modified because the Commission is adjusting the total number of competing consolidators down from 12 to eight.1405 Therefore, the initial burden hour estimates, which were calculated using eight competing consolidators, remains the same. (b) Ongoing Burden and Costs (i) Proposed Estimates—Ongoing Burden and Costs Rule 614(a)(2) requires 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. These amendments represent the ongoing annual burdens of Form CC and proposed Rule 614(a)(2).1406 The Commission estimated that the ongoing annual burden for complying with the amendment requirements would be approximately 6.15 burden hours for each competing consolidator per amendment 1407 (for a total of 1404 See ACTIV Financial Letter. supra note 1394. 1406 In addition, on an ongoing basis, each competing consolidator may add one individual to access EFFS. For example, a competing consolidator may have to add an individual to access EFFS to account for staffing changes. The Commission estimated that the ongoing burden would be 0.15 hours per competing consolidator. 1407 The Commission considered the hour burden estimates for Form SDR when estimating the hour burdens for amendments to Form CC. As noted in the Proposing Release, 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 1038, 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 used a similar ratio to estimate the burdens for filers of Form CC because filers of Form SDR, like filers of Form CC, 1405 See PO 00000 Frm 00113 Fmt 4701 Sfmt 4700 18707 $2,872.05), and approximately 49.2 burden hours for all competing consolidators per amendment (for a total of $22,976.40).1408 The Commission estimated that competing consolidators would have one Material Amendment per year and together with the Annual Report, the Commission estimated that respondents would be required to file on average a total of two amendments per year. The Commission estimated that each respondent would have an average annual burden of 12.3 hours (for a total of $5,744.10) for a total estimated average annual burden for all competing consolidators of 98.4 hours (for a total of $45,952.80).1409 In addition, the Commission estimated that obtaining a digital ID for an individual who signs the Form CC would cost approximately $25 each year or approximately $200 for all respondents. The Commission estimated that each respondent will have an average annual cost of $5,769.10 ($5,744.10 + $25), and for all respondents, a total estimated annual cost of $46,152.80 ($5,769.10 * 8). Rule 614(a)(3) would require a competing consolidator that ceases to act as such to file an amendment to Form CC 90 calendar days prior to cessation of operations. The Commission described a competing consolidator’s notice of cessation of acting as a competing consolidator on Form CC as substantially similar to its most recently filed Form CC, and therefore, since the form would already be complete, the burden would not be as great as the burden of filing an application for registration on Form CC. The Commission based its estimates for a notice of cessation on the estimates for filing an amendment on Form CC. The Commission estimated that the one-time burden of filing a Form CC notice of cessation would be approximately 2 burden hours (for a total of $934).1410 (ii) Comments/Responses on Ongoing Burden and Costs One commenter stated that competing consolidators would amend their fees 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 Nov. 27, 2020). Thus, the Commission estimated that the annual burden of filing one amendment on Form CC will be 3% of the 200 hour initial burden, or 6 hours. 1408 See supra note 1402. As with the initial Form CC, the Commission believed the competing consolidators would conduct this work internally. 1409 See id. 1410 See id. The Commission estimated that no competing consolidators would cease operations in the first three years of the rule’s effectiveness. E:\FR\FM\09APR2.SGM 09APR2 18708 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations more than once a year.1411 An amendment to competing consolidator fees would require an amendment to a competing consolidator’s Form CC. The Commission has considered this comment and is amending its ongoing estimate that a competing consolidator will file five amendments a year, plus the annual report, for a total of six amendments per year. The Commission believes this estimate is reasonable based upon a review of amendments of the fee schedules of the SROs. notice of cessation on Form CC as proposed. (iii) Adopted Estimates—Ongoing Burden and Costs The Commission is amending its ongoing burden hour estimate that a competing consolidator will file two amendments per year. Based on the comments received, the Commission now estimates that a competing consolidator will file six amendments per year. The Commission preliminarily estimated that the annual burden of filing one amendment on Form CC would be six hours per competing consolidator. Since the Commission now estimates that a competing consolidator will file six amendments in a year, the Commission estimates that the annual burden hours incurred per competing consolidator to file six amendments per year would be 36 hours,1412 for a total estimated average annual burden for all competing consolidators of 288 hours.1413 The Commission is adopting its annual external cost estimates as proposed.1414 Finally, the Commission is adopting the ongoing burden estimate for filing a (a) Initial Burden and Costs 1411 See IDS Letter I at 15 (‘‘In a truly competitive market, competing consolidators would amend their fees more often than once a year, as they responded to market forces.’’). 1412 36 annual burden hours = [(6 annual burden hours per amendment) × (6 amendments per year)]. The Commission monetized this amount to be $16,812. The Commission based this estimate on the $467 hourly rate as of May 2019 for an assistant general counsel × 36 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. 1413 288 annual burden hours = [(6 annual burden hours per amendment) × (6 amendments per year) × (8 competing consolidators)]. The Commission monetized this amount to be $133,632. The Commission based this estimate on the $467 hourly rate as of May 2019 for an assistant general counsel × 36 hours × 8 competing consolidators. 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. 1414 See supra note 1394. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 2. Competing Consolidators’ Public Posting of Form CC Rule 614(c) requires 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, amendments to effective Form CCs, and notice of cessation (if applicable). (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated 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,1415 for an aggregate initial burden of approximately six hours for the competing consolidators to post publicly the direct URL hyperlink to the Commission’s website on their own respective websites.1416 (ii) Comments/Responses on Initial Burden and Costs The Commission did not receive any comments on its initial burden hour estimate for the competing consolidators to publicly post the direct URL hyperlink to the Commission’s website on their own respective websites. (iii) Adopted Estimates—Initial Burden and Costs The Commission is adopting the initial burden hour per competing consolidator estimate as proposed without any changes. However, the 1415 The Commission based this estimate on a full-time Programmer Analyst spending approximately 0.5 hours to publicly post the URL hyperlink per competing consolidator. The Commission estimated 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. 1416 The Commission estimated 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. PO 00000 Frm 00114 Fmt 4701 Sfmt 4700 Commission is revising its aggregate initial burden hour estimate. As discussed above, eight competing consolidators would be required to file amendments to effective Form CCs. The Commission now estimates an aggregate initial burden of approximately four hours for the competing consolidators to publicly post the direct URL hyperlink to the Commission’s website on their own respective websites.1417 (b) Ongoing Burden and Costs (i) Proposed Estimates—Ongoing Burden and Costs For the ongoing burden and costs, the Commission estimated that each competing consolidator would check the Commission’s website whenever it files 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. Further, the Commission estimated that a competing consolidator will file two amendments per year, which would result in each competing consolidator incurring 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,1418 for an aggregate annual burden of approximately six hours for 1417 The Commission estimated the monetized initial aggregate burden for this requirement to be $964. 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) × (8 competing consolidators)] = 4 initial burden hours across the competing consolidators and $964. 1418 The Commission based 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 estimated that a competing consolidator would file two amendments per year, the Commission estimated 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 estimated 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. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations the competing consolidators to do so.1419 (ii) Comments/Responses on Ongoing Burden and Costs As discussed above, one commenter stated that competing consolidators would amend their fees more than once a year.1420 An amendment to fees would require an amendment to a competing consolidator’s Form CC. The Commission has considered this comment and is amending its ongoing estimate after a review of amendments of the fee schedules of the SROs. (iii) Adopted Estimates—Ongoing Burden and Costs As described above,1421 the Commission is amending its ongoing estimate that a competing consolidator will file two amendments per year. The Commission now estimates that a competing consolidator will file six amendments per year. The Commission believes a competing consolidator will file five amendments a year, plus the annual report, for a total of six amendments per year. The Commission believes this estimate is reasonable based upon a review of amendments of the fee schedules of the SROs. Because the Commission believes that a competing consolidator will incur an ongoing burden of 0.25 hours per amendment to ensure that it has posted the correct direct URL hyperlink to the Commission’s website on its own website,1422 the Commission now estimates that a competing consolidator will incur a total of 1.5 hours per year to ensure that it has posted the correct direct URL hyperlink to the Commission’s website,1423 for an 1419 The Commission estimated 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. 1420 Specifically, the commenter stated, ‘‘In a truly competitive market, competing consolidators would amend their fees more often than once a year, as they responded to market forces.’’ IDS Letter I at 15. 1421 See supra Section IV.D.1(b)(iii). 1422 See supra note 1418. 1423 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 estimates that a competing consolidator would file VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 aggregate annual burden of approximately 12 hours for all competing consolidators to do so.1424 The Commission is adopting the ongoing burden estimate as amended. 3. Competing Consolidator Duties and Data Collection Rules 614(d)(1) through (3) require competing consolidators to collect from the SROs quotation and transaction information for NMS stocks, calculate and generate a consolidated market data product, and make the consolidated market data product available to subscribers on a consolidated basis on terms that are not unreasonably discriminatory. Rule 614(d)(4) requires competing consolidators to timestamp the information with respect to quotations and transactions in NMS stocks that they collect from the SROs pursuant to Rule 614(d)(1) upon receipt, upon receipt by the aggregation mechanism, and upon dissemination to subscribers. The Commission estimated that five types of entities would register to become competing consolidators and would have to build systems, or modify existing systems, to comply with Rules 614(d)(1) through (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 estimated that, apart from the SRO category, two respondents from each category would register to become a competing consolidator; the Commission estimated that four SROs would register to become competing consolidators. six amendments per year, the Commission estimates that each competing consolidator would incur a burden of 1.5 hours per year. (0.25 hours) × (6 amendments per year) = 1.5 hours per year to check the URL hyperlink. The Commission estimated the monetized annual burden for this requirement to be $361.50. The Commission derives 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 1.5 hours = 1.5 annual burden hours per competing consolidator and $361.50. 1424 The Commission estimates the monetized aggregate annual burden for this requirement to be $2,892. The Commission derives 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 1.5 hours) × (8 competing consolidators)] = 12 annual burden hours across the competing consolidators and $2,892. PO 00000 Frm 00115 Fmt 4701 Sfmt 4700 18709 (a) Comments on Initial Burden and Costs and Annual Burden and Costs Generally The Commission received two comments that believed the Commission’s initial or ongoing burdens and costs associated with the operation of competing consolidators were too low.1425 One commenter said the Commission’s estimated initial and ongoing costs associated with competing consolidators should be comparable to those of the CAT.1426 The Commission considered this comment and disagrees with its assessment because the CAT is a different system in function and differs greatly in scope than the systems to be used by competing consolidators. Unlike the systems to be operated by competing consolidators, which would collect trade and quote information in NMS stocks from the SROs, and consolidate and disseminate such information to subscribers, the CAT must collect information for the entire lifecycle of an order (receipt/origination, routing, receipt of a routed order, modification or cancellation, and execution), in both NMS stocks and options from SROs as well as broker-dealers, and consolidate and store such information in a queryable database made available to regulators. The other commenter stated that the cost that NYSE incurred to build its ‘‘NMS network’’ inside one data center to provide access to SIAC’s NMS feeds ‘‘was substantially greater than the Commission’s estimation for networks that would extend to four data centers.’’ 1427 The commenter said that NYSE’s capital expenditure costs to build the NMS network were estimated to be $3.8 million, with ongoing costs of $215,000 per year.1428 The Commission considered this comment and believes the NMS network costs are informative but are not directly applicable to the costs to be incurred by competing consolidators to build or upgrade systems to comply with Rules 614(d)(1) through (4) because the NMS network is not a system that consolidates market data and its costs include the transmission of options information, which competing consolidators would not be collecting, consolidating, or disseminating. However, upon further consideration, the Commission believes that it is likely that competing consolidators would incur higher 1425 Data Boiler Letter I at 46; Data Boiler Letter II at 1; IDS Letter I at 13. 1426 Data Boiler Letter I at 46; Data Boiler Letter II at 1. 1427 IDS Letter I at 13, n. 38. 1428 Id. E:\FR\FM\09APR2.SGM 09APR2 18710 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations technology-related burden hours and external costs associated with building as well as operating systems to collect, consolidate, and disseminate consolidated market data than the Commission estimated in the proposal. The Commission is increasing its estimates accordingly. As adopted, Rules 614(d)(1) through (3) does not require competing consolidators to sell a full consolidated market data product.1429 Competing consolidators that decide to offer a limited consolidated market data product may incur fewer burden hours and costs to build and maintain a system that does not have to aggregate and disseminate a full consolidated market data product. However, the Commission believes that there will continue to be demand for a full consolidated market data product, which will incentivize some competing consolidators to meet this demand.1430 Therefore, the Commission is not reducing its estimated burden hours and external costs for competing consolidators to implement and maintain systems to comply with Rules 614(d)(1) through (4) to reflect this change to the data they must make available. The Commission acknowledges that these burden hours and external costs reflect an upper bound and as incurred may be lower than these estimates for those competing consolidators that sell a limited consolidated market data product. (b) Initial Burden and Costs for Market Data Aggregation Firms (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated that each market data aggregation firm would incur 900 initial burden hours 1431 and $206,250 1429 See supra Section III.C.8(a)(ii). See also supra Sections II.B.2; III.C.1(b). 1430 See supra notes 878–880 and accompanying text. See also infra Section V.C.1(c). 1431 The Commission estimated 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) through (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. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 in external costs 1432 to modify its systems to comply with Rules 614(d)(1) through (4). Additionally, the Commission estimated that an existing market data aggregator would incur initial external costs of $14,000 to purchase market data from the SROs,1433 and an additional initial external cost of $194,000 to co-locate at four exchange data centers,1434 for a total initial external cost of $414,250 per existing market data aggregator,1435 and an aggregate estimate for two market data aggregators of 1,800 initial burden hours 1436 and $828,500 in initial external costs.1437 (ii) Comments/Responses on Initial Burden and Costs In response to the commenter that believed that the estimated costs incurred by potential competing consolidators to build or upgrade systems to comply with proposed Rules 614(d)(1) through (4) should be increased,1438 the Commission is modifying its initial burden and cost estimates for market data aggregators, as discussed below. (iii) Adopted Estimates—Initial Burden and Costs The Commission is increasing its estimated initial costs and associated 1432 This estimate was based on discussions with a market participant and the Commission’s understanding of hardware costs. 1433 The Commission used 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). 1434 This estimate was 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 described that the market data aggregators would already be co-located at the four exchange data centers, which could lower the estimate. See NYSE Price List 2020, available at https://www.nyse.com/publicdocs/ nyse/markets/nyse/NYSE_Price_List.pdf (last accessed Nov. 27, 2020). 1435 $414,250 = [($206,250 in initial external costs to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 for the first month of market data costs) + ($194,000 in initial co-location costs at four exchange data centers)]. 1436 The Commission estimated 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. 1437 The Commission estimated 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) through (4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] × [(2 market data aggregation firms)] = $828,500. 1438 IDS Letter I at 13, n. 38. PO 00000 Frm 00116 Fmt 4701 Sfmt 4700 burden hours for market data aggregators to modify their systems to comply with Rules 614(d)(1) through (4). The Commission preliminarily believed that market data aggregators would not have to extensively modify their systems to comply with Rules 614(d)(1) through (4) because 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. However, the Commission now understands that these are small firms for which scaling out their hardware and personnel needs will be a significant undertaking. Most of these firms would have to spend substantial time coding for the new technical changes and would likely not have all of the components required to comply with Rules 614(d)(1) through (4). Additionally, the Commission initially believed that competing consolidators would build aggregation systems in a single data center; however, the Commission now believes that competing consolidators may build systems for aggregating data in more than one data center. The Commission believes market data aggregators would likely incur external costs greater than the Commission’s estimate to buy new technology (for example, hardware and network infrastructure). The Commission is increasing its estimated burden hours for Sr. Programmers and Sr. Systems Analysts employed by market data aggregation firms by three times. The Commission initially believed that competing consolidators would build aggregation systems in a single data center; however, the Commission now believes that competing consolidators may build systems for aggregating data in more than one data center, so the Commission is increasing the hours for these technical job categories by three times because competing consolidators may potentially build aggregation systems in three data centers. The Commission is also increasing its estimated external costs to be incurred by market data aggregation firms to purchase new technology to upgrade their systems to comply with Rules 614(d)(1) through (4) by three times for the same reason. The Commission estimates that each market data aggregation firm would incur 2,200 initial burden hours to modify its systems to comply with Rules 614(d)(1) through (4),1439 and initial external 1439 The Commission estimated the monetized initial burden for this requirement to be $697,150. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 1,050 hours) + (Sr. Systems Analyst at $285/hour for 900 E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations costs of $618,750 to purchase the necessary technology to effect such modifications,1440 $194,000 to establish co-location connectivity to the exchange data centers,1441 and $14,000 to purchase market data from the exchanges,1442 for a total external cost to each market data aggregator of $826,750.1443 The Commission estimates that the total initial burden hours for two market data aggregators would be 4,400 burden hours,1444 and that total initial external costs would be $1,653,500 for two market data aggregators to modify their systems to comply with Rules 614(d)(1) through (4).1445 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)] = 2,200 initial burden hours to upgrade existing systems to comply with Rules 614(d)(1) through (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. 1440 This estimate was originally based on discussions with a market participant and the Commission’s understanding of hardware costs. The Commission has increased this estimated cost by three times because the Commission believes competing consolidators may potentially build aggregation systems in three data centers. 1441 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 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 1434. 1442 As it did in the Proposing Release, the Commission is using the monthly market data access and redistribution fees charged by the CTA/ CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 1443 The Commission estimated that each market data aggregation firm would incur the following initial external costs: [($618,750 to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] = $826,750. 1444 The Commission estimated the monetized initial burden for this requirement to be $1,394,300. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 1,050 hours) + (Sr. Systems Analyst at $285/hour for 900 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)] = 4,400 initial burden hours across the market data aggregation firms. 1445 The Commission estimated that market data aggregation firms would incur the following initial external costs: [($618,750) to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] × [(2 market data aggregation firms)] = $1,653,500. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 18711 (c) Initial Burden and Costs for BrokerDealers That Aggregate Market Data burden hours 1451 and $828,500 in initial external costs.1452 (i) Proposed Estimates—Initial Burden and Costs (ii) Comments/Responses on Initial Burden and Costs In response to the commenter that believed that the estimated costs incurred by potential competing consolidators to build or upgrade systems to comply with proposed Rules 614(d)(1) through (4) should be increased,1453 the Commission is modifying its initial burden and cost estimates for broker-dealers that aggregate market data, as discussed below. In the Proposing Release, the Commission estimated that each brokerdealer 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) through (4) as well as external costs associated with such upgrades, including co-location fees at the exchange data centers and the cost of market data. Specifically, the Commission estimated that each brokerdealer would incur 900 initial burden hours 1446 and $206,250 in external costs 1447 to modify its systems to comply with Rules 614(d)(1) through (4). Additionally, the Commission estimated that a broker-dealer would incur initial external costs of $14,000 to purchase market data from the SROs,1448 and an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,1449 for a total initial external cost of $414,250 per broker-dealer,1450 and an aggregate estimate of 1,800 initial 1446 The Commission estimated the monetized initial burden for this requirement to be $293,750. The Commission reached the following hourly 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) through (4). The Commission derived this estimate based on discussions with a market participant and 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. 1447 This estimate was based on discussions with a market participant and the Commission’s understanding of hardware costs. 1448 The Commission used 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). 1449 This estimate was 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 1434. 1450 $414,250 = [($206,250 in initial external costs to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 for the first month of market data costs) + ($194,000 in initial co-location costs at four exchange data centers)]. PO 00000 Frm 00117 Fmt 4701 Sfmt 4700 (iii) Adopted Estimates—Initial Burden and Costs The Commission is increasing its estimated initial costs and associated burden hours for broker-dealers that aggregate market data for internal use to modify their systems comply with Rules 614(d)(1) through (4). The Commission preliminarily believed that the initial burden hour and external cost estimates for these broker-dealers to modify their systems to comply with Rules 614(d)(1) through (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 continues to believe this assumption is valid and is increasing its estimates for these broker-dealers as it is doing for market data aggregation firms. Most of these firms would have to spend substantial time coding for the new technical changes and would likely not have all of the components required to comply with Rules 614(d)(1) through (4). Additionally, the Commission initially believed that competing consolidators would build aggregation systems in a single data center; however, the Commission now believes that competing consolidators may build systems for aggregating data in more than one data center. The Commission 1451 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. 1452 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) through (4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers) × (2 brokerdealers)] = $828,500. 1453 IDS Letter I at 13, n. 38. E:\FR\FM\09APR2.SGM 09APR2 18712 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations believes broker-dealers that aggregate market data would likely incur external costs greater than the Commission’s estimate to buy new technology (for example, hardware and network infrastructure). The Commission is also revising its total initial burden hour and external cost estimates across all brokerdealers that aggregate market data to reflect a reduction in the number of potential competing consolidators that are broker-dealers that aggregate market data. As it did for its market data aggregation firm estimates, the Commission is increasing its estimated burden hours for Sr. Programmers and Sr. Systems Analysts by three times as well as its estimated external costs to be incurred by broker-dealers that aggregate market data to purchase new technology to upgrade their systems to comply with Rules 614(d)(1) through (4). The Commission estimates that each broker-dealer that aggregates market data would incur 2,200 initial burden hours to modify its systems to comply with Rules 614(d)(1) through (4),1454 and initial external costs of $618,750 to purchase the necessary technology to effect such modifications,1455 $194,000 to establish co-location connectivity to the exchange data centers,1456 and $14,000 to purchase market data from the exchanges,1457 for a total external cost to each broker-dealer that aggregates market data of $826,750.1458 1454 The Commission estimated the monetized initial burden for this requirement to be $697,150. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 1,050 hours) + (Sr. Systems Analyst at $285/hour for 900 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)] = 2,200 initial burden hours to upgrade existing systems to comply with Rules 614(d)(1) through (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. 1455 This estimate was originally based on discussions with a market participant and the Commission’s understanding of hardware costs. The Commission has increased this estimated cost by three times because the Commission believes competing consolidators may potentially build aggregation systems in three data centers. 1456 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 1434. 1457 As it did in the Proposing Release, the Commission is using the monthly market data access and redistribution fees charged by the CTA/ CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 1458 The Commission estimated that a brokerdealer that aggregates market data would incur the VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 The Commission estimates that the total initial burden hours for one brokerdealers that aggregates market data would be 2,200 burden hours,1459 and that total initial external costs would be $826,750 for one broker-dealer that aggregates market data to modify its systems to comply with Rules 614(d)(1) through (4).1460 (d) Initial Burden and Costs for Exclusive SIPs (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated that 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 estimated initial burden hour and external cost estimates that were higher than those estimated for market data aggregation firms.1461 Specifically, the Commission estimated that each exclusive SIP would incur 1,800 initial burden hours 1462 and following initial external costs: [($618,750 to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] = $826,750. 1459 The Commission estimated the monetized initial burden for this requirement to be $697,150. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 1,050 hours) + (Sr. Systems Analyst at $285/hour for 900 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)] × [(1 broker-dealer that aggregates market data)] = 2,200 total initial burden hours. 1460 The Commission estimated that brokerdealers that aggregate market data would incur the following total initial external costs: [($618,750) to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] × [(1 brokerdealer that aggregates market data)] = $826,750. 1461 In the Proposing Release, the Commission doubled its initial burden hour and external cost estimates for a market data aggregation firm to reach its initial burden hour and external cost estimates for an exclusive SIP. 1462 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) through (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 increased this initial burden hour estimate for the exclusive SIPs. Therefore, the Commission estimated that each exclusive SIP will incur 1,800 PO 00000 Frm 00118 Fmt 4701 Sfmt 4700 $412,500 in external costs 1463 to modify its systems to comply with Rules 614(d)(1) through (4). Additionally, the Commission estimated that an exclusive SIP would incur initial external costs of $14,000 to purchase market data from the SROs,1464 and an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,1465 for a total initial external cost of $620,500 per existing exclusive SIP,1466 and an aggregate estimate of 3,600 initial burden hours 1467 and $1,241,000 in initial external costs.1468 (ii) Comments/Responses on Initial Burden and Costs In response to the commenter that believed that the estimated costs incurred by potential competing consolidators to build or upgrade systems to comply with proposed Rules 614(d)(1) through (4) should be increased,1469 the Commission is initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1) through (4) (or $587,500, as monetized). 1463 As noted above, the Commission estimated the initial external cost estimates to comply with Rules 614(d)(1) through (4) to be higher for exclusive SIPs than for market data aggregation firms. The Commission estimated that each exclusive SIP will incur $412,500 in initial external costs to modify its systems to comply with Rules 614(d)(1) through (4). 1464 The Commission used 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). 1465 This estimate was 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 1434. 1466 The Commission estimated that each exclusive SIP would incur the following initial external costs: [($412,500 to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $620,500. 1467 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 increased this initial burden hour estimate to apply to the exclusive SIPs. Therefore, the Commission preliminarily estimated that each exclusive SIP will incur 1,800 initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1) through (4) (or $587,500, as monetized). The aggregate initial burden hour estimate for two exclusive SIPs would be [(1,800 initial burden hours) × (2 exclusive SIPs)] = 3,600 initial burden hours. 1468 The Commission preliminarily estimated that the exclusive SIPs would incur the following initial external costs: [($412,500 to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] × [(2 exclusive SIPs)] = $1,241,000. 1469 IDS Letter I at 13, n. 38. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations modifying its initial burden and cost estimates for the exclusive SIPs, as discussed below. (iii) Adopted Estimates—Initial Burden and Costs The Commission is increasing its estimated initial costs and associated burden hours for exclusive SIPs that choose to become competing consolidators to upgrade their systems to comply with Rules 614(d)(1) through (4). The Commission preliminarily believed that the exclusive SIPs would have to make a greater scope of changes to become competing consolidators than market data aggregation firms. For this reason, the Commission preliminarily estimated initial burden hour and external cost estimates that were higher than those estimated for market data aggregation firms.1470 The Commission continues to believe that exclusive SIPs will have to make greater changes to their systems than market data aggregation firms to comply with Rules 614(d)(1) through (4). However, like market data aggregation firms, exclusive SIPs will have to spend substantial time coding for the new technical changes and would likely not have all of the components required to comply with Rules 614(d)(1) through (4). Additionally, the Commission initially believed that competing consolidators would build aggregation systems in a single data center; however, the Commission now believes that competing consolidators may build systems for aggregating data in more than one data center. The Commission believes exclusive SIPs would likely incur external costs greater than the Commission’s estimate to buy new technology (for example, hardware and network infrastructure). As it did for its market data aggregation firm estimates, the Commission is increasing its estimated burden hours for Sr. Programmers and Sr. Systems Analysts employed by each exclusive SIP by three times, as well as its estimated external costs to be incurred by the exclusive SIPs to purchase new technology to upgrade their systems to comply with Rules 614(d)(1) through (4). The Commission estimates that each exclusive SIP would incur 4,400 initial burden hours to modify its systems to comply with Rules 614(d)(1) through (4),1471 and initial 1470 See supra note 1461. Commission estimated the monetized initial burden for this requirement to be $1,394,300. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 2,100 hours) + (Sr. Systems Analyst at $285/hour for 1,800 hours) + (Compliance Manager at $310/hour 1471 The VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 external costs of $1,237,500 to purchase the necessary technology to effect such modifications,1472 $194,000 to establish co-location connectivity to the exchange data centers,1473 and $14,000 to purchase market data from the exchanges,1474 for a total external cost to each exclusive SIP of $1,445,500.1475 The Commission estimates that the total initial burden hours for two exclusive SIPs would be 8,800 burden hours,1476 and that total initial external costs would be $2,891,000 for two exclusive SIPs to modify their systems to comply with Rules 614(d)(1) through (4).1477 18713 hours 1478 and $825,000 in external costs 1479 to build systems to comply with Rules 614(d)(1) through (4). Additionally, the Commission estimated that a new entrant would incur initial external costs of $14,000 to purchase market data from the SROs,1480 and an additional initial external cost of $194,000 to co-locate itself at four exchange data centers,1481 for a total initial external cost of $1,033,000 per new entrant,1482 and an aggregate estimate of 7,200 initial burden (e) Initial Burden and Costs for New Entrants (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated that each new entrant would incur 3,600 initial burden for 200 hours) + (Director of Compliance at $489/ hour for 100 hours) + (Compliance Attorney at $366/hour for 200 hours)] = 4,400 initial burden hours to upgrade existing systems to comply with Rules 614(d)(1) through (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. 1472 This estimate was originally based on discussions with a market participant and the Commission’s understanding of hardware costs. The Commission has increased this estimated cost by three times because the Commission believes competing consolidators may potentially build aggregation systems in three data centers. 1473 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 1434. 1474 As it did in the Proposing Release, the Commission is using the monthly market data access and redistribution fees charged by the CTA/ CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 1475 The Commission estimated that each exclusive SIP would incur the following initial external costs: [($1,237,500 to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] = $1,445,500. 1476 The Commission estimated the monetized initial burden for this requirement to be $1,394,300. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 2,100 hours) + (Sr. Systems Analyst at $285/hour for 1,800 hours) + (Compliance Manager at $310/hour for 200 hours) + (Director of Compliance at $489/ hour for 100 hours) + (Compliance Attorney at $366/hour for 200 hours)] × [(2 exclusive SIPs)] = 8,800 initial burden hours across the exclusive SIPs. 1477 The Commission estimated that the exclusive SIPs would incur the following initial external costs: [($1,237,500 to modify systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish colocation connectivity within four exchange data centers)] × [(2 exclusive SIPs)] = $2,891,000. PO 00000 Frm 00119 Fmt 4701 Sfmt 4700 1478 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) through (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 increased this initial burden hour estimate to apply to the new entrants. Therefore, the Commission estimated that each new entrant would incur 3,600 initial burden hours to build systems to comply with Rules 614(d)(1) through (4) (or $1,175,000, as monetized). 1479 As noted above, the Commission increased its initial external cost estimates for market data aggregation firms to apply to new entrants. In particular, the Commission estimated that each new entrant will incur $825,000 in initial external costs to build systems to comply with Rules 614(d)(1) through (4). 1480 The Commission used 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). 1481 This estimate was 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 1434. 1482 The Commission estimated that each new entrant would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $1,033,000. E:\FR\FM\09APR2.SGM 09APR2 18714 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations hours 1483 and $2,066,000 in initial external costs.1484 (ii) Comments/Responses on Initial Burden and Costs In response to the commenter that believed that the estimated costs incurred by potential competing consolidators to build or upgrade systems to comply with proposed Rules 614(d)(1) through (4) should be increased,1485 the Commission is modifying its initial burden and cost estimates for new entrants, as discussed below. (iii) Adopted Estimates—Initial Burden and Costs The Commission is increasing its estimated initial costs and associated burden hours for new entrants that choose to become competing consolidators to build systems to comply with Rules 614(d)(1) through (4). The Commission preliminarily estimated initial burden hour and external cost estimates for new entrants that are higher than those estimated for the potential entities, other than SROs, that may choose to become competing consolidators. Because new entrants would be wholly new to the business of consolidating market data, the Commission continues to believe that new entrants would incur substantially higher burden hours and external costs to build new systems to comply with Rules 614(d)(1) through (4) than potential competing consolidators that already collect and aggregate market data.1486 Additionally, the Commission 1483 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 increased the per market data aggregation firm initial burden hour estimate to apply to the new entrants. The Commission estimated that each new entrant would incur 3,600 initial burden hours to build systems to comply with Rules 614(d)(1) through (4) (or $1,175,000, as monetized). [(3,600 burden hours) × (2 new entrants] = 7,200 hours (or $2,350,000 as monetized). 1484 The Commission estimated that each new entrant would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1) through (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. 1485 IDS Letter I at 13, n. 38. 1486 The Commission’s assumption is supported by a commenter, which stated, ‘‘The incumbent SIPs, the Securities Industry Automation Corporation (‘SIAC’) and Nasdaq UTP, will have a significant competitive advantage over new entrants should they chose [sic] to transition to Competing VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 initially believed that competing consolidators would build aggregation systems in a single data center; however, the Commission now believes that competing consolidators may build systems for aggregating data in more than one data center. The Commission is increasing its estimated initial burden hours for new entrants to build systems to comply with Rules 614(d)(1) through (4). The Commission also believes new entrants would likely incur external costs greater than the Commission’s estimate to buy new technology (for example, hardware and network infrastructure). As it did for its market data aggregation firm estimates, the Commission is increasing its estimated burden hours for Sr. Programmers and Sr. Systems Analysts by three times for new entrants, as well as its estimated external costs to be incurred by new entrants to purchase new technology to upgrade their systems to comply with Rules 614(d)(1) through (4). The Commission estimates that each new entrant would incur 8,800 initial burden hours to build systems to comply with Rules 614(d)(1) through (4),1487 and initial external costs of $2,475,000 to purchase the necessary technology to build such systems,1488 $194,000 to establish co-location connectivity to the exchange data centers,1489 and $14,000 to purchase market data from the exchanges,1490 for a total external cost to Consolidators. For example, the incumbent SIPs will benefit from utilizing the existing infrastructure, which was funded by industry participants, to transform to a Competing Consolidator.’’ MIAX Letter p. 2–3. 1487 The Commission estimated the monetized initial burden for this requirement to be $2,788,600. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 4,200 hours) + (Sr. Systems Analyst at $285/hour for 3,600 hours) + (Compliance Manager at $310/hour for 400 hours) + (Director of Compliance at $489/ hour for 200 hours) + (Compliance Attorney at $366/hour for 400 hours)] = 8,800 initial burden hours to build systems to comply with Rules 614(d)(1) through (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. 1488 This estimate was originally based on discussions with a market participant and the Commission’s understanding of hardware costs. The Commission has increased this estimated cost by three times because the Commission believes competing consolidators may potentially build aggregation systems in three data centers. 1489 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 1434. 1490 As it did in the Proposing Release, the Commission is using the monthly market data PO 00000 Frm 00120 Fmt 4701 Sfmt 4700 each new entrant of $2,683,000.1491 The Commission estimates that the total initial burden hours for two new entrants would be 17,600 burden hours,1492 and that total initial external costs would be $5,366,000 for two new entrants to build systems to comply with Rules 614(d)(1) through (4).1493 (f) Initial Burden and Costs for SROs 1494 (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated that each SRO would incur 3,600 initial burden hours 1495 and $825,000 in external costs 1496 to build systems to comply with Rules 614(d)(1) through (4). Additionally, the Commission estimated access and redistribution fees charged by the CTA/ CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 1491 The Commission estimated that each new entrant would incur the following initial external costs: [($2,475,000 to build systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] = $2,683,000. 1492 The Commission estimated the monetized initial burden for this requirement to be $5,577,200. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 4,200 hours) + (Sr. Systems Analyst at $285/hour for 3,600 hours) + (Compliance Manager at $310/hour for 400 hours) + (Director of Compliance at $489/ hour for 200 hours) + (Compliance Attorney at $366/hour for 200 hours)] × [(2 new entrants)] = 17,600 initial burden hours across the new entrants. 1493 The Commission estimated that the new entrants would incur the following initial external costs: [($2,475,000 to build systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] × [(2 new entrants)] = $5,366,000. 1494 See supra note 1394. 1495 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) through (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 increased this initial burden hour estimate to apply to the SROs. Therefore, the Commission estimated that each SRO will incur 3,600 initial burden hours to build systems to comply with Rules 614(d)(1) through (4) (or $1,175,000, as monetized). 1496 As it did for its new entrant estimates, the Commission increased its initial external cost estimates for market data aggregation firms to apply to the SROs. Therefore, the Commission estimated that each SRO will incur $825,000 in initial external costs to build systems to comply with Rules 614(d)(1) through (4). E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations that an SRO would incur initial external costs of $14,000 to purchase market data from the SROs,1497 and an additional initial external cost of $194,000 to colocate itself at four exchange data centers,1498 for a total initial external cost of $1,033,000 per SRO,1499 and an aggregate estimate of 14,400 initial burden hours 1500 and $4,132,000 in initial external costs.1501 (ii) Comments/Responses on Initial Burden and Costs In response to the commenter that believed that the estimated costs incurred by potential competing consolidators to build or upgrade systems to comply with proposed Rules 614(d)(1) through (4) should be increased,1502 the Commission is modifying its initial burden and cost estimates for SROs, as discussed below. (iii) Adopted Estimates—Initial Burden and Costs The Commission is increasing its estimated initial costs and associated burden hours for SROs that choose to become competing consolidators to build systems to comply with Rules 614(d)(1) through (4).1503 The Commission initially believed and continues to believe that these entities would have to build new systems to 1497 The Commission used 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). 1498 This estimate was 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 1434. 1499 The Commission estimated that each SRO would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to co-locate within four exchange data centers)] = $1,033,000. 1500 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 increased the per market data aggregation firm initial burden hour estimate to apply to the SROs. Therefore, the Commission estimated that each SRO would incur 3,600 initial burden hours to upgrade its existing systems to comply with Rules 614(d)(1) through (4) (or $1,175,000, as monetized). [(3,600 burden hours) × (4 SROs)] = 14,400 hours (or $4,700,000 as monetized). 1501 The Commission estimated that each SRO would incur the following initial external costs: [($825,000 to build systems to comply with Rules 614(d)(1) through (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 SROs)] = $4,132,000. 1502 IDS Letter I at 13. 1503 See supra note 1394. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 comply with Rules 614(d)(1) through (4) and thus would incur initial burden hours that are similar to new entrants. Because SROs that do not operate exclusive SIPs would be wholly new to the business of consolidating market data, these entities would likely incur substantially higher burden hours and external costs to build new systems to comply with Rules 614(d)(1) through (4) than potential competing consolidators that already collect and aggregate market data. Additionally, the Commission initially believed that competing consolidators would build aggregation systems in a single data center; however, the Commission now believes that competing consolidators may build systems for aggregating data in more than one data center. The Commission is increasing its estimated initial burden hours for SROs to build systems to comply with Rules 614(d)(1) through (4). The Commission also believes that SROs would likely incur external costs greater than the Commission’s estimate to buy new technology (for example, hardware and network infrastructure). The Commission is also revising its total initial burden hour and external cost estimates across these entities to reflect a reduction in the number of such competing consolidators. As it did for its market data aggregation firm estimates, the Commission is increasing its estimated burden hours for Sr. Programmers and Sr. Systems Analysts by three times for SROs, as well as its estimated external costs to be incurred by SROs to purchase new technology to build systems to comply with Rules 614(d)(1) through (4). The Commission estimates that each SRO would incur 8,800 initial burden hours to build systems to comply with Rules 614(d)(1) through (4),1504 and initial external costs of $2,475,000 to purchase the necessary technology to build such systems,1505 1504 The Commission estimates the monetized initial burden for this requirement to be $2,788,600. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 4,200 hours) + (Sr. Systems Analyst at $285/hour for 3,600 hours) + (Compliance Manager at $310/hour for 400 hours) + (Director of Compliance at $489/ hour for 200 hours) + (Compliance Attorney at $366/hour for 400 hours)] = 8,800 initial burden hours to build systems to comply with Rules 614(d)(1) through (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. 1505 This estimate was originally based on discussions with a market participant and the Commission’s understanding of hardware costs. PO 00000 Frm 00121 Fmt 4701 Sfmt 4700 18715 $194,000 to establish co-location connectivity to the exchange data centers,1506 and $14,000 to purchase market data from the exchanges,1507 for a total external cost to each SRO of $2,683,000.1508 The Commission estimates that the total initial burden hours for one SRO would be 8,800 burden hours 1509 and that total initial external costs would be $2,683,000 for one SRO to build systems to comply with Rules 614(d)(1) through (4).1510 (g) Ongoing Burden and Costs for Competing Consolidators (i) Proposed Estimates—Ongoing Burden and Costs In the Proposing Release, the Commission estimated that once a competing consolidator’s system had been built, all types of entities that could become a competing consolidators (i.e., existing market data aggregation firms, broker-dealers that aggregate market data, exclusive SIPs, new entrants, and SROs) would incur annual ongoing burden hours and external costs to operate and maintain their systems to comply with Rules 614(d)(1) through (4) and that the annual ongoing burdens would be similar for all types of competing consolidators because such systems would likely be similar in nature. Therefore, the Commission estimated the same annual ongoing burden hours The Commission has increased this estimated cost by three times because the Commission believes competing consolidators may potentially build aggregation systems in three data centers. 1506 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 1434. 1507 As it did in the Proposing Release, the Commission is using the monthly market data access and redistribution fees charged by the CTA/ CQ SIP and Nasdaq UTP SIP as the basis of this estimate ($14,000). 1508 The Commission estimates that each SRO would incur the following initial external costs: [($2,475,000 to build systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] = $2,683,000. 1509 The Commission estimates the total monetized initial burden for this requirement to be $2,788,600. These estimates were initially based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 4,200 hours) + (Sr. Systems Analyst at $285/hour for 3,600 hours) + (Compliance Manager at $310/ hour for 400 hours) + (Director of Compliance at $489/hour for 200 hours) + (Compliance Attorney at $366/hour for 400 hours)] × [(1 SRO)] = 8,800 total initial burden hours. 1510 The Commission estimates that SROs would incur the following total initial external costs: [($2,475,000 to build systems to comply with Rules 614(d)(1) through (4)) + ($14,000 to purchase market data) + ($194,000 to establish co-location connectivity within four exchange data centers)] × [(1 SRO)] = $2,683,000. E:\FR\FM\09APR2.SGM 09APR2 18716 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and external costs for the five types of entities that the Commission anticipated may choose to become competing consolidators. 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) through (4). Specifically, the Commission estimated that each entity would incur 540 annual ongoing burden hours 1511 and $123,725 in annual ongoing external costs 1512 to operate and maintain its systems to comply with Rules 614(d)(1) through (4). Further, the Commission estimated that each competing consolidator would incur annual ongoing external costs of $168,000 to purchase market data from the SROs,1513 and an additional annual ongoing external cost of $4,602,720 to co-locate itself at four exchange data centers,1514 for a total annual ongoing external cost of $4,894,445 per entity.1515 In the Proposing Release, the Commission estimated that there would be two entities per category of potential competing consolidators for existing market data aggregators, broker-dealers 1511 The Commission estimated that once a competing consolidator’s infrastructure was in place, the burden of operating and maintaining the infrastructure would be less than the burdens associated with establishing the infrastructure. The Commission estimated 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. 1512 This estimate was based on the initial external cost estimate for a market data aggregation firm to modify its systems to comply with Rules 614(d)(1) through (4), but reduced because the Commission estimated that once a competing consolidator’s infrastructure was in place, the burden of operating and maintaining the infrastructure would be less than the burdens associated with establishing the infrastructure. 1513 The Commission used 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. 1514 This estimate was 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 estimated 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 1434. 1515 $4,894,445 = [($123,725 to operate and maintain systems to comply with Rules 614(d)(1) through (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 19:52 Apr 08, 2021 Jkt 253001 that currently aggregate market data, exclusive SIPs, and new entrants, and that for each of these categories, the aggregate estimates would amount to estimate of 1,080 annual ongoing burden hours 1516 and $9,797,530 in annual ongoing external costs.1517 In addition, the Commission estimated that there would be four SROs that would become a competing consolidator and that the SROs would incur an aggregate estimate of 2,160 annual ongoing burden hours 1518 and $19,577,780 in annual ongoing external costs.1519 (ii) Comments/Responses on Ongoing Burden and Costs 1520 No commenters suggested changes to the Commission’s estimated ongoing burden hours and external costs that competing consolidators would incur in maintaining and operating their systems 1516 The Commission estimated 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/exclusive SIPs/new entrants)] = 1,080 annual ongoing burden hours and $352,500. 1517 The Commission estimated 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) through (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. 1518 The Commission estimated 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. 1519 The Commission estimated that the SROs would incur the following initial external costs: [($123,725 to operate and maintain systems to comply with Rules 614(d)(1) through (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. 1520 One commenter stated that the costs to the industry may be significantly higher than the ongoing annual costs incurred by each competing consolidator because the proposal did not explain the fees the competing consolidators would charge investors. See Cboe Letter at 24. PO 00000 Frm 00122 Fmt 4701 Sfmt 4700 to comply with Rules 614(d)(1) through (4). However, one commenter noted that the NYSE’s ongoing costs associated with the NMS network are $215,000 per year,1521 which is less than the burden hours and external costs the Commission preliminarily estimated a competing consolidator would incur for operating and maintaining a system to comply with Rules 614(d)(1) through (4). As noted earlier, the Commission does not believe that the NMS network costs are directly applicable to the burden hour and cost estimates applicable to competing consolidators to build and operate systems to comply with Rules 614(d)(1) through (4). However, the Commission believes it is reasonable to increase its ongoing burden hour and external cost estimates to operate systems to collect, consolidate, and disseminate consolidated market data. As it did for its initial burden hour and external cost estimates, the Commission is increasing its estimated ongoing burden hours for Sr. Programmers and Sr. Systems Analysts by three times because competing consolidators may potentially build aggregation systems in three data centers, so they consequently must maintain these systems, as well as its estimated external costs associated with operating and maintaining systems by three times, for the same reason. (iii) Adopted Estimates—Annual Ongoing and Costs The Commission continues to believe that all types of competing consolidators would incur similar ongoing, annual burdens once their systems have been built because such systems would likely be similar in nature. As it did for its revised initial burden hour and external cost estimates, the Commission is increasing by three times its estimated ongoing burden hours for Sr. Programmers and Sr. Systems Analysts and external ongoing technology cost estimates because competing consolidators may potentially build aggregation systems in three data centers, and would have to maintain these systems. The Commission is also revising its total ongoing burden hour and external cost estimates to reflect a reduction in the number of potential broker-dealers that aggregate market data for internal uses and SRO competing consolidators. The Commission estimates that each competing consolidator would incur 1,320 ongoing, annual burden hours 1522 1521 IDS Letter I at 13, n. 38. Commission estimates the monetized annual ongoing burden for this requirement to be $418,290. These estimates were based on 1522 The E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations and external costs of $371,175 to operate and maintain its systems to comply with Rules 614(d)(1) through (4),1523 as well as external ongoing, annual external costs of $4,602,720 for co-location connectivity to the exchange data centers,1524 and $168,000 to purchase market data from the exchanges,1525 for a total ongoing, annual external cost to each competing consolidator of $5,141,895.1526 The Commission estimates that the total ongoing, annual external burden hours to be incurred by market data aggregation firms, exclusive SIPs and new entrants would be 2,640 burden hours,1527 for each of these categories of discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 630 hours) + (Sr. Systems Analyst at $285/hour for 540 hours) + (Compliance Manager at $310/hour for 60 hours) + (Director of Compliance at $489/hour for 30 hours) + (Compliance Attorney at $366/hour for 60 hours)] = 1,320 ongoing, annual burden hours per competing consolidator to operate and maintain systems to comply with Rules 614(d)(1) through (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. 1523 This estimate was originally based on discussions with a market participant and the Commission’s understanding of hardware costs. The Commission has increased this estimated cost by three times because the Commission believes that competing consolidators would have to maintain aggregation systems in three data centers. 1524 This estimate was 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. 1525 As it did in the Proposing Release, the Commission used 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. 1526 The Commission estimates that each market data aggregation firm/broker-dealer that aggregates market data/exclusive SIP/new entrant/SRO would incur the following ongoing, annual external costs: [($371,175 to operate and maintain systems to comply with Rules 614(d)(1) through (4)) + ($168,000 to purchase market data) + ($4,602,720 for co-location connectivity within four exchange data centers)] = $5,141,895. 1527 The Commission estimates the total monetized annual ongoing burden for this requirement to be $836,580. These estimates were based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 630 hours) + (Sr. Systems Analyst at $285/hour for 540 hours) + (Compliance Manager at $310/hour for 60 hours) + (Director of Compliance at $489/hour for 30 hours) + (Compliance Attorney at $366/hour for 60 hours)] × [(2 market data aggregation firms/exclusive SIPs/ new entrants] = 2,640 total ongoing, annual burden hours to operate and maintain systems to comply with Rules 614(d)(1) through (4) for each of these categories of 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. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 competing consolidator, as well as total ongoing, annual external costs of $10,283,790,1528 for each of these categories of competing consolidator. The Commission estimates that the total ongoing, annual external burden hours to be incurred by broker-dealers that aggregate market data and SROs would be 1,320 burden hours,1529 for each of these categories of competing consolidator, as well as total ongoing, annual external costs of $5,141,885,1530 for each of these categories of competing consolidator. 4. Recordkeeping Rule 614(d)(7) requires 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. Rule 614(d)(8) requires each competing consolidator to furnish promptly these documents to any representative of the Commission upon request. 1528 The Commission estimates the total annual ongoing external cost for market data aggregation firms/exclusive SIPs/new entrants would be: [($371,175 to operate and maintain systems to comply with Rules 614(d)(1) through (4)) + ($168,000 to purchase market data) + ($4,602,720 for co-location connectivity within four exchange data centers)] × [(2 market data aggregation firms/ exclusive SIPs/new entrants)] = $10,283,790 for each of these categories of competing consolidator. 1529 The Commission estimates the total monetized annual ongoing burden for this requirement to be $418,290. These estimates were based on discussions with a market participant, modified as discussed above: [(Sr. Programmer at $332/hour for 630 hours) + (Sr. Systems Analyst at $285/hour for 540 hours) + (Compliance Manager at $310/hour for 60 hours) + (Director of Compliance at $489/hour for 30 hours) + (Compliance Attorney at $366/hour for 60 hours)] × [(1 broker-dealer that aggregates market data/ SRO)] = 1,320 total ongoing, annual burden hours to operate and maintain systems to comply with Rules 614(d)(1) through (4) for each of these categories of 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. 1530 The Commission estimates the total annual ongoing external cost for broker-dealers that aggregate market data/SROs would be: [($371,175 to operate and maintain systems to comply with Rules 614(d)(1) through (4)) + ($168,000 to purchase market data) + ($4,602,720 for co-location connectivity within four exchange data centers)] × [(1 broker-dealer that aggregates market data/SRO)] = $5,141,885 for each of these categories of competing consolidator. PO 00000 Frm 00123 Fmt 4701 Sfmt 4700 18717 (a) Initial Burden and Costs (i) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated that these requirements would create an initial burden of 40 hours (for a total cost of $8,720),1531 for a total initial burden of 480 hours for all respondents (for a total cost of $104,640). These estimates were based on the Commission’s experience with recordkeeping costs and consistent with prior burden estimates for similar provisions.1532 (ii) Comments/Responses on Initial Burden and Costs The Commission did not receive any comments on the estimated initial burdens and costs of Rules 614(d)(7) and (8). (iii) Adopted Estimates—Initial Burden and Costs The Commission is revising its preliminary estimates to account for the downward estimate from 12 competing consolidators to 8 competing consolidators. The Commission estimates that the initial burden of 40 hours (for a total cost of $8,720) for a total initial burden of 320 hours for all respondents (for a total cost of $69,760) is reasonable based upon the Commission’s experiences with estimating similar provisions. (b) Ongoing Burden and Costs (i) Proposed Estimates—Ongoing Burden and Costs The Commission estimated that the ongoing annual burden of recordkeeping in accordance with Rules 614(d)(7) and (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). (ii) Comments/Responses on Ongoing Burden and Costs The Commission did not receive any comments on the estimated ongoing burdens and costs of Rules 614(d)(7) and (8). 1531 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. 1532 See Security Based Swap Data Repository Registration, Duties, and Core Principles, Securities Exchange Act Release No. 74246 (Feb. 11, 2015), 80 FR 14438 (Mar. 19, 2015) at 14541. E:\FR\FM\09APR2.SGM 09APR2 18718 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations (iii) Adopted Estimates—Ongoing Burden and Costs The Commission is revising its preliminary estimates to account for the downward estimate from 12 competing consolidators to eight competing consolidators. The Commission estimates that the ongoing burden of 20 hours (for a total cost of $4,360) for a total initial burden of 160 hours for all respondents (for a total cost of $34,880) is reasonable based upon the Commission’s experiences with estimating similar provisions. 5. Reports and Reviews Rules 614(d)(5) and (6) requires competing consolidators to produce monthly reports on performance metrics and systems issues. $966,804) 1535 and a total initial external cost of $9,600.1536 (ii) Comments/Responses on Initial Burden and Costs The Commission did not receive any comments on the estimated initial burdens and costs of Rules 614(d)(5) and (6). (iii) Adopted Estimates—Initial Burden and Costs The Commission is revising its preliminary estimates to account for the downward estimate from 12 competing consolidators to eight competing consolidators. The Commission estimates that the initial burden of 246 hours per competing consolidator (for a total cost of $80,507) 1537 and $800 in external costs.1538 The Commission (a) Initial Burden and Costs (i) Proposed Estimates—Initial Burden and Costs The Commission estimated that the average one-time, initial burden to program systems to produce the monthly reports required by Rules 614(d)(5) and (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) 1533 and $800 in external costs.1534 The Commission estimated that the total initial burden would be 2,952 hours (for a total cost of 1533 This figure was based on the estimated initial paperwork burden for 17 CFR 242.606(a) (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 Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR 58338 (Nov. 19, 2018) (‘‘Order Handling Disclosure Release’’). In the Proposing Release, the Commission converted the 10 hour estimate for a quarterly report to an estimate for a monthly report. In addition, the Commission added the burden of posting the required information to the website. The Commission estimated 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. 1534 The Commission estimated that each competing consolidator would incur an initial external cost of $800 for an external website developer to create the website. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 1535 The Commission estimated 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. 1536 $9,600 = ($800 for an external website developer to create the website) × (12 competing consolidators). 1537 This figure was 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 Order Handling Disclosure Release, supra note 1533. In the Proposing Release, the Commission converted the 10 hour estimate for a quarterly report to an estimate for a monthly report. In addition, the Commission added the burden of posting the required information to the website. The Commission estimated 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. 1538 The Commission estimated that each competing consolidator would incur an initial external cost of $800 for an external website developer to create the website. PO 00000 Frm 00124 Fmt 4701 Sfmt 4700 estimates that the total initial burden would be 1,968 hours (for a total cost of $644,056) 1539 and a total initial external cost of $6,400.1540 (b) Ongoing Burden and Costs (i) Proposed Estimates—Ongoing Burden and Costs The Commission estimated 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 Rules 614(d)(5) and (6) (for a total cost of $3,768.50), or a burden of 132 hours per year (for a total cost of $45,222).1541 Once a report is posted on an internet website, the Commission estimated that there would not be an additional burden to allow the report to remain posted for the period of time specified in the rules. The Commission estimated the total burden per year for all competing consolidators to comply with the monthly reporting requirement in Rules 1539 The Commission estimates the monetized initial aggregate burden for this requirement to be $644,056. 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)] × [(8 competing consolidators)] = 1,968 initial aggregate burden hours across the competing consolidators and $644,056. 1540 $6,400 = ($800 for an external website developer to create the website) × (8 competing consolidators). 1541 This figure was 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) through (iii) would be 10 hours. See Order Handling Disclosure Release, supra note 1533. In the Proposing Release, the Commission converted the 10 hour estimate for a quarterly report to an estimate for a monthly report. In addition, the Commission added the burden of updating the website. The Commission estimated 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. E:\FR\FM\09APR2.SGM 09APR2 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations 614(d)(5) and (6) to be 1,584 hours (for a total cost of $542,664).1542 (ii) Comments/Responses on Ongoing Burden and Costs The Commission did not receive any comments on the estimated ongoing burdens and costs of Rules 614(d)(5) and (6). (iii) Adopted Estimates—Ongoing Burden and Costs The Commission is revising its preliminary estimates to account for the downward estimate from 12 competing consolidators to eight competing consolidators. 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 Rules 614(d)(5) and (6) (for a total cost of $3,768.50), or a burden of 132 hours per year (for a total cost of $45,222).1543 Once a report is posted on an internet website, the Commission estimates that there would not be an additional burden to allow the report to remain posted for the period of time specified in the rules. The Commission estimates the total burden per year for all competing consolidators 1542 The Commission estimated 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. 1543 This figure was 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) through (iii) would be 10 hours. See Order Handling Disclosure Release, supra note 1533, at 58388. In the Proposing Release, the Commission converted the 10 hour estimate for a quarterly report to an estimate for a monthly report. In addition, the Commission added the burden of updating the website. The Commission estimated 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. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 to comply with the monthly reporting requirement in Rules 614(d)(5) and (6) to be 1,056 hours (for a total cost of $361,776).1544 6. Amendment to the Effective National Market System Plan(s) for NMS Stocks Rule 614(e) requires the participants to the effective national market system plan(s) for NMS stocks to file an amendment with the Commission, pursuant to Rule 608, that includes several specified provisions, including an amendment that conforms the plan(s) to reflect the provision of information necessary to generate consolidated market data by the SROs to competing consolidators, the application of certain timestamps by the SROs, assessment of competing consolidator performance and the provision of an annual report, the development of a list that identifies the primary listing exchange for each NMS stock and the calculation and publication of gross revenues. (a) Proposed Estimates—Initial Burden and Costs In the Proposing Release, the Commission estimated that the amendment to the effective national market system plan(s) would impose a one-time burden and cost. Specifically, the Commission estimated that it would take the participants to the effective national market system plan(s) approximately 420 hours to prepare the amendment. The preliminary estimate included 210 hours for an SRO to comply with the timestamps requirement, including a review and any applicable change to technical systems and rules. Each SRO already employs some form of timestamping, and the Commission did not necessarily expect that the burden to comply with the timestamp requirement would be particularly burdensome.1545 The preliminary estimate also included 105 hours for the participants to compose 1544 The Commission estimates the monetized annual aggregate burden for this requirement to be $361,776. 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)] × [(8 competing consolidators)] × [(12 months)] = 1,056 aggregate burden hours across the competing consolidators and $361,776. 1545 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 10, at Section VIII; CQ Plan, supra note 10, at Section VI; CTA Plan, supra note 10, at Section VI. PO 00000 Frm 00125 Fmt 4701 Sfmt 4700 18719 the form of annual report on competing consolidator performance. Finally, the preliminary estimate includes 20 hours for 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).1546 (b) Comments/Responses on Initial Burden and Costs One commenter stated that the SROs would continue to incur costs associated with the effective national market system plan, such as implementing the application of timestamps and assessing competing consolidators and developing an annual report.1547 This commenter, however, did not provide comment on the Commission’s preliminary estimates. (c) Adopted Estimates The Commission is modifying the estimates for the initial burden and costs to the SROs to file the amendment required pursuant to Rule 614(e) to eliminate the multiplication of the burden by each SRO because the respondents would file this amendment jointly, rather than individually, in connection with their status as participants in the effective national market system plan(s). Hence, the initial burden hours for all respondents would be 420 hours (for a total cost of $175,140). In addition, the Commission now believes that there would be ongoing burden and costs related to the amendment, including 245 hours for maintaining the required timestamps, conducting assessments of competing consolidators, preparing an annual report, maintaining the list of the primary listing exchange for each NMS stock, and calculating gross revenues. For the required timestamps, the Commission believes that the ongoing burden for such requirement to be minimal once the initial timestamping process is established. The Commission estimates that the ongoing burden for timestamping to be 50 hours.1548 The Commission estimates the ongoing burden for reviewing competing 1546 The Commission estimated 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)]. 1547 See NYSE Letter II at 28. 1548 The Commission reduced the initial burden hours by three-fourths to develop this estimate. E:\FR\FM\09APR2.SGM 09APR2 18720 Federal Register / Vol. 86, No. 67 / Friday, April 9, 2021 / Rules and Regulations consolidator performance and developing the annual report to be 105 hours.1549 The Commission estimates the ongoing burden for maintaining the list of the primary listing exchange for each NMS stock to be 10 hours annually.1550 Finally, the Commission estimates the ongoing burden for calculating gross plan revenues to be minimal. The Equity Data Plans already calculate and publish revenue figures so the Commission believes that establishing a new calculation and publication process to be 80 hours. 7. Collection and Dissemination of Information by National Securities Exchanges and National Securities Associations Rule 603(b) requires 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 on which NMS stocks are traded and the one national securities association. The new data elements of consolidated market data that the national securities exchanges and national securities associations collect and must make available include auction information, depth of book data, round lot data, regulatory data (including LULD price bands), and administrative data. The national securities exchanges and national securities associations currently collect and/or calculate all data necessary to generate consolidated market data and provide such data necessary to the exclusive SIPs and to subscribers of the proprietary data 1549 The Commission estimates that the ongoing burden for developing the annual report will be the same as the initial burden. 1550 The Commission reduced the initial burden estimate by half because the primary listing exchange for an NMS stock does not typically change. Accordingly, the Commission believes that the ongoing burden of monitoring and updating the list to be minimal. VerDate Sep<11>2014 19:52 Apr 08, 2021 Jkt 253001 feeds.1551 Therefore, as discussed below, the Commission believes that the amendments to 603(b) impose minimal initial and ongoing burdens on these respondents, including any changes to their systems, because they already collect such data. (a) Initial Burden and Costs (i) Proposed Estimates—Initial Burden and Costs The Commission estimated that a national securities exchange on which an NMS stock is traded or national securities association will require an average of 220 1552 initial burden hours of legal, compliance, information technology, and business operations personnel time to prepare and implement a system to collect the information necessary to generate consolidated market data (for a total cost per exchange or association of $70,865).1553 (ii) Comments/Responses on Initial Burden and Costs One commenter noted that SROs could incur ‘‘significant cost increases’’ to connect and transmit data to competing consolidators and selfaggregators but did not provide specific comment on the Commission’s proposed estimates.1554 Another commenter argued that the Commission did not consider how primary listing 1551 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). 1552 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 secur