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Rule2024-21867

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

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Published

October 8, 2024

Effective

December 9, 2024

Issuing agencies

Securities and Exchange Commission

Abstract

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

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[Federal Register Volume 89, Number 195 (Tuesday, October 8, 2024)]
[Rules and Regulations]
[Pages 81620-81774]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-21867]

[[Page 81619]]

Vol. 89

Tuesday,

No. 195

October 8, 2024

Part II

Securities and Exchange Commission

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17 CFR Part 242

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

Federal Register / Vol. 89 , No. 195 / Tuesday, October 8, 2024 /
Rules and Regulations

[[Page 81620]]

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-101070; File No. S7-30-22]
RIN 3235-AN23

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

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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

DATES: Effective Date: December 9, 2024. Compliance dates: See section
VI., titled ``Compliance Dates,'' for further information on
transitioning to the final rules.

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

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

------------------------------------------------------------------------
CFR citation (17
Commission reference CFR)
------------------------------------------------------------------------
Rule 600(b)(69)................................... Sec.
242.600(b)(69)
Rule 600(b)(89)................................... Sec.
242.600(b)(89)
Rule 600(b)(93)................................... Sec.
242.600(b)(93)
Rule 603.......................................... Sec. 242.603
Rule 610.......................................... Sec. 242.610
Rule 612.......................................... Sec. 242.612
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I. Introduction
A. Rule 612 Minimum Pricing Increments
1. Background
2. Proposed and Adopted Amendments
B. Rule 610 Fees for Access to Quotations and Transparency of
Fees
1. Background
2. Proposed and Adopted Amendments
C. Transparency of Better Priced Orders
1. Background
2. Proposed and Adopted Amendments
D. Overarching Comments on the Proposing Release
II. Equity Market Structure Initiatives and the Regulation NMS
Proposal
III. Final Rule 612 of Regulation NMS--Minimum Pricing Increment
A. Issues Raised in the Existing Market Structure Related to
Tick Sizes
B. Proposal To Amend Rule 612
C. Final Rule--Minimum Pricing Increments for Orders Priced
Equal to or Greater Than $1.00 per Share
1. General Comments and Discussion
2. Specific Comments on the Proposed Minimum Pricing Increments
3. Comments on the Number of Proposed Increments
4. Comments on Small- and Mid-Sized Stocks
5. Comments on Market Resiliency
6. Comments on Proposed Criteria for Assigning Minimum Pricing
Increments
7. Rule 612(a)--Definitions
8. Rule 612(b)(1)--Semiannual Operative Dates
9. Rule 612(c)--New NMS Stocks
10. Rule 600(b)(89)--Regulatory Data
D. Minimum Pricing Increment for Trades
IV. Final Rule 610 of Regulation NMS--Fees for Access to Quotations
A. Background
B. Issues Raised in the Existing Market Structure and the Need
for the Amendments
1. Amendments to Rule 612
2. Exchange Fee Models
C. Proposal To Amend 610(c)
D. Final Rule 610(c)
1. Comments on Proposed Rule 610(c)
E. Final Rule 610(d) Requiring That All Exchange Fees and
Rebates Be Determinable at the Time of an Execution
1. General Comments
V. Final Rule--Transparency of Better Priced Orders
A. Background
B. Final Rule--Round Lots
1. Round Lot Definition
2. Proposed Acceleration of Round Lot Definition
3. Comments and Response
C. Final Rule--Odd-Lot Information
1. Proposed Acceleration of Odd-Lot Information Definition
2. Proposed Amendment to Odd-Lot Information Definition for Best
Odd-Lot Orders
D. Display of Round Lots and Odd-Lot Information
1. Comments and Response
E. MDI Rules Implementation
VI. Compliance Dates
A. Final Rule 612 Compliance Date
B. Final Rule 610 Compliance Date
C. Final Compliance Date for Round Lot and Odd-Lot Information
VII. Economic Analysis
A. Introduction
B. Broad Economic Considerations
1. Liquidity and Spread
2. Economics of Minimum Pricing Increments
3. Economics of Access Fees
C. Baseline
1. Tick Sizes
2. Access Fees
3. Round Lots, Odd-Lots, and Market Data Infrastructure
4. Affected Entities and Markets
5. Amendments to Rule 605
D. Benefits, Costs, and Other Economic Effects
1. Modification of Rule 612 To Create a Half-Penny Tick
2. Lower Access Fee Cap
3. Exchange Fees and Rebates Determinable at the Time of
Execution
4. Acceleration and Implementation of the MDI Rules and Addition
of Information About Best Odd-Lot Orders
5. Compliance Costs
6. Interactions With Recently Adopted Rules
E. Effect on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
F. Reasonable Alternatives
1. Tick Size Alternatives
2. Access Fee Alternatives
VIII. Paperwork Reduction Act
A. Summary of Collection of Information
B. Proposed Use of Information
C. Respondents
D. Total Annual Reporting and Recordkeeping Burden
1. Initial Burden Hours and Costs
2. Ongoing Burden Hours and Costs
E. Collection of Information Is Mandatory
F. Confidentiality
G. Revisions to Current MDI Rules Burden Estimates
IX. Regulatory Flexibility Act
A. Amendments to Rule 612--Final Regulatory Flexibility Analysis
1. Reasons for the Action
2. Small Entities Subject to the Rule
3. Reporting, Recordkeeping, and Other Compliance Requirements
4. Significant Alternatives
B. Amendments to Rule 610
C. Amendments to Rule 603 and Definitions Odd-Lot Information
and Regulatory Data Under Rule 600
D. Certification
X. Other Matters
Statutory Authority and Text of Rule Amendments

I. Introduction

Consistent with Congress's directive almost 50 years ago to
facilitate the establishment of a national market system,\1\ the
Commission is amending certain of its rules to respond to market
developments since those rules were adopted, so that those rules
continue to benefit investors and the markets. Specifically, the
Commission is taking the following actions to continue to fulfill
Congress's directive and advance the objectives of investor protection
and the maintenance of fair and orderly markets:
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\1\ See Public Law 94-29 (S.249), June 4, 1975, Securities Acts
Amendments of 1975 (``1975 Amendments''). See also 15 U.S.C. 78k-1.
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<bullet> Reduce Transaction Costs for Investors by Reducing Minimum
Pricing Increments. The amendments will relax

[[Page 81621]]

existing restrictions on market-wide minimum pricing increments (``tick
sizes''), thus reducing transaction costs for investors and relaxing a
constraint on price discovery for certain stocks.
The reduced tick size will benefit investors and market
participants by: (i) allowing stocks to be priced more efficiently and
competitively, therefore lowering costs for investors to trade in those
stocks; and (ii) improving liquidity, competition, and price efficiency
in the markets.
<bullet> Improve Market Quality for Investors by Reducing Access
Fee Caps and Increasing Transparency. The amendments will reduce the
maximum fees that trading centers (e.g., securities exchanges) are
allowed to charge investors for execution against protected quotations
(``access fee caps''). The amendments will also address the lack of
transparency around the cost of a transaction at the time of a trade
execution by requiring exchange fees and rebates to be determinable at
the time of the execution.
The amendments will benefit investors and market participants by:
(i) providing for access fee caps that accommodate the change in tick
sizes; (ii) providing quotations that are more accurate and reflective
of market forces; (iii) mitigating potential conflicts of interest
between broker-dealers and their customers, where a broker-dealer is
incentivized to route to the exchange offering the most favorable fees
or rebates, which can lead to potentially worse execution quality for
customers; (iv) reducing the complexity associated with the fees and
rebates models; and (v) increasing the transparency of transaction fees
and rebates.
<bullet> Improve Transparency to Investors about Better Priced
Orders. The amendments will increase price transparency by accelerating
the implementation of previously adopted definitions of ``round lot''
and ``odd-lot information'' and by adding a data element for the best
odd-lot orders to buy and sell (``BOLO'') to the definition of ``odd-
lot information.''
These amendments will improve information available to investors
and other market participants about better priced orders in smaller
sizes that are available in the market.
In 1975, Congress explicitly granted the Commission ``broad
authority to oversee the implementation, operation, and regulation of
the national market system'' and the ``clear responsibility to assure
that the system develops and operates in accordance with
Congressionally determined goals and objectives.'' \2\ The 1975
Amendments and section 11A of the Exchange Act set forth Congress's
findings regarding the nation's securities markets and direct the
Commission to facilitate the establishment of a national market system
in accordance with specified Congressional findings and objectives.\3\
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\2\ Senate Report on Securities Act Amendments of 1975, S. Rep.
No. 94-75 at 8-9.
\3\ In particular, Congress found that it is in the public
interest and appropriate for the protection of investors and
maintenance of fair and orderly markets to assure five objectives:
(1) economically efficient execution of transactions; (2) fair
competition among brokers and dealers and among exchange markets,
and between markets other than exchange markets; (3) the
availability to brokers, dealers and investors of information with
respect to quotations for and transactions in securities; (4) the
practicability of brokers executing investors' orders in the best
market; and (5) an opportunity, consistent with items (1) and (4),
for investors' orders to be executed without the participation of a
dealer. See 15 U.S.C. 78k-1(a)(1)(C). Congress also found that new
data processing and communications techniques could create the
opportunity for more efficient and effective market operations, and
that ``[t]he linking of all markets for qualified securities through
communication and data processing facilities will foster efficiency,
enhance competition, increase the information available to brokers,
dealers, and investors, facilitate the offsetting of investors'
orders and contribute to the best execution of such orders.'' See 15
U.S.C. 78k-1(a)(1)(B), (D).
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Since 1975, the Commission has regulated the national market
system, adhering to the objectives of efficient, competitive, fair, and
orderly markets that are in the public interest and protect investors,
which are essential to meeting the investment needs of the public and
reducing the cost of capital for listed companies.\4\ The national
market system is premised on promoting fair competition among markets,
while at the same time assuring that all of these markets are linked
together, through facilities and rules, in a unified system that
promotes interaction among the orders of buyers and sellers in a
particular NMS stock.\5\
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\4\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37497 (June 29, 2005) (``Regulation NMS Adopting
Release''). In the nearly fifty years since the enactment of section
11A, the Commission has monitored the national market system and its
operation and has periodically reviewed certain of its rules to
address issues that have arisen in the markets with the goal of
ensuring that the regulatory framework continues to fulfill the
goals of section 11A. In each such case, the Commission has been
guided by the objectives embodied in section 11A. The Commission
also formed the Equity Market Structure Advisory Committee
(``EMSAC'') in 2015 to provide diverse perspectives on the structure
and operations of the U.S. equities markets, as well as advice and
recommendations on matters related to equity market structure. The
archives of these meetings are available at <a href="https://www.sec.gov/spotlight/emsac/emsac-archives.htm">https://www.sec.gov/spotlight/emsac/emsac-archives.htm</a> (``EMSAC Archives'').
\5\ See Regulation NMS Adopting Release, supra note 4, at 37498.
``NMS stock'' is defined under Regulation NMS as any NMS security
other than an option. 17 CFR 242.600(b)(65). An ``NMS security'' is
defined as any security or class of securities for which transaction
reports are collected, processed, and made available pursuant to an
effective transaction reporting plan, or an effective national
market system plan for reporting transactions in listed options. 17
CFR 242.600(b)(64).
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In 2005, the Commission adopted Regulation NMS to modernize and
strengthen the regulatory structure of U.S. equity markets, including
requirements pursuant to which quotations and orders for NMS stocks,
and the markets on which they trade, can compete. These requirements
support the public interest and the protection of investors and help to
ensure fair and orderly markets for the execution of orders in NMS
stocks. Among other things, Regulation NMS provides explicit
requirements for the tick sizes of quotations and orders,\6\ the means
for market participants to access quotations in the national market
system, including a cap on the highest permitted level of fees a
trading center may charge for access to the best quotations of a
trading center,\7\ and how information about quotations and trades is
made widely available to investors, among others.\8\
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\6\ See Rule 612 of Regulation NMS; 17 CFR 242.612.
\7\ See Rule 610 of Regulation NMS; 17 CFR 242.610.
\8\ See Rules 601, 602, and 603 of Regulation NMS; 17 CFR
242.601, 17 CFR 242.602, 17 CFR 242.603.
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Nearly two decades later, the technology and economics of trading
have evolved significantly. Transaction volume in listed equities
doubled in the last five years and tripled in the last seventeen.\9\
Electronic trading now dominates equity markets, with latency measured
in microseconds. These changes call for improvements to assure an
efficient and transparent price discovery process, in order to continue
to fulfill Congress's directive and advance the objectives of investor
protection and the maintenance of fair and orderly markets. However,
some parts of Regulation NMS have not been revised since their 2005
adoption. Thus, the Commission is adopting the below described
amendments to certain rules under Regulation NMS.\10\ The following

[[Page 81622]]

subsections provide an overview of the amendments and the rationales
for each.\11\
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\9\ See Cboe, ``Historical Market Volume Data,'' available at
<a href="https://www.cboe.com/us/equities/market_statistics/historical_market_volume/">https://www.cboe.com/us/equities/market_statistics/historical_market_volume/</a>.
\10\ The Commission has amended several aspects of Regulation
NMS to address and reflect changes in the markets since its
adoption. For example, in 2018, the Commission adopted new order
handling disclosure requirements in Rule 606 in response to changes
in equity market structure and order handling and routing practices.
See Securities Exchange Act Release No. 84528 (Nov. 2, 2018), 83 FR
58338 (Nov. 19, 2018). In 2020, the Commission adopted rules to
update the national market system for the collection, consolidation,
and dissemination of equity market data in the national market
system to keep pace with technological developments concerning the
use of market data. See Securities Exchange Act Release No. 90610
(Dec. 9, 2020), 86 FR 18596 (Apr. 9, 2021) (``MDI Adopting
Release''). More recently, responding to changes in market
conditions caused by technological advancements and the increased
participation of individual investors in the equity markets, the
Commission adopted amendments to Rule 605 under Regulation NMS to
update the disclosure of order execution quality statistics reports.
See Securities Exchange Act Release No. 99679 (Mar. 6, 2024), 89 FR
26428, 26429 (Apr. 15, 2024) (``Rule 605 Amendments'') (adopting
amendments to rule 605 under Regulation NMS to update reports on
execution quality).
\11\ See generally Securities Exchange Act Release No. 96494
(Dec. 14, 2022), 87 FR 80266 (Dec. 29, 2022) (``Proposing Release''
or ``Regulation NMS Proposal'').
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A. Rule 612 Minimum Pricing Increments

1. Background
One way that investors can buy or sell a stock is through the use
of limit orders, which are a type of order that specifies the price
(``limit price'') at which the investor is willing to buy or sell a
security.\12\ Limit orders serve a critical market function by helping
to set prices at which market participants are willing to trade,
revealing the supply and demand for a security, and providing liquidity
to the market. As such, limit orders play a key role in price discovery
and allow investors to participate in the price-setting process.\13\
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\12\ Whether a limit order can be executed immediately depends
on the limit price in relation to the current market price. For
example, a buy order with a limit price of $10.00 means the investor
would like to buy as soon as possible, but only when the current
market price is at $10.00 or less. By contrast, a ``market order''
is a type of order by which the investor specifies that it wishes to
buy or sell a security at the current market price, regardless of
what the market price is. See generally, Securities Exchange Act
Release No. 96495 (Dec. 14, 2022), 88 FR 128, 132-33 (Jan. 3, 2023);
Regulation NMS Adopting Release, supra note 4, at 37505 n.53.
\13\ Limit orders may be ``marketable'' meaning that its
specified price allows an immediate execution because it matches a
contra-side order, or they may be ``non-marketable'' meaning that
its specified price does not allow for an immediate execution and
therefore it must wait until a contra-side order comes in to trade
with it. Non-marketable limit orders that are submitted to an
exchange are placed on the order book and, if displayable, the price
and size will be displayed in the national market system if it is
the best priced order to buy or sell for such exchange. The
Commission has recognized displayed limit orders as ``a critically
important element of efficient price discovery.'' See Regulation NMS
Adopting Release, supra note 4, at 37517.
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Recognizing the value of limit orders, the Commission adopted Rule
612 under Regulation NMS, which requires that the prices of quotations
and orders in the national market system be reflected in a specified
minimum pricing increment, also known as the ``tick size.'' Rule 612
required, for quotations and orders of NMS stocks priced at or greater
than $1.00 per share, the minimum pricing increment to be $0.01.\14\ As
a result, subject to certain exceptions,\15\ the quotations and orders
of such NMS stocks are priced in penny increments: $10.00, $10.01,
$10.02, for example.
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\14\ See preexisting 17 CFR 242.612(a). For quotations and
orders of NMS stocks priced less than $1.00 per share, Rule 612
required the minimum pricing increment to be $0.0001. See
preexisting 17 CFR 242.612(b). However, most exchanges require
stocks listed on their exchanges to maintain a price greater than
$1.00 per share, and consequently $0.01 is the prevailing tick size
for most quotes and orders for NMS stocks. See infra section
VII.C.1.a.
\15\ See infra section VII.C.1.a. (discussing retail programs).
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The Commission adopted Rule 612 and minimum pricing increments to
address the concern that a market participant could gain priority over
existing limit orders by posting an economically insignificant price
improvement.\16\ For example, consider a market participant that posts
a limit order to buy an NMS stock at $10.00 per share. Without minimum
pricing increments, a second market participant could ``step ahead''
(also known as ``pennying'') of the first market participant by posting
a bid to buy at a price that is higher by an infinitesimally small
amount, such as $10.000001.\17\ This behavior disincentivizes market
participants from posting a limit order in the first place because
another market participant could always gain priority over that first
price by posting a limit order that is better by an economically
insignificant amount.\18\ This may lead to a decline in limit orders,
harm liquidity, and make it more costly to trade.\19\ This hypothetical
scenario illustrates the need for a minimum pricing increment that is
not too small.
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\16\ When Rule 612 was adopted, the Commission stated that
``[g]reater use of limit orders will increase price discovery and
market depth and liquidity'' and that ``if orders lose execution
priority because competing orders step ahead for an economically
insignificant amount, liquidity could diminish.'' See Regulation NMS
Adopting Release, supra note 4, at 37505, 37553. The Commission was
concerned that stepping ahead of displayed limit orders by
insignificant amounts would deter the submission and display of
limit orders, which would negatively impact price discovery and
market depth and liquidity. See id. at 37553. See also infra section
VII.A (discussing the importance of minimum pricing increments).
\17\ But with the minimum pricing increment of a penny, that
same market participant would be required to post a bid of $10.01
instead.
\18\ See infra sections VII.A, VII.B.2, and VII.D.1.
\19\ See infra sections VII.A, VII.B.2, and VII.D.1.b.i for
additional analysis of pennying.
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Too big of a minimum pricing increment is also problematic since it
would reduce the quality of price discovery by precluding price
competition for providing liquidity.\20\ More specifically, too large a
tick size can increase transaction costs for investors by artificially
widening the ``bid-ask spread''--the difference between the bid
(highest price a buyer is willing to pay) and the ask (the lowest price
a seller is willing to accept) prices.\21\ For example, consider a
hypothetical scenario where a liquidity provider is willing to bid
$10.121 to buy a stock and offer $10.124 to sell the stock. If the tick
size were $0.005, the resulting bid and offer from this liquidity
provider would be $10.120 and $10.125, respectively, with a spread of
$0.005. If the tick size were $0.01, the corresponding bid and offer
would be $10.120 and $10.130, with a spread of $0.01.\22\ In other
words, but for the requirement under Rule 612 that sets the tick size
to be $0.01 for quotes and orders in NMS stocks priced at or above
$1.00, a smaller tick size would have narrowed spreads in some
instances and allowed prices to better reflect the underlying economics
for certain NMS stocks. As explained below, up to 74.3% of the share
volume transacted in NMS stocks in 2023 may have bid-ask spreads that
are constrained by the current minimum pricing increments.\23\ These
widened bid-ask spreads increase transaction costs for investors.\24\
Conversely, a smaller tick size that allows for narrower bid-ask
spreads would benefit investors by reducing transaction costs.\25\
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\20\ See infra section VII.B.2.
\21\ See infra section VII.B.2; see also 17 CFR 242.600(b)(16).
\22\ See infra section VII.B.2 (providing a similar example
showing how a minimum pricing increment could double the width of a
bid-ask spread).
\23\ See infra section VII.C.1.b (discussing percentage of share
volume likely to be tick-constrained). See also infra section
VII.B.2 (discussing the definition of ``tick-constrained'').
\24\ See infra section VII.B.2.
\25\ See infra section VII.B.2.
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The minimum pricing increments in Rule 612 were adopted in 2005,
when the Commission adopted Regulation NMS, and it was an adjustment in
a long series of adjustments to the minimum pricing increments over
time. For many decades, the U.S. equity markets used fractions of a
dollar as minimum pricing increments (e.g., \1/8\, \1/16\, and \1/32\
of a dollar).\26\ Prior to 1997, the minimum

[[Page 81623]]

pricing increment on the New York Stock Exchange LLC (``NYSE'') for
stocks above $1.00 per share was \1/8\ of a dollar (or 12.5 cents).\27\
In 1997, NYSE and the Nasdaq Stock Market LLC (``Nasdaq'') revised
their rules to use the minimum pricing increment of 1/16 of a dollar
(6.25 cents).\28\ In January 2000, the Commission mandated decimal
pricing (i.e., moving from fractional increments to penny increments)
in certain securities,\29\ and by April 2001, the market had fully
converted to decimal pricing.\30\
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\26\ See Staff Report to Congress on Decimalization, Commission
(July 2012) (``Staff Decimalization Report''), available at <a href="https://www.sec.gov/files/decimalization-072012.pdf">https://www.sec.gov/files/decimalization-072012.pdf</a>, at 4. Staff reports,
Investor Bulletins, and other staff documents (included those cited
herein) represent the views of Commission staff and are not a rule,
regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of these staff
documents, and, like all staff documents, they have no legal force
or effect, do not alter or amend the applicable law, and create no
new or additional obligations for any person.
\27\ See Self-Regulatory Organizations; New York Stock Exchange,
Inc.; Order Granting Approval to Proposed Rule Change Relating to
Trading Differentials for Equity Securities, 62 FR 42847, 42848 n.5
(Aug. 8, 1997). See also Division of Market Regulation, Market 2000:
An Examination of Current Equity Market Developments (1994),
available at <a href="https://www.sec.gov/divisions/marketreg/market2000.pdf">https://www.sec.gov/divisions/marketreg/market2000.pdf</a>,
at 37-38, fn. 43 (describing NYSE's tick size of \1/8\ of a dollar
in 1994).
\28\ See Staff Decimalization Report, supra note 26, at 4-5.
\29\ See Securities Exchange Act Release No. 42360 (Jan. 28,
2000), 65 FR 5003 (Feb. 2, 2000).
\30\ See Staff Decimalization Report, supra note 26, at 5-6.
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Up to this point, minimum pricing increments for NMS stocks were
set by the individual trading venues. But in 2004, as part of
Regulation NMS and pursuant to the authority under the 1975 Amendments,
the Commission proposed Rule 612 to implement market-wide uniform
minimum pricing increments for quoting in NMS stocks.\31\ The
Commission stated that, while the benefits of decimal pricing had
justified the costs, there was a potential for costs to investors and
the markets to surpass the benefits if the minimum pricing increment
decreased beyond a certain level, and the proposed rule was designed to
address the scenario where market participants attempt to step ahead of
competing limit orders at the smallest economic increment possible.\32\
Thus, the Commission adopted Rule 612 in 2005, which established the
minimum pricing increments of $0.01 for quotations and orders of NMS
stocks priced at, or greater than, $1.00 per share, and $0.0001 for
quotations and orders of NMS stocks priced under $1.00 per share. The
Commission stated that, at the time, it did not believe that the
potential benefits of marginally better prices offered by allowing sub-
penny quoting in securities were likely to justify the costs of
permitting such quotes.\33\
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\31\ See Securities Exchange Act Release No. 49325 (Feb. 26,
2004), 69 FR 11126, 11171 (Mar. 9, 2004) (``2004 Regulation NMS
Proposing Release'') (``the Commission is proposing a rule that
would prohibit every national securities exchange, national
securities association, ATS (including ECNs), vendor, broker or
dealer from ranking, displaying, or accepting from any person a bid
or offer, an order, or an indication of interest in any NMS stock in
an increment less than $0.01.'').
\32\ See Regulation NMS Adopting Release, supra note 4, at
37551-52 (citing 2004 Regulation NMS Proposing Release at 11165).
\33\ See Regulation NMS Adopting Release, supra note 4, at 37553
(``Even assuming that quoting in sub-penny increments would reduce
spreads, the Commission continues to believe, on balance, that the
costs of sub-penny quoting are not justified by the benefits.'').
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When the Commission adopted Rule 612 in 2005, it acknowledged that
the markets could evolve over time and shift the balance of the costs
and benefits of the adopted tick size.\34\ Two decades later, the
market has evolved considerably, and amendments to Rule 612 are
necessary to continue to further the objectives of the Exchange Act.
Data analysis shows that stocks with sufficiently narrow bid-ask
spreads would trade better, namely it would be easier and less costly
for investors to transact, if they were allowed to quote at increments
smaller than one penny.\35\ Indeed, for these stocks, the risks of
``stepping ahead'' are lowered while the benefits of greater price
competition from relaxing the ``tick constraint'' are greater.\36\
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\34\ Id. (``Nevertheless, the Commission acknowledges the
possibility that the balance of costs and benefits could shift in a
limited number of cases or as the markets continue to evolve.'').
\35\ See infra section VII.D.1.
\36\ See infra sections VII.B.2 and VII.D.1.b.
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2. Proposed and Adopted Amendments
Accordingly, the Commission proposed amendments to Rule 612 to
introduce three minimum pricing increments that were less than $0.01
(i.e., $0.005, $0.002, $0.001) for quotes and orders priced $1.00 or
more for certain NMS stocks based upon each stock's time weighted
average quoted spread (``TWAQS'').\37\ The proposed amendments would
have assigned sub-penny minimum pricing increments to any NMS stock
that had a TWAQS of $0.04 or less. This proposed amendment was designed
to address the issues related to tick-constrained stocks described
above that have arisen since 2005. The Commission also proposed to
impose these minimum pricing increments for trades, subject to certain
exceptions.
---------------------------------------------------------------------------

\37\ See Proposing Release, supra note 11, at 80280.
---------------------------------------------------------------------------

As explained below, in response to commenters, the Commission is
adopting modified amendments to Rule 612 to introduce one minimum
pricing increment that is less than $0.01, i.e., $0.005, for quotes and
orders priced $1.00 or more for NMS stocks that have a TWAQS of $0.015
or less.\38\ The Commission is not adopting a minimum pricing increment
for trades.\39\
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\38\ See infra section III.C.
\39\ See infra section III.D.
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B. Rule 610 Fees for Access to Quotations and Transparency of Fees

1. Background
Trading centers \40\ can choose to charge an access fee, or pay a
rebate, to the participants--liquidity providers (market participants
with orders resting at the trading center) and liquidity takers (market
participants who submit incoming orders to execute against orders
resting at the trading center)--who trade at their venue. As discussed
in section VII.C.2.b, the predominant exchange fee structure is maker-
taker, in which an exchange charges a fee to liquidity takers and pays
a rebate to liquidity providers, and the rebate is typically funded
through the access fee.\41\
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\40\ 17 CFR 242.600(b)(106) (providing a definition of the term
``trading center''). This discussion focuses on exchange fees
because, currently, exchanges are the only trading centers that have
quotations that are subject to the access fee caps under Rule
610(c). See infra note 367.
\41\ See also infra sections VII.B.3 and VII.C.2.c, table 5 and
table 6 (showing the predominance of both dollar and share exchange
trading volume occurs on maker-taker venues).
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As adopted in 2005, Rule 610(c) set the access fee cap for
protected quotations \42\ priced at $1 or more at 30 cents per 100
shares (``30 mils'' per share) for NMS stocks. Rule 610(c) also applies
to any other quotation of a trading center that is the best bid or
offer of an exchange or association.\43\ The access fee cap was based,
in part, upon the prevailing fees that were charged by certain trading
centers at that time.\44\ For NMS stocks priced below $1, the fee cap
was set at 0.3% of the quotation price.\45\ Rule 610 was adopted at the
same time as Rule 611, the Order Protection Rule, which established
intermarket protection

[[Page 81624]]

against trade-throughs \46\ for all NMS stocks. Rule 610(c) was
designed to preclude trading centers that posted protected quotations
from raising their fees in an attempt to take improper advantage of the
trade-through protections adopted under Rule 611.\47\ The Commission
designed the access fee caps to preserve the benefits of both the
strengthened price protection under Rule 611 and the more efficient
linkages among trading centers that were developed under Regulation NMS
to access protected quotations because the benefits could be
compromised if substantial fees were charged.\48\
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\42\ 17 CFR 242.610(c). A protected quotation is defined in Rule
600(b)(82) as ``a protected bid or protected offer.'' 17 CFR
242.600(b)(82). A protected bid or protected offer is defined as ``a
quotation in an NMS stock that: (i) Is displayed by an automated
trading center; (ii) Is disseminated pursuant to an effective
national market system plan; and (iii) Is an automated quotation
that is the best bid or best offer of a national securities
exchange, or the best bid or best offer of a national securities
association.'' 17 CFR 242.600(b)(81).
\43\ For purposes of this discussion, references to protected
quotations under Rule 610(c) also include manual quotations that are
the best bid or best offer of an exchange or association.
\44\ See Regulation NMS Adopting Release, supra note 4, at
37545.
\45\ See Regulation NMS Adopting Release, supra note 4, at 37544
n.406.
\46\ A trade-through occurs when a trading center executes an
order at a price that is inferior to the price of a protected
quotation that is displayed by another trading center. See 17 CFR
242.600(b)(105) for the definition of trade-through under Regulation
NMS.
\47\ See Regulation NMS Adopting Release, supra note 4, at 37544
and 37595.
\48\ See Regulation NMS Adopting Release, supra note 4, at
37544.
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Since an access fee that is too high when compared to the tick size
can create pricing distortions, the access fee caps need to be adjusted
in conjunction with the reduction in tick size to prevent such
distortions.\49\ In addition, as discussed below, many exchanges charge
the maximum fee allowed to access protected quotes, and primarily use
those fees to pay rebates to market participants that provide
liquidity.\50\ This practice raises a number of concerns and may
interfere with section 11A's objectives of ensuring the fairness and
usefulness of quotation information.\51\
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\49\ See infra sections IV.D.1 and VII.D.2.a. See also Proposing
Release, supra note 11, at 80348 (stating ``the access fee cap
should not be greater than \1/2\ of the tick size in order to
preserve coherence between net and nominal price rankings of trading
venues.'').
\50\ See infra sections VII.B.3 and VII.C.2.
\51\ See infra sections IV.D.1 and VII.B.3. See also Regulation
NMS Adopting Release, supra note 4, at 37545 (``For quotations to be
fair and useful, there must be some limit on the extent to which the
true price for those who access quotations can vary from the
displayed price.'').
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First, the actual prices, inclusive of fees and rebates, for
investors and other market participants to trade a stock are not fully
transparent. In general, the higher the permitted level of access fees,
the higher the rebates, and the greater the potential discrepancy
between displayed quoted prices on the one hand, and actual prices on
the other.\52\
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\52\ See infra sections IV.B.2, VII.D.2, and VII.E.1. In certain
cases, the disparity between market quotations and actual
transaction costs may be substantial. See, e.g., Proposing Release,
supra note 11, at 80328.
---------------------------------------------------------------------------

Furthermore, exchanges' use of fees and rebates creates a potential
conflict of interest between broker-dealers and their customers with
respect to broker-dealer order routing, by providing incentives for a
broker-dealer to route customer orders to certain exchanges to receive
higher rebates or avoid higher fees based on their own economic
interest.\53\ This potential conflict of interest is exacerbated if
broker-dealers do not fully pass on the fees and rebate to their
customers, since rebate-seeking by broker-dealers may come at the cost
of execution quality of customers.\54\ In addition, exchanges use
complex fee schedules. Generally, the higher the access fee cap, the
wider the range of possible fees and rebates, which results in more
complex pricing schedules. Such complexity makes it more costly for
market participants to design and implement order execution strategies.
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\53\ See infra sections IV.B.2, IV.D and VII.D.3.
\54\ See text accompanying infra note 1518.
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Finally, exchanges' fee and rebate schedules are typically
calculated at month's end, which requires market participants to make
trading decisions without the ability to determine their full trading
costs at the time of execution.\55\ In turn, this lack of transparency
impedes a market participant's ability to evaluate fully where to send
its orders because the market participant cannot calculate the fees and
rebates that will apply to the order contemporaneous with
execution.\56\ Concerns with such lack of price transparency are
exacerbated when various exchanges have different fee schedules, as it
is difficult for market participants to compare net prices across
markets.
---------------------------------------------------------------------------

\55\ See infra sections IV.E, VII.C.2, and VII.D.3.
\56\ See infra sections IV.E, VII.C.2, and VII.D.3.
---------------------------------------------------------------------------

2. Proposed and Adopted Amendments
Accordingly, the Commission proposed to amend Rule 610 in two ways.
First, to accommodate the proposed smaller minimum pricing increments
under proposed Rule 612, as well as to address the distortions that
have developed under the access fee caps, the Commission proposed to
reduce Rule 610(c)'s 30 mil cap for executions against protected
quotations priced $1.00 or more as follows: a $0.001 (or 10 mils)
access fee cap for NMS stocks that would have been assigned a minimum
pricing increment larger than $0.001; and a $0.0005 (or 5 mils) access
fee cap for NMS stocks that would have been assigned a $0.001 minimum
pricing increment. For protected quotations in NMS stocks priced under
$1.00 per share, the Commission proposed to reduce the 0.3% fee cap to
0.05% of the quotation price.
As discussed in detail below, in response to comments, the
Commission is adopting amendments to Rule 610(c) with modifications
from the proposal. Specifically, in light of the amendments to Rule
612, the Commission is adopting only the proposed 10 mil per share
access fee cap for all protected quotations priced $1.00 or more.\57\
For protected quotations priced less than $1.00, the Commission is
adopting an access fee cap of 0.1% of the quotation price per
share.\58\ As discussed in section VII.D.2.b, the adopted amendments to
the access fee caps will not impede the ability of exchanges to fund
their execution services.
---------------------------------------------------------------------------

\57\ See infra section IV.D.
\58\ See id.
---------------------------------------------------------------------------

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

C. Transparency of Better Priced Orders

1. Background
The widespread availability of timely information with respect to
quotations for and transactions in NMS stocks (``NMS information'') is
critical to the ability of market participants to participate
effectively in the U.S. securities markets.\59\ NMS information is
currently disseminated within the national market system by the
exclusive plan processors (``exclusive securities information
processors'' or ``SIPs'').\60\
---------------------------------------------------------------------------

\59\ NMS information is made widely available to investors
through the national market system and ``serves an essential linkage
function by helping to assure that the public is aware of the best
displayed prices for a stock, no matter where they may arise in the
national market system.'' See Securities Exchange Act Release No.
61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) (``Concept Release
on Equity Market Structure'') at 3600. The availability of NMS
information also ``enables investors to monitor the prices at which
their orders are executed and assess whether their orders received
best execution.'' Id.
\60\ There are three effective national market system plans that
govern the collection, consolidation, processing and dissemination
of quotation and transaction information for NMS stocks: the
Consolidated Tape Association Plan (``CTA Plan''); the Consolidated
Quotation Plan (``CQ Plan''); and the Joint Self-Regulatory
Organization Plan Governing the Collection, Consolidation, and
Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading
Privileges Basis (``UTP Plan'') (together the ``Equity Data
Plans''). Currently, the Securities Industry Automation Corporation
(``SIAC,'' an affiliate of the NYSE) is the exclusive SIP for the
CTA and CQ Plans, and Nasdaq is the exclusive SIP for the UTP Plan.
See MDI Adopting Release, supra note 10, at 18728. Each exclusive
SIP is the plan processor for one of the Equity Data Plans.

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

[[Page 81625]]

In 2020, the Commission adopted amendments to Regulation NMS to
modernize the NMS information provided within the national market
system for the benefit of market participants and to better achieve
section 11A's goals of assuring ``the availability to brokers, dealers,
and investors of information with respect to quotations for and
transactions in securities that is prompt, accurate, reliable, and
fair'' (``MDI Rules'').\61\ In light of delays in the implementation of
the MDI Rules, the Commission is accelerating the implementation of the
round lot and odd-lot information definitions adopted as part of the
MDI Rules so that investors will benefit sooner from greater
transparency and accessibility of better priced orders \62\ and
improved ability to assess the execution quality of their orders, as
explained below.\63\
---------------------------------------------------------------------------

\61\ See MDI Adopting Release, supra note 10.
\62\ ``Better priced orders'' refers to orders that are priced
superior to the national best bid and national best offer but are
not included in NMS information because they consist of too few
shares. See infra notes 66-68 and accompanying text. The MDI Rules'
round lot and odd-lot information definitions will allow better
priced orders to be included in NMS information so that market
participants that subscribe to the exclusive SIP feeds (that
otherwise would not be able to view these orders without purchasing
exchange proprietary feeds) will be able to view and access these
orders.
\63\ See infra sections V.C.1.a and VII.D.4.
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Until the full implementation of the MDI Rules, NMS information
disseminated within the national market system by the exclusive SIPs
includes, for each NMS stock, the price, size, and exchange of each
last sale, each exchange's current highest bid and lowest offer and the
shares available at those prices (the best bid and best offer or
``BBO''), the national best bid and national best offer (``NBBO''),
odd-lot \64\ transaction information, and certain regulatory and
administrative data (``SIP data'').\65\ Information on NMS stock
quotations is provided in round lots, and, until the round lot
definition adopted in the MDI Rules is implemented, round lots are
defined in rules of the exchanges.\66\ For most NMS stocks, exchange
rules define a round lot as 100 shares.\67\ Market participants
interested in quotation data for orders that have a size less than a
round lot, i.e., odd-lots, must purchase individual exchange
proprietary feeds.\68\ This odd-lot order information is highly
relevant to market participants, including for investors who trade
small numbers of shares.
---------------------------------------------------------------------------

\64\ Odd-lot is defined in Rule 600(b)(68) as an order for the
purchase or sale of an NMS stock in an amount less than a round lot.
17 CFR 242.600(b)(68).
\65\ See Proposing Release, supra note 11, at 80294. Under the
decentralized consolidation model established by the MDI Rules, NMS
information will consist of ``consolidated market data,'' as defined
in the MDI Rules. 17 CFR 242.600(b)(24).
\66\ See Proposing Release, supra note 11, at 80294 n.328. A
``round lot'' is not defined in the Exchange Act and, prior to the
MDI Rules, it was not defined in Regulation NMS. Exchange rules
typically define a round lot as 100 shares, but they also allow the
exchange, or the primary listing exchange for the stock, discretion
to define it otherwise. See, e.g., NYSE Rule 7.5 (``A `round lot' is
100 shares, unless specified by the primary listing market to be
fewer than 100 shares.'').
\67\ According to NYSE Trade and Quote (``TAQ'') Data, as of
Nov. 28, 2023, 11 NMS stocks have a round lot size other than 100.
Nine NMS stocks have a round lot size of 10 and two NMS stocks have
a round lot size of one share.
\68\ See Proposing Release, supra note 11, at 80294; MDI
Adopting Release, supra note 10, at 18599.
---------------------------------------------------------------------------

The MDI Rules expanded the NMS information that will be made
available for dissemination within the national market system in order
to increase transparency about better prices available in the
market.\69\ The Commission, in the MDI Rules, amended Regulation NMS to
include a definition of ``round lot'' that assigns each NMS stock to a
round lot size based on the stock's average closing price. The round
lot definition, once implemented, will increase transparency about
smaller sized orders in higher priced stocks by assigning NMS stocks
priced over $250 to round lot sizes that are less than the predominant
100 shares.\70\ The Commission also adopted a definition of odd-lot
information as part of the MDI Rules.\71\ Once implemented, information
regarding the prices and sizes of odd-lot orders priced better than the
NBBO will be made available within the national market system and is
expected to be made widely available to investors.\72\
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\69\ See Proposing Release, supra note 11, at 80270.
\70\ 17 CFR 242.600(b)(93). In the MDI Adopting Release, the
Commission stated that ``[d]efining smaller-sized orders in higher-
priced stocks as round lots, in addition to providing transparency
into such quotations, ensures that these smaller-sized orders can
establish the [national best bid and national best offer], receive
order protection, and invoke the applicability of several other
rules under Regulation NMS.'' See MDI Adopting Release, supra note
10, at 18613.
\71\ Preexisting 17 CFR 242.600(b)(69). ``Odd-lot information''
is defined as (1) odd-lot transactions, and (2) odd-lots at a price
greater than or equal to the national best bid and less than or
equal to the national best offer, aggregated at each price level at
each national securities exchange and national securities
association. Id.
\72\ The Commission stated that the inclusion of this odd-lot
quotation information would allow market participants ``to trade in
a more informed and effective manner,'' and that ``the new
definition of round lot and the increased availability of better
priced odd-lot information will provide investors with valuable
information about the best prices available and help to facilitate
more informed order routing decisions and the best execution of
investor orders.'' See MDI Adopting Release, supra note 10, at 18602
and 18613. Unlike orders in the round lot sizes adopted pursuant to
the MDI Rules, odd-lots are not ``protected quotations.'' See 17 CFR
242.600(b)(16), (81), (82).
---------------------------------------------------------------------------

For the reasons explained in the MDI Adopting Release, the MDI
Rules sequenced the implementation of these definitions in the later
stages of the implementation schedule.\73\ The implementation of the
MDI Rules began with the filing of amendments to the effective national
market system plan(s) as required under Rule 614(e) (``MDI Plan
Amendments'').\74\ The Operating Committees of the CTA/CQ Plan and UTP
Plan \75\ filed the proposed MDI Plan Amendments on November 5,
2021,\76\ which the Commission disapproved.\77\ As a result, the
participants to the effective national market system plan(s) will need
to develop and file new proposed amendments pursuant to Rule 608.\78\
---------------------------------------------------------------------------

\73\ See MDI Adopting Release, supra note 10, at 18698. Pursuant
to the implementation schedule of the MDI Rules, the round lot
definition was set to be implemented as part of the last phase and
odd-lot quotation information was set to be implemented during a
``parallel operation period.'' See id. at 18700-01. As originally
adopted, during the parallel operation period, the exclusive SIPs
would have continued to disseminate the data that they currently
disseminate and competing consolidators would have been permitted to
offer consolidated market data products, including odd-lot
information. Because the round lot definition would have been
implemented during a later phase, the exclusive SIPs and competing
consolidators would have collected, consolidated and disseminated
NMS information based on then current exchange definitions of round
lot. Id. at 18699-18701.
\74\ 17 CFR 242.614(e). The Commission's approval of amendments
to the effective national market system plan(s) filed pursuant to
rule 614(e) will be the starting point for the rest of the MDI Rules
implementation schedule, which includes a 180-day development
period, during which competing consolidators can register with the
Commission, and ends with the cessation of the operations of the
exclusive SIPs and testing and implementation of the changes
necessary to implement the round lot definition. See MDI Adopting
Release, supra note 10, at 18699-701; Proposing Release, supra note
11, at 80295.
\75\ See supra note 60.
\76\ See Securities Exchange Act Release Nos. 93615 (Nov. 19,
2021), 86 FR 67800 (Nov. 29, 2021); 93625 (Nov. 19, 2021), 86 FR
67517 (Nov. 26, 2021); 93620 (Nov. 19, 2021), 86 FR 67541 (Nov. 26,
2021); 93618 (Nov. 19, 2021), 86 FR 67562 (Nov. 26, 2021).
\77\ See Securities Exchange Act Release Nos. 95848 (Sept. 21,
2022), 87 FR 58544 (Sept. 27, 2022); 95849 (Sept. 21, 2022), 87 FR
58592 (Sept. 27, 2022); 95850 (Sept. 21, 2022), 87 FR 58560 (Sept.
27, 2022); 95851 (Sept. 21, 2022), 87 FR 58613 (Sept. 27, 2022).
\78\ On Sept. 1, 2023, the Commission ordered the exchanges and
the Financial Industry Regulatory Authority, Inc. (``FINRA'') to
file a new single national market system plan regarding consolidated
equity market data. See Securities Exchange Act Release No. 98271,
88 FR 61630 (Sept. 7, 2023). On Jan. 19, 2024, the Commission
published notice of filing of a National Market System Plan for
Consolidated Equity Market Data. See Securities Exchange Act Release
No. 99403, 89 FR 5002 (Jan. 25, 2024). On April 23, 2024, the
Commission instituted proceedings pursuant to Rule 608(b)(2)(i) of
Regulation NMS to determine whether to approve or disapprove the
proposed plan or to approve the proposed plan with any changes or
subject to any conditions the Commission deems necessary or
appropriate after considering public comment. See Securities
Exchange Act Release No. 100017, 89 FR 33412 (Apr. 29, 2024). On
July 11, 2024, the Commission extended the period within which to
conclude proceedings regarding the proposed plan to 240 days from
the date of publication of the notice. See Securities Exchange Act
Release No. 100500 (Jul. 11, 2024), 89 FR 58235 (Jul. 17, 2024).

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[[Page 81626]]

2. Proposed and Adopted Amendments
In light of the delays in the implementation of the MDI Rules, the
Commission proposed to accelerate the implementation of the round lot
and odd-lot information definitions, to allow investors to benefit
sooner from greater transparency and accessibility of better priced
orders and improved execution quality.\79\ As discussed further below,
the Commission is accelerating the implementation of the round lot and
odd-lot information definitions but is providing the industry with more
time to make the necessary systems changes to implement these
definitions than what was proposed.\80\
---------------------------------------------------------------------------

\79\ See Proposing Release, supra note 11, at 80299; see also
infra sections V.B.2. and V.C.1. In addition, as discussed below,
the Commission is amending the definition of round lot so that the
frequency of round lot changes will be consistent with the frequency
of minimum pricing increment changes under amended Rule 612. See
infra section V.B.3.b. The Commission is not changing the
calculation used to assign round lots or the round lot tiers in the
round lot definition adopted in the MDI Rules.
\80\ See infra sections V.B.3, V.C.1, and VI.C.
---------------------------------------------------------------------------

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

\81\ See infra section V.C.2.
---------------------------------------------------------------------------

D. Overarching Comments on the Proposing Release

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

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

Many commenters broadly supported the Regulation NMS Proposal.\83\
Two commenters urged the Commission to promptly adopt the Regulation
NMS Proposal.\84\ One commenter urged the Commission to revise and
adopt the Rule 605 Proposal as well as the Regulation NMS Proposal
without delay.\85\ Another commenter suggested that the Commission
prioritize the adoption of the Regulation NMS Proposal \86\ stating
that, of the four EMS Proposals related to equity market structure, the
Regulation NMS Proposal ``is the least controversial and the least
interdependent on the other three, and so is the easiest one for the
Commission to move forward'' \87\ and ``has garnered the most consensus
and support from various market participants.'' \88\
---------------------------------------------------------------------------

\83\ See, e.g., Letters from Mark Rogers dated Mar. 30, 2023
(``I approve of the proposed changes to Regulation NMS''); Omar
Fakhro dated Mar. 28, 2023 (``I as a household investor strongly
support this rule for a better and fair market for EVERYONE'');
Danielle Ball dated Mar. 27, 2023 (``The proposed tick size regime,
variable minimum pricing increment model, and revised round lot
definition are important steps towards promoting fair and
transparent pricing across trading venues.''); Keith Noble dated
Apr. 1, 2023; Chris Miller dated Apr. 1, 2023; Kristen Palmer dated
Apr. 1, 2023; Amanda Kappes dated Apr. 1, 2023; Ian Rohel, dated
Apr. 1, 2023; Riley Hume dated Apr. 1, 2023; Matt Kelleher dated
Apr. 1, 2023; Keagan Wethington dated Mar. 31, 2023; J.W. Verret,
Associate Professor, George Mason University Antonin Scalia Law
School, dated Jan. 12, 2024 (``Verret Letter III'') at 26 (``. . .
the proposed amendments to Reg NMS rules regarding minimum pricing
increments and the proposed reforms to volume/access fees both
support the core principles of free market economics and will lead
to a more competitive, transparent, and efficient market
landscape.''); Eric Budish, Paul G. McDermott Professor of Economics
and Entrepreneurship, The University of Chicago Booth School of
Business, dated Jan. 18, 2024 (``Budish Letter'') at 1 (``. . . this
set of rules changes--primarily, a finer tick-size for tick-
constrained stocks, a lower access fee cap, and harmonization of
pricing increments for on-exchange and off-exchange trading--will
reduce both investors' costs and the overall complexity of U.S.
equity markets.''); Stephen W. Hall, Legal Director and Securities
Specialist, and Brady Williams, Legal Counsel, Better Markets, Inc.,
dated Mar. 31, 2023 (``Better Markets Letter I'') at 8-17; Joseph
Saluzzi, Partner, Themis Trading LLC, dated Mar. 31, 2023 (``Themis
Letter'') at 2-8; John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC, dated Mar. 20, 2023 (``IEX Letter I'');
Letter Type A, of which 22 comments were received; Letter Type C, of
which 5 comments were received; Letter Type D, of which 255 comments
were received; Letter Type E, of which 14 comments were received;
Letter Type G, of which 652 comments were received; Letter Type H,
of which 853 comments were received; Letter Type I, of which 22
comments were received; Letter Type J, of which 15 comments were
received; Letter Type K, of which 22 comments were received; and
Letter Type L, of which 4 comments were received; available at
<a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>.
\84\ See, e.g., Letters from Tyler Gellasch, President & CEO,
Healthy Markets Association, dated Mar. 31, 2023 (``Healthy Markets
Letter I'') at 28, 31; J. W. Verret, Associate Professor, George
Mason University Antonin Scalia Law School, dated Sept. 20, 2023
(``Verret Letter I'') at 1-2, 4, 5.
\85\ See Healthy Markets Letter I at 28, 31.
\86\ See Verret Letter I at 1.
\87\ Verret Letter I at 1-2.
\88\ See Verret Letter I at 2 (stating that the Regulation NMS
Proposal is supported by ``a wealth of prior work by the Commission
in the form of a pilot tick size study, comments submitted to the
SEC regarding the transaction fee pilot, and numerous roundtables
and proceedings of the SEC's Investor Advisory Committee and SEC's
Equity Market Structure Advisory Committee.'').
---------------------------------------------------------------------------

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

\89\ See, e.g., infra note 92.
---------------------------------------------------------------------------

The issues related to the amended rules have been considered by the
Commission and market participants for several years.\90\ Further, the
Commission has analyzed data provided by market participants and
conducted its own data analysis to inform the amendments that were
included in the Proposing Release and in this release.\91\ The
Commission has evaluated the national market system and its operation
in light of changes in the market and has sought input from market
participants throughout this process.\92\ After considering the
comments, which are discussed in context below, the Commission is
adopting amendments to these rules with certain modifications from the
Proposing Release.
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\90\ See, e.g., EMSAC Archives, supra note 4 (Rule 610 was
considered at the EMSAC), see also supra note 4 (discussing the
EMSAC); infra note 362 and accompanying text for a discussion of
previous considerations of Rule 610. For a discussion of previous
considerations of Rule 612, see Proposing Release, supra note 11, at
80272.
\91\ See infra sections V.B.1; V.B.3.b.iv and VII.D.
\92\ See also Proposing Release, supra note 11, at 80272
(discussing considerations of minimum pricing increments since Rule
612 was adopted) and 80287 (discussing considerations of access fee
caps since Rule 610 was adopted). See also IEX Letter I at 5
(describing steps taken by the Commission since the adoption of
Regulation NMS in 2005 to review the impact of Regulation NMS,
including the solicitation of input from stakeholders, further
stating, ``[t]he history shows that the Commission's current
Proposals do not arise in a vacuum. In fact, the Commission has
deliberately considered the views of multiple stakeholders over
years of review, and its current Proposals grow out of and build on
that ongoing review.'').
---------------------------------------------------------------------------

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

[[Page 81627]]

investors,'' and urged the Commission to review how these changes would
together impact liquidity.\93\ The Commission has considered the impact
of the amendments on liquidity and does not believe that they will
raise costs for investors.\94\ On the contrary, as discussed further
below, the amendments will enhance the ability of market participants
to price their orders in a competitive manner, reduce the amount of
fees for accessing protected quotations, help to ensure that exchange
fees are knowable when an order is placed and provide transparency
about orders in the market that are priced better than the NBBO. These
changes will enhance the operation of the national market system and
provide significant benefits to investors.
---------------------------------------------------------------------------

\93\ See Letter from Naureen Hassan, President, UBS Americas,
Robert Karofsky, President, UBS Investment Bank, and Suni Harford,
President, UBS Asset Management, dated Mar. 31, 2023 (``UBS
Letter'') at 10. See infra section V.B.3.b.i and section VII.D.4.a
for discussions of the interaction between the round lot definition
and the proposed changes to the minimum pricing increments.
\94\ See infra section VII.D.4.a (explaining that the
interaction of the reduction in tick size and the MDI Rules' round
lot definition would not have a material impact on the NBBO for
affected stocks as such stocks would be exceptionally liquid, which
should protect their NBBO from material deterioration).
---------------------------------------------------------------------------

Another commenter stated that the Regulation NMS Proposal would
increase ``market data costs'' because retail brokers would have to
take in and store an increased amount of market data to comply with the
changing minimum pricing increments, the MDI Rules' round lot
definition, and the odd-lot information requirements and to update
their systems accordingly, and because the exclusive SIPs may cause
third-party data vendors to require additional hardware to support
higher message rates.\95\ As discussed below,\96\ the Commission is
adopting amendments to the minimum pricing increments with
modifications from the proposal, which will lessen the potential costs
identified by the commenter. Specifically, the Commission is adopting
one minimum pricing increment for a smaller universe of NMS stocks than
was proposed and is reducing the frequency of minimum pricing increment
updates from a quarterly to a semiannual basis.\97\ While this
additional minimum pricing increment will likely require market
participants to incur new technology costs to manage the new data,
fewer changes are being adopted than were proposed and these changes
are necessary and justified to address the issues related to
constraints that have developed with the $0.01 minimum pricing
increment.\98\ Further, the costs related to implementing the round lot
definition were considered as part of the MDI Rules and the
acceleration of the timing of implementation does not increase those
costs. Although the Commission is modifying the round lot definition
from the definition adopted in the MDI Rules, the modifications will
reduce ongoing round lot implementation costs because round lots will
be assigned less frequently, i.e., from a monthly basis to a semiannual
basis, which means that systems will have to be updated less
frequently. Synchronizing the dates of the changes to round lots and
minimum pricing increments should also lower ongoing implementation
costs for market participants by potentially decreasing the number of
updates needed for their trading systems.\99\ Finally, the costs
related to implementing the odd-lot information definition were
considered in the Proposing Release.\100\ The adopted amendments, which
will result in fewer systems changes than anticipated in the Proposing
Release, will result in lower implementation costs than were
contemplated in the proposal \101\ and reduce the amount of data
disseminated by the exclusive SIPs and any future competing
consolidators as compared to what was contemplated in the Proposing
Release.
---------------------------------------------------------------------------

\95\ See Letter from Derrick Chan, Head of Equities, Fidelity
Capital Markets, dated Mar. 31, 2023 (``Fidelity Letter'') at 17.
The commenter described ``market data costs'' as those related to
systems changes necessary to implement the new minimum pricing
increments, round lot definition, and odd-lot information
definition.
\96\ See infra section III.C.
\97\ See infra section III.C.7.a; section III.C.8; section
VII.D.1.d and section VII.F.1.c.
\98\ See infra section VII.A; section VII.D.1.c (responding to
comments raising concerns about increased message traffic increasing
costs and stating: ``[t]he Commission recognizes the potential for
these costs articulated by the commenters but, considering
additional information provided by commenters, expects these effects
to be mild--including the effect on CAT costs.'').
\99\ See infra notes 1594-1595 and accompanying text.
\100\ See Proposing Release, supra note 11, at 80334.
\101\ See infra section VII.D.5.
---------------------------------------------------------------------------

One commenter stated that the implementation of various components
of the Proposing Release at or around the same time (specifically
access fees, minimum pricing increments and round lot sizes) could
complicate the Commission's ability to assess the impact of a specific
change and ``whether other consequences will ensue.'' \102\ To the
specific concerns of this commenter, the Commission has carefully
considered the interacting effects of access fees, minimum pricing
increments, and round lot sizes, see section VII. While the Commission
acknowledges that staging amendments may make them easier to study, the
nature of the adopted amendments will still make such study possible,
even if implemented together. Namely, the set of stocks for which the
tick size change applies tends to differ from the set of stocks for
which round lot changes apply.\103\ Access fee changes apply to some
stocks that will not be directly affected by either round lot reform or
tick size changes. Further, staging the amendments would delay the
significant benefits of the amendments.\104\
---------------------------------------------------------------------------

\102\ See Letter from Rich Steiner, Head of Global Market
Structure, RBC Capital Markets, dated Mar. 31, 2023 (``RBC Letter'')
at 2. See also Letter from Nathaniel N. Evarts, Managing Director,
Head of Trading, Americas, and Kimberly Russell, Market Structure
Specialist, Global SPDR Business, State Street Global Advisors,
dated Mar. 30, 2023 (``State Street Letter'') at 5 (suggesting that
the amendments to reduce the access fee caps should be implemented
before the minimum pricing increments to isolate the impact of the
effects) and infra section VII.D.2.c (responding to the State Street
Letter).
\103\ See infra note 801 for analysis identifying only two
stocks that would have qualified for both the tick reduction and a
reduction in the round lot as of Nov. 30, 2023. See also infra
section VII.D.4.a for a discussion of the small overlap of the round
lot definition and the tick size change.
\104\ See, infra, section II. The Commission recognizes that
delaying the rule would likewise delay costs to affected parties.
---------------------------------------------------------------------------

Several commenters suggested implementing the proposed accelerated
implementation of the round lot and odd-lot information definitions so
that the effects of these definitions could inform other proposed
changes.\105\ Other commenters suggested that round lots should be
implemented before the proposed changes to the minimum pricing
increments, so that data based on the MDI Rules' round lots could
inform changes to the minimum pricing increments.\106\
---------------------------------------------------------------------------

\105\ See, e.g., Letters from Jennifer W. Han, Executive Vice
President, Chief Counsel & Head of Global Regulatory Affairs,
Managed Funds Association, dated Mar. 30, 2023 (``MFA Letter'') at
14; Sarah A. Bessin, Deputy General Counsel, and Nhan Nguyen,
Assistant General Counsel, Investment Company Institute, dated Mar.
31, 2023 (``ICI Letter I'') at 2, 7; Gerald O'Reilly, Co-CEO and
Chief Investment Officer, and Ryan Wiley, Global Head of Equity
Trading, Dimensional Fund Advisors LP, dated Mar. 31, 2023
(``Dimensional Letter'') at 2.
\106\ See Letter from Hubert De Jesus, Managing Director, Global
Head of Market Structure and Electronic Trading, and Samantha DeZur,
Managing Director, Global Public Policy Group, BlackRock, Inc.,
dated Mar. 31, 2023 (``BlackRock Letter'') at 17; Dimensional Letter
at 2.
---------------------------------------------------------------------------

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

[[Page 81628]]

increments is based on round lots.\107\ Therefore, odd-lot information
will not have an impact on determining minimum pricing increments under
Rule 612. Further, for the reasons discussed below, the interaction of
the reduction in tick size and the MDI Rules' round lot definition will
likely not have a material impact on the NBBO of affected stocks since
only the most exceptionally liquid stocks would have prices over $250
and a TWAQS equal to or less than $0.015.\108\ Therefore, it is not
necessary to postpone amending the minimum pricing increments until
data is analyzed using the MDI Rules' round lots.
---------------------------------------------------------------------------

\107\ See infra section III.C.7.b.
\108\ See infra section V.B.3.b.i (identifying only two stocks--
both highly liquid--that would have qualified for both a tick
reduction and a reduction in the round lot as of Nov. 30, 2023).
---------------------------------------------------------------------------

In addition, the dissemination of odd-lot information in
conjunction with the MDI Rules' round lot sizes will increase
transparency about better priced orders and therefore should be
implemented within a similar time frame.\109\ Odd-lot information will
be provided for all NMS stocks, not just those NMS stocks that may be
assigned a smaller round lot. As discussed below, the number of NMS
stocks that may be assigned a smaller round lot as of November 30, 2023
is 163 NMS stocks.\110\ Therefore, while the MDI Rules' round lot sizes
will provide transparency about some better priced orders in higher
priced stocks, they will not enhance transparency about those orders
that continue to be defined as odd-lots and will not increase
transparency for NMS stocks priced at $250 or less. This transparency
is important for investors as it will enhance their ability to assess
the current pricing in the market for certain NMS stocks. Therefore,
the odd-lot information definition and the round lot definition each
represents important, but different information that will enhance the
usefulness of quotation information.
---------------------------------------------------------------------------

\109\ See infra section VII.D.4.
\110\ Id.
---------------------------------------------------------------------------

Some commenters recommended implementing the round lot definition
but not the odd-lot information definition,\111\ stating that
implementing odd-lot information would be burdensome on the
industry,\112\ or would delay the implementation of the round lot
definition by increasing the development work needed to be performed by
the industry,\113\ or that implementation of the odd-lot information
definition ``could lead investors to expect prices that are not
available.'' \114\ For the reasons discussed above, the implementation
of both of these definitions is important to enhancing transparency for
investors. The Commission has provided more time for implementing these
data elements to accommodate the systems changes that will be
necessary, therefore lessening implementation and development burdens
on the industry.\115\ Further, as discussed below, market participants
may decide to provide information to their customers about the changes
that are being implemented, such as how to understand the different
prices, and how the changes may impact their order entry requirements.
Investor notification and education can help investors understand the
operation and impact of these data elements.\116\
---------------------------------------------------------------------------

\111\ See, e.g., Letters from Michael Blaugrund, Chief Operating
Officer, NYSE, Jason Clague, Managing Director, Head of Operations,
Charles Schwab & Co., and Joseph Mecane, Head of Execution Services,
Citadel Securities, dated Mar. 6, 2023 (``NYSE, Schwab, and Citadel
Letter'') at 2; Jason Clague, Managing Director, Head of Operations,
Charles Schwab & Co., Inc., dated Mar. 31, 2023 (``Schwab Letter
II'') at 6, 36; Ryan Kwiatkowski, Chairman of the Board, and James
Toes, President & Chief Executive Officer, Security Traders
Association, dated Apr. 3, 2023 (``STA Letter'') at 8; Adam Nunes,
Hudson River Trading LLC, dated Mar. 31, 2023 (``Hudson River
Letter'') at 2; Joanna Mallers, Secretary, FIA Principal Traders
Group, dated Mar. 31, 2023 (``FIA PTG Letter II'') at 4-5; BlackRock
Letter at 12. See also infra section V.C.1.a. for a discussion of
comments received on the accelerated implementation of the odd-lot
information definition.
\112\ See FIA PTG Letter II at 4-5; Hudson River Letter at 2.
\113\ See FIA PTG Letter II at 4-5.
\114\ Schwab Letter II at 36.
\115\ See infra section VI.C.
\116\ See infra section V.B.3.a.
---------------------------------------------------------------------------

II. Equity Market Structure Initiatives and the Regulation NMS Proposal

In December 2022, the Commission issued three other proposals
related to separate aspects of equity market structure and Regulation
NMS.\117\ A number of commenters provided comments on all four EMS
Proposals jointly.\118\ One commenter stated that adoption of the Rule
605 Proposal is not a prerequisite to adoption of the other equity
market structure proposals.\119\ However, some commenters stated that
the Commission should consider an incremental approach and stagger the
implementation of the four EMS Proposals because of the extent to which
the proposed changes could impact the market and investors.\120\ Some

[[Page 81629]]

commenters suggested implementing only some of the proposed equity
market structure changes, such as the Rule 605 Amendments or portions
of the Regulation NMS Proposal.\121\ Some commenters stated that the
Rule 605 Proposal should be implemented first and that data from the
changes implemented in the Rule 605 Proposal should be analyzed to
assess whether the changes proposed in the Regulation NMS Proposal
should be made.\122\ Some commenters stated that, in light of the
Commission's approval of the amendments to rule 605, the Commission
should defer or suspend action on the Regulation NMS Proposal (and the
two remaining EMS Proposals) and re-evaluate whether to proceed after
the amendments to rule 605 have been implemented and the data collected
following implementation has been analyzed.\123\ One commenter
suggested implementing the round lot and odd-lot information
definitions after implementation of the Rule 605 Proposal, and
thereafter pausing to assess the impact of the changes on the
markets.\124\
---------------------------------------------------------------------------

\117\ See Securities Exchange Act Release Nos. 96943 (Dec. 14,
2022), 88 FR 3786 (Jan. 20, 2023) (proposal to amend rule 605 of
Regulation NMS) (``Rule 605 Proposal''); 96945 (Dec. 14, 2022), 88
FR 128 (Jan. 3, 2023) (proposal to adopt a new rule under Regulation
NMS that would enhance competition for the execution of marketable
orders of individual investors) (``OCR Proposal''); and 96946 (Dec.
14, 2022), 88 FR 5440 (Jan. 27, 2023) (proposal to establish
Commission rule-based best execution standards) (``Best Execution
Proposal'') (together, with the Proposing Release, the ``EMS
Proposals''). The Rule 605 Proposal was adopted on Mar. 6, 2024. See
Rule 605 Amendments, supra note 10.
\118\ See, e.g., Letters from Thom Tillis, Bill Hagerty, Mike
Crapo, Cynthia Lummis, and Kevin Cramer, United States Senate, dated
Jan. 20, 2023 (``Tillis et al. Letter''); Ellen Greene, Managing
Director, Equity and Options Market Structure, Securities Industry
and Financial Markets Association, dated Feb. 8, 2023 (``SIFMA
Letter I''); Joanna Mallers, Secretary, FIA Principal Traders Group,
dated Feb. 15, 2023 (``FIA PTG Letter I''); Hope M. Jarkowski,
General Counsel, NYSE Group, Inc., dated Mar. 13, 2023 (``NYSE
Letter I''); John A. Zecca, Executive Vice President, Global Chief
Legal, Risk & Regulatory Officer, Nasdaq, Inc., dated Mar. 30, 2023
(``Nasdaq Letter I''); Stephen John Berger, Managing Director,
Global Head of Government & Regulatory Policy, Citadel Securities,
dated Mar. 31, 2023 (``Citadel Letter I''); Adrian Griffiths, Head
of Market Structure, MEMX LLC, dated Mar. 31, 2023 (``MEMX
Letter''); Mehmet Kinak, Vice President and Global Head of Equity
Trading, and Jonathan Siegel, Vice President and Managing Legal
Counsel (Legislative & Regulatory Affairs), T. Rowe Price
Associates, Inc., dated Mar. 31, 2023 (``T. Rowe Price Letter'');
Bill Foster, French Hill, Henry Cuellar, Bill Huizenga, Wiley
Nickel, Andy Barr, Ritchie Torres, Ann Wagner, Brittany Pettersen,
Dan Meuser, Josh Gottheimer, Mike Flood, Vicente Gonzalez, Byron
Donalds, Mike Quigley, Michael V. Lawler, David Scott, Andrew R.
Garbarino, Gregory W. Meeks, Monica De La Cruz, Sean Casten, Scott
Fitzgerald, Bradley S. Schneider, Erin Houchin, Jim Himes, Young
Kim, Steven Horsford, Ralph Norman, Gwen Moore, Tom Emmer, Marc
Veasey, and Zach Nunn, United States House of Representatives, dated
Sept. 26, 2023 (``Foster et al. Letter''). See also Form Letter Type
E, of which 14 comments were received, Form Letter Type F, of which
1,703 comments were received, and Form Letter Type G, of which 652
comments were received, available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>.
\119\ See Letter from John Ramsay, Chief Market Policy Officer,
Investors Exchange LLC, dated Oct. 13, 2023 (``IEX Letter III'') at
3-5 (explaining how adoption of the amendments to rule 605 should
not delay adoption of the access fee cap and minimum increment
amendments, and stating, ``the premise that Rule 605 updates must be
a precondition to any other changes looks more like a calculated
stall than an argument for careful, reasoned decision making'').
\120\ See, e.g., T. Rowe Price Letter at 3; BlackRock Letter at
17; FIA PTG Letter II at 2; Dimensional Letter at 1, 3; State Street
Letter at 1-2; Letters from Jameson Schriber, Managing Director,
Goldman Sachs & Co. LLC, dated Mar. 31, 2023 (``Goldman Sachs
Letter'') at 8-9; Kirsten Wegner, Chief Executive Officer, Modern
Markets Initiative, dated Mar. 24, 2023 (``MMI Letter'') at 2;
William Capuzzi, Chief Executive Officer, Apex Fintech Solutions,
Inc., dated Mar. 31, 2023 (``Apex Letter'') at 14, 19; Michael
Markunas, Deputy General Counsel, Chief Compliance Officer, B. Riley
Securities, Inc., dated Mar. 31, 2023 (``B. Riley Letter'') at 1;
Kristen Malinconico, Director, Center for Capital Markets
Competitiveness, U.S. Chamber of Commerce, dated Mar. 31, 2023
(``Chamber of Commerce Letter'') at 2; Ellen Greene, Managing
Director, Equity and Options Market Structure, Securities Industry
and Financial Markets Association, dated Mar. 31, 2023 (``SIFMA
Letter II'') at 2, 22-23; William C. Thum, Managing Director and
Assistant General Counsel, Securities Industry and Financial Markets
Association Asset Management Group, dated Mar. 31, 2023 (``SIFMA AMG
Letter I'') at 2; Peter D. Stutsman, Global Head of Equity Trading,
and Timothy J. Stark, Head of Equity Markets and Transaction
Research, The Capital Group Companies, Inc., dated Mar. 31, 2023
(``Capital Group Letter'') at 2, 5; Ann Wagner, United States House
of Representatives, dated Nov. 28, 2022 (``Wagner Letter'') at 2.
\121\ See, e.g., Letters from Stephen John Berger, Managing
Director, Global Head of Government & Regulatory Policy, Citadel
Securities, dated Mar. 31, 2023 (``Equity Market Structure Citadel
Letter'') at 21; Ellen Greene, Managing Director, Equities & Options
Market Structure, and Joseph Corcoran, Managing Director, Associate
General Counsel, Securities Industry and Financial Markets
Association, dated Aug. 24, 2023 (``SIFMA Letter III'') at 3; Steven
M. Greenbaum, Senior Vice President, General Counsel, TradeStation
Securities, Inc., dated Mar. 30, 2023 (``TradeStation Letter'') at
7; Gregory Davis, Managing Director and Chief Investment Officer,
and Matthew Benchener, Managing Director, Personal Investor, The
Vanguard Group, Inc., dated Mar. 31, 2023 (``Vanguard Letter'') at
2; Michael Camacho, Chief Executive Officer, Wealth Management
Solutions, George C.W. Gatch, Chief Executive Officer, J.P. Morgan
Asset Management, and Jason E. Sippel, Chief Executive Officer, J.P.
Morgan Securities LLC, JPMorgan Chase & Co., dated Mar. 31, 2023
(``JPMorgan Letter'') at 2; Ji[rcaron][iacute] Kr[oacute]l, Deputy
Chief Executive Officer, Global Head of Government Affairs,
Alternative Investment Management Association, dated Mar. 31, 2023
(``AIMA Letter'') at 3; John L. Thornton, Co-Chair, Hal S. Scott,
President, and R. Glenn Hubbard, Co-Chair, Committee on Capital
Market Regulation, dated Mar. 31, 2023 (``CCMR Letter'') at 46;
Douglas A. Cifu, Chief Executive Officer, Virtu Financial, Inc.,
dated Mar. 30, 2023 (``Virtu Letter II'') at 4; Andrew M.
Saperstein, Co-President, Morgan Stanley, dated Mar. 31, 2023
(``Morgan Stanley Letter'') at 2-3, 6 and 7; Steve Quirk, Chief
Brokerage Officer, Robinhood Markets, dated Mar. 31, 2023
(``Robinhood Letter'') at 46; MFA Letter at 14; FIA PTG Letter II at
2, 4, 7; NYSE Letter I at 10-11; SIFMA Letter II at 11, 23; State
Street Letter at 3; Chamber of Commerce Letter at 1; STA Letter at
10-11; T. Rowe Price Letter at 3; Verret Letter I at 1, 5, 11; MMI
Letter at 2-3; BlackRock Letter at 17; Capital Group Letter at 5;
UBS Letter at 1-2; Foster et al. Letter at 1, 2; Fidelity Letter at
2, 5.
\122\ See, e.g., Letters from David Howson, Executive Vice
President, Global President, Cboe Global Markets, Nathaniel N.
Evarts, Managing Director, Head of Trading, Americas, State Street
Global Advisors, Kimberly Russell, Market Structure Specialist,
Global SPDR Business, State Street Global Advisors, Mehmet Kinak,
Global Head of Equity Trading, T. Rowe Price, Todd Lopez, Americas
Head of Execution Services, UBS Securities LLC, and Douglas A. Cifu,
Chief Executive Officer, Virtu Financial Inc., dated Mar. 24, 2023
(``Cboe, State Street, et al. Letter'') at 1-2, 3; Michelle Bryan
Oroschakoff, Managing Director, Chief Legal Officer, LPL Financial
LLC, dated Mar. 31, 2023 (``LPL Financial Letter'') at 4; Schwab
Letter II at 6, 37; UBS Letter at 1-2; Apex Letter at 14-15; MFA
Letter at 6; SIFMA Letter II at 11, 22; SIFMA AMG Letter I at 2; T.
Rowe Price Letter at 3; Vanguard Letter at 2, 7; JPMorgan Letter at
2; AIMA Letter at 3; CCMR Letter at 46; UBS Letter at 1-2, 10; Virtu
Letter II at 4; Foster et al. Letter at 1, 2; Capital Group Letter
at 5; Morgan Stanley Letter at 2, 6-7; Fidelity Letter at 2, 5, 27;
Letter from Ann Wagner, Andrew R. Garbarino, Frank D. Lucas, Bill
Huizenga, Tom Emmer, Dan Meuser, Zach Nunn, Pete Sessions, French
Hill, Bryan Steil, Michael V. Lawler, Erin Houchin, United States
House of Representatives, dated June 27, 2024 (``Wagner et al.
Letter''). Some commenters suggested adopting only the Rule 605
Amendments and portions of the Regulation NMS Proposal and then
evaluating the impact of those changes on the market. See Letter
from Melanie Ringold, Head of Legal, Americas, and Will Geyer,
Global Head of Capital Markets, Invesco Ltd., dated Mar. 31, 2023
(``Invesco Letter'') at 2, 5; Hudson River Letter at 1-2;
TradeStation Letter at 7.
\123\ See, e.g., Letters from Barbara Comstock, Executive
Director, American Consumer & Investor Institute, dated May 20, 2024
(``ACII Letter II'') at 1 and 3; Ellen Greene, Managing Director,
Equities & Options Market Structure, SIFMA, and Joseph Corcoran,
Managing Director, Associate General Counsel, SIFMA, dated 14, 2024
(``SIFMA Letter IV''); Ellen Greene, Managing Director, Equities &
Options Market Structure, SIFMA, Joseph Corcoran, Managing Director
and Associate General Counsel, SIFMA, William C. Thum, Managing
Director and Associate General Counsel, dated Aug. 13, 2024 (``SIFMA
AMG Letter II'') at 1-2; Thomas H. Merritt, Deputy General Counsel,
Virtu Financial, Inc., dated June 21, 2024 (``Virtu Letter III'').
See also Letters from Dan Meuser, Ann Wagner, Frank Lucas, Pete
Sessions, Bill Huizenga, French Hill, Andrew Garbarino, Young Kim,
Byron Donalds, Michael V. Lawler, Zach Nunn, United States House of
Representatives, dated June 27, 2024 (``Meuser et al. Letter'') at
2; Michael V. Lawler, United States House of Representatives, dated
July 9, 2024 (``Lawler Letter'') at 1; Wagner et al. Letter at 1-2.
\124\ See State Street Letter at 3.
---------------------------------------------------------------------------

The Commission disagrees with comments urging delayed
implementation of the Regulation NMS Proposal, either in its entirety
or portions of it, as delaying these amendments will delay significant
benefits for investors.\125\ The amendments adopted in this release
revise several provisions of Regulation NMS to benefit investors. The
Commission is adopting amendments to Rule 612 that will benefit
investors and other market participants by allowing certain NMS stocks
to be priced in increments that are smaller than the preexisting rule
allowed, which will lower transaction costs and introduce greater
competition on price into the market. The adopted amendments to Rule
610 will lower costs for investors and other market participants by
reducing the access fee caps and will help to address distortions in
the market associated with the preexisting fee caps. Additionally, the
amendments will require all exchange fees charged and rebates paid for
the execution of an order to be determinable at the time of execution,
allowing investors and other market participants the ability to know
with certainty the costs of their transactions at the time of the trade
and to allow investors to more readily request details about the fees
and rebates applicable to their orders. Accelerating the implementation
of the MDI Rules' round lot and odd-lot information definitions will
provide investors and other market participants that use SIP data with
transparency about better priced quotes and orders that are available
in the market but only visible to subscribers of exchange proprietary
data feeds sooner than originally planned. The amendments provide
important investor benefits, which are discussed throughout. Therefore,
the Commission is not delaying adopting the amendments.
---------------------------------------------------------------------------

\125\ See supra notes 121-124 and accompanying text. See also
supra note 104.
---------------------------------------------------------------------------

With respect to the Rule 605 Amendments, the Commission does not
agree with commenters that stated that amended rule 605 data must be
analyzed before adoption of the changes in this release.\126\ The
amendments adopted in this release are not dependent on rule 605 data
nor is the data from rule 605 reports necessary before the Commission
makes changes to better protect investors and benefit the markets more
broadly.\127\ While the Rule 605 Amendments will bring improvements to
disclosures for order executions of NMS stocks,\128\ the Regulation NMS
amendments address other structural concerns relating to investors'
trading and the lack of transparency in the national market system. For
example, quoted spreads for NMS stocks could not get tighter than $0.01
under preexisting Rule 612 for all quotes and orders in NMS stocks that
were priced equal to, or greater than, $1.00 per share.
---------------------------------------------------------------------------

\126\ See supra note 122.
\127\ Although the amendments adopted in this release are not
dependent on the implementation of the Rule 605 Amendments, the
amendments adopted in this release will enhance the usability of
information in the recently amended rule 605 reports. See infra
section VII.D.6.a.ii.
\128\ See Rule 605 Amendments, supra note 10.
---------------------------------------------------------------------------

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

[[Page 81630]]

round lot and odd-lot information definitions after the implementation
of the Rule 605 Amendments and then wait to assess the effects of these
changes.\129\ The commenter stated that it supported the round lot and
odd-lot information definitions but stated, without providing details
or any other support, that ``these changes could have unintended
impacts on price discovery, routing complexity, and trading costs.''
\130\ The Commission adopted the definitions in 2020 to provide
transparency about better priced orders that are available in the
market but are not fully transparent in NMS information. These
definitions will result in the provision to market participants of
important information about the prices at which market participants are
willing to trade and therefore will enhance price discovery. Market
participants may have to assess their order routing decisions based on
this enhanced transparency of better priced orders that are available
in the market.\131\
---------------------------------------------------------------------------

\129\ See State Street Letter at 3.
\130\ See State Street Letter at 3.
\131\ See Rule 605 Amendments, supra note 10, at 26482 (stating,
``Rule 605's price improvement statistics that are relative to the
best available displayed price will not be required to be reported
until six months after odd-lot order information needed to calculate
the best available displayed price is made available pursuant to an
effective national market system plan.'').
---------------------------------------------------------------------------

As discussed below, the data analysis performed by the Commission
and other market participants to assess changes in minimum pricing
increments and the access fee caps were not derived from rule 605
reports.\132\ While one commenter stated that rule 605 data should be
used to assess the amendments adopted in this release, the Commission
has utilized relevant and sufficient data other than rule 605 data that
fully and robustly support the amendments.\133\ One commenter states
that if this proposal were to be finalized along with the amendments to
Rule 605, ``it appears that market participants and regulators would be
unable to accurately assess the true impact of the market structure
changes contained in this Proposal, precluding an `apples-to-apples'
before-and-after comparison.'' \134\ However, market participants have
other data with which to analyze the effects of these amendments.
---------------------------------------------------------------------------

\132\ See infra section VII.D.6.a.iii (stating that the
Commission did not rely on rule 605 data in its analyses in the
Proposing Release and in this release).
\133\ See id. The Commission also has considered the interaction
of the compliance dates of the adopted amendments with the
compliance date of the Rule 605 Amendments. See infra section VI;
section VII.D.6.b.
\134\ See Citadel Letter I at 29.
---------------------------------------------------------------------------

Some commenters stated that the EMS Proposals would have an impact
on each other.\135\ Some commenters stated that the EMS Proposals
should have been analyzed together to assess how the proposals would
relate to, and operate with, each other.\136\ One group of members of
Congress recommended that no equity market structure rule ``should be
finalized or implemented'' until the Commission ``[c]onduct[s] a
comprehensive cost-benefit analysis of the aggregate impact of [these
rules] and seek[s] public comment on this analysis[,]'' and the
Commission proposes ``a reasonable, workable, and staggered schedule
for public comment on the adoption and implementation of the proposals,
considering their overlapping nature, significant compliance and
operational burdens, and if they may be insurmountable for smaller or
emerging firms.'' \137\
---------------------------------------------------------------------------

\135\ See, e.g., NYSE, Schwab, and Citadel Letter at 2; STA
Letter at 4, 10-11; T. Rowe Price Letter at 3; RBC Letter at 2 and
5; Nasdaq Letter I at 1, 6; Dimensional Letter at 1-2; FIA PTG
Letter II at 2; Schwab Letter II at 3, 37; Apex Letter at 14-15, 19;
JPMorgan Letter at 2-3; Chamber of Commerce Letter at 2; BlackRock
Letter at 3, 17; MMI Letter at 2-3, 9; B. Riley Letter at 2; Capital
Group Letter at 5; Letters from Ari Rubenstein, CEO, GTS Securities
LLC, dated Mar. 31, 2023 (``GTS Letter'') at 4, 9; Jatin
Suryawanshi, Managing Director, Head of Global Quantitative
Strategies, and Anna Ziotis Kurzrok, Managing Director, Head of
Market Structure, Jefferies, LLC, dated May 2, 2023 (``Jefferies
Letter'') at 1. See also Letters from Patrick McHenry, French Hill,
Frank Lucas, Pete Sessions, Bill Posey, Blaine Luetkemeyer, Bill
Huizenga, Ann Wagner, Andy Barr, Roger Williams, Tom Emmer, Barry
Loudermilk, Alexander X. Mooney, Warren Davidson, John Rose, Bryan
Steil, William Timmons, Ralph Norman, Dan Meuser, Scott Fitzgerald,
Andrew R. Garbarino, Young Kim, Byron Donalds, Mike Flood, Michael
V. Lawler, Zach Nunn, Monica De La Cruz, Erin Houchin, and Andy
Ogles, United States House of Representatives, dated Sept. 26, 2023
(``McHenry et al. Letter'') at 2; Ronald C. Parker, President and
CEO, National Association of Securities Professionals, dated Feb.
28, 2023 (``NASP Letter'') at 4; State Street Letter at 2.
\136\ See, e.g., SIFMA Letter I at 1; SIFMA Letter II at 3, 8-9,
11, 12-13; SIFMA AMG Letter I 4-5; GTS Letter at 4-5; Hudson River
Letter at 1; UBS Letter at 2; NYSE, Schwab, and Citadel Letter at 1;
Citadel Letter I at 2, 28-29; Schwab Letter II at 2-3, 37; Virtu
Letter II at 5, 19-20, 31-35, 55-57; MMI Letter at 2; Nasdaq Letter
I at 6-7; Invesco Letter at 2; Goldman Sachs Letter at 3; Robinhood
Letter at 7, 22, 24, 42, 44; Apex Letter at 14, 15; McHenry et al.
Letter at 1, 2; CCMR Letter at 46; Chamber of Commerce Letter at 3;
Equity Market Structure Citadel Letter at 13-14; Letters from JJ
Kinahan, President, Tastytrade, Inc., dated Mar. 30, 2023
(``Tastytrade Letter'') at 2; Jason Clague, Managing Director, Head
of Operations, Charles Schwab & Co., dated Mar. 22, 2023 (``Schwab
Letter I'') at 2; Eric J. Pan, President and CEO, and Susan Olson,
General Counsel, Investment Company Institute, dated Aug. 17, 2023
(``ICI Letter II'') at 2-3, 7-9; Mary Lou H. Ivey, Chairman of the
Boards and Independent Trustee, David J. Urban, Independent Trustee,
and Theo H. Pitt, Jr., Independent Trustee, Independent Trustees of
ETF Opportunities Trust and World Funds Trust, dated Mar. 31, 2023
(``Independent Trustees Letter'') at 1-2; Stephen John Berger,
Managing Director, Global Head of Government & Regulatory Policy,
Citadel Securities, dated Dec. 5, 2023 (``Citadel Letter II'') at 1,
10; Christopher A. Iacovella, President & Chief Executive Officer,
American Securities Association, dated Mar. 31, 2023 (``ASA
Letter'') at 2, 3; Seth A. Miller, President, Cambridge Investment
Research, Inc. dated Mar. 31, 2023 (``Cambridge Letter'') at 3;
Nicolas Morgan, Founder and President, Investor Choice Advocates
Network, dated Mar. 31, 2023 (``ICAN Letter'') at 2; Rebekah Goshorn
Jurata, General Counsel, American Investment Council, dated Aug. 8,
2023 (``AIC Letter'') at 2, 5, 10; James Angel, Associate Professor
of Finance, Georgetown University, dated Mar. 31, 2023 (``Angel
Letter'') at 2; see also Letter from Jonathan Kanter, Assistant
Attorney General, Doha Mekki, Principal Deputy Assistant Attorney
General, Maggie Goodlander, Deputy Assistant Attorney General, David
Lawrence, Policy Director, Karina Lubell, Chief, Competition Policy
& Advocacy Section, Ihan Kim, Attorney Advisor, Competition Policy &
Advocacy Section, and Owen M. Kendler, Chief, Financial Services,
Fintech & Banking Section, United States Department of Justice,
dated Apr. 11, 2023 (``DOJ Letter'') at 6.
\137\ See McHenry et al. Letter at 2.
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As discussed below in the economic analysis, the Commission uses as
a baseline the world as it exists at the time of adoption, including
adopted rules but not proposed rules.\138\ Each release, like this
release and the Rule 605 Amendments (which were adopted prior to the
amendments in this release), explains fully the rationale for the
particular rulemaking and includes a robust economic analysis of the
rules being adopted, including the possible economic effects that
commenters raised with regard to specific interactions between the
amendments and the Rule. In addition, comments on how the adoption of
the amendments should affect the timing or sequence of the other EMS
Proposals will be considered if and when those rules are adopted. The
economic analysis considers potential economic effects arising from any
overlap in compliance dates between these amendments and other recent
amendments.\139\ Similarly, the effects of the amended rules are
measured against the existing regulatory baseline, which includes
recently adopted rules.\140\
---------------------------------------------------------------------------

\138\ See infra section VII.C.
\139\ See infra sections VII.C and VII.D.6.
\140\ The OCR Proposal and the Best Execution Proposal Release
mentioned by commenters remain at the proposal stage. To the extent
that the Commission takes final action on either of those proposals,
the baseline in each of those subsequent rulemakings will reflect
the regulatory landscape that is current at that time. See infra
section VII.C, note 1047.
---------------------------------------------------------------------------

Commenting on the Proposing Release together with the other EMS
Proposals, some commenters requested that the Commission publicly
release anonymized subsets of CAT data \141\

[[Page 81631]]

used in connection with the tables and figures in the EMS Proposals'
economic analyses.\142\ In the Proposing Release, unlike certain of the
other EMS Proposals, CAT data was not used in any tables and
figures.\143\ Rather, the Proposing Release used CAT data to determine
the numbers of affected broker-dealers in the baseline and compliance
cost discussion in the economic analysis, as well as to determine
statistics in a reasonable alternative to the proposed amendment that
would have imposed a minimum pricing increment for trades.\144\ The CAT
information used in this adopting release is narrower still.
Specifically, the Commission uses CAT information, consisting of lists
of firm names, including firm identifier numbers and account type
information, only to determine the numbers of affected firms. The
Commission is not releasing anonymized versions of the CAT information
used in this release because releasing an anonymized list of firm names
would provide no meaningful information beyond the total number of
affected firms, which is the same information provided in this release.
The Commission described in the Proposing Release and describes in this
release the CAT data and methodology used in connection with its
estimates.
---------------------------------------------------------------------------

\141\ The CAT database contains confidential market information.
See, e.g., Securities Exchange Act Release No. 67457 (Jul. 18,
2012), 77 FR 45722, 45782 (Aug. 1, 2012) (stating that maintaining
the confidentiality of customer and other information reported to
CAT ``is essential'' and that ``[w]ithout adequate protections,
market participants would risk the exposure of highly-confidential
information about their trading strategies and positions''); see
also Securities Exchange Act Release No. 84696 (Nov. 15, 2016), 81
FR 84696 (Nov. 23, 2016).
\142\ See, e.g., SIFMA Letter I at 1-2, 3-4; Letters from Thomas
M. Merritt, Deputy General Counsel, Virtu Financial, Inc., dated
Feb. 24, 2023 (``Virtu Letter I'') at 1, 2; SIFMA Letter II at 2-3,
11, 22; SIFMA AMG Letter I at 5; Schwab Letter II at 3-4; T. Rowe
Price Letter at 3; Chamber of Commerce Letter at 2-3; Robinhood
Letter at 8; Equity Market Structure Citadel Letter at 16-17;
Cambridge Letter at 4; Jefferies Letter at 1; SIFMA AMG Letter II at
5-7; and SIFMA Letter IV at 6.
\143\ See SIFMA Letter I at 7 (``Regulation NMS: Minimum Pricing
Increments, Access Fees, and Transparency of Better Priced Orders--
The following tables/figures within the Proposal use CAT data:
none.''). The Commission responds to specific comments on releasing
the CAT data used in the tables and figures of the specific EMS
Proposals in the relevant adopting release, where appropriate. See
Rule 605 Amendments, supra note 10.
\144\ See, e.g., Proposing Release, supra note 11, at 80316,
80340-41. A commenter identifies this limited use of CAT data in the
Proposing Release but does not identify specific additional
information the Commission should provide. See Equity Market
Structure Citadel Letter at 16-17.
---------------------------------------------------------------------------

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

Rule 612 of Regulation NMS establishes minimum pricing increments
(also known as minimum price variations or tick sizes) for quotations
and orders in NMS stocks. Specifically, preexisting Rule 612 stated
that ``[n]o national securities exchange, national securities
association, alternative trading system, vendor, or broker or dealer
shall display, rank, or accept from any person a bid or offer, an
order, or an indication of interest in any NMS stock priced in an
increment smaller than $0.01 if that bid or offer, order, or indication
of interest is priced equal to, or greater than, $1.00 per share.''
\145\ Preexisting Rule 612(b) had similar language that applied to
bids, offers, orders, and indications of interest in any NMS stock
priced less than $1.00 per share and specified that the minimum pricing
increment could not be smaller than $0.0001. Preexisting Rule 612 of
Regulation NMS did not establish or include minimum pricing increments
for transactions.\146\
---------------------------------------------------------------------------

\145\ See 17 CFR 242.612.
\146\ As discussed in the Proposing Release, the Commission
granted exemptions from Rule 612 to various national securities
exchanges' retail liquidity programs (``RLPs'') as a way to allow
them to compete with over-the-counter (``OTC'') market maker sub-
penny price improvement. See Proposing Release, supra note 11, at
80271. Under the RLPs, exchanges can accept and rank certain quotes
and orders from certain participants in sub-penny increments as
small as $0.001.
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A. Issues Raised in the Existing Market Structure Related to Tick Sizes

The Proposing Release contains an extensive discussion of the
development and the consideration by the Commission and market
participants of Rule 612 since its adoption.\147\ Since the adoption of
Rule 612, there has been a marked increase in the trading volume of NMS
stocks that would likely be priced with tighter spreads if their
pricing was not constrained by the uniform $0.01 minimum pricing
increment required by preexisting Rule 612 for quotes and orders all
NMS stocks priced equal to, or greater than, $1.00 per share. Easing
constraints on ticks for these NMS stocks will reduce transaction costs
for market participants, including investors, and allow prices to be
determined in a more competitive manner. In other words, the number and
volume of NMS stocks that could benefit from the ability to quote in a
minimum pricing increment that is smaller than $0.01 (i.e., sub-
pennies) has grown.
---------------------------------------------------------------------------

\147\ See Proposing Release, supra note 11, at 80272-80273.
---------------------------------------------------------------------------

In the Proposing Release, the Commission considered data to
evaluate and determine which NMS stocks, by number and by volume, would
benefit from a reduced minimum pricing increment for quotes and orders
that would allow for tighter spreads. While the Commission could not
estimate the number of stocks that would have a TWAQS of $0.008 or less
due to the preexisting Rule 612 requirement that all orders priced
equal to greater than $1.00 per share have a $0.01 minimum pricing
increment, the Commission could estimate that 1,707 stocks, which
represented approximately 64% of share volume and 37.9% of dollar
volume in January through May 2022, had TWAQS that were less than
$0.016.\148\ Additionally, 2,648 stocks, which represented
approximately 17.9% of share volume and 22.3% of dollar volume in
January through May 2022, traded with a spread that was greater than
$0.016 and less than or equal to $0.04. More recently, the Commission
analyzed NMS stocks in 2023 and identified 2,420 NMS stocks that had a
TWAQS of $0.015 or less; these NMS stocks represent about 74% of share
volume and about 47% of dollar volume.\149\
---------------------------------------------------------------------------

\148\ See Proposing Release, supra note 11, at 80280.
\149\ See infra section VII.D.1.b, table 3.
---------------------------------------------------------------------------

Prior to the Proposing Release, certain market participants
conducted data analyses on the effects of Rule 612 and concluded that a
$0.01 minimum quoting increment may not be appropriate for all NMS
stocks that are priced greater than or equal to $1.00.\150\ The
Commission discussed these data analyses in the Proposing Release.\151\
One of these market participants, Cboe, submitted updated data analysis
in two comment letters to the Proposing Release.\152\
---------------------------------------------------------------------------

\150\ See, e.g., The Tick-Constrained Stock Problem by Phil
Mackintosh (Jan. 20, 2022), available at <a href="http://www.nasdaq.com/articles/the-tick-constrained-stock-problem">http://www.nasdaq.com/articles/the-tick-constrained-stock-problem</a>) (``Nasdaq Paper''). See
also Petition for Rulemaking to Amend Rule 612 of Regulation NMS to
Adopt Intelligent Tick-Size Regime, dated Dec. 16, 2019, submitted
by John A. Zecca, Executive Vice President, Chief Legal Officer &
Chief Regulatory Officer, Nasdaq Inc. available at <a href="https://www.sec.gov/rules/petitions/2019/petn4-756.pdf">https://www.sec.gov/rules/petitions/2019/petn4-756.pdf</a> (``Nasdaq Intelligent
Tick Proposal''); The Impact of Tick-constrained Securities on the
U.S. Equity Market (available at <a href="http://www.nyse.com/publicdocs/Tick_Constrained_Stocks.pdf">http://www.nyse.com/publicdocs/Tick_Constrained_Stocks.pdf</a>) (``NYSE White Paper'') (no date
available); and Cboe Proposes Tick-Reduction Framework to Ensure
Market Structure Benefits All Investors (available at <a href="https://www.cboe.com/insights/posts/cboe-proposes-tick-reduction-framework-to-ensure-market-structure-benefits-all-investors/">https://www.cboe.com/insights/posts/cboe-proposes-tick-reduction-framework-to-ensure-market-structure-benefits-all-investors/</a>) (``Cboe
Proposal'').
\151\ See Proposing Release, supra note 11, at 80274-80278.
\152\ See Letters from Angelo Evangelou, Cboe Global Markets,
Inc., dated Feb. 28, 2023 (``Cboe Letter I''); Patrick Sexton, EVP,
General Counsel & Corporate Secretary, Cboe Global Markets, Inc.,
dated Mar. 31, 2023 (``Cboe Letter II'') at Appendix A. See also
Letter from Hope M. Jarkowski, General Counsel, NYSE Group, Inc.,
dated Mar. 27, 2023 (``NYSE Letter II'') (submitting for the record
its paper entitled Price Improvement, tick harmonization & investor
benefit (Aug. 22, 2022). This paper was described in the Proposing
Release, supra note 11, at 80275; MEMX Letter, Appendix (submitting
Tick-constrained Securities (Aug. 2021). This paper was described in
the Proposing Release, supra note 11, at 80274. In the MEMX Letter,
MEMX also submitted Tick-constrained Securities, The Tick Size
Debate, Revisited (Jan. 2022) which analyzed a set of reverse splits
on certain low-priced ProShares exchange-traded products (``ETPs'')
and finding that the tick-constrained ETPs analyzed traded with
significantly lower spreads post reverse split. This paper was
described in the Proposing Release, supra note 11, at 80318.

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[[Page 81632]]

B. Proposal To Amend Rule 612

The Commission proposed variable minimum pricing increments for
quotes and orders for NMS stocks priced at, or greater than, $1.00 per
share based on the TWAQS of a particular NMS stock. The Commission also
proposed that the minimum pricing increment for executions be the same
as, and correlate to, the minimum pricing increment for quoting on all
trading venues (i.e., on-exchange and OTC), subject to certain
exceptions.
Specifically, the Commission proposed that the minimum pricing
increments for quotations, orders and executions in NMS stocks that are
priced equal to or greater than $1.00 per share would be variable and
no smaller than: (1) $0.001 if the TWAQS \153\ for the NMS stock during
the Evaluation Period \154\ was equal to, or less than, $0.008; (2)
$0.002, if the TWAQS for the NMS stock during the Evaluation Period was
greater than $0.008 but less than, or equal to $0.016; (3) $0.005, if
the TWAQS for the NMS stock during the Evaluation Period was greater
than $0.016 but less than, or equal to, $0.04; and (4) $0.01 if the
TWAQS for the NMS stock during the Evaluation Period was greater than
$0.04.\155\ Further, as proposed, NMS stocks' TWAQS would have been
measured quarterly based on one month of trading data.\156\ In other
words, it was proposed that the assignment of minimum pricing
increments for the quoting and trading of NMS stocks priced equal to or
greater than $1.00 per share be done on a quarterly basis.
---------------------------------------------------------------------------

\153\ See infra section III.C.7.b. See also proposed Rule
612(a).
\154\ See infra section III.C.7.a. See also proposed Rule
612(a).
\155\ See proposed Rule 612(c).
\156\ See proposed Rule 612(a).
---------------------------------------------------------------------------

The Commission stated that it preliminarily believed that the
proposed Rule 612 amendments would promote: (1) fair and orderly
markets and economically efficient executions, particularly for tick-
constrained NMS stocks and retail order flow; and (2) fair competition
and equal regulation between OTC market makers, exchanges, and ATSs
that compete for retail liquidity by requiring that NMS stocks trade
with the same minimum pricing increment regardless of venue (i.e., on
or off-exchange).\157\ The Commission also stated that proposed Rule
612 would promote price discovery and price competition, particularly
for tick-constrained stocks and retail order flow, by permitting the
uniform quoting and trading of NMS stocks across trading venues, in
finer increments, based on objective criteria. The Commission
preliminarily believed that the proposed Rule 612 amendments would
result in the pricing of quotes and orders being more in alignment with
the principles of supply and demand.
---------------------------------------------------------------------------

\157\ See Proposing Release, supra note 11, at 80273 (discussing
the competitive dynamic among exchanges, ATSs and OTC market
makers).
---------------------------------------------------------------------------

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

After considering comments, and analyzing additional data in
response to those comments, the Commission is modifying and adopting
the proposed amendments to Rule 612. As adopted, Rule 612(b)(2)
provides that no national securities exchange, national securities
association, ATS, vendor, or broker or dealer shall display, rank, or
accept from any person a bid or offer, an order, or an indication of
interest in any NMS stock in an increment smaller than required
pursuant to either paragraph (i) or (ii) below if that bid or offer,
order, or indication of interest is priced equal to or greater than
$1.00 per share:
(i) $0.01, if the Time Weighted Average Quoted Spread for the NMS
stock during the Evaluation Period was greater than, $0.015; or
(ii) $0.005, if the Time Weighted Average Quoted Spread for the NMS
stock during the Evaluation Period was equal to or less than $0.015.
Rule 612(b)(3) provides that no national securities exchange,
national securities association, alternative trading system, vendor, or
broker or dealer shall display, rank, or accept from any person a bid
or offer, an order, or an indication of interest in any NMS stock
priced in an increment smaller than $0.0001 if that bid or offer,
order, or indication of interest is priced less than $1.00 per
share.\158\
---------------------------------------------------------------------------

\158\ Rule 612(b)(3) is the same as preexisting Rule 612(b).
---------------------------------------------------------------------------

Further, as amended, minimum pricing increments for quotes and
orders will be assigned on a semiannual basis using 3-months of trading
data to calculate each NMS stock's TWAQS.\159\ Therefore, as adopted, a
minimum pricing increment of either $0.01 or $0.005 will be assigned to
each NMS stock for quotes and orders that are priced equal to or
greater than $1.00 per share twice a year and will be operative for a
six-month period.\160\
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\159\ See Rule 612(a)(1).
\160\ Some commenters suggested that the Commission consider
wider quoting increments. See, e.g., Nasdaq Letter I; ASA Letter at
4; MEMX Letter at 20; Cboe, State Street, et al. Letter at 2; BIO
Letter at 3; Invesco Letter at 3; Robinhood Letter at 39; Themis
Letter at 5; Dimensional Letter at 2; and Letter from Tim Gately,
Managing Director, Head of Equities Sales, Americas, Citigroup
Global Markets, Inc., dated Mar. 31, 2023 (``Citigroup Letter'') at
5. The Commission is not adopting a wider quoting increment for NMS
stocks or a subset of NMS stocks as part of these amendments. As
discussed throughout this release, the Commission is amending Rule
612 to address issues that developed related to the constraint that
results from the $0.01 minimum pricing increment. A wider quoting
increment would not address these specific issues.
---------------------------------------------------------------------------

The amendment differs from the proposal because rather than adding
three proposed smaller minimum pricing increments for quotes and orders
($0.005, $0.002, $0.001) to the current $0.01 increment, only one
additional minimum pricing increment ($0.005) for NMS stocks that have
a TWAQS of $0.015 or less will be added. In addition, the amendment
differs from the proposal as it (1) does not include a minimum pricing
increment for trades, (2) modifies the Evaluation Period, and (3)
provides for an implementation period.
1. General Comments and Discussion
The Commission received many comments on the proposal to amend Rule
612.\161\ Some commenters supported the need to amend Rule 612.\162\
Many individual commenters generally supported the proposed amendments;
\163\ while some individual

[[Page 81633]]

commenters agreed that Rule 612 should be amended but recommended that
the proposal be modified.\164\
---------------------------------------------------------------------------

\161\ See supra note 82.
\162\ See, e.g., Form Letter Type A, of which 22 comments were
received; Form Letter Type D, of which 255 comments were received;
Form Letter Type G, of which 652 comments were received, available
at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>; IEX Letter I at
6; Letters from David Mechner, Chief Executive Officer, Pragma, LLC,
dated Mar. 23, 2023 (``Pragma Letter''); Citigroup Letter at 4; MMI
Letter at 3; Cboe, State Street, et al. Letter at 2; Nasdaq Letter I
at 2; Managed Funds Letter dated March 30, 2023 at 11; letter from
Joseph Scafidi, Global Head of Trading, and Carlos Oliveira, Head of
Trading Analytics and Market Structure, Brandes Investment Partners,
L.P., dated Mar. 23, 2023 (endorsed by Adam Conn, Director, Baillie
Gifford (Overseas) Ltd. et al.) (``Brandes Letter'') at 1; Angel
Letter at 5; TradeStation Letter; Vanguard Letter at 4; B. Riley
Letter at 1; JPMorgan Letter at 4; and UBS Letter at 10.
\163\ See, e.g., Form Letter Type D, of which 255 comments were
received; Form Letter Type E, of which 14 comments were received;
and Form Letter Type G, of which 652 comments were received,
available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>;
Letter from Bibambop RIP, dated Mar. 16, 2023; Letter from Binh
Tran, dated Mar. 4, 2023; Letter from Jerry Pang, dated Mar. 4,
2023; Letter from Charlie Chen, dated Mar. 1, 2023; Letter from
Daniel Song, dated Jan. 12, 2023; Letter from Deok Park, dated Dec.
26, 2023; and Letter from Clarissa West, dated Apr. 1, 2023.
\164\ See, e.g., Form Letter Type H, of which 853 comments were
received, available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>.
---------------------------------------------------------------------------

Broadly, many commenters stated that preexisting Rule 612 should be
amended in order to permit sub-penny quoting.\165\ One commenter stated
that for those stocks that are tick-constrained ``[t]he one-cent
increment for quoting can make it difficult for liquidity providers to
fill orders and often results in higher trading costs.'' \166\ Another
commenter stated that tick-constrained stocks experience wider quoted
spreads, which results in ``significantly increased transaction costs
for investors,'' and that these securities generally have longer queues
and trade with ``outsized notional liquidity at the NBBO.'' \167\
Several commenters stated that the ``one-size-fits-all'' requirement in
Rule 612 should be revisited.\168\ One commenter stated that Rule 612
impedes the ability of market participants to price some NMS stocks
that would naturally be priced within the penny spread.\169\ The
adopted minimum quoting increment of $0.005 will enable the targeted
NMS stocks to be more naturally priced based on the principles of
supply and demand within the penny spread.
---------------------------------------------------------------------------

\165\ See, e.g., Letter from Stephen W. Hall, Legal Director and
Securities Specialist, Better Markets, Inc., dated Oct. 31, 2023
(``Better Markets Letter II'') at 3; SIFMA Letter II; Brandes Letter
at 1; ICI Letter I; BlackRock Letter; B. Riley Securities Letter;
JPMorgan Letter at 4; Cambridge Letter at 6; Invesco Letter at 3;
UBS Letter at 10; Citigroup Letter at 4; TradeStation Letter at 6;
letters from individuals, including the Form Letter Type D, of which
255 comments were received; Form Letter Type G, of which 652
comments were received; and Form Letter Type H, of which 853
comments were received, available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>.
\166\ See ASA Letter at 4.
\167\ See MEMX Letter at 9.
\168\ See, e.g., SIFMA Letter II at 33; BlackRock Letter at 5;
Citigroup Letter at 4; and MMI Letter at 5; UBS Letter at 10; Letter
from Lawrence Harris, Ph.D., CFA, Professor of Finance and Business
Economics, U.S.C. Marshall School of Business, dated Dec. 18, 2023
(``Harris Letter'') at 8.
\169\ See Better Markets Letter II at 8.
---------------------------------------------------------------------------

Generally, comments from individuals supported the proposal without
any additional suggested changes.\170\ One commenter stated of the
proposal, ``[t]his means that the pricing of stocks will be more
precise and accurate, ensuring that I can get the best possible price
for my trades.'' \171\ Another commenter stated that ``[a]llowing for
sub-penny pricing will enable buyers to obtain lower prices from
willing sellers and sellers to obtain higher prices from willing
buyers, resulting in a more efficient market.'' \172\ Comments from
other market participants, including exchanges,\173\ broker-dealers,
and institutional investors \174\ recommended modifying the proposal to
Rule 612 to reduce the number of potential minimum quoting increments.
Some commenters stated that further reduction of the minimum pricing
increment for quotes and orders may be warranted for certain NMS stocks
``in the future'' but that a $0.005 increment should be implemented and
studied before any further reductions.\175\ For the reasons discussed
throughout, in response to commenters, the Commission is adopting
amended Rule 612. Compared to the initial proposal, the modified
amendments will be easier for market participants to implement and
adapt to.
---------------------------------------------------------------------------

\170\ See, e.g., Form Letter Type A, of which 22 comments were
received; Form Letter Type D, of which 255 comments were received;
Form Letter Type E, of which 14 comments were received; Form Letter
Type G, of which 652 comments were received; Form Letter Type I, of
which 22 comments were received; Form Letter Type J, of which 15
comments were received; and Form Letter Type K, of which 22 comments
were received, available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>.
\171\ Letter from John dated Feb. 23, 2023.
\172\ Letter from Nevin Varghese dated Dec. 26, 2022.
\173\ See IEX Letter I at 6; Cboe, State Street, et al. Letter
at 2; Nasdaq Letter I at 14; MEMX Letter at 18; and Cboe Letter II
at 3.
\174\ See Capital Group Letter at 4; ICI Letter I at 5-6;
Vanguard Letter at 4-5; Invesco Letter at 3; Schwab Letter II at 6;
T. Rowe Price Letter at 4; Fidelity Letter at 14; Brandes Investment
Letter dated March 31, 2023 at 2; Ontario Teachers, Alberta
Investment, CalSTRS, CalPERS, Canada Pension, and Texas Retirement
Letter dated Mar. 31, 2023 at 2 (``Ontario Teachers et al.
Letter''); BlackRock Letter at 5; Dimensional Letter at 2; B. Riley
Letter at 1; and Letter from Christopher P. Bowker Jr., Director of
Global Equity Trading, Boston Partners Global Investors, Inc., Joe
Mariano, Senior Vice President, Global Head of Trading, Calamos
Advisors LLC, Melissa F. Hinmon, Director of Equity Trading,
Glenmede Investment Management, Dan Royal, Global Head of Equity
Trading, Janus Henderson Investors US LLC, dated Apr. 6, 2023
(``Boston Partners, Calamos Advisors, Glenmede Investment, and Janus
Henderson Letter''); State Street Letter at 3; NYSE, Schwab, and
Citadel Letter at 2; Letter from John Zhu, Head of Trading, Optiver
US LLC, dated Mar. 15, 2023 (``Optiver Letter'') at 4; Pragma Letter
at 1; Cboe, State Street, et al. Letter at 2; Letter from Milan
Galik, Chief Executive Officer, Interactive Brokers Group,
Interactive Brokers LLC, dated Mar. 30, 2023 (``Interactive Brokers
Letter'') at 5; RBC Letter at 3; Morgan Stanley Letter at 3-4;
JPMorgan Letter at 4-5; Letter from at 2; Joe Wald, Managing
Director & Co-Head of Electronic Trading, Eric Stockland, Managing
Director, Global Markets, Brad A. Rothbaum, Managing Director & Head
U.S. Global Markets, Chief Operating Officer & Head of the U.S.
Branches, and Michael Forlenza, Managing Director & Head of U.S.
Capital Markets Compliance, BMO Capital Markets Corp., dated Mar.
31, 2023 (``BMO Letter''); Brandes Investment Letter dated March 23,
2023 at 2; B Riley Letter at 1; Themis Letter; UBS Letter at 10;
Citigroup Global Letter at 4-5; and Jefferies Letter at 3.
\175\ See, e.g., BlackRock Letter at 6 and B. Riley Letter at 1.
---------------------------------------------------------------------------

One commenter suggested that the Commission use its exemptive
authority to reduce minimum pricing increments and access fees in a
manner similar to that requested by MEMX.\176\ MEMX requested an
increment of $0.005 for NMS stocks that are ``tick-constrained''
(defined by MEMX as stocks that trade with an average quoted spread of
$0.011 or less).\177\ The commenter recommended this course of action
as a means to gather data on sub-penny pricing increments to help
determine whether, and to what degree, the proposed modifications were
warranted.\178\ The commenter also stated that using an exemption to
test a reduction of minimum pricing increments and the access fee caps
could include an expiration and a ``roll-back'' plan should unintended
consequences become apparent.\179\ Other commenters recommended that
the Commission reduce the minimum pricing increments for a sample of
stocks so that data could be gathered and evaluated before changes were
adopted on a more widespread basis.\180\ Finally, one commenter
recommended that the Commission establish a ``transparent structured
process to evaluate whether proposed changes to minimum pricing
increments and access fees are actually improving the execution
experience'' and that a ``clearly articulated off-ramp/kill-switch to
unwind these changes'' be in place to return to current minimum pricing
increments and the access fee caps.\181\ Another commenter stated that
if the Commission adopted a modified amendment to Rule 612 that such
modification should be re-proposed for public comment.\182\
---------------------------------------------------------------------------

\176\ See Jefferies Letter. See also Proposing Release, supra
note 11, at 80277 for a discussion of the MEMX request for
exemption.
\177\ See Proposing Release, supra note 11, at 80277 for a
discussion of the MEMX request for exemption.
\178\ See Jefferies Letter at 2.
\179\ Id. at 4.
\180\ See, e.g., Cboe, State Street, et al. Letter at 2; letter
from Carlo Passeri, Vice President Biotechnology Innovation
Organization (``BIO Letter''), dated Mar. 30, 2023; and State Street
Letter at 3; MMI Letter at 3-7.
\181\ See Citigroup Letter at 6. With regard to the comment
about an ``off-ramp/kill-switch,'' should the Commission observe
trends detrimental to investors, the Commission could take
appropriate action.
\182\ See Citadel Letter II at 3.
---------------------------------------------------------------------------

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

[[Page 81634]]

adopted amendments is not warranted. The Commission and market
participants already have provided data and analyses that support
amending Rule 612 to address tick constraints.\183\ As discussed
throughout this release, the adopted amendments to Rule 612 will allow
NMS stocks that are experiencing tick constraints with the $0.01
minimum pricing increment to be priced more competitively (i.e., reduce
quoted spreads) and reduce transaction costs for liquidity demanders.
The amendments to minimum pricing increments are designed to
appropriately address significant concerns related to Rule 612.\184\
One of the primary goals of the proposal and the adopted amendments is
to alleviate tick constraints.
---------------------------------------------------------------------------

\183\ See, e.g., MEMX Letter, Pragma Letter; IEX Letter I; and
Nasdaq Letter I. See infra section VII.D.1.b.
\184\ See supra section III.A.
---------------------------------------------------------------------------

Reducing the minimum quoting increment for quotes and orders to
$0.005 for certain NMS stocks will enable such stocks to quote with
tighter spreads, which in return reduces the transaction costs of
investors.\185\ As discussed below, the Commission has conducted
analysis to show that quoted and effective spreads are likely to
decline such that costs of executing small and medium trades will
likely decline.\186\ Further, Rule 612, as amended, while simplified
compared to the proposal, continues to be designed to address
constraint concerns with respect to those NMS stocks. Market
participants and investors will be able to more easily adapt to the
amended tick regime because they will only need to accommodate, and
adjust for, one additional minimum pricing increment that is already
familiar for a limited, readily discernable, group of NMS stocks.\187\
The $0.005 minimum pricing increment for quotes and orders, one of the
three additional ticks proposed by the Commission, was widely supported
by commenters.\188\ Price improvement on exchanges and ATSs often
occurs through midpoint executions in an increment of $0.005.
Accordingly, $0.005 is an appropriate increment to introduce smaller,
sub-penny minimum pricing increments in the national market system for
quotes and orders priced equal to or greater than $1.00.
---------------------------------------------------------------------------

\185\ See infra section VII.D.1.b.ii.
\186\ See infra section VII.D.1.b.ii.
\187\ See infra section VII.D.1.a.
\188\ See, e.g., MEMX Letter at 15-16. See also note 219 and
accompanying text.
---------------------------------------------------------------------------

Some individual commenters did not support the proposal.\189\ One
of those commenters stated that the minimum pricing increment for
quotes and orders should be ``based solely on that which can be spent
in real life; no less than a single penny.'' \190\ Preexisting Rule 612
allowed quotes and orders in NMS stocks priced less than $1.00 per
share to be accepted, ranked and displayed in an increment as small as
$0.0001. Similarly, certain RLP Programs for national securities
exchanges have been granted Commission exemptions to permit quotes and
orders in NMS stocks priced equal to, or greater than, $1.00 per share
to be accepted, ranked and displayed in an increment as small as
$0.001. Sub-penny increments also existed in the market for many years,
even prior to the adoption of Rule 612 in 2005.\191\ Sub-penny
increments can allow market participants to better convey prices at
which they are willing to trade, which can promote better price
competition and lead to better price discovery. Further, as discussed
above, sub-penny trading occurs frequently, whether at the midpoint or
in other sub-penny increments.\192\ Thus, sub-penny increments are not
a novel concept. As discussed above, $0.005 is a common trading
increment because of the use of midpoint orders under current Rule 612,
and the ability to use such orders will not change under amended Rule
612. Nonetheless, the Commission understands that market participants
may decide to provide investor notice and education about the
availability of the new increment.\193\
---------------------------------------------------------------------------

\189\ See, e.g., letters from Joshua Russell dated Dec. 27,
2022; Matthew Gayvin Mutman dated Mar. 7, 2023; Aswin Joy dated Mar.
7, 2023.
\190\ See Letter from Joshua Russell dated Dec. 27, 2022. But
see letter from Anonymous dated Apr. 1, 2023 (stating ``[g]etting
more precise increment should be easy enough with our modern
computers. At the gas station I get charged down to the .000th
place, so why shouldn't our markets work the same? Seems fair to
me.'').
\191\ Prior to decimalization, quotes and orders were made in
increments that were fractions of a dollar, including \1/8\, 1/16
and 1/32, which resulted in sub-penny pricing.
\192\ See supra section III.A.
\193\ One commenter stated that to the extent the minimum
quoting increment is reduced, FINRA would need to update the Manning
Rule (FINRA rule 5320 which protects customer limit orders by
requiring a minimum amount of price improvement for a firm to
execute an order on a proprietary basis while holding an unexecuted
customer limit order--the minimum amount of price improvement is
currently $0.01 for orders equal to or greater than $1) in an
equivalent manner. See Citadel Letter I at 8. The compliance date of
the adopted rule provides sufficient time for FINRA to determine
whether it would want to amend the Manning Rule in light of the
amendments to Rule 612 and to file a proposed rule change pursuant
to section 19(b) of the Exchange Act and rule 19b-4 thereunder.
---------------------------------------------------------------------------

Another commenter stated that the proposed variable minimum pricing
increments were ``not an effective solution to address concerns related
to tick-constrained stocks'' and suggested a uniform $0.001 minimum
pricing increment for all NMS stocks.\194\ A uniform $0.001 minimum
pricing increment for all NMS stocks goes beyond what is necessary to
address the issues related to NMS stocks that are currently constrained
by the $0.01 tick. A $0.001 minimum pricing increment would be
significantly smaller than the current uniform $0.01 minimum pricing
increment for quotes and orders for NMS stocks that are priced equal
to, or greater than, $1.00 per share. A sub-penny increment for NMS
stocks that is too small would increase the incidence of stepping ahead
(i.e., pennying) \195\ and costs would not justify the benefits.
---------------------------------------------------------------------------

\194\ See Letter from Matthew Gayvin Mutman dated Mar. 7, 2023.
The commenter suggested a uniform $0.001 minimum pricing increment
for all NMS stocks. Comments related to the level of minimum pricing
increment are addressed in the next section.
\195\ See infra note 994 defining pennying. See also infra
section VII.D.1 for additional discussion of this topic.
---------------------------------------------------------------------------

2. Specific Comments on the Proposed Minimum Pricing Increments
A few commenters did not support the implementation of the smallest
proposed sub-penny increments (i.e., $0.002 and $0.001), and referenced
certain concerns, including stepping ahead of displayed orders, quote
flickering that occurs when the price of a trading center's best
displayed quotations changes multiple times in a single second, and
decreased depth.\196\ Each of these were articulated as concerns by the
Commission when Rule 612 was first adopted.\197\
---------------------------------------------------------------------------

\196\ See, e.g., Form Letter Type G Nasdaq Letter I; MFA Letter;
Letter from Douglas Friedman, General Counsel, Tradeweb Markets
Inc., dated Mar. 30, 2023 (``Tradeweb Markets Letter''); Virtu
Letter II; State Street Letter; RBC Letter; Invesco Letter; ICI
Letter I; Cboe Letter II; SIFMA Letter II; Vanguard Letter; JPMorgan
Letter; Hudson River Letter; T. Rowe Price Letter at 4; Goldman
Sachs Letter; Fidelity Letter; Citadel Letter I; Robinhood Letter;
GTS Letter; BlackRock Letter; Citigroup Letter; Fidelity Letter at
11; Themis Letter at 3; and Tastytrade Letter at 20.
\197\ See Regulation NMS Adopting Release, supra note 4, at
37551.
---------------------------------------------------------------------------

Some commenters stated that having ticks that are too small would
result in queue jumping \198\ and decreased depth.\199\ In the
Regulation NMS Adopting Release, the Commission discussed concerns
related to stepping ahead of displayed quotations with orders priced in
economically insignificant increments (i.e., to gain

[[Page 81635]]

execution priority) which can deter the display of aggressively-priced
limit orders that would narrow the spread.\200\ In light of these
comments, amended Rule 612 has been simplified compared to what was
proposed. Thus, the Commission is only adding the $0.005 minimum
pricing increment for quotes and orders for those NMS stocks that have
a TWAQS of $0.015 or less. Because the $0.005 minimum pricing increment
is based on the TWAQs of the NMS stock, the $0.005 minimum pricing
increment, relative to the spread, will be economically significant for
these stocks.\201\
---------------------------------------------------------------------------

\198\ See, e.g., MFA Letter at 11, State Street Letter at 3, and
RBC Letter at 3.
\199\ See, e.g., Nasdaq Letter I at 13; MFA Letter at 11, Virtu
Letter II at 15, State Street Letter at 3, and RBC Letter at 3.
\200\ See Regulation NMS Adopting Release, supra note 4, at
37551.
\201\ See infra section VII.D.1.b.ii and notes 1300-1303 and
accompanying text.
---------------------------------------------------------------------------

Some commenters stated that smaller tick sizes would cause
flickering quotations.\202\ In the Regulation NMS Adopting Release, the
Commission considered issues related to quote flickering.\203\ The
Commission stated that quote flickering can result in broker-dealers
having difficulties in satisfying their best execution obligations and
other regulatory responsibilities.\204\ Because computer algorithms and
ultra-fast connections dominate today's trading and quoting activities
such concerns are not as acute or prevalent as they were at the time of
the adoption of Rule 612.\205\ Today's quotations are calculated and
displayed in microseconds, which is significantly faster than in 2005
and while flickering quotations can exist today, computer systems are
much better able to process them such that they should not cause
compliance difficulties or investor confusion.\206\ Accordingly,
because of technological advancements, today's market structure,
compared to 2005, can more readily handle rapid changes to a trading
center's best bid or offer. Further, the concerns about the potential
for flickering quotes should be mitigated to some extent because the
amendments do not include the smaller proposed increments (i.e., $0.001
and $0.002) and are designed to have fewer ticks between the spread
which will lessen the potential price changes between the spread.
---------------------------------------------------------------------------

\202\ See, e.g., MFA Letter at 11, State Street Letter at 3, RBC
Letter at 3, and Invesco Letter at 3.
\203\ See Regulation NMS Adopting Release, supra note 4, at
37551.
\204\ Id. at 37552.
\205\ See MDI Adopting Release, supra note 10, for a discussion
about market data latencies. Flickering quotations is more of a
concern when there is quote latency, in other words, when the
displayed quotations do not reflect the actual quotations. For
example, when the quote is being updated faster than the quote can
be displayed, the price discovery mechanism may not be benefitted.
\206\ See Regulation NMS Adopting Release, supra note 4, at
37553-37554 (discussing the concerns with flickering quotes when
Rule 612 was adopted and acknowledging that the market could
evolve).
---------------------------------------------------------------------------

Other commenters stated that the proposed minimum quoting
increments of $0.002 and $0.001 were too small,\207\ would introduce
too many intra-spread ticks,\208\ and could harm trading by
substantially increasing fragmentation of liquidity.\209\ The
Commission also considered the impact of sub-penny quoting on market
depth,\210\ i.e., the number of shares available at the NBBO when it
originally adopted quoting increments.\211\ Decreased depth could lead
to increased transaction costs and fragmentation.\212\ Adopting only
one additional minimum quoting increment instead of the proposed four-
tier approach, should help address commenters' concerns with respect to
fragmented liquidity \213\ because there will be fewer price levels at
which liquidity aggregates, which will result in less fragmentation.
The modified amendment of Rule 612 does not include the proposed
smaller minimum pricing increments for quotes and orders of $0.001 and
$0.002, and thus commenters' concerns related to those increments
(e.g., decreased depth at the NBBO) are not applicable.\214\ As
discussed, the Commission has determined to take an incremental
approach in amending Rule 612 by only adding a $0.005 minimum pricing
increment for those NMS stocks that are constrained by the preexisting,
uniform minimum pricing increment based on an objective standard that
is designed to have fewer ticks between the spread than the
proposal.\215\ As adopted, those NMS stocks that are assigned the
$0.005 minimum pricing increment will result in three ticks intra-
spread, which falls in the middle of the 2 to 4 ticks intra-spread
suggested as potentially optimal by many commenters.\216\ Finally, the
Commission addresses its primary concern of relieving the constraint
related to the $0.01 increment for certain NMS stocks by only adding
the $0.005 minimum pricing increment and not adding minimum pricing
increments of $0.002 and $0.001. The $0.005 minimum pricing increment
for constrained NMS stocks will allow these stocks to quote more
naturally and efficiently, and thereby reduce transaction costs for
investors without the concerns that would attach if the minimum pricing
increments were smaller.
---------------------------------------------------------------------------

\207\ See, e.g., SIFMA Letter II at 33; Vanguard Letter at 5;
Schwab Letter II at 35; Fidelity Letter at 11; JPMorgan Letter at 4;
UBS Letter at 12; Citigroup Letter at 4; and Harris Letter at 7.
\208\ See, e.g., Pragma Letter, Robinhood Letter at 40; IEX
Letter I at 9; and Angel Letter at 6. The adopted $0.005 minimum
pricing increment will provide for at least three ticks intra-
spread. See infra section VII.D.1.
\209\ See, e.g., Interactive Brokers Letter at 4; Virtu Letter
II at 4; and Themis Letter at 3.
\210\ See infra section VII.D.1.b.
\211\ See Regulation NMS Adopting Release, supra note 4, at
37552.
\212\ See Regulation NMS Adopting Release, supra note 4, at
37552.
\213\ See Citadel Letter I at 7. See also Virtu Letter II at 2
and 6-7.
\214\ See infra section VII.D.1.b.i.
\215\ See infra section III.C.6.
\216\ See infra note 1299 and accompanying text.
---------------------------------------------------------------------------

3. Comments on the Number of Proposed Increments
Some commenters supported reducing the minimum pricing increment
for quotes and orders to address those NMS stocks that are tick-
constrained, but overall did not support the proposal's four minimum
quoting increments.\217\ Many commenters stated that the proposed
quoting increments were too numerous.\218\ Instead, a number of
commenters recommended that the Commission adopt a modified, simpler
amendment to Rule 612 and suggested only adopting one additional
minimum quoting increment of $0.005 for tick-constrained NMS
stocks.\219\ One commenter said that ``reducing the tick size to one-
half cent for stocks with narrower spreads will address the current
market need.'' \220\ Commenters opposed the proposed four minimum
quoting increments based on complexity for market participants to
program into their systems these increments,\221\ potential increased
costs for

[[Page 81636]]

investors,\222\ and potential investor confusion with respect to
minimum pricing increments that could change periodically as
proposed.\223\ Another commenter stated that the four-tier proposal
would favor ``high-frequency traders who have a long history of
leveraging complexity to their advantage and to the detriment of
ordinary investors.'' \224\ One commenter stated that the proposed
variable minimum pricing increments ``as small as $0.001 goes well
beyond what is necessary, and would also be cost prohibitive and
complicated to implement.'' \225\ One commenter questioned the impact
of smaller increments on Rule 611 of Regulation NMS and recommended
that if the Commission ``proceed[ed] with their sub-penny quoting
proposal. . . .'', it should consider amending Rule 611 to include all
displayed depth of book quotes.\226\
---------------------------------------------------------------------------

\217\ See, e.g., SIFMA Letter II at 34; AIMA Letter at 2; STA
Letter at 6-7; Citadel Letter I at 30; Citigroup Letter at 4;
Dimensional Letter at 2; BlackRock Letter at 3; Public Pension
Letters dated Mar. 31, 2023; MMI Letter at 3; Brandes Letter at 1;
Schwab Letter II at 35-36; Invesco Letter at 3; B. Riley Letter at
1; JPMorgan Letter at 4; Cambridge Letter at 6; and Tastytrade
Letter at 18.
\218\ See, e.g., MFA Letter at 12; Capital Group Letter at 3;
ICI Letter I ; Angel Letter at 6 ; Vanguard Letter at 5; and Meuser
et al. Letter at 1.
\219\ See id. See also Nasdaq Letter I; MFA Letter; MEMX Letter;
Capital Group Letter; ICI Letter I; Citadel Letter I; Citigroup
Letter at 4; BlackRock Letter; Apex Letter; Ontario Teachers et al.
Letter at 2; Citigroup Letter; GTS Letter; ICI Letter I; Invesco
Letter; Robinhood Letter; SIFMA Letter II; STA Letter; UBS Letter;
Vanguard Letter; TradeStation Letter at 6; Cboe Letter; IEX Letter;
Nasdaq Letter I; and NYSE Letter I; Brandes Letter at 2; Invesco
Letter at 2; Fidelity Letter at 14; Themis Letter at 6; B. Riley
Letter at 1; JPMorgan Letter at 4; Morgan Stanley Letter at 4; State
Street Letter at 3; Dimensional Letter at 2; BMO Capital Letter at
2; and Meuser et al. Letter at 1.
\220\ See ASA Letter at 5. See also TradeStation Letter at 6.
\221\ See, e.g., CTA/UTP Letter dated March 29, 2023; Nasdaq
Letter I; State Street Global Letter; RBC Letter; ICI Letter I;
Vanguard Letter; Cboe Letter II; SIFMA Letter II; Fidelity Letter;
Brandes Letter at 2; Robinhood Letter at 20; Morgan Stanley Letter
at 4; and Meuser et al. Letter at 2.
\222\ See, e.g., Dimensional Letter at 2.
\223\ See, e.g., Tastytrade Letter at 5, 18; SIFMA Letter II at
7; Morgan Stanley Letter at 3, 4; Fidelity Letter at 13; SIFMA
Letter II at 34; Better Markets Letter I at 14; Robinhood Letter at
20; Citadel Letter I at 8; and STA Letter at 5.
\224\ See Better Markets Letter II at 4. See also Fidelity
Letter at 12; Themis Letter at 6; Ontario Teacher et al. Letter at
2; and Harris Letter at 7.
\225\ See TradeStation Letter at 6.
\226\ See Themis Letter at 5. As discussed, the Commission is
adopting a modified amendment to Rule 612 to introduce only a $0.005
minimum pricing increment for certain NMS stocks, not the smaller
proposed increments of $0.002 and $0.001. Therefore, the commenter's
recommendation is no longer germane because without the proposed
smaller $0.002 and $0.001 increments, the liquidity would not be as
dispersed throughout the depth of the book which would not
necessitate protection of the full depth of the book.
---------------------------------------------------------------------------

After considering the comments and analyzing data,\227\ the
Commission is amending Rule 612 to only add one new minimum pricing
increment of $0.005 for those NMS stocks that have a TWAQS of $0.015 or
less, rather than also adopting the additional two $0.002 and $0.001
pricing increments as proposed. The Commission's basis for the new
minimum pricing increment of $0.005 is rooted by the current midpoint
increment when the NBBO is at its narrowest (or smallest) spread. The
midpoint increment of the current $0.01 minimum quoting spread is
calculated as (NBB plus NBO) divided by 2, and when the spread is at
its narrowest, the midpoint increment is equal to $0.005. For example,
if the NBB is 10.01 and the NBO is 10.02, the midpoint would be 10.015
((10.01 + 10.02)/2) = 10.015). Further, the new minimum quoting
increment is at a price level familiar to all market participants and
is already programmed into many computer systems. This modified
approach addresses the concerns raised by commenters related to the
proposed $0.002 and $0.001 minimum pricing increments. The adopted
amendments also address commenters' concerns about complexity and
potentially advantaging certain types of market participants by
reducing the number of new increments and the universe of NMS stocks
that may be eligible for a smaller minimum pricing increment. The
adopted $0.005 minimum pricing increment for those NMS stocks that have
a TWAQS of $0.015 will address the immediate concerns about the
constraints that have developed in the national market system as a
result of preexisting Rule 612.
---------------------------------------------------------------------------

\227\ See infra section VII.D.1.
---------------------------------------------------------------------------

4. Comments on Small- and Mid-Sized Stocks
A few commenters stated that the proposal to reduce minimum pricing
increments did not consider the impact on small and mid-sized
stocks.\228\ One commenter opposed the Regulation NMS Proposal because
of concerns that it did not ``address the needs and possible unintended
consequences for small and mid-sized stocks'' and that the Commission
should ``not take any action until such time as a pilot has been
launched and its effects studied and verified by a committee of market
participants and academics.'' \229\ Another commenter stated that the
proposed tick sizes were ``too granular'' for small to mid-sized stocks
and would result in fewer liquidity providers.\230\
---------------------------------------------------------------------------

\228\ See BIO Letter at 1-2, 3 and STA Letter at 5.
\229\ See BIO Letter at 1-2, 3.
\230\ See STA Letter at 5.
---------------------------------------------------------------------------

The assignment of the smaller minimum pricing increment is not
based on market capitalization because the economics of being tick-
constrained do not depend on market capitalization. Rather, whether a
stock is experiencing constraint depends on its spread. In other words,
since a stock's spread relative to the tick size does not depend on
whether it has a small or mid-sized market capitalization, such a stock
could still trade with a quoted spread constrained by $0.01 minimum
pricing increment. With respect to implementing a pilot program to
assess the needs and potential consequences of the proposal for small
and mid-sized stocks, the Commission previously conducted a tick size
pilot program for small- and mid-sized stocks to assess the impact of
wider minimum quoting and trading increments.\231\ The Commission
analyzed data from that pilot program for purposes of the
amendments.\232\ Another pilot program is not necessary because the
Commission and market participants have demonstrated with data the
issues related to tick constraints that have increased since the
preexisting rule was adopted.\233\ Further, the modified amendment will
not introduce increments that are ``too granular'' for any NMS stock;
only those NMS stocks that have a TWAQS of $0.015 or less will be
assigned the new $0.005 increment, or three ticks or fewer within the
spread. These NMS stocks are constrained by the preexisting increment
and the amendment will alleviate this regulatory constraint to allow
competitive forces of supply and demand to better establish bid and ask
prices.\234\
---------------------------------------------------------------------------

\231\ See Proposing Release, supra note 11, at 80272-73 for a
discussion of the tick size pilot program. See also Tick Sizes and
Market Quality: Revisiting the Tick Size Pilot by Yashar H.
Barardehi, Peter Dixon, Qiyu Liu, and Ariel Lohr, available at
<a href="https://www.sec.gov/dera/staff-papers/working-papers/dera_wp_tick-sizes-and-market-qualityrevisiting-tick-size-pilot">https://www.sec.gov/dera/staff-papers/working-papers/dera_wp_tick-sizes-and-market-qualityrevisiting-tick-size-pilot</a>.
\232\ See infra section VII.D.1.
\233\ See infra section VII.D.1.b.ii.
\234\ See also infra section VII.D.1.b.i and VII.B.2 for
additional discussion.
---------------------------------------------------------------------------

5. Comments on Market Resiliency
A few commenters raised concerns related to market resiliency
risks.\235\ The commenter stated that ``[b]ecause the Commission's
proposal would increase the number of ticks inside the weighted average
spread for many stocks, we could expect a significant increase in
message traffic that would result from the Commission's proposal.''
\236\ The commenter asked the Commission to consider the potential
increased message traffic that could result from the proposed minimum
pricing increments and stated that the proposal would result in a
significant increase in message traffic.\237\ The commenter recommended
the Commission take a measured and phased approach for reducing the
minimum pricing increment for quoting to apply the minimum quoting
increment initially to a limited number of stocks and additional groups
of stocks in subsequent phases, with review of market resiliency during
each phase.
---------------------------------------------------------------------------

\235\ See, e.g., Letter from Howard Meyerson, Managing Director,
Financial Information Forum, dated Mar. 31, 2023 (``FIF Letter'') at
6; and Goldman Sachs Letter at 8.
\236\ See FIF Letter at 7.
\237\ See FIF Letter at 7. See also Robinhood Letter at 41;
Morgan Stanley Letter at 3; UBS Letter at 12; Citigroup Letter at 4;
TradeStation Letter at 7; and Goldman Sachs Letter at 9.
---------------------------------------------------------------------------

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

[[Page 81637]]

therefore there should pose less of a concern related to market
resiliency. The modified amendment adopts a single sub-penny increment
that impacts a smaller universe of NMS stocks compared to the proposal,
which included three sub-penny increments that would have impacted more
NMS stocks. The need for a phased approach is significantly reduced
because fewer NMS stocks will be impacted by the one additional minimum
quoting increment, and there will be fewer ticks between the spread.
The commenter stated that the potential costs to industry members
from increased message traffic would include purchasing additional
computer hardware such as servers and that the costs would also apply
to production, backup, test, and development environments.\238\ The
commenter stated that the actual costs would be multiples of the
estimated costs from the proposal. However, the adopted amendment to
Rule 612 will result in less message traffic than the proposal because
it has fewer quoting increments. Consequently, the modified amendments
that are being adopted will reduce computer hardware and developmental
costs for the industry compared to the proposal. In the Proposing
Release, the Commission considered the message traffic of the options
markets, and the systems for the options markets that handle many times
more messages compared to (1) the current NMS stock market or (2) the
estimated additional message traffic from the adopted amendments.\239\
One commenter submitted data that supported this conclusion.\240\
---------------------------------------------------------------------------

\238\ See FIF Letter at 9. See also Citigroup Letter at 2. See
infra section VII.D.5.a.
\239\ See Proposing Release, supra note 11, at 80279, notes 196
and 197 (stating that in the second quarter of 2011, the average
peak message per second for Tapes A and B reported by the CTA/CQ
Plan was 1,015,000 and for Tape C reported by the UTP Plan was
408,300 versus 36.4 million reported by the Options Price Reporting
Authority (``OPRA'')). See also section VII.E.1.
\240\ See NYSE Letter I at 11-13.
---------------------------------------------------------------------------

The commenter also raised concerns that increased quote message
traffic could significantly increase the costs of the operation of the
CAT system.\241\ The commenter recommended that the Commission estimate
the potential increase in message traffic, provide those estimates to
CAT LLC, obtain estimates from the CAT LLC of the increased CAT costs
that would result from this increased message traffic, and factor the
estimated costs into the cost benefit analysis of the proposed minimum
pricing increments changes. Another commenter also stated that the
Commission failed to consider whether the increase in message traffic
will increase the CAT operating budget.\242\ The Commission estimates
the impact of the adopted amendments on message traffic, and thus on
the CAT operating budget in section VII.D.1.c. As discussed further
below, the Commission estimates the increase in CAT costs associated
with adopting the additional minimum pricing increment to be
approximately $4.1 million per year.\243\ The Commission does not
believe it is appropriate to delay action on Rule 612 to have CAT LLC
engage in its own analysis of the potential costs.
---------------------------------------------------------------------------

\241\ See FIF Letter at 10 (``FIF members are concerned that
increased message traffic could significantly increase the costs for
the operation of the CAT system as increased quote volumes
(including increased frequency of quote updates) would increase the
number of CAT-reportable events. 100% of these increased CAT costs
would be charged to broker-dealers and exchanges. The operating
expenses for CAT were $84.5 million for 2020 and $146.5 million for
2021. CAT LLC, the operator of the CAT system, has estimated the
total expenditures for CAT for 2022 at $178.9 million. These costs
are in excess of the costs that were contemplated in the CAT NMS
Plan.'').
\242\ See Citadel Letter II at 5. The commenter added that
increased message traffic increases costs for all market
participants, including higher fees charged by CAT and the exclusive
SIPs. See also Citadel Letter I at 9 and Virtu Letter II at 6-7.
\243\ See infra section VII.D.1.c.
---------------------------------------------------------------------------

Commenters raised the issue of increased market data volume on
competing consolidators, which are not yet in operation.\244\ Likewise,
the possible costs to potential competing consolidators will be reduced
vis-[agrave]-vis the proposal. The Commission recognizes that while the
costs may be lower than the proposed rule, the adopted rule could
nevertheless create increased message traffic than the preexisting
rule. It follows that more message traffic could lead to more possible
costs for competing consolidators. However, this new message traffic
should still be within the operational capacity of the existing
computer systems.\245\
---------------------------------------------------------------------------

\244\ See, e.g., Citadel Letter II at 9 (``A material increase
in total message traffic increases costs for all market
participants, including due to the resulting higher fees charged by
industry utilities, such as the [CAT] and the [SIP]'') and Virtu
Letter II at 6-7 (``The Commission has failed to analyze the impact
of the significantly increased volume of market data on competing
consolidators.'').
\245\ See infra section VII.D.1.
---------------------------------------------------------------------------

One commenter stated that even with the largest potential increases
in messages, equity messaging traffic would remain well below that of
the options market and that ``the increase in messaging activity from
adopting finer tick increments is now well within the industry's
capability.'' \246\ On the other hand, another commenter stated that a
larger number of ticks across a large number of stocks would lead to
increased message traffic, which would, in turn, increase data and
infrastructure costs and market latency.\247\ One commenter added that
increased message traffic would lead to increased latency, which would
harm market participants by disrupting trading strategies and impairing
market functionality and liquidity.\248\ As stated above, the adopted
amendment to Rule 612 is significantly less complex than the proposal
and will not result in the larger number of ticks across a large number
of stocks as the commenter suggested. The proposal's four minimum tick
increment has been simplified to one additional new tick at $0.005, and
the proposal's reduction of minimum pricing increments for NMS stocks
that had a TWAQS of $0.04 or less has been reduced to those NMS stocks
that have a TWAQS equal to or less than $0.015, which results in fewer
expected NMS stocks being assigned a smaller minimum pricing
increment.\249\ These adopted changes may result in significantly less
message traffic than under the commenter's assumption on the proposal.
While message traffic may increase over today's message traffic, any
increase in message traffic will be significantly less than in the
options market, and the options market participants have over the years
adjusted to increasingly higher message traffic.\250\
---------------------------------------------------------------------------

\246\ See NYSE Letter II at 11 (stating that OPRA handles many
times more messages than the equity markets).
\247\ See MFA Letter at 11.
\248\ See Tradeweb Letter at 2-3 (``Even trading platforms with
the most advanced technological infrastructure will need to expend
considerable amounts of time and resources to prepare the
accommodate increased message traffic, since any increase in latency
(even at the millisecond level) would disrupt trading strategies,
impair market functionality and liquidity, and, ultimately, harm
market participants.''); see also Virtu Letter II at 6 (``This
increase in message traffic. . . will significantly add to the
overall content of market data.''). See also NYSE Letter I at 6 and
Nasdaq Letter I at 9 (``Securities with too many ticks not only have
wider spreads, but they also have more odd lots, and more message
traffic, leading to a more fragile NBBO.'').
\249\ See infra section VII.D.1.a.
\250\ See Options Clearing Corporation Daily Volume report,
available at <a href="https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Daily-Volume">https://www.theocc.com/Market-Data/Market-Data-Reports/Volume-and-Open-Interest/Daily-Volume</a>.
---------------------------------------------------------------------------

6. Comments on Proposed Criteria for Assigning Minimum Pricing
Increments
The Commission proposed to measure the TWAQS when determining the
appropriate minimum pricing increment for NMS stocks and proposed four
ranges of the TWAQS to determine the corresponding minimum pricing
increments. The four proposed TWAQS ranges were: (1) equal to or less
than

[[Page 81638]]

$0.008; (2) greater than $0.008 but less than or equal to $0.016; (3)
greater than $0.016 but less than or equal to $0.04; and (4) greater
than $0.04. Preliminarily, the Commission believed that NMS stocks with
a TWAQS of $0.04 or less would have benefited from smaller minimum
pricing increments. After considering the comments, the Commission is
retaining TWAQS as the measure to determine when an NMS stock will be
assigned smaller minimum pricing increment but has modified the
threshold to be equal to or less than $0.015.
Many commenters stated that tick-constrained stocks would benefit
from smaller minimum pricing increments.\251\ Commenters, however,
raised concerns about reducing the minimum pricing increment for NMS
stocks that were not experiencing tick constraint with the $0.01
minimum pricing increment.\252\ One commenter stated that ``a reduction
in tick sizes for those stocks that are merely near-tick-constrained
will not result in meaningful price-improvements and will not be worth
the increased risk of diminished liquidity to bids and offers being
spread too thinly across too many price points.'' \253\ As adopted, the
new $0.005 minimum pricing increment will be assigned to those NMS
stocks that have a TWAQS of $0.015 or less. These NMS stocks are
experiencing constraint with the $0.01 minimum pricing increment and
will benefit from being able to be quoted in the smaller increment. As
adopted, the Commission has modified the amendment so as not to assign
the smaller $0.005 increment to those NMS stocks that are not
necessarily experiencing constraint with the $0.01 minimum pricing
increment.
---------------------------------------------------------------------------

\251\ See, e.g., Pragma Letter at 6 (``tick-constrained stocks
will benefit from smaller tick sizes with narrower spreads.''); MEMX
Letter; NYSE, Schwab, and Citadel Letter; IEX Letter I at 7; Nasdaq
Letter I at 2 (``Nasdaq supports adjusting the minimum pricing
increment (``tick size'') to better reflect the trading dynamics of
Regulation National Market System (``Reg. NMS'') securities.'');
Brandes Letter at 2; Schwab Letter II at 35; and Robinhood Letter at
46.
\252\ See, e.g., IEX Letter I; Pragma Letter; Invesco Letter;
ICI Letter II at 14 (stating that the Commission should not apply
sub-penny increments to stocks that are not tick-constrained); ASA
Letter (``we strongly oppose the application of a one-half cent tick
size to any stock outside of the most liquid (narrower spread)
stocks.''); Nasdaq Letter I at 14 (``We propose that securities fall
into this new $0.005 tick bucket only if they are tick-
constrained.''); and Cboe Letter II.
\253\ See Invesco Letter at 3. See also e.g., ICI Letter II
(stating that there is no market failure or harm identified for
stocks that are not tick-constrained.) and Brandes Letter at 2
(favoring a reduction to $0.005 for those stocks that are
experiencing constraint with the $0.01 increment and stating that
the proposed reduction in a minimum pricing increment for stocks
that had a TWAQS of $0.04 or less was too broad).
---------------------------------------------------------------------------

Some commenters stated that the TWAQS of $0.011 should be used for
identifying NMS stocks that are experiencing tick constraint.\254\
However, one commenter recommended that NMS stocks that ``could easily
become tick-constrained'' should have their minimum pricing increment
reduced.\255\ Other commenters offered other recommendations as to the
TWAQS threshold for reducing minimum pricing increments, including a
TWAQS threshold of $0.02 or less,\256\ a TWAQS threshold of $0.016 or
less,\257\ and a TWAQS threshold of 0.015 or less.\258\
---------------------------------------------------------------------------

\254\ See, e.g., NYSE Letter I; Vanguard Letter; Cboe Letter I;
and Schwab Letter II at 35-36. But see also Invesco Letter at 3
(stating that $0.011 was overly broad and would result in
unnecessary tick reductions for stocks that are not tick-
constrained.).
\255\ See, e.g., IEX Letter I at 7 (``IEX agrees with the
premise that tick sizes should be reduced for stocks that are
currently ``tick-constrained'' or could easily become tick-
constrained because of the current one-cent limitation.'').
\256\ See IEX Letter I at 7, 13 (``We believe that reducing the
tick size and applying it to all securities with a TWAQS up to two
cents will substantially improve the efficiency of displayed trading
. . .'').
\257\ See BMO Capital Letter at 2 and Form Letter Type H, of
which 853 comments were received, available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>.
\258\ See Pragma Letter at 6 (``While perhaps not conclusive,
the lines of evidence from our analysis also suggest that the
Proposal's range of 4 to 8 ticks is too many and will force wider
spreads and higher trading costs on the market than necessary. This
leads to our primary recommendation: stocks should be moved to a
smaller tick size only when their average spread is less than \1/5\
in the preceding month; and moved to a larger tick size only when
their spread is greater than 4 ticks in the preceding month.'').
---------------------------------------------------------------------------

As discussed further below, the Commission is adopting the TWAQS
threshold of $0.015 or less in order to identify NMS stocks that will
be eligible for the $0.005 minimum pricing increment.\259\ This
amendment will generally result in these NMS stocks having a bid-ask
spread with one to three ticks, which will improve market quality.\260\
Data analysis supports that liquidity and market quality will improve
if NMS stocks with a TWAQS of $0.015 or less are assigned to the $0.005
minimum pricing increment.\261\ Commenters provided analysis and cited
studies that suggest that 2 to 4 ticks intra-spread is optimal for
trading, which is consistent with the results of the Commission's
analysis.\262\
---------------------------------------------------------------------------

\259\ See infra section VII.D.1.b for more discussion on TWAQS.
\260\ See infra note 1303 and accompanying text. See also Nasdaq
Letter I at 18 (stating that ``quoting outside of the optimal 2-3
tick spreads leads to queues for tick-constrained securities and
slower price formation for securities with overly-wide spreads.'').
\261\ See infra section VII.D.1.b.
\262\ See, e.g., Nasdaq Letter I at 8, 18; Pragma Letter at 1;
RBC Letter at 3; CCMR Letter at 23; Letter from Eric Swanson, Chief
Executive Officer, XTX Markets LLC, dated Mar. 30, 2023 (``XTX
Letter'') at 4; MMI Letter at 5; and Harris Letter at 7. See also
infra notes 1293-1299 and accompanying text.
---------------------------------------------------------------------------

Some commenters agreed that the TWAQS was the appropriate measure
for determining the relevant minimum pricing increment.\263\ Several
commenters stated that as many stocks as possible should be identified
as eligible for a smaller tick size.\264\ Other commenters suggested
that a multi-factor approach be taken in evaluating whether to reduce
the minimum pricing increment for certain NMS stocks.\265\ Commenters
suggested that such factors include average quoted size,\266\ ratio of

[[Page 81639]]

average quoted size to average traded size,\267\ daily traded
volume,\268\ queue length,\269\ quotes on multiple exchanges,\270\ or
stock price.\271\ One commenter recommended the inclusion of factors
such as large quoted displayed size and a relatively high level of
liquidity based on average daily trading volume.\272\
---------------------------------------------------------------------------

\263\ See, e.g., IEX Letter I at 7 (``[w]e agree that TWAQS is a
reasonable and appropriate measure to define which securities should
be subject to a narrower tick size.''); MEMX Letter; and BMO Capital
Letter.
\264\ See, e.g., Form Letter Type K, of which 22 comments were
received, available at <a href="https://www.sec.gov/comments/s7-30-22/s73022.htm">https://www.sec.gov/comments/s7-30-22/s73022.htm</a>; Anonymous Letter dated Mar. 6, 2023; letter from Victor
Piousbox dated Mar. 6, 2023; letter from Jimit Raithatha dated Mar.
7, 2023; letter from Munib Mian dated Mar. 7, 2023; letter from
Peter Unum dated Mar. 19, 2023; letter from Anonymous dated Mar. 22,
2023; and letters from Chris and Donna Graves, dated Mar. 26, 2023;
Spencer Neukam dated Mar. 26, 2023; Samuel Cressy dated Mar. 24,
2023; and Zaf Khan dated Mar. 24, 2023.
\265\ See, e.g., Cboe Letter II at 3 (``The most critical step
in any tick-size regime reform is first establishing an objective
methodology designed to address truly tick-constrained securities.
In this regard, we recommend using a multi-factor methodology, such
as Cboe's Tick Size Reduction Framework.''); Themis Letter at 7
(supporting Cboe's methodology); Cboe, State Street, et al. Letter;
Optiver Letter (discussing the European Union's tick regime as
considering stock price and liquidity); NYSE Letter I; ICI Letter II
at 11 (stating that applying other factors would lessen concerns
about an overbroad tick reduction and mitigate concerns about an
adverse market outcome); BlackRock Letter at 5 (stating that quoted
spread is one-dimensional and does not provide sufficient context
for determining the optimal tick size); Citigroup Letter
(recommending a new $0.005 quoting increment for the most liquid
tick-constrained stocks); T. Rowe Price Letter (stating that a
multi-factor approach would allow the Commission to measure whether
a tick size is properly calibrated); STA Letter at 6 (recommending
that the Commission use a multifactor approach); Virtu Letter II at
6 (stating ``one must consider many factors, not just quoted
spread'' and describing methods proposed by Cboe and Nasdaq); NYSE,
Schwab, and Citadel Letter at 1 (``We define `tick-constrained' to
mean symbols that have an average quoted spread of 1.1 cents or less
and a reasonable amount of available liquidity at the NBBO.''); and
Cambridge Letter at 6 (stating that securities should have an
average quoted spread of 1.1 cents and be ``reasonably liquid'').
See also SIFMA Letter II at 36 (``SIFMA believes that a more robust
analysis is necessary to evaluate the most appropriate tick sizes
for purposes of achieving the best balance between available
liquidity at the inside quotation versus narrower spreads.'').
\266\ See, e.g., BlackRock Letter at 6 (`` . . . if material
size was present at the National best Bid and Offer (`NBBO') or a
significant proportion of executions were occurring at sub-penny
prices, this would be a clear indication of fierce order book
competition and interest to tighten the spread and trade in smaller
increments.''); T. Rowe Price Letter; and Citadel Letter I.
\267\ See, e.g., Cboe Letter II at 3 (``we started with the
complete universe of NMS securities, and applied three constraints--
quoted spread, quoted-size-to-trade-size ratio, and notional
turnover ratio--to arrive at a group of securities that are
quantifiably tick-constrained.'') and BlackRock Letter.
\268\ See, e.g., BlackRock Letter at 5 (``BlackRock recommends
that in addition to the time weighted quoted spread, the Commission
should incorporate other factors for designating tick sizes, such as
the average quoted size, ratio of average quoted size to average
traded size, daily traded volume, or stock price.''); Optiver
Letter; T. Rowe Price Letter; and Citadel Letter I.
\269\ See, e.g., T. Rowe Price Letter at 4 (``Other factors that
could be considered include queue length and quoted size at the top
of the order book, turnover, and whether the stock is quoted on
multiple exchanges.'') and Citadel Letter I.
\270\ See, e.g., T. Rowe Price Letter at 4.
\271\ See, e.g., BlackRock Letter at 5 and Optiver Letter
(``[w]e recommend that the Commission undertake further analysis of
the optimal level of tick granularity, leveraging price and volume
to define appropriate tick sizes.'').
\272\ See ICI Letter I at 11. See also Cambridge Letter at
(stating that minimum pricing increments should be reduced for those
stocks that have a TWAQS of $0.011 or less and ``are reasonably
liquid.'') and Citigroup Letter at 4.
---------------------------------------------------------------------------

One commenter suggested that in addition to the TWAQS, ``quote
stability'' should be measured.\273\ According to the commenter, quote
stability would be measured by looking at a change in a stock's quote
after execution; if the quote widens after an execution, ``the quoted
liquidity may not be sufficient for the liquidity demanded, suggesting
that the quote increment is not actually constraining quoting
activity.'' \274\ Another commenter suggested that the Commission
consider using ``spread leeway,'' which the commenter defined as equal
to the average quoted spread divided by the minimum tick size.\275\ The
commenter stated that spread leeway could ``effectively quantify the
extent to which bid-ask spreads are constrained by the minimum tick
size.'' \276\ Another commenter suggested that in addition to a TWAQS
of $0.011, there should be ``balance or near equilibrium of multiple
bids and offers at the top of the central order book'' as this would
``imply that market forces of supply and demand would naturally force
the bid/ask spread tighter through market competition.'' \277\ One
commenter that recommended a multi-factor approach to identify NMS
stocks suggested that in addition to average quoted spread, a high
quoted size to traded size ratio and a high average daily notional
turnover should be examined when identifying NMS stocks that are tick-
constrained.\278\ According to the commenter, a high quoted size to
traded size ratio is ``an objective signal that shows even though there
is an abundance of liquidity, the current $0.01 tick constraint
disincentivizes investors to cross the spread due to high costs,
resulting in a lack of trade executions.'' \279\ Further, the commenter
stated that a high average daily notional turnover is ``an objective
signal because it focuses the tick reduction effort on high turnover
securities that would benefit from the ability to be traded in finer
increments.'' \280\ Other commenters supported this approach.\281\
---------------------------------------------------------------------------

\273\ See, e.g., NYSE Letter I at 3. See also B. Riley Letter.
\274\ Id.
\275\ See MMI Letter (stating that spread leeway. . .
``quantifies the extent to which bid-ask spreads are constrained by
the minimum tick size . . . is equal to the average quoted spread
divided by the minimum tick size. Prior studies have suggested a
spread leeway of 3-9 as optimal for tick sizes to be neither too
small, nor too large.'').
\276\ Id. at 5.
\277\ See Invesco Letter at 3.
\278\ See Cboe Letter I and Cboe Letter II at 3. See also Cboe,
State Street, et al. Letter; State Street Letter at 3.
\279\ See Cboe Letter I at 2.
\280\ Id.
\281\ See, e.g., SIFMA Letter II at 40; Tastytrade Letter at 18;
and Themis Letter at 4.
---------------------------------------------------------------------------

After analyzing data to determine whether the suggested additional
factors would be helpful in eliminating NMS stocks that could be harmed
by a smaller minimum pricing increment,\282\ the Commission has
concluded that TWAQS is the appropriate measure to determine whether an
NMS stock should be eligible for a smaller minimum pricing increment.
Specifically, TWAQS provides a transparent and objective basis to
determine whether the $0.01 minimum pricing increment results in a
quoted spread that is too wide for a particular NMS stock. Other
possible factors, such as average quoted size, ratio of average quoted
size to average trade size, the average daily traded volume, queue
length, quotes on multiple exchanges or stock price, would add
unwarranted and additional complexity that would be difficult and
costly for market participants to monitor because some of these
measures require the purchase of proprietary data. Supplementing TWAQS
with quoted size, turnover calculations, quote stability, and the other
recommend criteria would similarly add additional complexity and
responsibilities to the primary listing exchanges assigned to
calculating TWAQS.\283\ The additional criteria suggested by commenters
are unnecessary because TWAQS is a sufficient, comprehensive and
objective way to determine whether NMS stocks are experiencing issues
of constraint related to the $0.01 minimum pricing increment for quotes
and orders.\284\ Specifically, the Commission concluded that harm is
unlikely to result if the other data factors suggested by commenters
(e.g., price, volume, or depth-based criteria) are not included.\285\
Accordingly, the Commission is not adopting factors other than the
TWAQS to measure which NMS stocks would be assigned a minimum pricing
increment of $0.005.
---------------------------------------------------------------------------

\282\ See infra section VII.D.1.b.iii. for further discussions
of alternative criteria.
\283\ See Proposing Release, supra note 11, at 80274.
\284\ See infra section VII.D.1.b.iii.
\285\ See infra section VII.D.1.b.iii.
---------------------------------------------------------------------------

One commenter suggested that issuers should be able to select the
minimum pricing increment for the quotes and orders of their
stock.\286\ The Commission disagrees. Rule 612 is an important rule
under Regulation NMS and serves to link the markets within the national
market system by establishing uniform minimum pricing increments for
all NMS stocks. This important linkage function would be undermined by
allowing increments to be individually assigned to each NMS stock in a
non-uniform manner. Rule 612, as originally adopted and as amended,
standardizes minimum pricing increments based on transparent and
objective criteria in order to ensure that minimum pricing increments
are applied uniformly. Introducing issuer choice would eliminate such
standardization and enable individual issuers to choose different
minimum pricing increments based on their specific, unique individual
preferences which would likely result in random and inconsistent
application of increments across NMS stocks that otherwise share
several relevant trading characteristics. Minimum pricing increment for
quotes and orders of NMS stocks priced greater than, or equal to, $1.00
per share based on unpredictable, opaque, non-standard criteria of
individual issuers would result in unnecessary complication, such as
varied minimum quoting increments

[[Page 81640]]

and investor confusion, to the national market system. Further, market
participants would likely incur additional costs related to, for
example, the monitoring and tracking of the minimum pricing increments
for issuers.
---------------------------------------------------------------------------

\286\ See Angel Letter at 5. But see Harris Letter at 8
(opposing suggestions that issuers should choose ticks).
---------------------------------------------------------------------------

7. Rule 612(a)--Definitions
As adopted, amended Rule 612(a) contains two definitions for
purposes of the rule--``Evaluation Period'' and ``Time Weighted Average
Quoted Spread.'' The primary listing exchanges will use these
definitions in identifying the required minimum pricing increments for
NMS stocks.
a. Evaluation Period
The Commission proposed to define ``Evaluation Period'' as the last
month of a calendar quarter (March in the first quarter, June in the
second quarter, September in the third quarter and December in the
fourth quarter) of a calendar year during which the primary listing
exchange shall measure the TWAQS of an NMS stock that is priced equal
to, or greater than, $1.00 to determine the minimum pricing increment
to be in effect for the next calendar quarter, as set forth by proposed
paragraph (c). In other words, the minimum pricing increment for quotes
and orders would have been evaluated every quarter based on one month's
worth of data and could have potentially changed once every quarter.
After considering the comments, the Commission is adopting a
revised definition of Evaluation Period. Rule 612(a)(1) defines
Evaluation Period as (i) the three months from January through March of
a calendar year and (ii) the three months from July through September
of a calendar year during which the TWAQS of an NMS stock shall be
measured by the primary listing exchange to determine the minimum
pricing increment for each NMS stock.
The Commission received comments on the proposed definition of the
Evaluation Period.\287\ Two commenters generally supported the
definition as proposed.\288\
---------------------------------------------------------------------------

\287\ See, e.g., IEX Letter I; Optiver Letter; NYSE Letter I;
Pragma Letter; MMI Letter; FIA PTG Letter II; BlackRock Letter;
SIFMA Letter II; T. Rowe Price Letter; Cboe Letter I and Cboe Letter
II; UBS Letter; and JPMorgan Letter at 4.
\288\ See, e.g., IEX Letter I and NYSE Letter I (stating that
the quarterly updates based on the last month of a quarter's data
would ``ensure that the next quarter's universe of tick-constrained
names is selected using the most recent and relevant basis and
allows for monitoring of other securities that are not yet tick-
constrained but maybe starting to exhibit tick-constrained
behavior.''). IEX, however, recommended that the second month of a
quarter be used for calculating the TWAQS. See also infra note 305
and accompanying text. See also Harris Letter at 7.
---------------------------------------------------------------------------

Several commenters stated that one month was too short a period for
measuring and calculating TWAQS.\289\ One commenter stated that an
analysis of one month's data ``has the potential to disproportionally
weigh systemic and idiosyncratic events (including corporate actions)
resulting in unrepresentative tick sizes.'' \290\ Another commenter
stated that ``longer evaluation periods will reduce the risk that
short-term aberrations will have an outsized impact on market
structure. Using too short of an evaluation period, especially during
periods of heightened volatility, could lead to unrepresentative price
variations that ultimately result in illogical minimum price
increments.'' \291\ A few commenters recommended providing a longer
period for conducting data analysis. Specifically, one commenter
suggested that the time frame be ``coterminous with the time between
tick size changes. In other words, if tick sizes are adjusted every
quarter, then the evaluation period should be every quarter . . .''
\292\ Another commenter suggested that the Evaluation Period should be
at least one quarter.\293\ Another commenter recommended that the
Evaluation Period be performed on an annual basis so as to reduce costs
and operational risks that may be created by needing to update relevant
systems.\294\ Finally, one commenter suggested that the evaluation of
NMS stocks be conducted on a semi-annual basis, based on six-months of
data, to reduce variability and complexity.\295\
---------------------------------------------------------------------------

\289\ See, e.g., Optiver Letter at 2; MMI Letter at 6; FIA PTG
Letter II at 2; and UBS Letter at 13. See also Cboe Letter I at 5
(stating that the framework for reevaluating the parameters for
revising tick changes according to their proposed methodology should
be quarterly or bi-annually so that the parameters ``remain nimble
to changing market conditions.'').
\290\ See Optiver Letter at 2.
\291\ See FIA PTG Letter II at 2-3. See also MMI Letter at 6
(``The evaluation period preceding the change should be at least one
quarter to avoid capturing instances of market volatility, or events
such as stock splits that may indirectly drive trading interest that
cause the behavior and characteristics of a stock to depart
dramatically from its history.'').
\292\ See FIA PTG Letter II at 2-3.
\293\ See MMI Letter at 6.
\294\ See UBS Letter at 13.
\295\ See JPMorgan Letter at 4.
---------------------------------------------------------------------------

A few commenters provided suggestions as to the length of time
between tick adjustments.\296\ One commenter stated that ticks should
be adjusted on a monthly basis rather than a quarterly basis.\297\ The
commenter stated ``[w]e would expect more frequent smaller updates to
reduce how often and how long a stock's tick stays outside the optimal
range.'' \298\ Another commenter, however, suggested that the
Commission align tick adjustments with other elements in the proposal.
Specifically, this commenter recommended that ``the Commission reduce
the frequency of changes and synchronize the intervals for revising
market structure parameters by updating both round lots and tick sizes
on a quarterly or semi-annual basis.'' \299\ Another commenter
suggested an annual consideration as a means to reduce burdens on
market participants a

[…truncated; see source link]

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Indexed from Federal Register on October 8, 2024.

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